Investing Archives | Page 175 of 221

Jun

2022

What NFT Music Is, How It Works, & Why It Matters

Guide to Music NFTs: What They Are and How They Work

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

You may be familiar with digital artworks that have been turned into non-fungible tokens (NFTs) and sold to collectors. Now NFT music, or music NFTs, are emerging as the hot new crypto collectible.

What does NFT mean, and why have these virtual products taken the world by storm? An NFT is basically a piece of intellectual property that has been minted into a non-reproducible digital asset that is logged on a blockchain.

NFTs, and NFT music, are also part of a broader technological shift toward digital products and lifestyles that reflect the emergence of Web 3.0, also known as Web3, a blockchain based evolution of Web 2.0.

We’ll explain what music NFTs are, how they work, and more, below.

What Are Music NFTs?

Music NFTs are digital assets that grant holders the ownership rights to music clips. Like other NFTs, which grant their holders ownership to images or digital artwork, NFT music does so with audio recordings. By minting music NFTs (read more if you’re asking yourself “what is NFT minting?”), musicians and artists are able to provide original digital assets to interested investors, while adding to their own revenue streams.

This is critical given that the music industry has been undergoing a massive transformation since the days of Napster, with streaming services and copyright issues compromising legacy systems. Artists have sought to find ways to leverage technology for their own benefit. And NFTs, based on blockchain technology, have emerged as a promising income source.

NFTs have gained popularity in recent years in large part due to the pandemic. Many artists generate revenue through touring — by selling merchandise, and getting a cut of ticket sales. But when the pandemic struck, all of that revenue dried up. As such, some turned to music NFTs as a way to incorporate a new revenue stream.

How Do Music NFTs Work?

Music NFTs work more or less the same way that other NFTs work in that they grant ownership to a unique piece of property to the holder. They use the same underlying cryptocurrency technology, blockchain, that cryptos such as Bitcoin are built on. Music NFTs, then, take the form of digital tokens, which their owners keep safely in digital crypto wallets.

Web 3.0 technology is growing as well, and because it’s also decentralized and permissionless, like many forms of crypto, it supports the widespread use of NFTs.

Music NFTs are minted, and then ownership details are grafted into a blockchain network, and when they are transacted, the details of those ownership changes are likewise recorded on the blockchain — similar to various other types of cryptocurrency transactions.

The big difference between NFT music and, say, purchasing a song or album on Amazon or another retailer, is that the NFT owner becomes the actual owner of the song itself. They own the asset, whereas purchasing a digital music track from a retailer only grants you the right to listen to the song. In effect, it’s licensing.

How Music NFTs Are Created

The creation of music NFTs is also the same process as creating image-based NFTs. That process, which is called “minting,” can only begin after there’s an underlying asset to mint. In this case, that would be a song or audio recording of some kind.

Let’s say a musician wants to mint a new song into an NFT and sell it. They would first need to select the necessary tools and platforms, such as which digital wallet they’d want to use for storing their assets, and which platform they’d like to use to execute the transactions (OpenSea is a popular choice, for example, as is Rarible and Mintable).

The musician would also need crypto to pay for minting fees and other transactions, as many platforms only accept crypto.

Using a platform like OpenSea, the minting process involves a few steps, but it’s fairly straightforward. It mostly involves selecting the audio track the musician wishes to mint, adding a title and some cover art, a description, and adding a few additional details.

Finally, the musician would choose a blockchain network to mint onto (usually Ethereum), and then hit the big red button to mint the song into an NFT.

From there, it can be sold to an investor.

Where Music NFTs Are Bought and Sold

The next logical question: Where can you sell or buy music NFTs? Or, how to buy and sell NFTs in general? The answer: An NFT marketplace. And again, there are many out there. OpenSea is one of the more prevalent, but a few simple Google searches will yield many more. It’s up to you to choose one.

In terms of the actual process of buying and selling music NFTs, it’s important to keep in mind that NFTs usually trade for ETH or native blockchain tokens, so you may not be able to fork over cold, hard USD cash in exchange for one.

How NFT Music Is Valued

Music NFTs have value for the same reason that any other digital asset, including other types of NFTs, have value: They’re scarce, and people are willing to pay for them. So, when they go up for sale, their value is ultimately determined by what an investor or music fan is willing to pay for them.

When it comes to music NFTs in particular, artists are creating digital assets — one-of-a-kind assets, at that — that are likely to catch the attention of many would-be NFT owners and investors.

Pros and Cons of NFT Music

NFTs are unique digital assets tied to blockchain technology and various crypto platforms. As such, they have their pros and cons:

Pros	Cons
Provide unique investment opportunities for music fans.	Blockchain platforms may be vulnerable to hacks or even collapse.
Easily purchased and sold with a digital wallet.	The NFT market is highly speculative, with a risk of volatility.
Popular artists are creating NFTs, validating the space.	Unclear what the future of NFTs might be.

Notable NFT Music

One reason that music NFTs have become so popular is that some big-name artists are getting in on the action. Here’s a handful of recent examples that are notable for their success:

• Kings of Leon: The rock band released an entire album, “When You See Yourself,” as an NFT in March 2021, generating millions of dollars.

• Grimes: The singer sold a package of songs and digital art in early March 2021, likewise making millions of dollars.

• 3LAU: The electronic musician released a collection of NFTs in February 2021.

• Haleek Maul: In 2021, the rapper sold four songs as NFTs, earning hundreds of thousands of dollars.

• Mike Shinoda: Shinoda, a former member of the rock band Linkin Park, has also taken to NFTs, releasing a mixtape last year in the form of NFTs.

The Future of NFT Music

It’s hard to say what the future holds for music NFTs, but it’s hard to ignore the sales number. In 2018, for example, NFT sales overall totaled about $40.7 million. But in 2021 sales reached more than $44 billion — and shows no signs of slowing. Indeed, the prevalence and popularity of many digital assets is likely to grow, given the adoption of Web 3.0 technology.

For musicians, the ability to sell their music as NFTs offers some clear benefits, and possibly could allow them to make more money than they would under a traditional recording contract.

With that in mind, it’s easy to see why many people think music NFTs are here to stay.

The Takeaway

Music NFTs are the music industry’s take on non-fungible tokens, blockchain-based digital assets that allow artists and musicians to sell audio content in a new format. As mentioned, they’ve taken off over the past couple of years largely due to the pandemic, and offer musicians a new way to derive additional revenue from their work.

FAQ

What is NFT music?

Music NFTs are similar to other types of NFTs, except that they comprise audio files rather than digital artwork or pictures.

How can you buy NFT music?

You can purchase music NFTs from an exchange, of which there are many. There are some that are designed specifically for the music industry.

How is NFT music used?

Music NFTs can be used as investments (you hold onto them and hope they gain value so you can earn a return), or for personal enjoyment.

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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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Jun

2022

Guide to Zero-Coupon Certificates of Deposit (CDs)

By Rebecca Lake | Growing Wealth, Investing, money | Comments Off

A zero-coupon certificate of deposit or zero-coupon CD is a type of CD that’s purchased at a discount and pays out interest at maturity. Zero-coupon CDs can offer higher yields than standard CDs for investors who have the patience to wait until maturity to collect their original deposit and the interest earned.

Zero-coupon certificates of deposit are similar to bonds, in that both are considered low-risk, fixed-income instruments, but they serve different purposes in a portfolio. Understanding how a zero-coupon CD works can make it easier to decide if it’s a good investment.

What Is a Zero-Coupon CD?

To understand zero-coupon CDs, let’s recap how a certificate of deposit works. A CD account, also referred to as a time-deposit or term-deposit account, is designed to hold money for a specified period of time. While the money is in the CD, it earns interest at a rate determined by the CD issuer — and the investor cannot add to or withdraw from the account.

CDs are FDIC or NCUA insured when held at a member bank or credit union. That means deposits are insured up to $250,000.

CDs are some of the most common interest-bearing accounts banks offer, alongside savings accounts and money market accounts (MMAs).

A zero-coupon certificate of deposit does not pay periodic interest. Instead, the interest is paid out at the end of the CD’s maturity term. This can allow the purchaser of the CD to potentially earn a higher rate of return because zero-coupon CDs are sold at a discount to face value, but the investor is paid the full face value at maturity.

Recommended: CD Loans, Explained

By comparison, traditional certificates of deposit pay interest periodically. For example, you might open a CD at your bank with interest that compounds daily. Other CDs can compound monthly. Either way, you’d receive an interest payment in your CD account for each month that you hold it until it matures.

Once the CD matures, you’d be able to withdraw the initial amount you deposited along with the compound interest. You could also roll the entire amount into a new CD if you’d prefer.

Remember: Withdrawing money from a CD early can trigger an early withdrawal penalty equal to some or all of the interest earned.

How Do Zero-Coupon CDs Work?

Ordinarily when you buy a CD, you’d deposit an amount equal to or greater than the minimum deposit specified by the bank. You’d then earn interest on that amount for the entirety of the CD’s maturity term.

With zero-coupon CD accounts, though, you’re purchasing the CDs for less than their face value. But at the end of the CD’s term, you’d be paid out the full face value of the CD. The discount — and your interest earned — is the difference between what you pay for the CD and what you collect at maturity. So you can easily see at a glance how much you’ll earn from a zero-coupon CD investment.

In a sense, that’s similar to how the coupon rate of a bond works. A bond’s coupon is the annual interest rate that’s paid out, typically on a semiannual basis. The coupon rate is always tied to a bond’s face value. So a $1,000 bond with a 5% interest rate has a 5% coupon rate, meaning a $50 annual payout until it matures.

Real World Example of a Zero-Coupon CD

Here’s a simple example of how a zero-coupon CD works. Say your bank offers a zero-coupon certificate of deposit with a face value of $10,000. You have the opportunity to purchase the CD for $8,000, a discount of $2,000. The CD has a maturity term of five years.

You wouldn’t receive any interest payments from the CD until maturity. And since the CD has a set term, you wouldn’t be able to withdraw money from the account early. But assuming your CD is held at an FDIC- or NCUA-member institution, the risk of losing money is very low.

At the end of the five years, the bank pays you the full $10,000 face value of the CD. So you’ve received $400 per year in interest income for the duration of the CD’s maturity term — or 5% per year. You can then use that money to purchase another zero-coupon CD or invest it any other way you’d like.

Tips When Investing in a Zero-Coupon CD

If you’re interested in zero-coupon CDs, there are a few things to consider to make sure they’re a good investment for you. Specifically, it’s important to look at:

• What the CD is selling for (i.e., how big of a discount you’re getting to its face value)

• How long you’ll have to hold the CD until it reaches maturity

• The face value amount of the CD (and what the bank will pay you in full, once it matures)

It’s easy to be tempted by a zero-coupon certificate of deposit that offers a steep discount between the face value and the amount paid out at maturity. But consider what kind of trade-off you might be making in terms of how long you have to hold the CD.

If you don’t have the patience to wait out a longer maturity term, or you need the money in the shorter term, then the prospect of higher returns may hold less sway for you. Also, keep in mind what kind of liquidity you’re looking for. If you think you might need to withdraw savings for any reason before maturity, then a standard CD could be a better fit.

Comparing zero-coupon CD offerings at different banks can help you find one that fits your needs and goals. You may also consider other types of cash equivalents, such as money market funds or short-term government bonds if you’re looking for alternatives to zero-coupon CDs.

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Pros of Zero-Coupon CDs

Zero-coupon CDs have some features that could make them more attractive than other types of CDs. The main advantages of investing in zero coupon certificates of deposit include:

• Higher return potential than regular CDs

• Guaranteed returns, since you’re unable to withdraw money before maturity

• Suited for longer-term goals

• Can be federally insured

Zero-coupon CDs are low-risk investments, which can make them more appealing than bonds. While bonds are considered low-risk investments generally, if the bond issuer defaults, then you might walk away from your investment with nothing.

A zero-coupon certificate of deposit, on the other hand, does not carry this same default risk because your money is insured up to $250,000. There is, however, a risk that the CD issuer could “call” the CD before it matures (see more in the next section).

Cons of Zero-Coupon CDs

Every investment has features that may be sticking points for investors. If you’re wondering what the downsides of zero-coupon CDs are, here are a few things to consider:

• No periodic interest payments

• No liquidity, since you’re required to keep your money in the CD until maturity

• Some zero-coupon CDs may be callable, which means the issuer can redeem them before maturity, and the investor won’t get the full face value

• Taxes are due on the interest that accrues annually, even though the interest isn’t paid out until maturity

It may be helpful to talk to your financial advisor or a tax expert about the tax implications of zero-coupon CDs. It’s possible that the added “income” from these CDs that you have to report each year could increase your tax liability.

How to Collect Interest on Zero-Coupon CDs

Since zero-coupon CDs only pay out at interest at the end of the maturity term, all you have to do to collect the interest is wait until the CD matures. You can direct the bank that issued the CD to deposit the principal and interest into a savings account or another bank account. Or you can use the interest and principal to purchase new CDs.

It’s important to ask the bank what options you’ll have for collecting the interest when the CD matures to make sure renewal isn’t automatic. With regular CDs, banks may give you a window leading up to maturity in which you can specify what you’d like to do with the money in your account. If you don’t ask for the money to be out to you it may be rolled over to a new CD instead.

How to Value Zero-Coupon CDs

The face value of a zero-coupon CD is the amount that’s paid to you at maturity. Banks should specify what the face value of the CD is before you purchase it so you understand how much you’re going to get back later.

In terms of whether a specific zero-coupon CD is worth the money, it helps to look at how much of a discount you’re getting and what that equates to in terms of average interest earned during each year of maturity.

Purchasing a $10,000 zero-coupon CD for $8,000, for example, means you’re getting it at 20% below face value. Buying a $5,000 zero-coupon CD for $4,500, on the other hand, means you’re only getting a 10% discount.

Of course, you’ll also want to keep the maturity term in perspective when assessing what a zero-coupon CD is worth to you personally. Getting a 10% discount for a CD with a three-year maturity term, for example, may trump a 20% discount for a five-year CD, especially if you don’t want to tie up your money for that long.

The Takeaway

Investing in zero-coupon CDs could be a good fit if you’re looking for a low-risk way to save money for a long-term financial goal, and you’d like a higher yield than most other cash equivalents.

Zero-coupon CDs are sold at a discount to face value, and while the investor doesn’t accrue interest payments annually, they get the full face value at maturity — which often adds up to a higher yield than most savings vehicles. And because the difference between the discount and the face value is clear, zero-coupon CDs are predictable investments (e.g. you buy a $5,000 CD for $4,000, but you collect $5,000 at maturity).

As with any investment, it’s important for investors to know the terms before they commit any funds. For example, zero-coupon CDs don’t pay periodic interest, but the account holder is expected to pay taxes on the amount of interest earned each year (even though they don’t collect it until they cash out or roll over the CD).

If you’re eager to earn a higher rate on your savings, you’ve got a lot of options — including the new high-yield bank account with SoFi. With SoFi, you don’t pay management fees or account fees, and you can earn a competitive APY.

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FAQ

What is a coupon on a CD?

The coupon on a CD is its periodic interest payment. When a CD is zero coupon, that means it doesn’t pay out interest monthly or annually. Instead, the investor gets the full amount of interest earned paid out to them when the CD reaches maturity.

Is a certificate of deposit a zero-coupon bond?

Certificates of deposit and bonds are two different types of savings vehicles. While a CD can be zero-coupon the same way that a bond can, your money is not invested in the same way. CD accounts also don’t carry the same types of risk that bonds can present.

Are CDs safer than bonds?

CDs can be safer than bonds since CDs don’t carry default risk. A bond is only as good as the entity that issues it. If the issuer defaults, then bond investors can lose money. CDs, on the other hand, are issued by banks and typically covered by FDIC insurance which can make them safer investments.

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Jun

2022

Investment Property Guide: Definition, Types, Pros and Cons

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

Suppose you’re one of the lucky few who have substantial savings, built an emergency fund, and are well on your way to a healthy retirement portfolio. In that case, it may be time to think about diversifying your financial portfolio. An investment property may be a solid option to do that.

Real estate investing can help diversify your existing investment portfolio and bring an additional income stream. But before taking the plunge to invest in real estate, here’s what you need to know about investment properties and how to invest in this asset class.

What is an Investment Property?

An investment property is a piece of real estate purchased to earn a return on the investment through rental income or the property’s future resale.

Usually, an investment property differs from an investor’s primary residence or a second home. It can be more challenging for investors to secure financing for an investment property because lenders see it as riskier than a primary residence.

Investors often treat property as a long-term investment. Over a given period, investors can benefit from a stream of rental income and capital appreciation, where the value of a property increases over time.

Most investors get into real estate investing with this long-term time horizon, but some investors treat investing in property as a short-term trade. Investors do this by house flipping, which is when real estate is purchased, renovated, and sold for profit in a short amount of time.

Types of Investment Properties

Residential real estate is a type of property used for people to live in, like single-family homes, apartments, townhouses, and more. Most people think of residential real estate when investing in property.

💡 Recommended: Investing in Single Family vs. Multi Family Houses

However, that is just one type of investment property. Other types of investment properties include:

• Commercial: Commercial real estate is a term used to describe a piece of land or property used for business purposes. Commercial real estate can include office buildings, warehouses, retail space, large apartment developments, etc. While less common for individual investors, commercial real estate may still be an attractive investment that offers higher rents than residential property, though with increased costs.

• Mixed-use: A mixed-use property can be used for both commercial and residential purposes. For instance, a building may have a retail storefront on the main floor, while the upper portion of the structure consists of residential apartments or condos.

Who Is an Investment Property Right For?

An investment property is usually a good fit for those interested in earning rental income or owning an appreciating asset. Investing in property can be a way to diversify a financial portfolio, combining it with a mix of stocks, bonds, and other assets.

Additionally, some people invest for the tax benefits associated with real estate investment, while others invest for the ability to build equity in a property.

No matter your reason for investing in real estate, it is vital to research and understand the risks and potential rewards associated with this type of investment.

Pros of Investing in Property

Here are some of the advantages of investing in property. However, these advantages are not guaranteed; investors must research properties and real estate markets to increase the odds of generating returns.

Potential for High Returns

If the real estate you own increases in value over time, you can sell it for a profit. However, this price appreciation isn’t guaranteed.

Passive Rental Income

Investing in real estate can be a way to generate relatively passive income. Whether you invest in residential or commercial real estate, you can rent out your space to tenants and receive regular rental income.

Hedge Against Inflation

Real estate investments may protect against inflation. When the prices of goods and services rise, home values and rents typically increase. Investment properties can therefore provide you with increasing monthly income and appreciation to help protect you when consumer prices are going up.

Potential Tax Advantages

Investing in real estate comes with tax benefits. You can deduct several expenses associated with owning an investment property from your taxes, including your property taxes, mortgage interest, and other expenses.

Cons of Investing in Property

Like any investment, there are potential downsides to investing in property.

High Upfront Costs

Directly investing in property generally requires higher upfront costs than primary residences. Lenders usually require higher down payments and interest rates for investment properties. This makes it difficult for some people who don’t have the initial capital to invest in a property.

High Maintenance Costs

Maintaining a property can be expensive and time-consuming, and it is essential to factor in these costs when considering an investment.

Illiquidity

Real estate isn’t a liquid asset. It could be complicated if you want to sell the property, and you may not be able to sell the property at the price you want.

Real Estate Market Risks

The real estate market can be volatile, and there is always the risk that your investment may not perform as well as you hoped. It’s important to do market research to make sure your investment property is in a location that may experience price increases.

How to Invest in Property

Rental Properties

Purchasing a residential investment property to rent out to tenants is a popular way to invest in property. This strategy allows investors to reap the benefits of generating rental income and price appreciation.

Before you directly invest in a property, it’s important to determine how much you have to spend on this property upfront. Also, it would be best if you have the time to take care of it or have the means to employ someone else to maintain the property.

It’s often beneficial to look in neighborhoods or areas you are familiar with to limit surprises down the line. You may also want to consider neighborhoods where experts think a property is likely to increase in value.

Real Estate Investment Trust (REIT)

Buying and selling the shares of real estate investment trusts (REITs) is one of the easier ways to invest in real estate. With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. There’s less responsibility and pressure on the shareholder when compared to purchasing an investment property.

When a person invests in a REIT, they’re investing in a real estate company that owns and operates anything from malls, office complexes, warehouses, apartment buildings, mortgages, etc. It’s a way for someone to add a diverse mix of real estate investments to their portfolio without developing real estate.

In addition to diversification, earning consistent dividends can be a compelling reason for investors to get involved with REITs. REITs are required by law to pay at least 90% of their income in dividends. The REIT’s management can decide to pay out more than 90%, but they can’t drop below that percentage.

Many, but not all, REITs are registered with the SEC (Securities and Exchange Commission) and can be found on the stock market, where they’re publicly traded. Investors can also buy REITs registered with the SEC but are not publicly traded.

💡 Recommended: Pros & Cons of Investing in REITs

Interest Rates on Investment Properties

Lenders treat investment property loans differently because people are more likely to default on an investment property loan than on a primary residence mortgage.

Typically, lenders will charge a higher interest rate on an investment property than on an owner-occupied property. So if the rate was at 5% for your primary home mortgage, you might have a 6% to 8% interest rate on your investment property mortgage.

Lenders often require at least a 20% down payment to purchase an investment property. This down payment minimum may be higher, depending on the borrower’s credit score and savings.

The Takeaway

Adding an investment property to your financial portfolio can be a good option to build wealth. However, real estate investments come with a lot of work, especially if you decide to invest directly in a property; not everyone is cut out to be a landlord.

Fortunately, investors don’t have to invest directly in real estate or resort to house flipping to get exposure to real estate. Investors can invest in various publicly-traded REITs to benefit from their potential share price appreciation and regular dividends. And with the SoFi Invest® online trading platform, investors can trade stocks and exchange-traded funds (ETFs) for as little as $5.

See how a SoFi Invest account can help you build wealth.

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.

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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Jun

2022

SWOT Analysis, Explained: Definition and Examples

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

A SWOT analysis is a tool used by businesses and investors to assess a company’s strengths, weaknesses, opportunities, and threats. Businesses often use the SWOT framework to help make strategic decisions about where to allocate resources and how to respond to changes in the marketplace.

Investors can use a SWOT analysis to decide whether or not to invest in a particular company. This can be helpful because investors look for any way to evaluate stocks and other investments. By conducting a SWOT Analysis on a specific company, it can be one more tool in an investor’s toolkit when choosing what stocks to buy and sell.

What Is a SWOT Analysis?

SWOT is an acronym that stands for Strength, Weakness, Opportunity, and Threats. Analysts who use a SWOT analysis consider these four key aspects of a company to determine its future performance.

Initially, SWOT analyses were used by businesses to assess a firm’s operations. But now, SWOT analyses are used by all sorts of organizations and individuals, including investors.

When using the SWOT framework, investors consider a company’s internal operations and external competition with the expectation that this will provide a well-rounded view of where the stock lies—and where it might be headed.

💡 Recommended: How to Analyze a Stock

Strengths and weaknesses are a company’s elements that give it a relative advantage or disadvantage over its competitors. In this analysis, the strengths and weaknesses usually come from internal factors involving the company’s operations. Opportunities and threats typically come from external factors in the company’s industry or the overall economy.

Many investors probably use some form of a SWOT analysis already, whether they realize it or not. Common sense could compel investors to consider the strengths and weaknesses of a company to some extent.

Using the formal SWOT analysis may give an investor a more systematic, in-depth picture of a company’s present and its potential future.

💡 Recommended: How to Evaluate a Stock Before You Buy

SWOT Analysis Matrix

Business analysts and investors usually depict a SWOT analysis in a table, with quadrants dedicated to each element. Analysts typically create a list of questions for each component that they can answer with quantitative and qualitative data. Strengths and weaknesses are listed first, followed by opportunities and threats.

Example SWOT Analysis Matrix

Strengths	Weakness
• What products are performing well? • What assets does the company have? • What unique resources and relationships does the company have access to?	• What areas of the company need to improve? • How much debt does the company have? • What complaints do customers usually have?
Opportunities	Threats
• Could the company offer additional products or enter a new market? • Is there talent available that the company could hire? • Could the company leverage new technology to improve operations?	• Do regulations threaten business operations? • Is the company positioned to withstand an economic downturn? • Are there any outside security risks?

Strengths

Weakness

• What products are performing well?

• What assets does the company have?

• What unique resources and relationships does the company have access to?

• What areas of the company need to improve?

• How much debt does the company have?

• What complaints do customers usually have?

Opportunities

Threats

• Could the company offer additional products or enter a new market?

• Is there talent available that the company could hire?

• Could the company leverage new technology to improve operations?

• Do regulations threaten business operations?

• Is the company positioned to withstand an economic downturn?

• Are there any outside security risks?

How to Do a SWOT Analysis

There are several ways to approach a SWOT analysis. Regardless of the method used, analysts should look at a company’s strengths, weaknesses, opportunities, and threats to identify the key factors that will impact an investment.

Strengths

Strengths may be areas or characteristics where a company excels and has a competitive advantage over its peers. Examples of strength include having a solid brand, conducting innovative research on new technologies or products, or cornering the market for a particular sector in an area (e.g., being the first legal cannabis company in a state that recently legalized cannabis).

Analysis of strength might also come from simply looking at a company’s financial statements. Rising quarterly earnings and dividends, for example, might be considered a strength because it means the company is growing.

Weakness

If a company doesn’t perform well in critical areas that typically indicate strength, that could show a potential weakness. Declining earnings, cutting or suspending dividends, or a general lack of promising research and development could be signs of weakness. Additionally, analysts may consider inexperienced management or high employee turnover as weaknesses.

Opportunities

Opportunities are potential external factors that a company may be able to take advantage of. For example, suppose a pharmaceutical company specializes in manufacturing a particular type of drug, and that drug is expected to be approved by regulators in another country. In that case, that could be seen as an opportunity to enter a new market. However, it’s important to note that the existence of an opportunity and the reality of a company seizing it are two different things.

Threats

Threats are external factors that may harm a company. For a company specializing in oil and petroleum products, the rising trend of electric vehicles (EVs), renewable energy tech, and shifting consumer trends toward sustainable practices could pose a significant threat. This trend may threaten an entire industry, especially with the growth in renewable energy and green investing.

Other examples include a company’s most significant product becoming obsolete (like film and digital cameras did once smartphones became widespread) or a significant competitor encroaching on its business.

How to Use a SWOT Analysis

The best way to use a SWOT analysis will vary depending on the specific situation and goals of the investor conducting the analysis. However, some general tips on how to use a SWOT analysis effectively include:

• Clearly define the purpose of the SWOT analysis.

• Gather as much relevant information as possible. This may involve conducting market research or analyzing data.

• Be honest and objective in your assessment. It is important to avoid bias or personal opinion when conducting a SWOT analysis.

• Periodically review and update the SWOT analysis. As the market environment changes, the SWOT factors will affect the company. Investors want to regularly review and update a SWOT analysis to ensure it remains relevant.

Additionally, investors can gather internal and external data to use the SWOT analysis framework.

💡 Recommended: Using Fundamental Analysis to Choose Stocks

Internal

As noted above, strengths and weaknesses refer to a company’s internal operations. These are the resources and experiences readily available to a company. The following are some common internal factors that investors consider when determining a company’s strengths and weaknesses:

• Financial resources: Revenue, earnings, and investments

• Physical resources: facilities and equipment

• Intangible assets: brand name, trademarks, patents, and copyrights

• Human resources

External

External forces influence and affect every company. They may present opportunities or threats to a company or potential investment. External factors are typically things a company doesn’t directly control, such as the following:

• Market trends: new products and technology advancements

• Economic trends: local, national, and global financial and economic trends

• Demographics

• Regulations

💡 Recommended: Understanding Economic Indicators

Example of a SWOT Analysis

For investors interested in conducting a SWOT analysis, here is an example of one by looking at Netflix.

Netflix Strengths

One of Netflix’s main strengths is its brand recognition — Netflix has become synonymous with online video streaming. The general public sometimes uses “Netflix” to mean all streaming.

Like Netflix, Amazon, Apple, Meta, and Nike all have strong brands as one of their key strengths. These corporations also have the following strengths:

• Amazon: The e-commerce giant has developed an industry-leading logistics and distribution network that ensures quick delivery times to customers

• Apple: The technology company invests substantial resources into the research and development of its products and services.

• Meta: The social media company, formerly known as Facebook, has a diversified portfolio of business units – like Facebook, WhatsApp, and Instagram – that gives it a substantial market share.

• Nike: The apparel company creates strong marketing and advertising campaigns to target more customers.

While Netflix does have many competitors that are threatening its business, the company still has several other strengths because they were the first big player in the streaming space. Additionally, the company produces a lot of exclusive content not available on any other streaming platform.

Netflix Weaknesses

A potential weakness for Netflix is its high debt levels. The company’s debt rose from shy of $1 billion in 2014 to more than $16 billion in 2020. The company increased its borrowing as it shifted from licensing content to becoming a large television and movie production studio. However, this debt level may constrict future growth, especially in a rising interest rate environment.

Netflix Opportunities

One opportunity that Netflix may consider is adding an ad-based model with a lower-priced subscription tier. This opportunity could help the company gain increased revenue from advertisements on its platform while also attracting subscribers interested in signing up for the service at a lower price.

Netflix Threats

The visible threats to Netflix would likely be their competitors, including Hulu, Amazon Prime, Disney+, and HBO Max. They also have a recognizable, trusted name and plenty of exclusive content not available on other platforms. Disney+, in particular, has gained a large number of subscribers since it was made available.

Additionally, Netflix faces threats from macroeconomic factors, like rising inflation and the tightening of consumer spending. Because of the prevalence of competitors and the increasing cost of a Netflix subscription, consumers may be willing to cancel their subscriptions.

How Can Investors Use SWOT Analysis?

There are several ways that investors can use SWOT analysis. One way is to use it as a tool to screen companies. For example, an investor could use a SWOT analysis to determine companies with a solid competitive position and are well-positioned to take advantage of opportunities in the market.

Investors can also use SWOT analyses to monitor a company’s performance. An investor may conduct periodic SWOT analyses to track a company’s progress in its competitive position and growth prospects.

The Takeaway

Even if they don’t know what a SWOT analysis is, investors usually consider at least one of the four areas of strengths, weaknesses, opportunities, and threats when making investment decisions. However, investors can leverage a SWOT analysis to look at all four factors from a systematic, big-picture perspective, providing investment insights that might have been missed otherwise. That is the essence of SWOT analysis.

While SWOT analysis won’t eliminate investment risks, it is one more way for an investor to be as informed as possible before making any financial decision.

The SoFi Invest® investment app offers a variety of options so you can invest in line with your personal risk preferences and financial goals. With SoFi Invest, you can trade stocks and ETFs for as little as $5.

Find out how SoFi Invest can help you choose investments that suit your needs.

Jun

2022

What Is a Governance Token?

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

A governance token is a cryptocurrency that gives its holders a right to vote on proposed changes to a blockchain network. This innovation is seen as a necessary step toward keeping certain crypto projects, particularly those within the decentralized finance (DeFi) ecosystem, decentralized. The idea is that rather than a single person or group controlling the direction of a platform, a community of users can influence decisions in a process known as governance.

While not unique to DeFi, governance tokens have become a key attribute of the DeFi ecosystem. Stick with us in this crypto guide to learn more about the question “what is a governance token.”

What Are Governance Tokens Used For?

Governance tokens give users of a particular blockchain protocol certain rights — such as the right to vote on proposed changes to the network. This could include granting token holders the ability to create new proposals or to spend tokens in an attempt to alter an existing proposal.

Other examples of uses for governance tokens might include:

• Voting for changes to a network’s fee structure

• Implementing changes to a project’s user-interface

• Changing a network’s reward structure

• Revising the amount of funding that developers receive

Governance tokens can have other functions in addition to granting voting rights to holders. Most DeFi tokens have governance features built into them, and most of them can also be used for things like staking crypto and yield farming.

Examples of Governance Tokens

As mentioned, most governance tokens are involved in the DeFi space in one way or another. Community governance is a key function that helps to keep DeFi decentralized. Most DeFi protocols run on the Ethereum blockchain.

Here are some examples of popular governance tokens.

Compound

Compound (COMP) is an ERC-20 utility token running on Ethereum. The protocol is a DeFi lending/borrowing platform. COMP holders have a chance to vote for changes to the network via the compound governance dashboard.

💡 Recommended: What Is Compound Finance (COMP)?

Yearn.finance (YFI)

Yearn.finance (YFI) is also a DeFi protocol hosted on Ethereum that offers lending, borrowing, and trading services. The platform has different products like Earn, Zap, Vaults, and APY. Users can earn YFI tokens by locking up crypto funds in smart contracts that run on Curve and Balance (other DeFi trading platforms). This allows users to participate in what’s known as yield farming.

Yield farming is the act of locking up funds in a DeFi protocol to earn interest. The more value that users lock up, the more tokens they earn as rewards.

Maker (MKR)

Based on Ethereum, Maker is responsible for creating the DAI stablecoin. MKR holders can vote on new proposed changes to the Maker DAO network inside the Maker Voting Dashboard. DAI has been praised for being one of the few stablecoins that are intended to be decentralized. It has also been integrated into some games, wallets, and DeFi apps.

💡 Recommended: What Is Maker (MKR) Cryptocurrency?

Synthetix Network Token (SNX)

Synthetix is a decentralized exchange (DEX) for synthetic assets. Also known as “synths,” these are tokens that are designed to mirror the price of a real-world asset. Whether it be bonds, stocks, commodities, or fiat currencies, users can trade synths in an effort to gain exposure to the price of a particular asset. This can be beneficial for those who might not have access to traditional capital markets.

SNX, the native token of the Synthetix Network, functions like a stablecoin in that it is pegged to an external asset at a one-to-one ratio. However, rather than being tied to a single currency, Synthetix allows users to mint a synthetic asset that will be backed by SNX. SNX holders can also influence the direction of the platform going forward.

Aave (AAVE)

Aave is a DeFi platform for borrowing, lending, and earning interest on crypto. Much like its peers, Aave runs on a series of smart contracts that manage the platform’s financial operations. Users can borrow funds and pay interest, or lock up crypto to earn interest. AAVE is the network’s native token, and it gives holders a say in the platform’s future development.

Governance Token vs Utility Token

When trying to answer the question “what is a governance token,” it’s useful to think of it as an improved type of utility token. Utility tokens usually have a single specific use case only.

For example, Binance coin (BNB) is used to give discounts on trading fees to traders who use the Binance crypto exchange. Holders may get to vote on which tokens they’d like to see listed on the exchange, but that’s very different from voting on a fundamental change to the protocol of a specific blockchain; which is a function of a governance token.

Depending on the crypto network, a governance token may offer the best of both types of tokens.

Governance Tokens: Potential Advantages and Disadvantages

While the idea of a governance token may sound almost perfect in theory, in practice governance tokens have their advantages and disadvantages.

Potential Advantages:

• Decentralization. Governance tokens allow developers to keep projects decentralized. Without this type of governance structure in place, DeFi platforms would be only collections of smart contracts that no one could control.

• More effective and inclusive development processes. Developers can arrive at conclusions and implement changes after receiving guidance from the community, instead of needing to figure out everything on their own.

• Community involvement. Governance gives a project’s community a reason to come together to help improve the platform.

Potential Disadvantages:

• Potential for a takeover. Individuals or groups with large amounts of capital can sometimes acquire enough governance tokens to make unilateral decisions affecting the network. This can defeat the whole purpose of a governance token, which is to keep decision-making decentralized and democratic.

• Selfish decisions. Just because people have the ability to vote doesn’t mean they will always act in the best interest of their own community. A real-time example: In 2020, Maker experienced a flash crash that caused many of its investors to lose large sums of cash. Initially, the Maker community — represented by current holders of MKR governance tokens — voted to reimburse investors. Six months later, the community rescinded the vote; none of Maker’s investors could reclaim any of the money they lost.

• No real accountability. Ultimately, there’s no legitimate accountability when it comes to democratic crypto governance. If a decision is deemed to be wrong or appears to go against the best interest of many users, there’s no clear person or party to blame or hold accountable.

The Takeaway

A governance token is not a unique type of token. Rather, a governance token may be any token that gives its holder a share of influence over how a crypto network is governed. In addition to their use in the decentralized finance sector, governance tokens may also be utilized on social media platforms that are decentralized.

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.

Photo credit: iStock/katleho Seisa
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