Everything You Need to Know About GRT (The Graph)

Everything You Need to Know About GRT (The Graph)

GRT, or “the Graph” is a relatively new kid on the block when it comes to cryptocurrency. And like some other cryptos, it’s not merely a digital currency—there’s a little more to it than that.

Read on to learn what “the Graph” is, GRTs role, how to buy it, and whether it’s a good investment.

What Is GRT?

The Graph Network, also known as “the Graph” allows users to build APIs, known as subgraphs, to allow applications to talk to each other, and it also makes querying networks fast and secure. While it may require a further deep-dive to really understand the ins and outs of APIs and querying, we’ll save that for another time.

In technical terms, the Graph is a decentralized query protocol built for use with blockchains. More specifically, it works with Ethereum and the InterPlanetary File System (IPFS) to make it easy for users to build and publish APIs, or application program interfaces. Applications built on the Graph do not need a centralized server.

Users also use the Graph to query specific networks (again, like Ethereum or IPFS) to collect data without a third party.

GRT is an ethereum token that runs on the Graph Network. GRT is central to the Graph’s economy. Users swap it to keep things running.

Recommended: What is a Token? Crypto Tokens vs Crypto Coins

History of the Graph (GRT) Crypto

The Graph Network and its token, GRT, are a very new type of cryptocurrency. As of spring 2021, GRT has been on the crypto markets for less than a year.

The team behind the Graph Network includes a slew of industry veterans, and the founding team consists of Yaniv Tal, Brandon Ramirez, and Jannis Pohlmann. They started working on the Graph back in 2017, finally seeing the project come to fruition a few years later.

In October 2020, The Graph Foundation sold roughly $12 million worth of GRT during its initial public sale, comprising 400 million tokens. The Graph protocol launched in December 2020, giving GRT utility.

Some traders or investors have not yet heard about GRT because it’s still very new to the market, but it has gained ground with larger investors. Ten holders control more than half of GRT’s supply.

How Does GRT Work?

In effect, the Graph Network works as an intermediary between blockchains and decentralized applications—it helps the two communicate in a secure and efficient way using a query language called GraphQL. The Network comprises users who need queries to be processed, and who are willing to pay for it. As such, there are indexers, curators, and delegators who make it all happen on the back end.

Some of these users act as GRT stakers, supporting the others, who run nodes and process those queries. To run nodes, however, users must hold a certain stake of GRT token—which is where the token comes into the mix.

GRT allocates resources within the Graph Network, and acts as an incentive for users within the network to keep the Network up and running. That can mean processing queries, improving APIs, etc.

Effectively, the Graph Network is similar to networks like Ethereum in which users use the network for their own purposes, and use GRT tokens to facilitate transactions on the network. GRT also has value outside of the Graph’s ecosystem, although not much utility. It’s the utility on the network that gives it value, and why crypto traders and investors may want to add it to their wallets.

Subgraphs

Users can create open APIs, known as subgraphs, to index and store data pulled from the Ethereum blockchain, like Google indexes data from the Internet. Developers query via GraphQL to build on blockchain with these subgraphs.

GRT Price

Having been in existence on the market for only a handful of months, as of spring 2021, GRT’s price history is short, but fairly volatile.

GRT hit crypto exchanges back in December 2020, as you’ll recall, and its value soon shot up to around $0.70. When many other cryptos started to see values start to skyrocket in February 2021, GRT’s followed suit—although not quite to the lofty heights as some of its crypto cousins.

GRT prices hit their all-time peak (so far) in mid-February 2021, reaching more than $2.70 per token. Since then, prices have slowly declined, and as of July 2021, are hovering around $0.66 per token. So, in a matter of months, GRT’s value has nearly quadrupled, and then fallen by more than 75%.

Recommended: Crypto Bear Markets: What Are They?

Investing in GRT: Benefits and Disadvantages

For investors and traders, GRT won’t have much utility outside of the Graph Network’s ecosystem. Like many other cryptocurrencies, it’s going to be very difficult, if not impossible, to find a business willing to accept GRT in exchange for goods or services. But you can always trade your GRT for US dollars if need be, via an exchange.

Benefits of GRT

For investors or traders, GRT is yet another cryptocurrency that can help diversify a crypto portfolio. GRT’s value is currently down, but there is potential for it to go up in the future, depending on adoption of the Graph Network in the future. But that may require investors to HODL for some time.

Drawbacks of GRT

GRT is a cryptocurrency, which means it comes with a slew of risks. Cryptos are incredibly volatile (as is easy to see with GRT’s price history), and risk-averse investors may have trouble handling daily or weekly price fluctuations. Additionally, there is always the potential that the government could institute or change crypto regulations and rules, which could throw the crypto market into flux.

How to Trade GRT Cryptocurrency

Seasoned crypto traders: You know the drill when it comes to buying GRT or other cryptocurrencies. For newbies, it’s time to go over some investing in crypto basics:

Step 1: Choose an exchange and fund your account

If you want to trade cryptos like GRT, you’ll need to do so on an exchange—it’s pretty much the same thing as choosing a broker to buy stocks. Pick one, fund your account, and get yourself a crypto wallet (if one isn’t offered by the exchange) to store your holdings.

Step 2: Make the trade

Log in to your crypto exchange, and look up GRT—of course, you’ll want to make sure your chosen exchange offers GRT on its platform, first. Assuming it does, the process should be as simple as looking up GRT, deciding how much you want to buy, and executing the trade.

Step 3: Transfer your holdings

With your trade executed and GRT listed among your account holdings, you may want to transfer your tokens to your crypto wallet. Do some research into different types of wallets, and see which is right for you depending on how long you plan to hold onto your GRT.

The Takeaway

GRT is a relatively new ethereum token that powers the Graph, a decentralized protocol that indexes and queries blockchains. Users can build subgraphs, known as APIs, that can collect data without a third-party.

Understanding the intricacies of GRT and APIs, can be complicated for non-expert crypto investors. That said, if crypto investing is something that catches your fancy, you can wade in using the SoFi Invest® investing app. With SoFi invest, you can build your own investment portfolio, including cryptocurrencies as well as stocks, and exchange-traded funds.

Photo credit: iStock/Eva-Katalin


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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How Does the Iron Butterfly Spread Work?

What Is an Iron Butterfly?

What Is an Iron Butterfly?

An iron butterfly spread, sometimes called an “Iron Fly” or a “Butterfly Spread” is a trade involving four separate options contracts.

As a strategy that earns investors money when stocks or futures prices make moves within a defined range, it’s especially popular with traders who expect a decrease in implied volatility. To succeed with an iron butterfly spread, traders will try to forecast when option prices will likely decline, usually when the broader markets are in a holding pattern, or gradually moving upwards.

Recommended: A Guide to Options Trading

How Does an Iron Butterfly Trade Work?

An Iron Butterfly is a four-legged spread, since an investor buys four options contracts, two calls and two puts. The call options allow the investor to buy a stock at a given price, and the put options allow the investor to sell a stock at a given price. In the trade, the calls and puts have three strike prices, but the same expiration date.

In a put or call option, the strike price is the price an investor can sell the option when it is exercised. With a call option, the strike price is the price at which the investor can buy the security. With a put, the strike price is the value at which they can sell the security.

The three strike prices consist of one in the middle, called the options straddle, and two other strike prices, called the strangle, positioned above and below that price. As a trade, the Iron Butterfly has the propensity to deliver profits when the option’s underlying stock hits its expiration date at the middle strike price.

Recommended: Popular Options Trading Terminology to Know

Example of an Iron Butterfly

For the strategy to work, the call and put options that sit on either side of the target stock price should be far enough apart that they can still make money regardless of the unexpected price movement of the stock between the time when the trade is executed, and the expiration of the options.

As an example, you’re an investor with a sense that a stock would reach $50 in the next month, and that it would be at least within a range of $10 above or below the target price. To make an Iron Butterfly trade, you’d buy a call and a put option with a strike price of $50. Then you’d buy a call option ten dollars higher, followed by a put option ten dollars lower than the target price, or saddle price, of $50.

The theory behind the Iron Butterfly strategy is that there’s a high likelihood that the eventual price of the stock targeted in the strategy will trade within a profitable range by the time the strike price of the options arrives.

Pros and Cons of Iron Butterfly Spreads

There is a limit to the maximum profit that an investor can earn by using the Iron Butterfly. That’s because of the cost of the options they have to buy to make money on their bet, as well as the cost of the options they purchase to protect themselves in the event that their hunch is wrong.

In the strategy, the most money the investor can make becomes possible when the underlying stock reaches the stock price at which they’ve purchased the saddle options. But even in this best-case-scenario, at least half of the options expire worthless.

While this limited return may seem like a downside, it also comes with limited risk. As long as the stock rises or falls – at the time of the options’ expiration – between the target price and the strike prices of the outlying call and put options, then the trade will not lose money. But the closer it is to the target price, the more money it will make.

The biggest risk in an Iron Butterfly strategy is that the stock trades outside of the strangle, making all of the options worthless.

Recommended: What Is Your Risk Tolerance?

How to Sell out of an Iron Butterfly Spread

The investor will have at least one option that is in the money, and possibly two options that are in the money, when the options expire. They will exercise those options, and make money on the trade.

Traders realize that it’s unrealistic that any given trade will reach its expiration date exactly at the strike price, or straddle price, that they choose. But with a smart spread on the outer range of the call and put options in the trade, the strategy can deliver returns on the capital put at risk that are consistently in the 15-20% range.

What is the Difference Between Iron Condor and Iron Butterfly?

An Iron Butterfly is similar to another option strategy known as an Iron Condor. The strategies differ in terms of their strike prices and premiums. In an Iron Condor the strike prices are different and in an Iron Butterfly they’re the same. The premiums are higher in an Iron Butterfly than an Iron Condor.

Recommended: How to Sell Options for Premium

The Takeaway

The Iron Butterfly is a trading strategy that investors use when they believe that a stock price will trade within a specific range. Rather than buying the stock itself, an Iron Butterfly involves purchasing four options based on the investor’s price prediction for a certain security.

There are also plenty of ways to invest without options. A great way to get started is by opening an account on the SoFi Invest® brokerage platform. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs without paying SoFi commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a management fee.

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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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How Does a Block Trade Deal Work?

What Is a Block Trade?

A block trade is a single purchase or sale of a large volume of financial assets. Just how many shares are in a block trade deal? A block, as defined by the New York Stock Exchange’s Rule 127.10, is a minimum of 10,000 shares of stock. For bonds and penny stocks, a block trade usually involves at least $200,000 worth of a given fixed-income security.

Typically though, the number of shares in a block trade is far higher. Individuals typically don’t execute block trades. Rather, they most often come from institutional investors, such as mutual funds, hedge funds or other large-scale investors.

Why Block Trades Exist

These trades are often so large that they can move the market in a given security. If a pension fund manager, for example, plans to sell a million shares of a particular stock without sparking a broader market selloff, selling all those shares on a public market will take time.

During that time, the price of the shares the manager is selling will go down, simply as a result of the sale that they are making. Sometimes, the manager will sell even more slowly. But that creates the risk that other traders will identify the institution or the fund who’s selling. Then those investors might short the stock to take advantage of the manager’s selling.

Those same risks exist for a fund manager who is buying large blocks of a given security on a public market. The purchase itself can drive up the price. And if the trade attracts attention, other traders may front-run the manager’s purchases.

How Block Trades Are Executed

That’s why many large institutions conduct their block trades through block trade facilities, dark pools, or blockhouses. They all have expertise in both initiating and executing very large trades, without making a
major – and costly – impact on the price of a given stock or bond.

Every one of these non-public exchange services operates according to its own rules, but what they have in common is that they have a set of relationships with hedge funds and other large traders who can buy and sell large blocks of securities. By connecting these large buyers and sellers, blockhouses and dark pools offer the ability to make sometimes enormous trades without roiling the markets.

Investment banks and large brokerages often have a division known as a block house, which runs dark pools, which get their name because the public can’t see the trades until at least a day after they’ve been executed. Dark pools have been growing in popularity. In 2020, there were more than 50 dark pools registered with the Securities and Exchange Commission (SEC) in the United States. In June 2021, dark pools executed about 13% of all US equity trades, according to an analysis by Rosenblatt Securities.

Smaller Trades Are Used to Hide Block Trades

To help institutional traders conceal their block trades, blockhouses use a series of maneuvers to conceal the size of the trade being executed. At their most basic, these strategies involve breaking up the block into smaller trades. But they can be quite sophisticated, such as “iceberg orders,” in which the blockhouse will break block orders into a large number of limit orders.

By using an automated program to make the smaller limit orders, they can hide the actual number of orders at any given time. That’s where the “iceberg” in the name comes from, given that the limit orders that other traders can see are just the “tip of the iceberg.”

Taken together, these networks of traders who make block trades are often referred to as the “Upstairs Market,” because their trades occur off the trading floor.

Are Block Trades Good or Bad?

Neither. While they can move markets, block trades are not market manipulation. They’re simply a method used by large investors to adjust their asset allocation with the least market disruption and stock volatility possible.

Recommended: How Much Market Fluctuation is Normal?

However, institutional investors wouldn’t go to such lengths to conceal their block trades unless the information offered by a block trade was valuable. A block trade can offer clues about the short-term future movement and liquidity of a given security. Or it can indicate that market sentiment is shifting.

However, sometimes it’s hard to know what a block trade indicates. A large trade that looks like the tuning of the tide for a popular stock may just be a giant mutual fund making a minor adjustment.

So how can retail investors find information about block trades, and profit from it? There are a host of digital tools, some offered by mainstream online brokerages, that function like block trade indicators.

Many of these tools use Nasdaq Quotation Dissemination Service (NQDS), Level 2 – usually just called
Level 2 – data. This subscription service offers investors access to the NASDAQ order book in real time. Its data feed includes price quotes from the market makers who are registered to trade every NASDAQ and OTC Bulletin Board security, and is popular among investors who trade using market depth and market momentum.

Recommended: Using Technical Analysis to Research Stocks

Some blockhouses design their strategies, such as “iceberg orders,” to make them hard to detect on Level 2. But when combined with software filters, investors have a better chance of glimpsing these major trades before they show up later on the consolidated tape, which records all trades through blockhouses and dark pools – though often well after those trades have been fully executed.

These software tools vary widely in both sophistication and cost, but may be worth considering, especially for momentum investors, who buy securities that have been trending upwards, and sell ones that have begun to decline.

At the very least, using software to scan for block trades is a way to keep track of what large institutional investors and fund managers are buying and selling. Active traders may use the information to spot new trends.

Recommended: Day Trading Strategies: How to Day Trade

The Takeaway

It can be difficult for individual investors to detect block trades–giant position shifts by institutional investors–on their own. But these trades have some benefits for individual investors. The mutual funds and exchange-traded funds (ETFs) that most investors have in their brokerage accounts, IRAs, 401(k)s and 529 plans take advantage of the lower trading costs and volatility-dampening benefits of block trades every day, and pass along those advantages to their shareholders.

An easy way to start building a portfolio of exchange-trade funds and other investments like stocks and cryptocurrency is via the SoFi Invest® brokerage app. You can pick your own investments or use SoFi Invest’s automated investing solution that invests your money for you based on your goals and risk, without charging a management fee.

Photo credit: iStock/marchmeena29


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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Is It a Good Idea To Use a Personal Loan for Investing?

Is It a Good Idea to Use a Personal Loan for Investing?

Personal loans can be used to fund home repairs, consolidate high-interest credit card debt or cover an emergency expense. There’s also another way to use personal loans: investing in the stock market.

Using loans for investments could help with building a portfolio when you don’t have other cash to invest. While you may generate a solid return on those investments over time, there’s always the risk that you could lose money instead.

If you’re considering using personal loans to invest, it’s important to consider the pros and cons.

Can You Use Personal Loans to Invest?

Personal loans allow you to borrow a lump sum of money that you can use for virtually any purpose. Some of the most common uses for personal loans include home improvements, debt consolidation, vehicle purchases, medical bills, and emergency expenses.

In terms of using loans for investing, you can generally do so unless the lender specifies otherwise. While personal loans typically allow for flexibility in how the money can be used, lenders have the option to impose restrictions.

So why would private investors use personal loans to invest anyway?

There are different reasons for doing so. For some private investors personal loans could make sense if:

• They don’t have other cash available to invest.

• Shifts in the market create a buying opportunity that they’d like to capitalize on.

• Personal loan interest rates are low compared to the return potential for investments.

• They can afford to make the payments on a personal loan.

An investor line of credit is also an option. Unlike a loan, which offers a lump sum of cash to invest, an investor line of credit can be drawn against as needed.

For example, this type of personal borrowing arrangement may suit someone who’s investing in rental properties or fix-and-flip real estate and is unsure exactly how much they’ll need to invest.

When Using a Personal Loan to Invest Might Make Sense

Ultimately, whether you should consider using personal loans for investing may hinge on your investment goals, timeline for investing, and risk tolerance. But there are some situations where it might benefit you.

1. You Can Qualify for the Lowest Rates, Based on Credit

One of the most important factors lenders consider when approving personal loan applications is credit. Specifically, that means your credit scores and credit reports come under scrutiny.

The higher your credit score, the lower your interest rate on a loan is likely to be. If you’re interested in using personal loans for investments then getting the best rate matters.

Why? While you might be earning returns on your investments, you’re paying some of them back to the lender in the form of loan interest. So it makes sense to angle for the lowest rates possible. If you have good to excellent credit, that could be an incentive to get a personal loan or investor line of credit.

2. You May Be Able to Pay the Loan Off Early

Personal loans can be used to fund different types of investments, from stocks to mutual funds to real estate. But again, the interest you pay on the loan can eat away at your returns.

Being able to pay the loan off ahead of schedule could help you save money on interest charges. So think about your budget and what you might realistically be able to afford to pay each month to get the loan paid off early.

But be aware that doing so could trigger a prepayment penalty. While SoFi personal loans don’t have any prepayment penalties, other personal loan lenders may charge them.

If you get stuck paying a prepayment penalty that could wipe out any interest savings associated with paying the loan off early.

3. You’re Confident About Your Return Potential

Some financial experts might say that personal loans for private investors only make sense when they’re guaranteed to get a return that outpaces what they’ll pay in interest. But trying to predict a stock or exchange-traded fund’s future performance is an inexact science and not a recommended practice.

For that reason, it’s important to consider how confident you are about an investment paying off. This is where you may need to do some research to understand what an investment’s risk/reward profile looks like, how well it’s performed in the past, what’s happening with the market currently, and where it might be headed next.

In other words, you’ll want to perform some due diligence before using loans for investments. Looking at both the upsides and the potential investing risks can help with deciding if you should move forward with your personal loan plans.

When You Might Think Twice About Using Personal Loans for Investing

While there may be some upsides to using personal loans for investments, there are some potential drawbacks to weigh as well.

1. You Don’t Qualify for the Best Rates

When using personal loans for investing, the math becomes important since any interest you pay has to be justified by the returns you earn. Even if you’re investing in something that you’re sure is going to result in a sizable gain, you still have to consider whether the interest fits in.

If you don’t have great credit then any returns you realize may be overshadowed by the interest you’re paying to the lender. The total interest cost increases the longer you pay on the loan, which is also something to keep in mind if you’re considering a two-year, three-year, or even five-year repayment term.

Before applying for a personal loan, it’s helpful to check your credit reports and scores to see where you stand.

This can help you gauge what type of interest rates you’re most likely to qualify for if you do decide to go ahead with a loan.

2. You Have a Lower Risk Tolerance

Investments aren’t risk-free and some are riskier than others. If you’re taking on debt to invest in the market, you have to be reasonably sure that your investment will pay off. In the meantime, you have to be comfortable with the risk that involves.

The stock market moves in cycles, and volatility can affect stock prices from day to day. So it’s good to understand how you typically react to volatility and what level of risk is acceptable to you before taking out a personal loan.

If the idea of being stuck with a loan for an investment that doesn’t pan out isn’t something you can stomach, then it may not be right for you.

Likewise, you may want to take a pass on a personal loan if you’d be investing in something that you don’t fully understand or haven’t thoroughly researched.

3. Your Income or Expenses Could Change

Taking out a personal loan means you’re committing to repaying that money. While you might be able to afford the payments now, that may not be true if your income or expenses change down the line.

Something investors might not like to think about, but is a risk, is what if the market doesn’t perform favorably? What happens if there is a loss on the investment and you have to find other funds to make the personal loan payments? It’s a good idea to have a backup plan because even if the investment doesn’t provide the return that’s expected, the lender will still expect payments on that personal loan.

Before applying for a personal loan, ask yourself whether you’d still be able to keep up with the payments if your income were to decrease, your other expenses were to go up, or the investment didn’t see the return you thought it would.

If you don’t have an emergency fund in place, for instance, how would you manage the loan payments? Would you have to sell the investments you made to make a loan payment? Could you borrow money from friends or family?

Thinking about these kinds of contingencies can help you decide if a personal loan for investing is the best way to go.

What to Consider With Personal Loans for Investing

Before taking out a personal loan for investing, there are a few things to keep in mind. For instance, consider things like:

• How much you can afford to pay toward personal loans monthly.

• How much you need or want to borrow.

• Current personal loan interest rates.

• Which rates you’re most likely to qualify for, based on your credit history.

• Any fees a lender may charge, such as origination fees or application fees.

• Whether you’ll be able to repay the loan early and if so, what prepayment penalty might be involved.

Beyond credit scores, also consider what else is needed to get approved for a personal loan or an investor line of credit. For instance, lenders may look at your debt-to-income ratio, employment history, and what you plan to use the loan proceeds for.

Also, think about where you plan to use the money to invest. If you’re interested in trading stocks or ETFs, for example, you may want to choose an online brokerage that charges $0 commission fees for those trades.

The fewer fees you pay to your brokerage, the more of your investment returns you get to keep.

The Takeaway

Using personal loans for investments may suit some investors better than others. It’s important to weigh the potential rewards against any risk you may be taking on before committing to a personal loan for investing.

If you’re planning to use personal loans to build a portfolio, take time to compare lenders online to find the best fit for your needs, credit history, and budget. SoFi unsecured personal loans, for instance, offer competitive interest rates and come with no fees.

Learn more about SoFi’s personal loan options.

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SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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.

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How to Calculate the Dividend Payout Ratio

The dividend payout ratio is a metric that helps investors understand how much of a company’s net income it pays out in the form of dividends relative to how much it keeps to reinvest or pay down debt. Here’s a quick look at dividend basics and how investors can calculate the dividend payout ratio themselves.

Understanding Dividends and How They Work

Companies may pay out a portion of their profits to shareholders in the form of a dividend. Investors can take their dividend payments in cash or reinvest them in the market. Not all companies pay dividends, and those that do tend to be large, established companies with predictable profits. If an investor owns a stock or fund that pays dividends, they can expect a regular payment from that company, usually quarterly. Some companies may pay dividends more frequently.

Recommended: How Often Are Dividends Paid?

What is the Dividend Payout Ratio?

The dividend payout ratio expresses the percentage of income that a company pays to shareholders. Ratios vary widely by company. Some may pay out all of their earnings, while others may hang on to a portion to reinvest in the company or pay off debt. Generally speaking, a healthy range for payout ratios is from 35% to 55%. There are certain circumstances in which a lower ratio might make sense for a company. For example, a relatively young company that plans to expand might reinvest a larger portion of its profits into growth.

How to Calculate Dividend Payout

The simplest dividend payout ratio formula divides the total annual dividends by net income, or earnings, from the same period.

The equation looks like this:

Dividend payout ratio = Dividends paid / Net income

For example, if a company reported net income of $120 million and paid out a total of $50 million in dividends, the dividend payout ratio would be $50 million/$120 million, or about 41%. That means that the company retained about 59% of its profits.

An alternative dividend payout ratio calculation uses dividends per share and earnings per share as variables:
Dividend payout ratio = Dividends per share / Earnings per share

A third formula uses retention ratio, which tells us how much of a company’s profits are being retained for reinvestment, rather than paid out in dividends.

Dividend payout ratio = 1 – Retention ratio

Determine the retention ratio with the following formula:

Retention ratio = (Net income – Dividends paid) / Net income

Total dividends paid and a company’s net income are figures you can find in a company’s financial statements, such as its earnings report or annual report.

Why Does the Dividend Payout Ratio Matter?

Dividend stocks often play an important part in individuals’ investment strategies. Dividends are one of the primary ways stock holdings earn money. (Investors also earn money on stocks by selling holdings that have appreciated in value.) Investors may choose to automatically reinvest the dividends they do earn, increasing the size of their holdings, and therefore, potentially earning even more dividends over time.

The dividend payout ratio can help investors gain insight into the health of dividend stocks. For instance, a higher ratio indicates that a company is paying out more of its profits in dividends, and this may be a sign that it is established, or not necessarily looking to expand in the near future. It may also indicate that a company isn’t investing enough in its own growth.

Lower ratios may mean a company is retaining a higher percentage of its earnings to expand its operations or fund research and development, for example. These stocks may still be a good bet, since these activities may help drive up share price or lead to large dividends in the future.

Dividend Sustainability

Paying attention to trends in dividend payout ratios can help you determine a dividend’s sustainability—the likelihood a company will continue to pay dividends of a certain size in the future. For example, a steadily rising dividend payout ratio could indicate that a company is on a stable path, while a sudden jump to a higher payout ratio might be harder for a company to sustain.

It’s worth noting dividend payout ratios that are more than 100% as well. That means the company is paying out more money in dividends than it is earning, something no company can do for very long. While they may ride out a bad year, they may also have to lower their dividends, or suspend them entirely, if this trend continues.

Dividend Payout Ratio vs. Dividend Yield

The dividend yield is the ratio of a stock’s dividend per share to the stock’s current price:

Dividend yield = Annual dividend per share/Current stock price.

For example, if a stock costs $100 and pays an annual dividend of $7 the dividend yield will be $7/$100, or 7%

Like the dividend payout ratio, dividend yield is a metric investors can use when comparing stocks to understand the health of a company. For example, high dividend yields might be a result of a quickly dropping share price, which may indicate that a stock is in trouble. Dividend yield can also help investors understand whether a stock is valued well and whether it will meet the investor’s income needs or fit with their overall investing strategy.

The Takeaway

Dividend stocks can be an important component of an investment strategy, creating income or serving as a low-risk way to grow a portfolio. The dividend payout ratio is one measure to help investors evaluate stocks that pay dividends, often providing clues about company health and long-term sustainability.

If you’re interested in adding dividend stocks to your portfolio, you can get started by opening an account on the SoFi Invest® brokerage platform. You can use the platform to build your own portfolio containing 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.

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