Investing Archives | Page 169 of 221

Jul

2022

How to Invest in the Metaverse: A Beginner’s Guide

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

The metaverse refers to an amalgamation of digital and virtual worlds where people will be able to collaborate, socialize, shop, and even work and learn in 3D spaces. It’s billed as a more embodied or immersive way of experiencing life on the internet, and it’s tied to Web 3.0 — the next iteration of the world wide web.

The metaverse includes cryptocurrencies, video games, Web3 platforms, and much more. And with established tech companies creating countless new products and possibilities, you can even invest in the metaverse. True, the metaverse is an evolving state of technology + reality. It’s really just getting started. But for those who want to seize the moment and invest in the metaverse in its early stages, here’s what you need to know.

Birth of the Metaverse

The concept of the metaverse can be difficult to wrap your head around, and yet in many ways it’s already here. There are numerous aspects of modern life that can be considered a part of the metaverse, including virtual infrastructure, multi-player video games, non-fungible tokens (NFTs), cryptocurrencies, and more.

In fact, it’s easier to think of the metaverse in more established terms like cyberspace or Web 3.0, which describe how existing technologies are evolving in new directions. Cyberspace helped define the emergence of interconnected digital spaces and devices. And Web 3.0 is now emerging as the term of art for where the internet is headed: more experiential, decentralized, and open.

Recommended: Web 3.0 Guide for Beginners

History of the Metaverse

You could argue that the origins of the metaverse date back to the creation of the first three-dimensional image in the 1830s — a primitive system that helped pave the way for stereoscopes and even today’s VR headsets.

The idea of 3D images combined with sensory experiences led to the first virtual reality products in the 1950s. Decades later, many remember when Google unveiled “Google Glass,” which never took off, but could also be thought of as an attempt to bring the metaverse to the masses.

As a result of nearly a century of digital innovation — including science fiction stories and movies that inspired real life technologies — augmented and virtual reality technologies are now fairly common. And many companies are hard at work intertwining virtual worlds with the physical world. That’s helping to fuel new opportunities in the metaverse, and potentially a trillion-dollar market by the end of the decade.

As such, it’s easy to see why investors may be interested in exploring new opportunities in order to get in on the ground floor and invest in the metaverse now.

3 Ways to Invest in the Metaverse

If you’re ready to put your money to work and wondering, How can I invest in the metaverse?, there are a few avenues to consider — and they are similar to investing in any other industry:

1. Invest in companies or industries where business growth is related to the metaverse.

2. Invest in metaverse cryptocurrencies.

3. Invest in stocks and funds doing business in the metaverse.

For now, investors may want to consider investing in companies or industries that are focused on expanding or innovating products, technologies, and services that relate to the metaverse. In addition, there may be digital assets and currencies that will also grow as the metaverse expands.

Investors can also explore stocks of companies that are doing business in the metaverse as well as mutual funds and exchange-traded funds (ETFs) related to the metaverse,

Of course, the same caveats apply when you invest in the metaverse as when you invest in any other sector. It pays to do your research, to decide where metaverse investments fit into the rest of your financial portfolio, and to get expert guidance when needed.

Indeed, when you invest in the metaverse, even more caution may be required, given that these technologies and industries don’t have long track records.

Are There Metaverse ETFs?

Yes, there are a number of metaverse ETFs that are already available to investors.

Generally speaking, and as with many investments in the metaverse space, these ETFs offer exposure to companies working directly on technologies related to the metaverse, or in adjacent industries. Think: fintech, gaming, social media, tech giants, and similar companies.

Many of these ETFs are also being launched by established financial institutions, which can be a sign of a broader trend that investors may want to keep an eye on.

5 Metaverse Stocks to Watch For

If metaverse ETFs aren’t your preferred investment vehicle, you can buy some specific, individual metaverse stocks. Or, at least stocks that are metaverse related. Below are five of the biggest companies in the metaverse space. That doesn’t mean you should add them to your investment portfolio, but if you’re interested in the metaverse and the tech that powers it, you may want to keep an eye on these stocks:

1. Meta

With its new moniker “Meta,” the parent company of Facebook, Instagram, and Oculus is considered a leading metaverse-focused corporation. Meta (META) is dedicating a lot of resources to the metaverse, incorporating virtual reality, augmented reality, and more into its Oculus headsets and smart glasses. It even rolled out digital workrooms that allow users to participate in digital meetings using VR headsets. Meta is going all-in on the metaverse.

2. Microsoft

Microsoft (MSFT), the global software manufacturer, also has a large gaming division with its Xbox console and has become a leader in the metaverse. A big part of Microsoft’s activity in the metaverse space has to do with gaming and building virtual worlds, as it has been acquiring numerous video game studios (including Activision Blizzard and Bethesda, makers of popular IPs like “Call of Duty” and “Fallout,” among others) in recent years.

3. NVIDIA

NVIDIA (NVDA), a semiconductor producer known for inventing the GPU, is creating what may be considered the backbone of the metaverse with its powerful processors and chips. Plus, NVIDIA also launched the NVIDIA Omniverse, which is a simulation and collaborative platform in the existing metaverse.

4. Autodesk

Autodesk (ADSK) makes software that’s used by engineers and architects to design buildings and real estate projects. Now, it’s being used to create similar digital projects in the metaverse.

5. Roblox

Roblox (RBLX) is a video game ecosystem, where users can design their own characters, content, and games. In a sense, Roblox is a more established player in that it has already created a metaverse, with millions of people engaging in virtual experiences and creating their own virtual content. Thus may be appealing to investors in this space.

4 Metaverse Cryptocurrencies to Watch For

Similarly, here are some metaverse cryptocurrencies that may catch the eye of an enterprising metaverse investor. These are the largest metaverse cryptocurrencies by market cap, as of June 10, 2022:

1. The Sandbox (SAND)

SAND is the native token of The Sandbox platform, which is something of play-to-earn virtual game that is backed by gaming brands such as Atari. Participants can use SAND tokens to create NFTs on the platform, which is built on the Ethereum blockchain.

2. Theta Network (THETA)

The Theta Network aims to decentralize streaming services — it’s a unique blockchain that allows users to build apps for streaming, broadcasts, and more. For metaverse crypto investment outside of the Ethereum blockchain, Theta may be of interest to some investors.

3. Axie Infinity (AXS)

Axie Infinity is another play-to-earn metaverse game on the Ethereum blockchain which allows players to create little virtual creatures called Axies. They can also buy and exchange land plots, NFTs, and more in the game. AXS is the network’s native coin, which players can earn by playing.

4. Enjin Coin (ENJ)

Enjin Coin (ENJ) is a crypto that was created by Enjin, a software company that allows users to create and trade virtual goods like NFTs on the Ethereum blockchain. The coin, in effect, makes it easier to conduct in-game or in-virtual-world transactions, making it easy to see why it would be appealing to metaverse participants and investors.

The Takeaway

The metaverse, with its rapidly expanding virtual worlds and digital assets and NBDB technologies, is just beginning to take off. Yet so many established tech companies are already in this space, there are numerous opportunities for investors to consider, including mutual funds, exchange traded funds (ETFs), stocks, cryptocurrencies, and more.

Still, investing in the metaverse has some very clear and obvious risks because this sector is so new. It’s difficult to predict which products, services, and virtual currencies might succeed, and where the inevitable hurdles for this nascent industry will arise.

If you’re keen to get started, consider opening an investment account with SoFi Invest. From SoFi’s secure app, you can trade stocks, ETFs, IPOs, and more right from your phone or computer. And SoFi members are entitled to complimentary access to financial professionals who can help answer your investing questions.

Check out SoFi Invest today.

Photo credit: iStock/Prostock-Studio

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.

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.

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.

SOIN0522006

Jul

2022

ETFs vs Index Funds: Differences and Similarities, Explained

By AJ Smith | invest, Investing, Terminology | No Comments

While most exchange-traded funds, or ETFs, are passively managed just like index funds (meaning they track a certain market index), these funds have different structures, which can have a significant impact on investors.

Index funds are a type of mutual fund, which means they are less transparent, liquid, and tax efficient compared with ETFs. Exchange-traded funds shares, for example, trade on exchanges throughout the day, similar to stocks — while index funds do not. Owing to disclosure regulations, index ETFs are also more transparent than index mutual funds.

Here’s what else you need to know before you decide whether to invest in an index fund vs. an ETF.

An Overview of Index Funds

In order to understand some of the similarities between index funds and ETFs, both of which adhere to passive investing strategies (though a small fraction of ETFs are actively managed), let’s start with what a market index is and how it works.

What Is an Index?

A market index tracks a representative sample of securities in a particular sector or asset class. For example, the S&P 500 index tracks the performance of the 500 largest companies in the U.S., while the Russell 2000 index tracks small-cap domestic companies. Typically, the index is weighted according to the size of the companies.

Most indices are used as benchmarks to measure the performance of assets in a particular sector. Meaning: large-cap U.S. mutual funds might measure their performance against the S&P 500 index as a benchmark.

You can’t invest in an index, but you can invest in funds that track the index.

So index funds or index ETFs that track the S&P 500 seek to mimic the performance of that benchmark by investing in the same large-cap U.S. companies that are in the index, and giving them a similar weight in the fund.

The same goes for funds that track any other benchmark, whether that’s the Nasdaq 100 Index (which includes 100 of the largest domestic and international non-financial companies), or the MSCI World Index (mid- and large-cap global companies), or one of the many bond indices. Index funds and ETFs simply track the performance of the index, thus they are passively managed.

What Is Passive Investing?

As noted above, an index fund mirrors the performance of its index, which is known as passive investing. An actively managed fund, however, follows the strategy of an active management team. So active investing is a strategy where human portfolio managers pick investments they believe will outperform the market — whereas passive investing relies on a formula to mirror the performance of certain market sectors.

There are thousands of mutual funds available to investors, and the vast majority of them rely on active strategies. In 2021, there were over 6,600 actively managed funds, and about 500 passively managed (index) funds in the U.S., according to Statista.

Even though the number of index funds is much smaller, these funds track a wide range of benchmarks, which naturally has an impact on index fund returns. A fund that tracks a corporate bond index versus a fund that tracks an index of biotech stocks will typically have different returns.

What’s the Differences Between an ETF and Index Fund?

When picking ETFs, however, bear in mind that the world of ETFs is the opposite of mutual funds: the majority of ETFs are passively managed; i.e. they are index ETFs.

Only about 2% of ETFs are actively managed, owing to rules about transparency for these products.

That’s why many actively managed ETFs rely on a certain fund structure that allows for less transparency. These are called active non-transparent or ANT ETFs.

So: ETF vs. index fund, what are the primary differences?

How an Index Fund Works

Index funds are mutual funds. They are a collection of stocks, bonds, or other securities that are bundled together into a single unit (the mutual fund). Some may invest in large-cap stocks; some in ESG companies; some in tech; some in international companies, and so on. Most investors own more than one type of mutual fund in their portfolio, and you can also own more than one type of index fund.

Like any other type of mutual fund, index fund shares can be traded only once per day. You can put in the order in the morning, but it won’t go through until the market closes. This means the price you anticipated when you entered the order to buy or sell isn’t necessarily what you’ll get.

💡 Recommended: Learn what actively managed ETFs are and how they work.

How an ETF Works

An ETF is an exchange-traded fund, so its wrapper — or structure — is not the same as a traditional mutual fund. While an exchange-traded fund is also a basket of securities, shares of these funds can be traded on exchanges throughout the day, just like stocks. As a result, ETF shares are not only more liquid from a cash standpoint, they are also more fluid.

Mutual fund shares vs. ETF shares are relatively fixed. ETFs can generate more shares, depending on investor demand. But because an ETF is listed on a stock exchange, a sale can go through any time the market is open. An investor can get real-time pricing information with relative ease by checking financial websites or calling a broker. That’s a plus for investors and financial professionals who like the idea of making moves based on market conditions.

When trading ETFs, bear in mind that the expense ratio of ETFs is generally lower than most mutual funds. And owing to the way shares are created and redeemed, ETFs can be more tax efficient.

ETFs can offer that flexibility and more transparency: Investors can review holdings daily and monitor portfolio risk exposures more frequently than with indexed mutual funds.

Similarities Between ETFs and Index Funds

As noted above, ETFs and index funds are both pooled investments, like baskets that include dozens, sometimes hundreds of securities in a single package. This helps provide investors with diversification within the fund that can help mitigate risk and may improve performance. In addition, these two fund types share some other similarities.

Cost

ETF vs. index fund — which is cheaper? The cost per share varies widely, of course, but when it comes to expense ratios of these funds the two are increasingly competitive. Time was when ETFs fees were far lower, but now many index funds have ultra-low expense ratios.

Still, many ETFs no longer charge brokerage fees or commissions, which cuts out a cost that many mutual funds still charge. Mutual funds also tend to have higher administrative costs.

Diversification

Both ETFs and index funds can offer investors the potential to add diversification to their portfolios.

ETF vs Index Fund: Pros and Cons of Each

There’s no cut-and-dried answer to whether ETFs are better than index funds, but there are a number of pros and cons to consider for each type of fund.

Transparency

By law, mutual funds are required to disclose their holdings every quarter. This is a stark contrast with ETFs, which disclose their holdings each day.

Transparency may matter less when it comes to index funds, however, because index funds track an index, so the holdings are not in dispute. That said, many investors prefer the transparency of ETFs, whose holdings can be verified day to day.

Pricing

Because a mutual fund’s net asset value (NAV) isn’t determined until markets close, it can be hard to know exactly how much an index fund costs until end of day. That’s partly why mutual funds, including index funds, allow straight dollar amounts to be invested, as well as purchasing shares. If you buy an index fund at noon, you can buy $100 worth, for example, regardless of the share price.

ETF shares, which trade throughout the day like stocks, are priced by the share, so you always know how much you’re paying for an ETF.

This pricing structure also allows investors to use stop order or limit orders to set the price they’re willing to buy or sell.

Taxes

ETFs are generally considered more tax efficient than mutual funds, including index funds.

The way mutual funds are structured, there can be more tax implications as investors buy in and out of an index fund, and the cost of taxes is shared among different investors. ETF shares are redeemed directly for cash, so if there are capital gains, you would only owe them based on your ETF shares.

How Do Investors Find the Right ETF?

Choosing between ETFs vs. index funds typically comes down to cost and flexibility, as well as understanding the tax implications of the two fund types. While both ETFs and index funds are low-cost, passively managed funds — two factors which can provide an upside when it comes to long-term performance — ETFs generally have the upper hand when it comes to taxes.

If taxable gains are a concern for you, ETFs may be a more tax-efficient option vs. index funds, which are structured such that gains are dispersed among shareholders. Also consider the tax structure of the container: i.e. are you holding the fund in a taxable portfolio, or a tax-deferred retirement account?

Once your goals are clear, selecting an ETF is easy when you set up a brokerage account with SoFi Invest. You can explore ETFs from the secure SoFi app at your convenience, and invest in ETFs in a taxable account or an IRA. SoFi also enables you to trade stocks, IPO shares, and more. Whatever your aims are, SoFi can get you started on your investing future.

Download the SoFi app to get started.

FAQ

Is it better to choose an ETF or an index fund?

ETFs and index funds each have their pros and cons. ETFs tend to cost less and be more tax efficient, and you can trade ETFs like stocks throughout the day. If you’re interested in more of a buy-and-hold strategy, an index fund may make more sense.

What are the similarities between an ETF and an index fund?

All index funds, and about 98% of ETFs, are passively managed — meaning, they track a certain market index. In addition, both ETFs and index funds tend to be much cheaper to own, versus their actively managed counterparts.

What are the differences between an ETF and an index fund?

ETFs generally cost less, are more transparent, and more tax efficient compared with index funds.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Jul

2022

FINRA vs the SEC

By Paulina Likos | Growing Wealth, invest, Investing | Comments Off

The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are critical regulating entities for the financial services industry in America. They oversee financial markets to ensure that they are fair and orderly, and to protect investors. The role of financial regulators is to facilitate a sound financial services industry that consists of markets, exchanges, and firms that comply with their laws and regulations.

These regulators exist to keep market participants safe from financial fraud and to help participants to manage their investment risk. There are many reasons why investors should understand the roles and responsibilities of both the SEC and FINRA, as well as how these regulatory bodies differ. Arm yourself with this vital information to help make better investment decisions.

What Is Financial Industry Regulatory Authority (FINRA)?

FINRA is a government authorized not-for-profit organization that oversees U.S. broker dealers. The organization’s purpose is to protect investors and uphold the integrity of financial markets to ensure the markets operate fairly. FINRA oversees more than 600,000 brokers throughout the U.S. and monitors billions of daily market events.

The SEC supervises FINRA in writing and enforcing investing rules that all registered broker dealers in the U.S. must follow. FINRA makes sure that these firms comply with these rules, as it facilitates market transparency and educates investors.

Specifically Regulates Margin Accounts

FINRA also regulates margin accounts, which involve a customer borrowing funds from a firm to make trades. Under FINRA margin requirements, some securities cannot be purchased on margin, in which case a cash account must be used to deposit 100% of the purchase price. FINRA rules require traders to have 25% or more of the current market value of securities in the account, otherwise they may be required to deposit more funds or securities to meet the 25% threshold. If this requirement is not met, the firm may need to liquidate the securities to bring the account to the required level.

What Is the Securities and Exchange Commission (SEC)?

The SEC is a market regulator whose purpose is to protect investors, maintain fair markets, and facilitate ways for businesses to access capital. This regulatory body consists of 11 regional offices and 6 divisions. It requires public companies, asset managers, and investment professionals to disclose important financial information, so investors are equipped to make the best investment decisions.

The SEC will also enforce federal securities laws to keep lawbreakers accountable in the name of protecting investors. In order to maintain fair and efficient markets, the SEC monitors the market and adjusts rules and regulations according to the evolving market environment.

FINRA vs the SEC

Both institutions were created to protect investors against investment fraud and maintain the integrity of U.S. financial markets, but there are differences between these regulatory agencies.

How Are FINRA and the SEC Different?

The SEC was created under the Securities Exchange Act of 1934 and one of its responsibilities is to oversee FINRA, which was created in 2007. FINRA is a self-regulatory organization that oversees and regulates its member’s actions. Unlike the SEC, FINRA is not mandated by the U.S. government. Rather, it’s a private or self-regulatory organization (SRO) consisting of the registered broker-dealers that FINRA oversees.

The SEC on the other hand focuses more on protecting the individual investor. The SEC was born of the Great Depression in 1929 with the goal of restoring investors’ confidence in financial markets, as well as enforcing the rules. FINRA’s role is narrower. It revolves around regulating brokerage firms and handles the testing and licensing requirements, such as the series 7 exam. All broker dealers must be licensed and registered by FINRA.

How They Are Similar

Both FINRA and the SEC have similar responsibilities of protecting investors. Both organizations play important roles in upholding the integrity of the U.S. financial system and take action to protect the public from fraud and other financial bad practices. And both agencies’ website offers tools and insights that help educate investors about how to secure their financial future.

The SEC is the ultimate regulatory watchdog of financial markets, and FINRA regulates the securities industry by overseeing stockbrokers. The work that comes out of the SEC and FINRA helps these agencies to function smoothly. The SEC reviews FINRA’s regulatory work — like managing required industry examinations and inspecting securities firms — which is vital to protecting investors and monitoring financial markets.

FINRA vs the SEC: Quick Look

	FINRA	The SEC
What Is It?	government authorized not-for-profit that oversees U.S. broker dealers (BDs)	a U.S. government agency; ultimate regulatory watchdog of financial markets
What is it’s purpose?	both uphold integrity of financial markets; maintain fair/ orderly markets; specific regulator for margin accounts	focuses more on protecting individual investors; created to restore investors’ confidence in financial markets; helps firms to access capital
When/ how created?	created in 2007	created with the Securities Exchange Act of 1934
Relationship with U.S. Government	not mandated by U.S. government; a private SRO; consists of registered BDs	a U.S. government agency; born of Great Depression,1929
Function?	enforces rules; but narrower role than SEC’s; regulates BDs; manages testing/ licensing requirements (e.g., series 7 exam); all BDs must be licensed by FINRA	enforces rules; oversees FINRA; creates and enforces securities laws
Public resources?	yes, offers tools and insights that help educate investors about how to secure their financial future	yes, offers tools and insights that help educate investors about how to secure their financial future

How to Avoid Trouble With FINRA and the SEC

The best way to avoid trouble with FINRA and the SEC is to abide by their rules and regulations. And, if you give your money to an investment professional to manage, you also may want to confirm that this professional is registered with the SEC and licensed to do business in your particular state. It also could be worthwhile to research whether this professional has ever been disciplined by the regulatory agencies, or if there are any prior complaints against these professionals.

If you want to take it a step further, you could examine which types of financial instruments this professional recommends. At all times, it’s best to know that you and your investment advisor are aligned with your investment goals; that they are choosing securities that are right for you, your future, and your financial goals.

Cash Accounts vs Margin Accounts

Two popular accounts that are typically opened by market participants are either cash accounts or margin accounts. Each type of account comes with its own regulations. With margin accounts — which are regulated by FINRA along with other financial institutions — you have the ability to borrow funds, but with a cash account, you cannot borrow funds. For investors using cash accounts to purchase securities, there are regulations to abide by. To avoid violations, remember that you can’t borrow funds from your brokerage firm to pay for transactions in your cash account. Transactions using borrowed funds can only be made in a margin account.

The Takeaway

The SEC and FINRA exist to manage U.S. financial markets with investor protection top of mind. Their rules and regulations can adjust according to how the market is evolving. Understanding their mandates and goals is a great tool for investors to understand their rights as market participants in the event they fall victim to fraud.

You can get started investing by opening a brokerage account with SoFi Invest. You might want to take advantage of its new features, like margin lending, which lets you borrow money against your current assets. If you are an active investor who prefers the do-it-yourself approach, SoFi offers all the tools needed so you can make the right investment decisions that are best suited for your investing style and future goals.

FAQ

Does FINRA approve SEC rules?

No. In the line of hierarchy, the SEC is the oversight authority over FINRA.

Is FINRA part of the U.S. federal government?

No. FINRA is an independent, private entity, while the SEC is a government-mandated organization.

Does FINRA report to the SEC?

FINRA is a self-regulatory organization that operates under the purview of the SEC.

Photo credit: iStock/damircudic

Jul

2022

Stablecoins vs Altcoins: A Comparison

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Getting started with cryptocurrency investing can be overwhelming because there are a lot of technical terms to learn. One important distinction to understand is the difference between Bitcoin, altcoins, and stablecoins. Each of these types of crypto have their benefits and downsides.

In this article, we look at stablecoins and altcoins to see how they compare as crypto investments.

What Is An Altcoin?

An altcoin is simply any cryptocurrency that is not Bitcoin (BTC). Some people refer to altcoins as any cryptocurrency that is not Bitcoin or Ethereum (ETH). Bitcoin was the very first cryptocurrency, and is still the most dominant crypto. Usually, BTC is worth between 45% and 70% of the entire value of the multi-trillion dollar crypto market. In addition to its value and adoption, Bitcoin is the most widely known cryptocurrency around the world.

💡 For more details, check out: What Are Altcoins? A Guide to Bitcoin Alternatives

Although Ethereum is not as widely adopted as Bitcoin, it is also well-known and holds a large percentage of the market. Because the Ethereum network can be used to create smart contracts and other tokens, many blockchain and crypto transactions use the Ethereum network.

Because Bitcoin is such a dominant part of the crypto sector, all other crypto tokens have become known as altcoins. Thousands of altcoins are available for trade on various exchanges. It’s impossible to know exactly how many altcoins there are, as the industry is so decentralized and global, and anybody can create an altcoin. Industry watchers have observed patterns in the relationship between Bitcoin and altcoins. If Bitcoin increases a lot in value, often that is followed by altcoin season, in which altcoins also increase in value.

Bitcoin and altcoins have the same basic characteristics. They are digital currencies that use blockchain-based ledgers to keep track of transactions in a secure and transparent manner. However, each altcoin has different features that can make it a potentially attractive alternative to Bitcoin. For instance, some altcoins use different types of staking or proof systems; they can claim more anonymity than Bitcoin, or they have faster transaction times.

What Is a Stablecoin?

A stablecoin is a cryptocurrency whose value (of each coin) is pegged to an external asset — such as the U.S. dollar, the Euro, and even a commodity or another cryptocurrency. All stablecoins are also altcoins. They were originally brought to the crypto market in 2015.

💡 For more details, check out: What Are Stablecoins?

How Stablecoins Work

As the price of each coin is pegged to a particular asset, the price of the coin is always the same as the current market price of the asset. For instance, if a stablecoin is pegged to the U.S. dollar, the price of each coin will always remain as close as possible to $1. In order to maintain a stable price, the coin’s developers — or in some cases a government agency — can intervene, which generally takes the form of launching inflation production along with a guaranteed buyback.

For example, if a stablecoin XYZ is created and pegged to the U.S. dollar, the coin creators could hold the amount of USD that they have released in the token form in an account. This way, they can always guarantee that they could buy back XYZ coins for $1, even if they need to buy 100% of them back. Although backing guarantees a minimum value for XYZ, the market price of the coin could still go up. In order to keep it at $1, the creators can release more XYZ coins to reduce the price. Unbacked stablecoins are also known as non-collateralized stablecoins or “seigniorage-style” stablecoins.

Although this system works in theory, it takes a lot of capital to back 100% of a stablecoin. There is a risk that stablecoin developers claim to hold more than they really do. If enough people try to sell their stablecoin and there isn’t sufficient cash to back it up, the stablecoin price could collapse.

About “Seigniorage”

Another way that stablecoin developers can maintain a stable pegged token price is to use a system of algorithms that guides the expansion and contraction of a stablecoin’s money supply. In other words, algorithms can tell governments and economists when it might be beneficial either to inject money into or withdraw money from the economy.

Under certain conditions, creating new money within a particular country is cheaper than the money’s current face value. When this occurs, a government can claim as revenue the difference in price between printing new money and the current face value of the money.

In financial services, the revenue a government receives by creating new money is called seigniorage. The seigniorage strategy only uses supply as a regulating tool. If the price of XYZ drops below $1, the developers buy back coins from the market to increase the price, and vice versa. Although this requires less capital than the backing method, it tends to be slower, so the stablecoin may not hold quite as stable a price.

Stablecoins vs Altcoins

Although all stablecoins are altcoins, not all altcoins are stablecoins. Let’s look at some similarities and differences between the two.

Similarities

Both stablecoins and altcoins are cryptocurrencies that use the blockchain to record and keep track of transactions. They are digital currencies that can be traded on exchanges and stored in different types of hot or cold storage crypto wallets.

Differences

The main difference between stablecoins and altcoins is that stablecoins always remain at the same value, whereas altcoins can spike or dip in value.

Stablecoins provide a stable investment that will always remain the same value. Altcoins, on the other hand, offer different types of functionality, which makes them an attractive alternative to Bitcoin.

Similarities	Differences
Both are cryptocurrencies	Stablecoins’ value usually remains the same
Built on blockchain	Altcoins’ value can rise or fall
Digital currencies
Can trade on crypto exchanges
Stored in different types of crypto wallets

Examples of Altcoins and Stablecoins

Below are examples of altcoins and stablecoins an individual can buy.

Altcoins: Examples

There are thousands of altcoins on the market; some popular altcoins are: Dogecoin (DOGE), Litecoin (LTC), and Monero (XMR).

Some types of altcoins include mining-based altcoins, security tokens, utility tokens, and stablecoins.

• Mining-based altcoins: This type of altcoin can be earned by users through a computer-based process known as mining. Bitcoin also uses a mining system for the minting of new coins and to keep the network running. Examples of mining-based altcoins are Ethereum and Litecoin.

• Security tokens: These altcoins are similar to buying stock in a company. They are issued by businesses and released to buyers through an initial coin offering (ICO). Buyers who own security tokens can earn dividends or partial ownership in the issuing company. Examples of security tokens include Sia Funds, Blockchain Capital, and Science Blockchain.

• Utility tokens: These tokens serve a use case within a specific ecosystem, such as a video game or an ecommerce store. They enable the owner to take certain actions in the network, such as buying a digital good within a video game world. The token is created just for use in that ecosystem and can be traded in the broader crypto market; but it only has real use within that ecosystem. Some examples of utility tokens are Basic Attention Token and Binance Coin.

Stablecoins: Examples

Some popular stablecoins are: Binance USD (BUSD), Dai (DAI), Digix Gold (DGX), Paxos Standard (PAX), and TrueUSD (TUSD).

Potential Advantages/ Disadvantages of Altcoins

Altcoins can be a great way to diversify away from Bitcoin, and they offer features that can be attractive to investors. It’s impossible to know which altcoins will ultimately survive and be mass adopted, so altcoins do come with some risk, but there are several altcoins that have already become widely used.

Potential Advantages	Potential Disadvantages
Room to grow	Can be volatile
May offer unique functions	Limited usage
Can have lower fees	No guarantee that they’ll survive
Can have quicker transactions	Hard to compete with Bitcoin for market share
Can offer more anonymity	Can have low liquidity
Can offer lower energy usage	Second choice for many investors

Potential Advantages/ Disadvantages of Stablecoins

Stablecoins make it easier to trade cryptocurrencies on an exchange. Instead of buying bitcoin (or another crypto) with fiat currency directly, traders often exchange fiat for a stablecoin — and then using the stablecoin, they execute a trade for another cryptocurrency. During times of market volatility, some investors might choose to park their money in stablecoins. However, stablecoins don’t offer the same potential upward price movement as altcoins.

Potential Advantages	Potential Disadvantages
Fast processing time	Require a third party
Lower fees	Require external auditing
Transparency	Low return on investment
Borderless transactions	Locked to the value of an external asset
Easily programmable changes
Safer asset in which to store funds during volatile markets
Many are securely backed by external assets
Convenient to trade on an exchange

FAQ

Is XRP considered a stablecoin?

No. XRP is an altcoin, but it is not a stablecoin.

Can stablecoins be mined?

Yes, some stablecoins can be mined.

Are altcoins and stablecoins mutually exclusive?

All stablecoins are altcoins, but not all altcoins are stablecoins.

Photo credit: iStock/akinbostanci

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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.

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Jul

2022

Cross Margin and Isolated Margin in Trading

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

There are two common ways to use margin in a trading account. Cross margin involves margin that is shared between open positions. Isolated margin, on the other hand, is margin assigned to a single position that is restricted from being shared.

Cross margin helps prevent quick liquidations and has a better capability to withstand portfolio losses. Isolated margin offers better flexibility in that other portfolio holdings will not be affected if a single position is liquidated.

What Is Cross Margin?

Cross margin was introduced in the late 1980s to reduce systematic risk in the market and to help traders better manage their portfolios when engaging in margin trading. At the institutional level, cross margin offsets the value of hedged positions maintained by firms at multiple clearinghouses. Cross margining recognizes intermarket hedged positions, thus it allows for reduced initial margin requirements, fewer margin variations, and smaller net settlements.

For individual traders, cross margin provides more leeway in how open positions in a portfolio move. Cross margin takes excess margin from one margin account and gives it to another to satisfy maintenance margin requirements. That sharing of margin allows the trader to use all available margin balances across their accounts.

How Does Cross Margin Work?

Cross margin is not a simple calculation, and it runs on sophisticated algorithms. By sharing margin across accounts, traders can access more exposure without depositing more capital. Clearinghouses, central counterparties, and brokers determine cross margin amounts and automatically move margin between accounts that have registered for the service. Traders might prefer cross margining, as a single losing position might not be liquidated quickly when market conditions change. Excess margin is transferred from another account to meet a minor shortfall in minimum maintenance. Cross margin helps to avoid quick margin calls and forced liquidations.

How to Use Cross Margin

Cross margin is best used when a trader has multiple margin trading accounts. A cash account and margin account work differently, and cross vs. isolated margin only apply to the latter type. For traders concerned about a single position being stopped out, it is generally better for them to use cross margin vs. isolated margin, as the former is a tool to help prevent unnecessary forced liquidations. So a trader must trade with a broker who offers this service.

Volatile markets demonstrate the benefits of cross vs. isolated margin. With cross margin, when there are extreme movements in single securities, it is hard to keep a handle on individual positions’ margin requirements. Cross margining can calculate amounts automatically and move excess margin to other accounts that need it.

Increase your buying power with a margin loan from SoFi.

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*For full margin details, see terms.

What Is Isolated Margin?

Isolated margin is the margin assigned to a single position that is restricted to a specific amount. When the allocated margin drops below an unrealized profit and loss threshold or the maintenance margin requirement, the position is automatically liquidated. The upshot is that other positions in the account are not affected. Isolated vs. cross margin offers better flexibility because it can divide the trader’s funds, but stop-outs can happen quickly in volatile markets. Isolated margin vs. cross margin are different from each other, and both are used in crypto trading. It’s important to know what decentralized exchanges are when using either margin type when buying and selling crypto.

How Does Isolated Margin Work?

Isolated margin works by setting aside a margin amount for a single position. Volatile and speculative positions are sometimes good candidates for the use of isolated margin. It can be helpful when you don’t want other portfolio holdings to be impacted by a change in the value or margin requirements from that single position.

How to Use Isolated Margin

Traders have the flexibility to adjust their isolated margin amounts, which can be useful when managing their portfolio positions. You should consider isolated margin when you want more flexibility with a single position and seek to restrict a potential loss to only a small piece of your account. Isolated vs. cross margin can also require more nimble attention to the market, as you might need to actively adjust the isolated margin amount.

Cross- vs Isolated-Margin Compared

Let’s review the similarities and differences in cross vs. isolated margin. In general, cross margin is preferable for long-term strategies, as market- and single-asset volatility could always strike. Cross margin helps portfolios endure volatility with fewer automated stop-outs. The downside is that if there is an extremely volatile event, and liquidations occur, then total portfolio losses could be severe.

Similarities

Initial and maintenance margin rules apply to your account whether you use cross margin or isolated margin. The two strategies help to reduce the risk that your overall portfolio will experience fast liquidations.

Differences

The key difference between the two is that cross margin shares margin between positions and accounts. This can be a helpful feature for long-term investors and during periods of market volatility. Overall, cross margin can be a better risk-management tool for complex portfolios that consist of cryptocurrencies, options, and other derivatives.

Cross Margin	Isolated Margin
Margin shared between open positions	Restricts margin to single positions
Reduces the risk of liquidations	Tighter liquidation thresholds — more stop-outs possible
Ideal when used with intermarket hedged positions, as margin requirements can be offsetting	Traders can actively manage margin amounts on single positions

Advantages and Disadvantages of Cross Margin

Cross Margin Advantages	Cross Margin Disadvantages
The entire portfolio can be used to margin a position, as excess margin is transferred from one position to another	Cross margin amounts cannot be adjusted like isolated margin amounts can
The available balance can be added to isolated holdings	Higher liquidation total portfolio losses if the market moves against the trader in an extreme way
Useful in a volatile market to avoid quick stop-outs	One position change can negatively impact other holdings

Advantages and Disadvantages of Isolated Margin

Isolated Margin Advantages	Isolated Margin Disadvantages
Liability is limited to the initial margin posted	Excess margin won’t be transferred to a losing position
Ideal for a single speculative position	Volatility can cause fast liquidations
Dividing funds between assets can reduce risk of major loss across a portfolio	Leverage can be adjusted quickly

The Takeaway

It’s important that traders who engage in margin trading understand the concept of cross- vs. isolated margin. Cross margining is a feature that increases a firm’s or individual trader’s liquidity and trading capability by reducing margin requirements and lowering net settlement values. It provides flexibility when owning many positions. Isolated margin is the margin assigned to just one position — if it is liquidated, the account positions are not affected.

If you have the experience and risk tolerance and are ready to try out trading on margin for yourself, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.

Get one of the most competitive margin loan rates with SoFi, 11%*

FAQ

How is cross margin calculated?

In options trading, cross margin is calculated by clearinghouses and their clearing members, including prime brokerages that offer margining services. At the end of each trading day, organizations such as the Intercontinental Exchange and the Options Clearing Corporation (OCC) perform routing calculations and run reports for their clearing members.

Sophisticated algorithms calculate cross-margin levels. The OCC uses a program known as System for Theoretical Analysis and Numerical Simulations (STANS).

Is isolated margin the same as isolated leverage?

Isolated margin and isolated leverage are similar concepts. Isolated leverage is sometimes employed in cryptocurrency trading.

In isolated leverage mode, each cryptocurrency pair has a specific isolated margin account. Each margin account can only use margin on a specific trading pair.

What is the main benefit of cross margin?

Cross margining is when excess margin is transferred to another margin account to satisfy maintenance margin requirements. It allows traders to use their available margin balances across all their accounts. It makes it possible to have more exposure without extreme risk of liquidation should the market move against the trader.

Photo credit: iStock/Mirel Kipioro

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

SOIN0221010