Investing Archives | Page 152 of 221

Oct

2022

What Are Bull Put Spreads & How Do They Work?

Bull Put Spread: How This Options Strategy Works

By Brian Nibley | Going to College, invest, Investing, Terminology | Comments Off

A bull put spread is an options trading strategy that someone may use when they have a moderately bullish view of an asset, meaning they think the price will increase slightly. The strategy allows you to profit from an increase in an underlying asset’s price while limiting losses if an asset’s price declines.

Bull put spreads and options trading are not for everyone, but learning the ins and outs of this strategy may help your financial portfolio.

What Is a Bull Put Spread?

A bull put spread is an options trading strategy that involves buying a put option and selling another put option on the same underlying asset with the same expiration date, but at different strike prices. The trade is considered a neutral-to-bullish strategy, since it’s designed so the maximum benefit occurs when an asset’s price moderately increases.

To execute a bull put spread, a trader will simultaneously sell a put option at a specific strike price (the short leg of the trade) and buy a put option with a lower strike price (the long leg of the trade).

The trader receives a premium for selling the option with a higher strike price but pays a premium for buying the put option with a lower strike price. The premium paid for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. The difference between the premium received and the premium paid is the maximum potential profit in the trade.

The goal of the bull put spread strategy is to finish the trade with the premium earned by selling the put (sometimes referred to as writing a put option) and lose no more than the premium paid for the long put.

A bull put spread options trading strategy is sometimes called a short put spread or a credit put spread.

How a Bull Put Spread Works

Bull put spreads focus on put options, which are options contracts that give the buyer the right – but not always the obligation – to sell a security at a given price (the strike price) during a set period of time.

The bull put spread strategy earns the highest profit in situations where the underlying stock trades at or above the strike price of the short put option – the put option sold with the higher strike price – upon expiration. This strategy, therefore, works best for assets that the traders of a bull put spread believe will trade slightly upwards.

The strategy provides a way to profit from a stock’s rising price without having to hold shares. An options strategy like this also caps downside risk because the maximum loss is the difference between the strike prices of the two puts minus the net premium received.

Even though the risk is limited, there can still be times when it makes sense to close out the trade.

Max Profit and Risk

A bull put spread is meant to profit from a rising stock price, time decay, or both. This strategy caps both potential profit and loss, meaning its risk is limited.

The profit of a bull put spread is capped at the premium you receive by selling the short leg of the trade, minus the premium you spent to buy the long leg put option. You achieve this maximum profit if the underlying asset finishes at any price above the strike price of the short leg of the trade.

Maximum profit = premium received for selling put option – premium paid for buying put option

The maximum losses (i.e., the risk) of a bull put spread is the difference between the strike price of the short put option and the strike price of the long put option, minus the net premium you received.

Maximum loss = strike price of short put – strike price of long put – net premium received

The breakeven point of a bull put spread is the price the underlying asset trades at expiration so that the trader will come away even. The breakeven point will equal the difference between the net premiums you receive up front and the strike price of the short put option. At the breakeven, the trader neither makes nor loses money, not including commissions and fees.

Breakeven point = strike price of short put – net premium received

Bull Put Spread Example

Alice would like to use a bull put spread for XYZ stock since she thinks the price will slowly go up a month from now. XYZ is trading at $150 per share. Alice sells a put option for a premium of $3 with a strike price of $150. At the same time, she buys a put option with a premium of $1 and a strike price is $140. Both put options have the same expiration date in a month.

Alice will collect the difference between the two premiums, which is $2 ($3 – $1). Since each option contract is usually for 100 shares of stock, she’d collect a $200 premium when opening the bull put spread.

Maximum Profit

As long as XYZ stock trades at or above $150 at expiration, both puts will expire worthless, and she will keep the $200 premium she received at the start of the trade, minus commissions and fees.

Maximum profit = $3 – $1 = $2 x 100 shares = $200

Maximum Loss

Alice will experience the maximum loss if XYZ stock trades below $140 at expiration, the strike price of the long leg of the trade. In this scenario, Alice will lose $800, plus commissions and fees.

Maximum loss = $150 – $140 – ($3 – $1) = $8 x 100 shares = $800

Breakeven

If XYZ stock trades at $148 at expiration, Alice will lose $200 from the short leg of the trade with the $150 stock price. However, this will be balanced out by the initial $200 premium she received when opening the positioning. She neither makes nor loses money in this scenario, not including commissions and fees.

Breakeven point = $150 – ($3 – $1) = $148

Bull Put Spread Exit Strategy

Often, trades don’t go as planned. If they did, trading would be easy, and everyone would succeed. What sets successful traders apart from the rest of the pack is the ability to make winning trades, mitigate risk, and limit losses.

Having an exit strategy can help by providing a plan to cut losses at a predetermined point, rather than being caught off guard or simply “waiting” and “hoping” that the market turns around in your favor.

An exit strategy may be a little complicated for a bull put spread. Before the expiration date, you may want to exit the trade so you don’t have to buy an asset you may be obligated to purchase because you sold a put option. You may also decide to exit the position if the underlying asset price is falling and you want to limit your losses rather than take the maximum loss.

To close out a bull put spread entirely would require that the trader buy the short put contract to close and sell the long put option to close.

💡 Recommended: Buy to Open vs Buy to Close

Pros and Cons of Bull Put Spreads

The following are some of the advantages and disadvantages of bull put spreads:

Bull Put Spread Pros	Bull Put Spread Cons
Protection from downside risk; the maximum loss is known at the start of the trade	The gains from the strategy will be limited and may be lower than if the trader bought the underlying asset outright
The potential to profit from a modest decline in the price of the underlying asset price	Maximum loss is usually more substantial than the maximum gain
You can tailor the strategy based on your risk profile	Difficult trading strategy for novice investors

Impacts of Variables

Several variables impact options prices, and options trading terminology describes how these variables might change in a given position.

Because a bull put spread consists of a short put and a long put, the way specific changes in different variables impact the position can be different than other options positions. Here’s a brief summary.

1. Stock Price Change

A bull put spread does well when the underlying security price rises, making it a bullish strategy. When the price falls, the spread performs poorly. This is known as a position with a “net positive delta.” Delta is an options measurement that refers to how much the price of an option will change as the underlying security price changes. The ratio of a stock’s price change to an option’s price change is not usually one-to-one.

Because a bull put spread is made up of one long put and one short put, the delta often won’t change much as the stock price changes if the time to expiration hasn’t changed. This is known as a “near-zero gamma” trade. Gamma is an estimation of how much the delta of a position will change as the underlying stock price changes.

2. Changes in Volatility

Volatility refers to how much the price of a stock might fluctuate in percentage terms. Implied volatility (IV) is a variable in options prices. Higher volatility usually means higher options prices, assuming other factors stay the same. But a bull put spread changes very little when volatility changes, and everything else remains equal.

This is known as a “near-zero vega” position. Vega measures how much an option price will change when volatility changes, but other factors are unmoved.

3. Time

Time decay refers to the fact that the value of an option declines as expiration draws near. The relationship of the stock price to the strike prices of the two put options will determine how time decay impacts the price of a bull put spread.

If the price of the underlying stock is near or above the strike price of the short put (the option with a higher strike price), then the price of the bull put spread declines (and makes money) as time goes on. This occurs because the short put is closest to being in the money and falls victim to time decay more rapidly than the long put.

But if the stock price is near or below the long put’s strike price (the option with a lower strike price), then the price of the bull spread will increase (and lose money) as time goes on. This occurs because the long put is closer to being in the money and will suffer the effects of time decay faster than the short put.

In cases where the underlying asset’s price is squarely in-between both strike prices, time decay barely affects the price of a bull put spread, as both the long and short puts will suffer time decay at more or less the same rate.

4. Early assignment

American-style options can be exercised at any time before expiration. Writers of a short options position can’t control when they might be required to fulfill the obligation of the contract. For this reason, the risk of early assignment (i.e., the risk of being required to buy the underlying asset per the option contract) must be considered when entering into short positions using options.

In a bull put spread, only the short put has early assignment risk. Early assignment of options usually has to do with dividends, and sometimes short puts can be assigned on the underlying stock’s ex-dividend date (the date someone has to start holding a stock if they want to receive the next dividend payment).

In the money puts with time value that doesn’t match the dividends of the underlying stock are likely to be assigned, as traders could earn more from the dividends they receive as a result of holding the shares than they would from the premium of the option.

For this reason, if the underlying stock price is below the short put’s strike price in a bull put spread, traders may want to contemplate the risk of early assignment. In cases where early assignment seems likely, using an exit strategy of some kind could be appropriate.

Start Investing Today With SoFi

Trading options isn’t easy and can involve significant risk. Many variables are involved in options trading, some of which have been notorious for catching newbie traders by surprise. While we’ve answered the fundamental question “what is a bull put spread” here, new investors looking to implement this strategy will still have a lot to learn.

For investors ready to dive into bull spreads and other options trading strategies, SoFi’s options trading platform is a good place to start, thanks to its intuitive design. Investors can trade options from the mobile app or web platform. Plus, they can check out educational resources about options if any questions arise.

Trade options with low fees through SoFi.

Photo credit: iStock/kate_sept2004

Oct

2022

How to Make Passive Income with Cryptocurrency

12 Ways to Make Passive Income With Cryptocurrency

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

There are numerous ways to earn passive income with cryptocurrency, such as staking, lending, and even yield farming. Like many other investments, crypto presents the opportunity to not only earn a return through trading cryptocurrency, but also by putting your investment to work to earn passive income.

Earning passive income generally means utilizing your assets, without active involvement, to generate additional dollars, and it can be done in the crypto space. The concept is the same as compounding interest or reinvesting dividends in the traditional financial world or earning rent on investment properties. Continue reading to learn how to earn passive crypto income.

Can You Generate Passive Income with Cryptocurrency?

It is possible to earn passive income with crypto, but keep in mind that any returns will depend on the method chosen and the amount of crypto you have to start with. Also, given the crypto market’s volatility, there’s no guarantee that any crypto strategies will deliver returns at all.

Still, those holding large amounts of crypto have several potential avenues to make money with crypto. However, it’s up to you to weigh the risks of trying to earn a yield on your crypto, and its potential rewards, versus the risk/reward ratio of simply holding for potential long-term gains.

12 Ways You Can Earn Passive Income With Crypto

Many of the potential ways to earn passive income with crypto involve lending and borrowing. Other methods, including running a node, mining, or staking coins, are more technical.

Here are twelve ways to earn passive income with different types of crypto.

1. Proof-of-Stake (PoS) Staking

Proof-of-stake is a consensus method used in blockchain technology that serves as an alternative to Bitcoin’s proof-of-work. PoS networks agree on which transactions are valid through a process that involves nodes locking up, or “staking,” large amounts of tokens for a time. Crypto staking replaces the role of mining in a proof-of-stake system, and is, effectively, like sticking your assets in a locked savings account in order to earn interest.

Instead of “miners” receiving new block rewards, like in a PoW system, “validators” receive new block rewards in PoS. Validators do not need expensive computer hardware, but they do need to have sufficient tokens to have a chance at adding the next block to the chain. Many networks require an initial investment before allowing staking.

2. Interest-Bearing Digital Asset Accounts

A number of service providers allow users to deposit their crypto and earn a yield on it, as they might with depositing cash in a savings account. To do so, simply open an account and deposit your crypto or stablecoins. You can do an internet search to find companies that provide these types of accounts.

In exchange for the deposit, users earn interest on crypto. Stablecoins like U.S. Dollar Coin (USDC) and Dai (DAI) often have the best interest rates. Note that there might be a “lockup period” involved, where users can’t access their funds for a fixed amount of time. And there are risks associated with these types of accounts, as they aren’t offered the same government protections as standard bank accounts.

3. Lending

There are several ways that investors can lend out crypto. The main draw of lending is that you can charge interest to a borrower. The amount earned will depend on a few things, including:

• The total value of crypto being lent

• The duration of the loan

• The interest rate

Higher rates, longer loan terms, and larger loan quantities can lead to more income from the interest paid by borrowers. In some cases, those earning crypto passive income through lending get to choose the terms of the loans they create. In others, a third party negotiates the terms ahead of time. Here are some of the main forms of crypto lending:

Margin Lending

Margin lending is lending crypto to traders who want to use borrowed assets to increase their leverage through margin trading. This allows traders to amplify their positions with those assets and repay the loans with interest. Crypto exchanges handle most of the details on the lender’s behalf, in this case. Users only need to make their digital assets available.

💡 Recommended: Learn more about margin trading and how it works

Centralized Lending

Centralized lending involves relying on the lending infrastructure and terms set by a third party. In this case, the interest rates and lock up periods will be fixed ahead of time. Users must deposit their crypto to the lending platform before earning interest.

Decentralized Lending

Also known as DeFi lending, this option involves using lending services directly through the blockchain. There are no intermediaries, and lenders and borrowers interact through smart contracts that automate interest rates.

Peer-to-Peer Lending

Platforms that enable peer-to-peer lending make it possible for people to borrow directly from one another. Users first deposit their crypto into the lending platform’s custodial wallet. They can then set the interest rate, terms of the loan, and decide how much they’d like to lend. This gives users some control over the crypto lending process.

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4. Cloud Mining

Mining proof-of-work cryptocurrencies typically requires substantial investment in computing hardware, along with the necessary technical knowledge. Cloud mining contracts offer an alternative.

Instead of setting up a new mining rig, people can simply “rent” hashing power from an established operation through the internet. In exchange for a fixed fee, people can buy cloud mining contracts that entitle them to a certain hash rate for a certain period of time. The contract owner receives new coins in proportion to the size of their contract.

Be warned, however: Many cloud mining scams exist. Those interested in cloud mining would do well to do as much research as possible to try and make sure the company offering the contract is legitimate.

5. Dividend-Earning Tokens

Tokenized stocks are cryptocurrencies backed by shares of equity in a company. Sometimes, these tokens offer dividend payouts in the same manner that shareholders receive dividends. Dividends are usually paid on a quarterly basis.

Owning and holding some of these tokens could prove to be yet another way to earn passive income with crypto.

6. Yield Farming

Yield farming is one of the more complex options listed here and will require a lot of additional research for those interested. But it can also be one of the most lucrative options available to make passive income with crypto.

To yield farm, investors deposit tokens into a special smart contract called a liquidity pool. Those who provide liquidity in this way receive a portion of the fees generated through traders accessing the pool.

Yield farming often requires some Ethereum (ETH) along with a DeFi token of some kind like Uniswap (UNI) or Pancake Swap (CAKE) or possibly a stablecoin like Tether (USDT).

The term “yield farming” became popular in 2020 and 2021 with the rise of decentralized exchanges, which rely on smart contracts and liquidity provided by investors.

7. Run a Lightning Node

The Bitcoin Lightning network is a layer-2 scaling solution that allows for lightning-fast affordable micropayments at scale. Lightning nodes facilitate these transactions, and those who run nodes receive a small portion of each transaction fee that gets routed through their node.

Unfortunately, running a Lightning node usually generates very little income. Because fees tend to be low, those who run a node might only make a few dollars per month in Bitcoin, or less.

Most participants who do run Lightning nodes do so to support the use of Bitcoin as a medium of exchange. And as the Lightning network grows and more transactions get routed through it, the income for node operators could presumably rise as well.

8. Affiliate Programs

Affiliate programs exist for many different business models, one of them being crypto-related products and services. Some exchanges offer affiliate programs, which reward participants for getting others to sign up or open accounts.

In general, to participate, users simply have to:

• Sign up, submit an application, or share an affiliate link

• Introduce a platform or product to their friends, family, or social media followers

• Earn rewards when someone takes a certain action, like signing up for an account on a given exchange

As an example, an exchange may offer a small Bitcoin incentive to those who get a new user to sign up for an account through their affiliate link. Affiliate programs might not be the fastest way to generate passive income with crypto, but they could be one of the easiest. (Make sure to check the company’s terms of service before bulk sharing an affiliate link.)

9. Master Nodes

Some blockchain networks contain a specific type of node referred to as “master nodes.” Those who run these nodes can receive large payouts, as masternodes receive a portion of the block rewards each time a new block is mined.

The chance to run one of these nodes probably won’t be available to the average person, however, as running a master node often requires holding a significant amount of the network’s cryptocurrency.

10. Forks and Airdrops

Forks happen when an existing coin branches off into a new chain. Airdrops happen when new coins are created and “dropped” onto users as a type of reward.

Users don’t have any control as to when or if these events might occur. But being active in the crypto ecosystem increases the odds.

In 2017, for example, everyone who held Bitcoin (BTC) received an equivalent amount of Bitcoin Cash (BCH) when the network hard forked. Someone who had 1 BTC, for example, would have received 1 BCH.

Similarly, in 2021, users of the KeepKey hardware wallet (among other groups) received an airdrop of FOX tokens from the company that runs the ShapeShift platform. Those who had logged into ShapeShift during a certain time period automatically received the tokens in their crypto wallets.

11. Sun Exchange

Sun Exchange is a South Africa-based company that crowdsources funding for solar power projects. Investors can purchase solar cells used for community projects in South Africa and receive a regular payout once the projects begin producing solar power.

Customers can pay for solar cells in either fiat currency or Bitcoin, and can also receive their payouts in fiat or Bitcoin. This method of generating passive income with crypto differs from the others in that there’s a tangible investment. While the other options are financial products, Sun Exchange allows people to invest directly in renewable energy projects built in South Africa.

The returns from solar projects are typically small, paid out monthly, and spread out over many years. The projects involve 20-year leases, so buying in is a long-term commitment. (Currently, there is no secondary market for trading your solar cells.) But more than any potential profit, investors may be drawn to the clean energy tax incentives and the idea of providing affordable renewable energy to South Africa.

12. Crypto Games

As online gaming continues to grow in popularity and spills into the metaverse, the opportunities to earn passive income through crypto games should grow, too. There are many crypto games out there, and a lot of them reward players for participating with various types of crypto.

Some of the numerous games out there include Axie Infinity, The Sandbox, Gods Unchained, Ethermon, and Pegaxy.

Pros and Cons of Passive Income Generation With Crypto

Even when it comes to potential passive income generation, it’s wise to weigh the potential risks against the potential rewards.

Here are some of the pros and cons of learning making passive income with crypto.

Pros	Cons
Some options can be rather simple.	Most options come with considerable risk.
Allows investors to put off capital gains.	Some options can be difficult to navigate for beginners.

Pros

There are several benefits to generating passive income via crypto.

• Some options can be rather simple. Most interest-bearing digital asset accounts are straightforward. Users deposit stablecoins and start earning interest, in most cases. Centralized lending might involve little more than putting crypto assets into a custodial wallet and giving permission to an exchange to lend them out.

• Allows investors to put off capital gains. Instead of selling a large amount of crypto that has gone up in value since the time of purchase, investors might consider keeping those holdings in the crypto ecosystem and using it to generate a yield. The yield would still equate to taxable income, but would likely result in less of a tax burden than selling a large amount of crypto outright.

Cons

There are also drawbacks that crypto traders must consider when contemplating passive income.

• Most options come with considerable risk. Losing all of your crypto assets is a real possibility in some cases. This can happen as a result of hacks, smart contract bugs, or because the lending platform goes bankrupt.

• Some options can be difficult to learn to navigate. Getting involved in DeFi requires setting up and using an Ethereum (ETH) wallet, then becoming familiar with one or more DeFi protocols. This could prove difficult for those who don’t yet hold any ETH and haven’t used crypto wallets before.

The Takeaway

Some of the numerous ways that crypto investors can generate passive income with their holdings are by staking, lending, and even participating in crypto games. Of course, some methods of earning passive crypto income are simpler than others, and for beginners, it can be as easy as depositing coins into an account and earning interest. Others could try their hand at running a node.

FAQ

Is staking crypto passive income?

Yes, staking crypto provides a type of passive income. However, it’s important to understand that when you stake crypto, you receive the income in the native token of a specific network. This creates an additional risk, and if the price of that token falls, losses could still be realized even if users earn a significant yield from staking.

What are the risks of trying to create passive income with crypto?

In many cases, users are assuming 100% risk when earning passive income with crypto. While it is possible to earn a high rate of return, total loss of principle is also a possibility. There’s also the risk of tokens losing value. If yields are earned in an altcoin, the rate of return relies on that token’s value. There is also a risk of protocols being hacked.

Photo credit: iStock/Deklofenak

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

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Oct

2022

What Is Impact Investing?

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | No Comments

Impact investing is a strategy that seeks to create both financial return and positive social or environmental impact. Impact investments can be made in both publicly traded companies and private companies or funds, and can take the form of equity, debt, or other assets.

In recent years investors have become increasingly aware of potential adverse societal effects to which their investments may contribute. These can include effects on health, the environment, and human rights. As such, large firms and foundations have increasingly decided to put capital to work to minimize these negative effects. For investors, it helps to be aware of the growing trend of impact investing to determine whether it is a suitable wealth-building strategy for a portfolio.

How Does Impact Investing Work?

Impact investing is usually done by large institutional investors and private foundations, though individual investors can do it as well. These organizations invest in various areas, including affordable housing, clean water, and renewable energy. Impact investments in these areas can benefit both developed and emerging markets.

The term “impact investing” is relatively new, but the concept of investing for both financial return and social good is not. Impact investing began in the early 1900s, as numerous philanthropists created private foundations to support their causes.

Over time, the assets of these foundations grew, and the foundation trustees began to look for ways to invest the assets to support their charitable activities. Many of these early foundations were created to support causes such as education, health care, and the arts.

💡 Recommended: What Is Asset Allocation?

The concept of impact investing has expanded to include a broader range of investors and investment vehicles. Impact investing is now practiced by individuals, foundations, endowments, pension funds, and other institutional investors.

The growth of impact investing has been fueled by several factors, including the rise of social media and the increasing availability of data and analytics. Impact investing is also being driven by the growing awareness of businesses and investors’ role in solving social and environmental problems. Individual investors can take this new knowledge and consider index funds that focus on various causes.

Characteristics of Impact Investments

As outlined by Global Impact Investing Network (GIIN), the following are considered characteristics of credible impact investments:

• Investor intentionality: An investor must intend to make a measurable positive impact with their investment. This requires a certain level of transparency about both financial and impact goals. The investor’s intent is one of the main differentiators between traditional investments and impact investments.

• Utilize data: Impact investments must use data and evidence to make informed decisions to achieve measurable benefits.

• Manage impact performance: Specific financial returns and impact goals must be established and managed.

• Contribute to the growth of the industry: The goal of impact investments is to further social, economic, or environmental causes. Impact investing toward these goals must be intentional and measured, not just guesswork.

Impact Investing vs Socially Responsible Investing

Impact investing is often associated with “socially responsible investing” (SRI). Both SRI and impact investing seek to generate positive social or environmental impact, but they differ in some ways.

SRI typically focuses on actively avoiding investments in companies involved in activities that are considered harmful to society, such as the manufacture of tobacco products or the production of weapons. SRI also typically focuses on promoting corporate policies considered socially responsible, such as environmental sustainability or gender diversity.

In contrast, impact investing focuses on making investments in companies or projects that are specifically designed to generate positive social or environmental impact.

Impact Investing vs ESG

The main difference between impact investing and ESG (environmental, social, and governance) is that impact investing is focused on investments that are expected to generate a positive social or environmental impact. In contrast, ESG considers a range of environmental, social, and governance factors in investing decisions.

Why Is Impact Investing Important?

There are a few reasons why impact investing is important. First, it allows investors to put their money into companies or projects that they believe will positively impact society or the environment. This can be an excellent way for investors to make a difference while also earning a return on investment.

Second, impact investing can help attract more capital to social and environmental causes. When more people invest in companies or projects that aim to make a difference, it can help to increase the amount of money and resources available to make positive change happen.

Finally, impact investing can help create jobs and support businesses working to improve society or the environment. This can have a ripple effect, as these businesses often provide goods or services that benefit the community.

Examples of Impact Investing

Impact investing is usually done by institutional investors, large asset managers, and private foundations. Some of the largest foundations and funds focused on impact investing include:

• The Bill & Melinda Gates Foundation: This foundation has a $2.5 billion Strategic Investment Fund. This fund makes direct equity investments, provides low-interest loans, and utilizes other impact investing tools in promoting global health and U.S. education.

• The Ford Foundation: The foundation has committed to invest up to $1 billion of its endowment to address social problems while seeking a risk-adjusted market rate of financial return. Its mission-related investments are focused on affordable housing, financial inclusion, and other areas in the U.S. and across the Global South.

• The Reinvestment Fund: The Philadelphia-based nonprofit finances housing projects, access to health care, educational programs, and job initiatives. With about $1.2 billion in assets under management, it operates primarily by assisting distressed towns and communities in the U.S.

Types of Impact Investments

There are various impact investment areas, including but not limited to microfinance, renewable energy, sustainable agriculture, and affordable housing.

Impact investments don’t have to be equity investments either; they come in many different investment vehicles, like bonds and alternative investments.

Is Impact Investing Profitable?

Impact investing may be profitable, though it depends on several factors, including the type of impact investments and the specific goals and objectives of the investor. Nonetheless, a 2020 GIIN study noted that 88% of impact investors reported that their investments met or surpassed their financial expectations.

In general, impact investing can be a good idea if investors approach it thoughtfully and strategically. As with any investment, there is always a risk of loss, but the profit potential is considerable if the investor does their homework and carefully selects their assets.

The bottom line is that you may not have to sacrifice your financial goals to make a positive impact with your investments. In fact, it’s possible that impact investments might be better for both your pocketbook and the world.

Evaluation Methods for Impact Investors

There are many ways to measure impact investments. The United Nations Sustainable Development Goals (SDGs) are a popular framework for measuring impact. The SDGs are a set of 17 goals that the United Nations adopted in 2015.

The SDGs include goals such as “no poverty,” “zero hunger,” and “good health and well-being.” Each SDG has a specific target to be achieved by the year 2030.

Impact investors often seek to invest in companies or projects that will help achieve one or more of the SDGs. For example, an impact investor might invest in a company working on a new technology to improve water quality, contributing to the SDG goal of ensuring access to water and sanitation for all.

Another popular framework for measuring impact is the Impact Management Project (IMP). The IMP is a global initiative that seeks to develop standards for measuring and managing impact.

How to Start an Impact Investment Portfolio

Though foundations and institutional investors are the heart of the impact investing world, individual investors can also make investments in companies and funds that positively impact society. It doesn’t take much to start an impact investment portfolio.

1. Decide what type of investment you want to make, whether that’s in a stock of a company, an exchange-traded fund (ETF) with an impact investing strategy, or bonds.

2. Next, research the different companies and funds, and find a diversified selection that fits your desires.

3. Finally, make your investment with a brokerage and monitor your portfolio to ensure that your investments have a positive impact.

In order to become an impact investor, it’s wise to consider both the financial potential of an investment, as well as its social, environmental, or economic impact.

Some investors have a higher risk tolerance than others, and some might be willing to take a lower profit in order to maximize the positive impact of their investments.

💡 Recommended: Using Fundamental Analysis to Choose Stocks

The Takeaway

There is no one-size-fits-all answer to how to balance financial return and social or environmental impact. Impact investors must make investment decisions that are aligned with their values and objectives.

Not all impact investments are created equal. Some impact investments may have a higher financial return potential than others but may also have a lower social or environmental impact. Similarly, some impact investments may have a higher social or ecological impact but may also have a lower financial return potential. Impact investors must consider both financial return and social or environmental impact when making investment decisions.

If you’re interested in investing in individual companies or a socially conscious ETF, SoFi Invest® can help. With SoFi’s active investing and automated investing tools, you can research various companies and investment funds. Once you decide what type of impact you’d like to have and your financial goals, you can trade stocks and ETFs with as little as $5 in the SoFi app.

Learn more with SoFi Invest

Oct

2022

Call vs Put Option: The Differences

By SoFi | Growing Wealth, invest, Investing | Comments Off

You know what it means to invest in a stock: you buy shares, thinking that they will go up in value at a later date, at which point you might choose to sell them. If there are shares you already own that you think are going to lose value, you might sell them.

But there are other ways to put money behind the movements of a stock price. Investors can also buy and sell options, which are a kind of contract that allows the investor to buy (or sell) a stock, or some other asset, at a certain price. The two basic types of options are “puts” and “calls.”

Unlike shares of stocks, put and call options have expiration dates, at which point you no longer have the right to buy or sell the shares. Options trading is a popular strategy for day traders, because you make profits not by owning the underlying shares and patiently waiting for them to go up, but acting quickly with options that expire quickly.

Much like buying and shorting stocks, an investor can use options to express their view on whether the price is likely to go up or down.

What Is a Call Option?

A call option is a contract that allows an investor to buy 100 shares of an underlying stock or other security at a prearranged price (known as the “strike price”). A call option can be appealing because it gives an investor a way of profiting from a stock’s increase in price without having to pay for the full price of 100 shares. What one pays is known as the “premium” on each share, which is typically much less than the current price of the stock.

The profit from a call option is determined by both the premium an investor pays and whether they’re able to exercise the option—this means actually buying the underlying stock and the price agreed to in the option contract.

An investor can also sell their call option: as the price of the underlying stock rises above the strike price, the value of the option to buy will rise. By selling the option itself, an investor doesn’t have to take delivery of the underlying shares and can profit from the increasing value of the option itself.

The Basics of Buying a Call Option

Consider this example: If an investor buys an option with a strike price of $50 for a stock that’s currently worth $40, the option will be “out-of-the-money” until the stock rises to $50. If the premium is $1/share—meaning they only pay $1 up front—then the investor will only be risking $100, not $4000.

If the stock is trading at $55 on or before the expiration date, it would make sense to “exercise” the option and buy the stock for $50, thus giving the investor shares with built-in profit thanks to the difference between the strike price of $50 and the value of $55. In this case the profit would be $4/ per share (or $400): a strike price of $50 gives the investor the right to buy 100 shares of a stock worth $55, with a premium of $1 per share.

On the other hand, if the stock has not risen in price enough, the investor can just let the option expire, having only lost the price of the premium, rather than being saddled with shares they can’t profit from.

Many brokerages, including discount brokerages who offer their services to day traders and individuals, offer put and call options.

What Is a Put Option?

There’s a key difference in call vs put options: If call options are a way to profit from a stock going up in price without having to own the stock itself, than put options are a way to profit from the fall of a stock’s price without having to short the stock (i.e. borrow the shares and then buy them back at a lower price). Of course, in cases where an investor sells their option, the opposite is true: they would benefit from the opposite movement of the stocks.

A put option is a contract that allows someone to sell shares at a certain price at a specified time in the future. The seller of the put option has the obligation to buy the shares from the put buyer if they choose to exercise it.

The Basics of Buying a Put Option

As an example, let’s say a stock is worth $50 today. If an investor thought the stock’s value could go down, they might buy a put option with a strike price of $40. Let’s say the premium for the option is $1, and they buy a contract that gives them the right to sell 100 shares at $40. The premium, then, is $100.

At the time the investor buys the put option, it’s “out-of-the-money.” If the price remains above $40 until it expires, the investor will not be able to exercise the option and they will lose the premium. But if the stock has dropped from, say, $50 to $35, the option is “in-the-money” and they could sell it for an increased premium to someone else. If an investor were to exercise the option, they’d profit from being able to sell shares for $40 that are worth $35, pocketing $5 per share or $500, minus the $100 premium, leaving them with $400.

Risks of Options Trading

Option trading can be a useful way to manage risks or profit from movements in stocks one doesn’t own. They can also lead to large losses, especially if an investor doesn’t understand the potential downside to the trades they’re executing.

This is especially true if an investor starts selling call options or put options, putting them in the position of collecting premiums but obligating them to either buy or sell the shares in question at the options expiration date. Investing in options on margin — i.e. with borrowed money—can also be high risk. Some brokerages have tools to screen traders from making certain types of option trades in order to maintain the risk.

The Takeaway

Option trades—call and put options—can be popular with individual or amateur traders because they offer a way to make profits from large movements in a stock without having to own the underlying shares. But by this same token, buying and selling options can also lead to paying premiums over and over with little or no actual payoff.

If you’re ready to keep learning about options and try your hand at options trading, you may consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform. Plus, there are a number of educational resources available to support you as you continue to learn about options trading.

Pay low fees when you start options trading with SoFi.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Oct

2022

The Growth of Socially Responsible Investing

By AJ Smith | Growing Wealth, invest, Investing | No Comments

The extraordinary growth of socially responsible investing strategies in the last decade, and especially the last couple of years, is bringing good news for performance-hungry investors, and potentially the planet as well.

In 2021 alone, socially responsible U.S. mutual funds saw inflows of some $70 billion — a 36% increase over 2020. And investors enjoyed returns comparable to, and in some cases better than conventional funds, according to a report by Morningstar, a fund rating and research firm, released in Feb. 2022.

Clearly the trend of doing well by doing some good in the world may have an upside. Here’s what you need to know about socially responsible investing (SRI) strategies now.

What Is Socially Responsible Investing?

Socially responsible investing is a broad term that can mean different things to different groups. SRI strategies may also be referred to as impact investing, sustainable investing, or ESG investing (for environmental, social, and government factors) — although these terms don’t always mean the same things, and “investing according to your values” can signify very different things to different people.

What Is the Difference Between SRI, ESG, and Other Strategies?

While the various terms for investing according to one’s values are often used interchangeably, it’s important for investors to understand some of the differences. Socially responsible or socially conscious investing are two of the broader labels, and they are typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.

Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).

For example, third-party organizations have helped create ESG scores for companies and funds based on how well they adhere to various ESG factors.

Investors who believe in socially responsible investing, or sustainable investing may want to choose stocks, bonds, mutual funds, or exchange-traded funds (ETFs) that meet ESG standards.

What Is Sustainable Investing?

Sustainable investing is often used as a shorthand for securities that have a specific focus on protecting the environment. This term is sometimes used interchangeably with “green investing”, “eco-friendly investing”, or even ESG.

💡 Recommended: Beginner’s Guide to Sustainable Investing

What Is Impact Investing?

Impact investing is perhaps the broadest term of all, in that it can refer to a range of priorities, goals, or values that investors may want to pursue. To some degree, impact investing implies that the individual is investing with specific outcomes in mind: i.e. the growth of a certain sector, type of technology, or societal issue.

Either way, the underlying principle of these strategies is the same. By putting money into companies that embrace certain practices, investors can support organizations that embody certain principles, thereby potentially making a difference in the world, and perhaps earning a profit at the same time.

What Is Corporate Social Responsibility (CSR)?

Last, corporate social responsibility (CSR) refers to a general set of business practices that may positively impact society. Often, these decisions are put in place to support socially responsible movements, e.g. environmental sustainability, ethical labor practices, and social justice initiatives.

Ideally, CSR strategies work in tandem with traditional business objectives of hitting revenue and profit goals. But since CSR goals are specific to each company, they aren’t formally considered part of socially responsible, sustainable, or ESG investing.

What Are Some Socially Responsible Investments?

Investors today can choose from a wide range of socially responsible, sustainable, or ESG stocks, bonds, ETFs, and more. These days, thousands of companies aim — or claim — to embrace ethical, social, environmental, or other standards, such as those put forth in the United Nations’ Principles of Responsible Investing, or the U.N.’s 17 Sustainable Development Goals.

In addition to those, there can also be various criteria set out by financial institutions or other organizations which they use to evaluate the products, processes, and policies of different companies. Here are some options.

What Are Socially Responsible Stocks?

It may be useful when selecting stocks that match your values to know the standards or metrics that have been used to verify a company’s ESG status.

Depending on your priorities, you could consider companies in the following sectors, or that embrace certain practices:

• Clean energy technology and production

• Supply chain upgrades

• Clean air and water technology, products, systems, manufacturing

• Racial and gender equality

• Fair labor standards

• Community outreach and support

Investors can also trade stocks of companies that are certified B Corporations (B Corps), which meet a higher standard for environmental sustainability in their businesses, or hit other metrics around public transparency and social justice, for example. B Corps can be any company, from bakeries to funeral homes, and may or may not be publicly traded.

What Are Socially Responsible Bonds?

Green bonds are issued by companies to finance projects and business operations that specifically address environmental and climate concerns, such as energy-efficient power plants, upgrades to municipal water systems, and so on.

These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

What Are Socially Responsible Mutual Funds and ETFs?

Another option for investors who don’t want to pick individual SRI or ESG stocks is to consider mutual funds and exchange-traded funds that provide exposure to socially responsible companies and other investments.

There are a growing number of index funds that invest in a basket of sustainable stocks and bonds. These funds allow investors to diversify their holdings by investing in one security.

What Are Socially Responsible Indexes?

There are numerous indexes that investors use as benchmarks for the performance of socially responsible funds. Three of the most prominent socially responsible indexes by parent company include: the MSCI USA Extended ESG Focus Index; Nasdaq 100 ESG Index; S&P 500 ESG Index. You cannot invest directly in an index.

The Growing Appeal of Socially Responsible Investments

While many investors find the idea of doing good or making an impact appealing, the question of profit has long been a point of debate within the industry. Do you sacrifice performance, a.k.a. making a profit, if you invest according to your conscience?

For a while it was difficult to make a clear case either way because most SRI and ESG funds didn’t have a long enough track record. Now, two separate studies from Morningstar suggest that funds which embrace socially responsible strategies tend to outperform conventional mutual funds. Their “Sustainable Funds U.S. Landscape Report” from February 2022 found that “two thirds of sustainable offerings in the large-blend category topped the U.S. market index last year compared with 54% of all funds in the category.”

An analysis of 745 European-based funds found that the majority of sustainable funds outperformed non-ESG strategies over one-, five-, and 10-year periods.

According to Morningstar, socially responsible strategies continue to gain traction with investors. In 2021, the number of open-end mutual funds and ETFs that claim some type of sustainable investing mandate increased from 413 to 534. Those funds now have more than $350 billion in assets, a 25% increase over 2020.

According to the report: “There are 5 times as many sustainable funds in the U.S. today than a decade ago, and 3 times more than five years ago.”

The Evolution of Responsible Investing

Socially conscious investing is not a new concept: People have been tailoring their investment strategies for generations, for a number of reasons, not all of them related to sustainability. In fact, it’s possible to view the emergence of socially conscious investing in three phases.

Phase 1: Exclusionary Strategies

Exclusionary strategies tend to focus on what not to invest in. For example, those who embrace Muslim, Mormon, Quaker, and other religions, were (and sometimes still are) directed to avoid investing in companies that run counter to the values of that faith. This is sometimes called faith-based investing.

Similarly, throughout history there have been groups as well as individuals who have taken a stand against certain industries or establishments by refusing to invest in related companies. Non-violent groups have traditionally avoided investing in companies that produce weapons. Others have skirted so-called “sin stocks”: companies that are involved in alcohol, tobacco, sex, and other businesses.

On a more global scale, widespread divestment of investor funds from companies in South Africa helped to dismantle the system of racial apartheid in South Africa in the 1980s.

Phase 2: Proactive Investing

Just like exclusionary strategies, proactive strategies are values-led. But rather than taking an avoidant approach, here investors put their money into companies and causes that match their beliefs.

For example, one of the earliest sustainable mutual funds was launched in 1971 by Pax World; the founders wanted to take a stand against chemical weapons in the Vietnam war and encourage investors to support more environmentally friendly businesses.

This approach gained steady interest from investors, as financial companies launched a range of funds that focused on supporting certain sectors. So-called green investing helped to establish numerous companies that have built sustainable energy platforms, for example.

Phase 3: Investing With Impact

With the rise of digital technology in the last 30 years, two things became possible.

First, financial institutions were able to create screening tools and filters to help investors gauge which companies actually adhered to certain standards — whether ethical, environmental, or something else. Second, the ability to track real-time company behavior and outcomes helped establish greater transparency — and accountability — for financial institutions evaluating these companies for their SRI fund offerings.

By 2006, the United Nations launched the Principles for Responsible Investment (PRI), a set of global standards that helped create a worldwide understanding of Environmental, Social, and Governance strategies.

ESG became the shorthand for companies that focus on protecting various aspects of the environment (including clean energy, water, and air); supporting social good (including human rights, safe working conditions, equal opportunities); and fair corporate governance (e.g. fighting corruption, balancing executive pay, and so on).

Why Choose Socially Responsible Investing?

While the three phases of socially responsible investing did emerge more or less chronologically, all three types of strategies still exist in various forms today. But the growing emphasis on corporate accountability in terms of outcomes — requiring companies to do more than just green-washing their policies, products, and marketing materials — has shifted investors’ focus to the measurable impacts of these strategies.

Now the reasons to choose SRI strategies are growing.

Investors Can Have an Impact

The whole notion of values-led investing is that by putting your money into organizations that align with your beliefs, you can make a tangible difference in the world. The performance of many sustainable funds, as noted above, indicates that it’s possible to support the growth of specific companies or sectors (although growth always entails risk, and past performance is no guarantee of future results).

Socially Responsible Strategies May Be Profitable, Too

As discussed earlier, the question of whether SRI and ESG funds are as profitable as they are ethical has long been a point of debate. But that skepticism is ebbing now, with new performance metrics suggesting that sustainable funds are on par with conventional funds.

Socially Responsible Investing May Help Mitigate Risk

ESG factors can help identify companies with poor governance practices or exposure to environmental and social risks, leading to financial losses. And during the Covid-19 pandemic, many ESG funds showed more resilience in the face of prolonged market volatility than conventional funds — indicating that ESG funds may offer some downside protection as part of an overall portfolio allocation.

ESG and SRI Strategies Are Gaining Popularity

The various benefits that ESG investing may offer seems to be attracting investors. Globally speaking, assets under management that adhere to ESG principles may surpass $41 trillion by the end of 2022, according to a 2022 report by Bloomberg Intelligence based on data from the Global Sustainable Investment Association.

At this rate, global AUM could reach $50 trillion by 2025 — a leap from the nearly $36 trillion in AUM at the start of 2020.

Do Retirement Accounts Offer Socially Responsible Investments?

Generally speaking, some retirement accounts may include socially responsible or ESG investment options. For example, when investing in a traditional, Roth, or SEP IRA, investors typically have access to all the securities offered by that financial institution, including stocks, bonds, and ETFs that may reflect ESG standards. The choice is up to individual investors.

That said, when dealing with an employer-sponsored 401k or 403b plan, the plan provider may or may not offer SRI or ESG options. Typically, ERISA standards for retirement plans dictate that the investment options offered by employer-sponsored plans “must be based on risk return factors that the fiduciary prudently determines are material to investment value.”

What that means, though, has been the subject of debate, especially over the last few years. In 2020, for example, the Department of Labor (DOL) issued a rule that might have limited or eliminated ESG investments in employer-sponsored plans. That was revised, however, in October of 2021 when another proposed rule re-opened the door to socially responsible investments in these plans.

The new proposed rule will likely be finalized at some point in 2022.

Invest in Socially Responsible Funds With SoFi

Socially responsible investing is a broad term that can mean different things to different groups, but no matter which term you use — socially conscious investing, impact investing, ESG investing — it comes down to the compelling idea that by investing your money in organizations that match your values, you can make a difference in the world.

To gauge the appeal of these strategies, look to the remarkable growth of socially responsible funds worldwide. According to the Global Sustainable Investment Alliance report released in 2021, ESG assets under management (AUM) reached $35.3 trillion globally in early 2020, and are well over that today. Data from Morningstar released this year suggests that more than half of these funds are outperforming conventional funds, especially in the last three to five years.

If investing according to your values is something you’d like to do, consider opening an online brokerage account with SoFi Invest. You can trade stocks, ETFs, even IPO shares — all from the secure SoFi platform. Even better, you can access complimentary advice from financial professionals when you have questions. Develop your personal investing strategy today!

See how SoFi Invest can help you pursue socially responsible investing.

FAQ

Is socially responsible investing profitable?

According to a 2022 report by Morningstar, the performance of sustainable funds was “on par with the overall fund universe in 2020” — and outperformed conventional funds over trailing three- and five-year periods.

What is the difference between ESG investing and socially responsible investing?

Socially responsible investing is considered a broad term that can encompass a range of practices and standards. ESG investing is a set of principles that is often used to assess how well companies meet specific, measurable criteria.

How many socially responsible investment opportunities are there?

It’s impossible to say how many SRI opportunities there are, as the stocks, bonds, and other securities that embrace ESG standards continue to grow. More than 120 new sustainable funds entered the SRI landscape in 2021, in addition to 26 existing funds that took on a sustainable mandate.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Photo credit: iStock/luigi giordano
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