Is Inflation a Good or Bad Thing for Consumers?

Is Inflation a Good or Bad Thing for Consumers?

What Is Inflation?

Inflation is an economic trend in which prices for goods and services rise over time. The Federal Reserve uses different price indexes, including the Consumer Price Index, to track inflation and determine how to shape monetary policy. Generally speaking, the Fed targets a 2% annual inflation rate as measured by pricing indexes.

Rising demand for goods and services can trigger inflation when there’s an imbalance in supply. This is known as demand-pull inflation. Cost-push inflation occurs when the price of commodities rises, pushing up the price of goods or services that rely on those commodities.

Recommended: 7 Factors That Cause Inflation

Inflation can have both pros and cons for consumers and investors. Understanding the potential effects of inflation can maximize the positives while minimizing the negatives.

Is Inflation Good or Bad?

Answering the question of whether inflation is good or bad means knowing more why inflation matters so much. The Federal Reserve takes an interest in inflation because of how it relates to the broader economic and monetary policy.

Some level of inflation in an economy is normal, and an indication that the economy is continuing to grow. While inflation has remained relatively low over the past decade, it has historically seen the most change during or right after recessions.

The Fed believes that its 2% target inflation rate encourages price stability and maximum employment.

Broadly speaking, high inflation can make it difficult for households to afford basic necessities, such as food and shelter. When inflation is too low, that can lead to economic weakening. If inflation trends too low for an extended period of time, consumers may come to expect that to continue, which can create a cycle of low inflation rates.

That sounds good, as lower inflation means prices are not increasing over time for goods and services. So consumers may not struggle to afford the things they need to maintain their standard of living. But prolonged, low inflation can impact interest rate policy.

The Federal Reserve uses interest rate cuts and hikes to keep the economy on an even keel. For example, if the economy is in danger of overheating because it’s growing too rapidly or inflation is increasing too quickly, the Fed may raise rates to encourage a pullback in borrowing and spending.

Conversely, when the economy is in a downturn, the Fed may cut rates to try to promote spending and borrowing. When both inflation and interest rates are low, that may not leave much room for further rate cuts in an economic crisis, which may spur higher employment rates. If prices for goods and services continue to decline, that could lead to a period of deflation or even a recession.

So, is inflation good or bad? The answer is that it can be a little of both. How deeply inflation affects consumers or investors–and who it affects most–depends on what’s behind rising prices, how long inflation lasts, and how the Fed manages interest rates.

Who Benefits from Inflation?

The Federal Reserve believes some inflation is good and even necessary to maintain a healthy economy. The key is keeping inflation rates at acceptable levels, such as the 2% annual inflation rate target. Staying within this proverbial Goldilocks zone can result in numerous positive impacts for consumers and the economy in general.

Inflation Pros

Sustainable inflation can yield these benefits:

•  Higher employment rates and steady paychecks for workers

•  Continued economic growth

•  Potential for higher wages if employers offer cost-of-living pay raises

•  Cost-of-living adjustments for those receiving Social Security retirement benefits

The danger, of course, is that inflation escalates too rapidly, requiring the Federal Reserve to raise interest rates as a result. This increases the overall cost of borrowing for consumers and businesses.

Who Is Inflation Good For?

Inflation can benefit certain groups, depending on how it impacts Fed shapes monetary policy. Some of the people who can benefit from inflation include:

•  Savers, if an interest rate hike results in higher rates on savings accounts, money market accounts or certificates of deposit

•  Debtors, if they’re repaying loans with money that’s worth less than the money they borrowed

•  Homeowners who have a low, fixed-rate mortgage

•  People who hold investments that appreciate in value as inflation rises

Who Does Inflation Hurt the Most?

Some of the negative effects of inflation are more obvious than others. And there may be different consequences for consumers versus investors.

Inflation Cons

In terms of what’s bad about inflation, here are some of the biggest cons:

•  Higher inflation means goods and services cost more, potentially straining consumer paychecks

•  Investors may see their return on investment erode if higher inflation diminishes purchasing power, or if they’re holding low-interest bonds

•  Unemployment rates may climb if employers lay off staff to cope with rising overhead costs

•  Rising inflation can weaken currency values

Inflation can be particularly bad if it leads to hyperinflation. This phenomenon occurs when prices for goods and services increase uncontrolled over an extended period of time. Generally, this would mean an inflation growth rate of 50% or more per month. While hyperinflation has never happened in the United States, Zimbabwe experienced a daily inflation rate of 98% in 2008.

Who Is Inflation Bad For?

The negative impacts of inflation can affect some more than others. In general, inflation may be bad for:

•  Consumers who live on a fixed income

•  People who plan to borrow money if higher interest rates accompany the inflation

•  Homeowners with an adjustable rate mortgage

•  Individuals who aren’t investing in the market as a hedge against inflation

Inflation and higher prices can be detrimental to retirees whose savings may not stretch as far, particularly when health care becomes more expensive. If the cost of living increases but wages stagnate, that can also be problematic for workers because they end up spending more for the same things.

How to Invest During Times of Inflation

While inflation is an investment risk to consider, smart investing can minimize its impact on your portfolio. While savings accounts may yield more interest if the Fed raises interest rates, investing in stocks, exchange-traded funds (ETFs) or mutual funds could generate even higher returns.

Real estate and Treasury-Inflation Protected Securities (TIPS). Government-issued securities designed to generate consistent returns regardless of inflationary changes, can also be good buys during periods of rising inflation. If prices are rising, that can increase rental property incomes. You could benefit from that by investing in real estate ETFs or real estate investment trusts (REITs) if you’d rather not own property directly.

Recommended: Pros and Cons of Investing in REITs

In general, compounding interest and the benefits of dollar-cost averaging over time can also help offset inflation. Compounding interest allows you to earn interest on your interest, which is key to building wealth. Dollar-cost averaging means investing continuously, whether stock prices are low or high. When inflationary changes are part of a larger shift in the economic cycle, investors who dollar-cost average can still reap long term benefits, despite rising prices.

The Takeaway

Inflation is unavoidable but you can take steps to minimize the impact to your personal financial situation. Building a well-rounded portfolio of stocks, ETFs and other investments is a smart strategy for keeping pace with rising inflation.

You don’t need a lot of money to get started either. With SoFi Invest® brokerage platform, you can begin building a portfolio with as little as $5. Learn more about how you can start investing now to offset inflation’s negative impacts.

Photo credit: iStock/AJ_Watt


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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What is an IPO Underwriter? What Do Underwriters Do?

What is an IPO Underwriter? What Do Underwriters Do?

Underwriters are financial professionals that take on someone else’s risk in exchange for a fee. They evaluate risk and then determine a price for financial transactions such as purchasing an insurance policy or taking out a mortgage.

In the world of equities, underwriters work with private companies to value their operations, connect with potential investors, and issue stock on a public exchange for the first time.

What Is an IPO Underwriter?

An initial public offering (IPO) underwriter is a financial specialist who works closely with a company to issue stock on the public markets. They are almost always IPO specialists who work for an investment bank.

Stock underwriters guide the company that’s issuing stock through the IPO process, making sure they satisfy all of the regulatory requirements imposed by the Securities and Exchange Commission (SEC), as well as the rules imposed by the exchange, such as the Nasdaq or the New York stock Exchange (NYSE).

An IPO’s underwriter creates the market for the stock by contacting a wide range of institutional investors, including mutual funds, insurance companies, pension funds and more. They first reach out to this network of investors to gauge their interest in the company’s stock, and to see what those investors might be willing to pay. The underwriter uses those conversations to set the price of the IPO.

From there, the underwriter of an IPO works with the company issuing the stock through the many steps that lead up to its IPO. On the day of the IPO, the underwriter is responsible for purchasing any unsold shares at the price it set for the IPO.

The way that IPO underwriters get paid depends on the structure of the deal. Typically, IPO underwriters buy the entire IPO issue and then resell the stocks, keeping any profits, though in some cases they receive a flat fee for their services.

What Is IPO Underwriting?

An IPO is the process through which a company has its shares sold to regular investors on a public market. The company issuing stock works with the IPO underwriters throughout the process to determine how to price their stock and gin up interest among potential investors.

Most companies find their way to the investing public through a group of underwriters who agree to purchase the shares, and then sell them to investors. But only a few broker-dealers belong to this “underwriting syndicate,” and some of them sell exclusively to institutional investors.

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What Does an IPO Underwriter Do?

In essence, an underwriter in an IPO is the intermediary between a company’s executives and owners, such as venture capitalists, seeking to issue shares of stock and public-market investors.

When a company seeks funding from the capital markets, it must make dozens of decisions. How much money does the company want to raise? How much ownership will it cede to shareholders? What type of securities should it issue? Those are just a few, including what kind of relationship the company wants to have with its underwriter.

Underwriting agreements take different forms, but in the most common agreement, the underwriter agrees to purchase all the stock issued in the IPO, and sell those shares to the public at the price that the company and the underwriter mutually agree to. In this agreement, the underwriter assumes the risk that people won’t buy the company’s stock.

Sometimes a company works with a group of underwriters, who assume the risk, and help the company work through the many steps toward an IPO. This involves issuing an S-1 statement. This is the registration form that any company needs to file with the SEC to issue new securities. The statement is how companies introduce themselves to the investing public. S-1 requires companies to lay out plans for the money they hope to raise. The IPO underwriter also creates a draft prospectus for would-be investors.

The IPO Underwriting Process

Underwriting an IPO can take as little as six months from start to finish, though it often takes more than a year. While every IPO is unique, there are generally five steps that are common to every IPO underwriting process

Step 1. Selecting a Bank

The issuing company selects an underwriter, usually an investment bank. It may also select a group or syndicate of underwriters. In that case, one bank is selected as the lead, or book-running, underwriter.

One kind of agreement between the issuing company and the underwriter is called a “firm commitment,” which guarantees that the IPO will raise a certain sum of money. Or they may sign a “best efforts agreement,” in which the underwriter does not guarantee the amount of money they will raise. They may also sign in “all or none agreement.” In this agreement, the underwriter will sell all of the shares in the IPO, or call off the IPO altogether.

There is also an engagement letter, which often includes a reimbursement clause that requires the issuing company to cover all the underwriter’s out-of-the-pocket expenses if the IPO is withdrawn at any stage.

Step 2. Conduct Due Diligence and Start on Regulatory Filings

The underwriter and the issuing company then create an S-1 registration statement. The SEC then does its own due diligence on the required details in that document. While the SEC is reviewing it, the underwriter and the company will issue a draft prospectus that includes more details about the issuing company. They use this document to pitch the company’s shares to investors. These roadshows usually last for three to four weeks, and are essential to gauging the demand for the shares.

Step 3. Pricing the IPO

Once the SEC approves the IPO, the underwriter decides the effective date of the shares. The day before that effective date, the issuing company and the underwriter meet to set the price of the shares. Underwriters often underprice IPOs to ensure that they sell all of their shares, even though that means less money for the issuing company.

Step 4. Aftermarket Stabilization

The underwriter’s work continues after the IPO. They will provide analyst recommendations, and create a secondary market for the stock. The underwriter’s stabilization responsibilities only last for a short period of time.

Step 5. Transition to Market Competition

This final stage of the process begins 25 days after the IPO date, which is the end of the “quiet period,” required by the SEC. During this period, company executives can not share any new information about the company, and investors go from trading based on the company’s regulatory disclosures to using market forces to make their decisions. After the quiet period ends, underwriters can give estimates of the earnings and stock price of the company.

Some companies also have a lock up period before and after they go public, in which early employees and investors are not allowed to sell or trade their shares.

The Takeaway

The IPO underwriter plays an important role in the process of taking a company public. IPOs are an important part of the stock market, and they present an opportunity for investors to get in on a company that may be entering a growth phase by allowing them to buy IPO stocks.

If you’re interested in investing in IPOs, one way to get started is by opening an account with the SoFi Invest® brokerage platform.The platform has an IPO investing feature that allows members to access IPO shares before they’re listed on public exchanges.

Photo credit: iStock/katleho Seisa


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
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What Are Trading Index Options?

What Are Index Options?

While stock options derive their value from the performance of a single stock, index options are derivatives of an index. Indexes can have a narrow focus on a specific market sector or they can contain a broader mix of stocks. They’re listed on US option exchanges and regulated by the Securities and Exchange Commission (SEC).

Like stock options, the prices of index options fluctuate according to factors like the value of the underlying security, volatility, time left until expiration, strike price, and interest rates. Unlike stock options, there is no underlying asset with index options, they’re simply bets on the direction that an index will move.

Recommended: How to Trade Options: A Beginner’s Guide

What Is An Index Call Option?

An index call option is a financial derivative that represents a bullish bet on the underlying index. An investor who buys an option of this kind believes that the index in question will rise in value. If the index appreciates, so too will the call option.

What Is An Index Put Option?

An index put option is a bearish bet on the underlying index. An investor who buys this derivative believes that its underlying index will decline in value.

Differences Between Index Options and Stock Options

In addition to the existence of an underlying security, there are several key differences between trading index options and trading stock options. It’s important for investors to understand these differences.

Trading Hours

Broad-based indexes stop trading at 4:15 PM Eastern Time while stock options and narrow-based index options end their trading fifteen minutes earlier, at 4:00 PM ET. When significant news drops after the market closes, this could impact the prices of narrow-based index options and stock options.

Broad-based indexes are less likely to be affected, however, because they tend to include more sectors in their baskets of securities.

Recommended: When Is the Stock Market Closed?

Settlement Date and Style

While stock options use the American-style of exercise, meaning options holders can exercise at any point leading up to expiration, most index options have European-style exercise (with some exceptions). That means the trader can’t exercise the option until their expiration date. However, traders can still close out their index option positions by buying or selling throughout the life of the contract.

As for settlement date, stock index options usually have their last trading day on the Thursday before the third Friday of the month, with determination of the settlement value coming on Friday. Stock options, by contrast, have their last trading day on the third Friday of the month, with settlement being determined on Saturday.

Settlement Method

When settling stock options, the underlying stock changes hands upon the exercise of the contract. However, traders of index options settle their contracts in cash.

That’s because of the number of securities involved. For example, an investor exercising a call option based on the S&P 500 would have to buy shares of all the stocks in that index.

What Are Options Trading Levels?

Some options trading strategies are simple and come with relatively low investment risk. But there are other ways to use options that can get rather complicated and come with substantial risk.

To make sure that investors are aware of the bets they are making and the risks involved, brokerages have something called options trading levels. Brokerages have enacted these levels to protect themselves from liability if new investors lose large amounts of money in a short period when trading options they don’t understand.

If a brokerage believes an investor faces a low risk of potentially blowing up their whole account through complex options trading, they’ll assign that investor a higher options trading level. Higher options levels open up a user’s account to additional investment strategies, enabling them to trade different types of options.

Most brokerages have four or five trading levels. Reaching all but the highest level usually involves little more than answering some questions and taking a quiz to test an investor’s knowledge.

Options Trading Level 1

This is the lowest level and most often only allows a user to trade the simplest options like covered calls and protective puts. A covered call is when an investor writes an out-of-the-money call option on stocks they own, and a protective put is when an investor buys put options against stocks they own.

These strategies require the trader to hold shares of the underlying stock, making these trades less risky than many others. There is also only one option leg to worry about, which makes executing the trade much simpler in practice.

Options Trading Level 2

Level 2 comes with the right to buy calls and puts. The difference between level 2 and level 1 is that traders at level 2 can make directional bets. Most new traders begin their accounts at this level.

Options Trading Level 3

At level 3, more complex strategies start to come into play. This level usually brings with it the ability to trade debit spreads. Though complicated to execute, debit spreads still limit risk since the trader’s loss is limited to the cash paid to buy the necessary options.

Options Trading Level 4

Level 4 provides traders the ability to trade credit spreads, and is sometimes included in level 3 (in which case the brokerage would have only 4 levels). A credit spread works like a debit spread, although the trader will receive a premium.

Calculating potential losses becomes more complicated at this level. It is here that novice traders can wind up accidentally exposing themselves to tremendous risk.

Options Trading Level 5

Level 5 brings with it the highest risk, allowing traders to write call and put options without owning shares of the underlying stock. These trades expose investors to potentially unlimited losses and should be avoided by all but the most experienced options traders.

The most important requirement of level 5 is that an investor keeps adequate cash as margin in their account. That way, if an options trade moves against the investor, the broker can take cash to cover the losses created by the bad trade.

Recommended: What Are Naked Options?

What Happens to Index Options On Expiry?

Most index options have European-style exercise, meaning traders can only execute them upon expiration. Investors should conduct the appropriate research to learn which type of exercise their index options have before making a trade.

Upon expiration, the Options Clearing Corporation (OCC) assigns the option to one or more Clearing Members who have short positions in the same options. The Clearing Members then assign the option to one of their customers.

The index option writer must then pay the settlement amount in cash. Settlement usually occurs on the business day following the exercise.

How To Trade Index Options

Trading index options may be one type of investment to consider as part of a diversified portfolio. For the most part, trading index options works like trading any other option. The big difference is that the underlying security will be an index, rather than stock.

Here are a few basic steps that investors can follow to begin trading index options.

•  Get your brokerage account authorized for options trading

•  Get familiar with how the options chains look in your brokerage account

•  Study different option trading strategies and pick one appropriate for your level of expertise

•  Enter an option trade using the trading screens of your account

•  Monitor your option trades and make a plan for closing out positions to either lock in profits or cut losses.

The Takeaway

Index investing with index options could appeal to investors looking to hedge their portfolios with different types of investments. If an investor holds a lot of positions within a particular index, or perhaps an index fund or other low-fee ETFs, put options for that index could serve as a hedge, for example.

Investors can learn more about trading strategies from educational resources and financial planners on the SoFi Invest® brokerage platform. They can use it to invest directly in stocks, exchange-traded funds, and cryptocurrencies.

Photo credit: iStock/kate_sept2004


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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What is an Impermanent Loss?

What is an Impermanent Loss?

Impermanent loss can be a financial fact of life for cryptocurrency token holders – who may not even be aware it exists.

Impermanent loss involves a liquidity risk centered on the pricing algorithms used by so-called decentralized finance (DeFi) exchanges, which can impact portfolio asset values.

To define impermanent loss, cryptocurrency investors must first understand the difference between holding tokens in an automated market maker (AMM) and holding coins on your own, usually in a crypto wallet. (An AMM is a digitalized and decentralized cryptocurrency exchange protocol that uses its own statistical formula to set cryptocurrency prices.)

Liquidity providers act as a broker of sorts, by depositing an equal number of assets into the exchange, with two funded assets per liquidity pool. Liquidity providers stake their digital assets to earn trading fees made in the pool, with the size of the liquidity pool contribution. Impermanent loss is the opportunity cost that comes from staking crypto with an AMM.

Recommended: What Is DeFi (Decentralized Finance)?

As in-the-know crypto traders might say, impermanent loss could leave an investor rekt, meaning with a substantial loss.

What Is Impermanent Loss?

An impermanent loss is the money that a liquidity provider loses when the value of crypto deposited into an automated market maker, a type of DeFi exchange, differs from the value of that crypto if it were stored in a crypto wallet.

Pricing volatility can present an investment risk when liquidity-minded investors hold tokens in an AMM, and when those prices do diverge significantly, impermanent losses can mount up, impacting the value of an overall crypto portfolio.

However, the losses can be offset–completely or partially–by fees that the decentralized exchange pays for liquidity providers. Exchanges that have high volume tend to pay higher fees to liquidity providers, which can minimize the impermanent losses that leave investors at a net negative.

How Does Impermanent Loss Happen?

The key factor with impermanent loss is the way automated market makers work. As noted above, AMM’s enable investors to trade digital financial assets like cryptocurrencies without the permission of the token holder. AMMs allow for this type of trading by leveraging liquidity pools in lieu of the more stable and traditional form of asset trading, which relies on the “buyer-and-seller” stock exchange model.

AMMs allow any investor to fund a liquidity pool and act as a de facto market maker in pairing trades and charging trading fees. Impermanent risk is the downside risk in that scenario.

With volatile assets like cryptocurrency, over time the value of those assets may not equal the value they held when first deposited (i.e., their dollar value can shift downward or upward from the time of deposit to the time of withdrawal.) The more substantial the price change, the higher the chances the liquidity provider is exposed to impermanent loss.

How much can a liquidity pool funder lose? The science isn’t exact, but data indicates that an asset price change of just 1.25% can lead to a 0.6% deprecation in funded pool assets, relative to holding the assets in a digital wallet instead of using the assets to pair trades. A significantly higher price change of five times the initial price deposit could lead to a 25% decrease in asset value.

When pairing trades, liquidity pools may have one asset that’s relatively stable and one asset that is susceptible to higher pricing volatility. In that case, the odds of a significant loss impairment are higher than when the paired tokens are both stable and have a low exposure to impairment loss.

An Impermanent Loss Example

In an AMM scenario, the protocol’s decentralized structure digitalizes the cryptocurrency trading model, essentially setting a price between two different cryptocurrency assets. AMM uses an algorithm to set these prices on a constant basis, which can trigger volatility between the two assets.

Often, those assets can differ in structure. For instance, one cryptocurrency may be a stablecoin and the other can be a more volatile crypto asset, like Ethereum. In this scenario, the more volatile asset is Ethereum, which can change value quickly on trading markets, even as de-fi exchanges set prices on the cryptocurrency.

Ideally, exchanges want to offer equal liquidity levels when setting a price between two assets. Yet when one of the assets quickly rises or declines significantly in value, it changes the pricing structure. Now, the automated market’s trading price on stablecoin and Ethereum (using the above examples) is out of skew with the real value of the more volatile asset (Ethereum, in this case.) The markets will try to fix this pricing discrepancy, as traders wade in to the AMM to buy and invest in Ethereum at a discounted price. When enough traders do this, they drive the price up, and the AMM pricing structure once again is in balance.

Recommended: What Is a Stablecoin?

That scenario can have a major impact on the liquidity holder’s portfolio value. The liquidity provider, usually a cryptocurrency investor who leverages automated markets to find profit opportunities, may lose value based on the way AMM operates. When the provider trades on an AMM platform, they’re normally required to fund the two assets (as in the stablecoin and Ethereum example above) so traders can transition between the two assets by trading those assets in pairs.

When one of the paired asset prices is volatile, the investor can wind up with more of one of the cryptocurrency assets than expected, and less of the other. That hit to the current value of their portfolio assets compared to what the assets would be worth if left untraded, and kept stored in a digital wallet (that difference represents the impermanent loss).

It’s worth noting the loss in value may be temporary, if the value of the asset returns to the value at deposit, before the liquidity provider removes their crypto. Until then it’s an unrealized loss that only becomes permanent when the investor pulls their coins from the liquidity pool for good.

The Takeaway

Cryptocurrency investors are increasingly using liquidity pools to cull profits from automated market makers.
In the process, liquidity-minded investors may be leaving themselves exposed to imperfect DeFi asset pricing, leading to impermanent loss that can reduce the value of their cryptocurrency portfolios.

Staking crypto is a strategy that may make sense for more advanced crypto traders. For those just starting to build a crypto portfolio, a great way to start is by opening a SoFi Invest® brokerage platform. You can use the account to purchase Bitcoin, Ethereum and other cryptocurrencies, as well as individual stocks and exchange-traded funds.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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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What is a Direct Stock Purchase Plan (DSPP)?

A direct stock purchase plan (DSPP) is a plan that allows investors to purchase stock in a company without a broker and get it directly from the company instead.

The benefits include that there are oftentimes no brokerage fees. Meanwhile, discounts to the share prices may be available for larger purchases. With shares purchased through a DSPP, investors have the same profit and loss opportunities, access to dividends, as well as stockholder voting rights.

This common investment strategy can also work for people who want to focus on a select number of quality stocks, long term. It might also help people who want to have a direct method of ownership, without an intermediary. Some investors also appreciate that some DSPP programs offer dividends reinvestment plans.

Conversely, this may not be the preferred method for investors who value portfolio diversification, because not all stocks offer DSPPs. Companies also often put maximum limits on how much an individual investor can purchase. And when selling DSPP stocks, multiple types of fees can sometimes be charged.

Here’s a closer look at direct stock purchase plans.

Direct Stock Purchase Plan, Explained

When you buy vegetables from a grocery store, you know farmers grow the vegetables, then a distributor might buy from the farmer and sell the vegetables to grocery stores, The stores then sell those vegetables to the consumer. This is comparable to investors using a broker to buy shares of stock, because a middleman is involved.

But you can sometimes purchase food directly from growers, perhaps at a farmer’s market. This direct form of purchasing can be comparable to participating in a direct stock purchase plan.

Many blue-chip stocks tend to offer DSPPs. For example, let’s say Company X offers a plan that allows investors to buy $500 or more worth of company stock directly from it, up to $250,000 a year, with some service and transaction fees.

With a DSPP, investors directly purchase shares sometimes at a small discount. Discounts can range from 1% to 10% to encourage investors to buy more shares.

Briefly returning to our vegetable analogy, buyers can sometimes get a better price from a farmer’s market, because the distributors and grocery stores may mark up their prices to cover their own costs. But many brokerage accounts now waive fees and commissions entirely for many investors, the difference is smaller than it used to be.

How To Invest in a DSPP

Armed with information about how to buy directly from companies, investors may want to explore what specific opportunities exist. Perhaps they already have a publicly traded company in mind. In that case, they can go to that company’s investor relations website to see if that company offers this type of investment opportunity.

They can also search on the Internet broadly to see which direct stock purchase plans are available. A service like Computershare provides a listing of companies that sell stocks through a DSPP.

More specifically, if someone wants to buy stocks in this way, they typically open an account and make deposits into it. Usually, these deposits are automatically made monthly through an ACH funds transfer from the investor’s bank account. In some cases you can write checks as well.

Then, that dollar amount is applied toward purchasing shares in that company’s stock, which can include fractional shares. For example, let’s say that one share of a company’s stock currently costs $20. If an investor sets up an ACH withdrawal of $50 monthly, then, each month they have purchased 2.5 shares of that company’s stock.

One of the benefits of investing through a direct stock purchase plan is the ability to incrementally invest in an inexpensive way. This might make it a good choice for some first-time investors with smaller amounts of money to invest, with initial deposits ranging from $100 to $500. In some cases, initial deposit minimums can be waived if you purchase a certain dollar value of stock every month.

What to Consider Before Buying DSPPs

When Internet investing was new, people typically needed to pay significant fees to brokers to buy stock—so, in that era, direct stock purchase plans could be real money-savers for investors. Over time, though, fees for online investing have lessened, making this less distinctive of a benefit.

Plus, many DSPPs charge initial setup fees, and may have other investment fees, including ones for each purchase transaction or sale. Although they may be small, these fees can build up over time. And it may be challenging to re-sell shares without the use of a broker, which makes this investment strategy more of a long-term one.

Plus, any time a share is purchased, some degree of stock volatility comes along with it—how much depends upon what is happening with that specific company and the overall levels of turbulence in the market.

Here’s something else to consider: When owning stock in just one company, or only a couple of them, portfolios aren’t diversified. When you diversify your investment assets, it helps to spread out the degree of risk—that’s because, if one stock’s value decreases, others may rise to balance out that portfolio.

The Takeaway

At a high level, direct stock purchase plans are when individual investors can directly purchase shares of that company’s stock without the need for broker involvement. The benefits of DSPPs include often offering company shares at a discount, as well as helping investors who want just a smaller number of well-established stocks.

The downside of DSPPs is that a limited number of companies offer them, which means that an investor who invests solely through DSPPs may not have the best portfolio diversification. Plus, with brokerage commissions and fees rapidly shrinking, in many cases to zero, DSPPs have become a less essential way of cutting down trading costs.

When it’s time to start investing online, that’s also the time when people need to choose their broker. With the SoFi Invest®️ online investing app, people can invest with ease, no matter what level of investment experience exists.

If you’re looking to start investing in stocks, the Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

Download the SoFi Invest mobile app today.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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