Investing Archives | Page 39 of 221

Dec

2023

Consumer Price Index (CPI): What Is CPI?

The Consumer Price Index (CPI): A Comprehensive Guide

By Austin Kilham | Growing Wealth, invest, Investing, Terminology | Comments Off

The Consumer Price Index (CPI) is a monthly measure of how the aggregate costs of consumer goods and services in the United States are changing. Economists use CPI to help them understand whether the economy is in a period of inflation or deflation, and individuals can use it to get a sense of where prices might be headed.

What Is the Consumer Price Index (CPI)?

The CPI measures the change of the weighted-average prices paid by urban consumers for select goods and services, according to the Bureau of Labor Statistics (BLS). In other words, the metric tracks the rise and fall of prices over a given period of time.

Definition and Significance

As mentioned, “CPI” is short for Consumer Price Index, and it’s an often-cited economic indicator.

The BLS produces indexes that cover two populations: CPI-U covers all urban consumers, representing more than 90% of the population. And CPI-W represents urban wage earners and clerical workers, representing approximately 30% of the population. The CPI excludes people who live in rural areas, the military, and imprisoned people.

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How the CPI Works

cpi year over year change 2020-2024

The CPI tracks prices for a basket of goods and services people commonly buy in eight major categories, including:

• Food and beverage

• Recreation

• Apparel

• Transportation

• Housing

• Medical care

• Education and communication

• Various services

CPI Formulas

Each month, the BLS contacts retailers, service providers, and rental spaces across the country gathering prices for about 80,000 items. It uses this data to calculate CPI using the following formula:

CPI = Cost of the Market Basket in a Given Year/Cost of the Market Basket in the Base Year.

The result is multiplied by 100 to express CPI as a percentage. The BLS uses the years 1982-1984 as its base year. It set the index level during this period at 100.

Annual CPI Calculation

Here’s an example of the annual CPI calculation, and comparing two different years to get a gist of the differences.

Imagine the cost of a hypothetical basket of goods in 1984.

	Sweatshirt	1 dozen eggs	Movie ticket
Price in 1984	$10	$1.50	$5
Quantity	2	6	10
Total Cost	$20	$9	$50

When you total the price of these goods you get $79. Using the CPI formula above you take $79/$79 x 100 = 100%. This is where the 1984 base rate of 100 comes from.

Now let’s consider the same basket of goods in 2023.

	Sweatshirt	1 dozen eggs	Movie ticket
Price in 2023	$24	$3	$15
Quantity	2	6	10
Total Cost	$48	$18	$150

When you total the prices of these goods you get $216. Now, when you plug this into the CPI formula you get $216/$79 x 100 = 273%. You can now tell that from 1984 to 2023 prices for this particular basket of goods have risen by 173%.

Diverse Categories Within CPI

The CPI tracks more than 200 categories of items, and within each category it samples hundreds of specific items at various businesses which serve to represent the thousands of items available to consumers. In addition to these categories, CPI includes government-charged user fees like water, sewages, tolls, and auto registration fees. It also factors in taxes associated with the price of goods such as sales tax and excise tax. However, it does not include Social Security taxes or income taxes that aren’t directly related to the purchasing of goods and services.

The CPI also does not include the purchase of investments, like stocks and bonds.

The Consumer Price Index (CPI) in Practice

The CPI can be used in a variety of ways, but perhaps most prominently, in economic policy.

Usage in Economic Policy

The CPI is the most common way to measure inflation, the economic trend of rising prices over time, or deflation, the trend of falling prices. The federal government — or the Federal Reserve, more specifically — sets a target inflation rate of 2% annually, and the CPI can help the government understand whether or not its monetary policy is effective in meeting this target.

The Federal Reserve’s Utilization

The Federal Reserve may look at the CPI to gauge whether or not to raise interest rates, which may cool or heat up the economy, accordingly, by increasing the cost of borrowing. As borrowing costs go up, demand for goods or services tends to fall, lowering prices, and putting downward pressure on the CPI.

Implications for Other Government Agencies

Economists also use CPI as a measure of cost of living, the amount of money you need to cover basic expenses, such as housing, food, and health care. This is important because the government may make cost-of-living adjustments to programs such as Social Security benefits. As the cost of living rises, benefit amounts may be adjusted higher to keep up with the rising costs of goods.

Employers may also look at the cost of living to help them set competitive salaries and determine when to raise wages for employees.

Recommended: Cost of Living by State

CPI’s Influence on Market Sectors

The CPI can also have an influence on market sectors, like the housing markets, financial markets, and even labor markets. As noted, a lot of it is top-down — depending on how the Federal Reserve reads the CPI and decides to change interest rates, if at all.

Raising rates can temper demand in the housing market, as a mortgage can become more expensive. It can also slow down sales for all sorts of businesses, which is reflected in earnings reports and finally, in the stock market. That can then spill into the labor market, and potentially raise unemployment as companies look to cut costs.

All told, the CPI’s influence can run deep in an economy.

CPI Versus Other Economic Indicators

The CPI is only one of many economic indicators, as mentioned. Others include unemployment, and the Producer Price Index (PPI).

CPI vs Unemployment: Understanding the Relationship

As noted, there tends to be a relationship between the CPI and unemployment rate, as the Fed targets 2% inflation, and full employment. As such, it can decide to make changes to monetary policy to try and restore balance or at least get closer to its goals.

CPI vs PPI (Producer Price Index)

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods. Like the CPI, the PPI can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Analyzing and Critiquing the CPI Methodology

The CPI is a useful measure in many ways, but it does have some limitations. First, it doesn’t apply to all populations in the United States. CPI considers urban populations alone, so it is not necessarily representative of the costs for those who live outside of those areas.

Also, the CPI calculation does not take into account all of the goods and services available to consumers or new technologies not yet considered consumer staples. What’s more, the metric does not provide any contact into what’s causing prices to move up and down, such as social or environmental trends.

CPI’s Broader Impact and Usage

CPI reports are issued monthly by the BLS, and are available to anyone who wants to access them online. They give a broad breakdown of the previous month, and compare price changes year-over-year, and month-over-month.

Breaking Down the Monthly CPI Report

The standard CPI report has an introduction that discusses the changes over the previous month, followed by a table that outlines changes in specific price categories over the past year and several months. It further breaks down food, energy, and “all items less food and energy,” providing additional insight for each category.

Anticipating the Next CPI Report

The BLS publishes the date and time of the upcoming CPI report on its website, typically the second week of the month, at 8:30am ET.

Contemporary Relevance of CPI

In recent years, many people have kept a closely-trained eye on the CPI and CPI reports due to increased costs following the pandemic in 2020. While there were a variety of reasons as to why prices increased, that bout of inflation — the first serious case of inflation since the 1980s — caught many people off guard, and strained consumers’ budgets.

It also led to the Fed increasing interest rates. Inflation, or the increase in the CPI over the past couple of years, peaked at more than 9% during the summer of 2022, and as of late 2023, was back down to around 3.1%.

Educational Resources and Further Reading on CPI

There are numerous resources and places to learn more about the CPI, especially after all the attention it has garnered in recent years.

Learning More About CPI

A simple internet search will net a cornucopia of results, loaded with information and insight into the CPI. You’re also likely to find opinion pieces and other media discussing the CPI’s shortcomings or strengths — it can be a good idea to consider everything, and formulate your own opinion.

But in terms of learning more about the CPI itself, the BLS publishes a handbook discussing the concepts and methods it uses, which can also be helpful if you’re hoping to bolster your CPI IQ.

CPI-Related Statistics and Where to Find Them

The BLS publishes the CPI, and a whole host of data and statistics related to it. With that in mind, it can be a great place to start when hunting down CPI-related data. There are multiple other sources that utilize the BLS’ data to compile charts, graphs, and more, but typically, it’s all sourced back to the BLS.

The Bottom Line: Why the CPI Matters to Everyone

Rising inflation decreases the value of individuals’ cash savings over time. Investing in stocks, bonds and other investments that offer inflation-beating returns may help consumers protect the value of their savings. Understanding CPI, and how it’s moving, can help you devise a strategy for your investment portfolio.

The CPI can be a deep topic, especially when you consider how it intersects and relates to other elements of the economy, such as unemployment and interest rates. And again, the more an investor understands about the underlying machinations of the economy, the more knowledge they’ll have to power their decisions in the market.

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

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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Dec

2023

Using Technical Analysis to Research Stocks

By SoFi | Growing Wealth, Investing | No Comments

Using technical analysis to evaluate stocks includes using data and indicators to try and identify trends and patterns that can help guide investing or trading decisions. It’s one of the two main forms of stock analysis, the other being fundamental analysis.

Using technical analysis indicators to evaluate stocks isn’t necessarily easy, and is risky for investors who may not know exactly what they’re doing. With that in mind, it may take a long time for investors to feel comfortable with their technical analysis skills. And, of course, even the most seasoned investor could be wrong – but knowing the basics of technical analysis can be helpful for investors of all experience levels.

What Is Technical Analysis?

Technical analysis uses a variety of data points and indicators to evaluate stock performance, and help guide investing decisions. Technical analysis is an investment strategy by which investors try to forecast how a stock price will move based on current data on its past movements.

It uses various sets of data and stock indicators, such as price and volume, to identify patterns and trends. Technical analysis only considers a stock’s price and does not consider other factors, such as how a company operates, its earnings, or its assets. Technical analysts chart this data to help them visualize patterns. Think of these charts as trails that stocks leave behind them as prices move up and down.

One of the basic tenets of technical analysis is that history tends to repeat itself. By examining these trails, and as patterns begin to emerge, analysts can make an educated guess about where stock prices might be headed when current patterns line up with historical patterns.

For example, it may become clear that stock prices move a certain way at a certain time of year on a stock chart. A retailer that might see an uptick in share price during the holiday season, for instance.

Or, maybe it becomes clear that a stock reacts a certain way during specific market conditions. For example, when the price of steel rises, analysts may see a shift in the stock price of auto manufacturers.

Anyone can use technical analysis, though some of the indicators that professional analysts use to analyze stocks may be a bit on the complicated side. However, knowing some basics can be useful even for lay investors to help them make informed decisions about the stocks they choose.

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Approaches to Technical Analysis

Investors may choose to take a top-down or a bottom-up approach to technical analysis.

Those who take the top-down approach will typically start looking at stocks from a viewpoint that starts broad and gets narrower. For example, they might look at broad indexes like the S&P 500 and narrow their search to individual stocks from there.

Top-downers will also look at individual stocks from a wide time frame to a shorter time frame, perhaps starting by looking at daily charts and zeroing in on hour-to-hour charts to figure out the best time to execute a trade.

When using a bottom-up approach, investors look immediately at individual stocks, searching for points at which the stock is perhaps undervalued that might provide an opening point at which to buy.

The Basics of Technical Analysis

Investors who use technical analysis have a number of tools available to help them analyze stock. Here’s a look at some of the most common tools and how they are used:

Price

The main factor that technical analysis considers is price. Stock charts show how price changes over time, and technical analysts look for ways to read those charts to identify trends in price or other factors, like volume.

Investor Behavior

Technical analysts also consider how investor behavior, or psychology, can have big effects on how prices move. Understanding patterns in price can help analysts understand how other investors are likely to react under certain conditions given how they’ve reacted in the past to similar situations.

Stock Charts

Technical analysis is all about keeping track of the trail that stocks leave behind. One of the ways that investors and analysts organize this data is with stock charts, including bar, line, and candlestick charts. These charts can cover wide or short time frames and show the patterns of how trades are executed.

You’re likely familiar with line and bar graphs in which the height of the bar or line illustrates the up and down movement of the stock. Candlestick charts may be a little bit less familiar and can be an extremely useful tool if you can read them.

Candlestick charts are made up of distinct pieces, “candlesticks,” that look like a cylinder with a line coming out of the top and bottom. The cylinder and the lines should be read as three parts. There are four pieces of data represented in each candlestick — opening price, closing price, and the high and the low.

Additionally, each candlestick represents a period of time. Say one candlestick represents five minutes. Within that five-minute period, the bottom of the body of the candlestick represents the opening price of a stock and the top of the body represents the closing price.

The line extending downward from the body represents the low within that time period, and the line extending upward represents the high. If the closing price is higher than the opening prices, the candlestick is colored green, and if it’s lower, the candlestick is colored red.

Each candlestick is read in the context of the other data points around it, and gives analysts a detailed look at how investors are buying and selling stocks over a given period of time. Certain candlestick shapes can be an indicator of distinct changes in the market.

A hammer candlestick has a low, low price, but its closing price is close to its opening price, indicating that prices have potentially hit a low and are reversing. Its inverse, a shooting star candlestick, indicates that prices may have peaked and are on their way down.

Trends

Technical analysis looks for trends that can help indicate the direction a stock price is moving. As the stock price goes up, it is on an upward trend. As it goes down, it’s on a downward trend. By comparing current trends to historical data, technical analysts may be able to predict where the trend is headed and what points may represent its highs and lows.

Momentum Indicators

Analysts can measure the strength of trends and movement in price by taking a look at momentum indicators. This indicator compares the most recent closing price to previous closing prices. In a stock chart, the momentum indicator is represented as a separate line from the price line.

Momentum indicators may be expressed as the difference between the current closing price and the closing price a certain number of periods ago. Or it may be expressed as a percentage, or rate of change, by dividing the current closing price by a past closing price.

The momentum indicator helps investors know whether the price of a stock is moving up or down, but, more importantly, it helps them know how fast it’s moving. When calculating the difference, a positive number means prices are moving up, while a price below zero indicates prices going down.

When calculating a rate, when the rate is above 100, the price is on an upward trajectory. When it’s below 100, the price is on a downward trajectory. How far the rate is above or below zero or 100 is an indication of how fast the price is moving. For example, a momentum of 90% is moving down faster than a rate of 95%.

In general, momentum indicators are used less to provide a signal that investors should make a trade than they are used to help support trades made based on other price actions. For example, if the price of a stock is moving down but downward momentum is slowing, it may help provide confirmation it’s a good time to buy if other indicators also show it’s a good time to buy.

Volume

Stock volume is a measure of the number of shares that are being bought and sold during a given period. Another way to look at volume is that it represents investor interest in a stock. The more stock being traded, the heavier the volume and the greater the interest.

Investors can look at volume as an indicator that prices are changing, and rising volume can be a sign that stock price is starting to move in a significant way.

That said, it is possible that high volume can represent the end of a trend. For example, investors hoping to take advantage of a rise in a stock price may pile on at the end as the stock price is reaching its peak and just about to fall.

Support and Resistance Levels

One of the patterns that analysts will look out for when looking at stock charts are certain thresholds at which stock prices tend to rise or fall. The support level is a point to which a stock will sink but won’t usually fall any further before rising again.

It is essentially the level at which demand is strong enough to bolster the price. Conversely, there is also frequently a price ceiling that stocks will hit that may cause prices to fall back down.

This is the resistance level, the level at which selling is strong enough to prevent prices from rising. Investors may pay attention to these levels, choosing to buy when prices are near the support level or sell as prices meet the resistance level.

Moving Averages

Price movement over a given period of time can make a stock chart overwhelming to look at. The ups and downs of the line can be visually confusing and messy to look at. A way to simplify and show trends more clearly is by using a moving average.

This indicator focuses less on day-to-day movement and more on average price over time. A simple moving average (SMA) takes the sum of the closing prices over a given period of time and divides by the number of prices used. So if you were looking at a three-month period, you would add all the closing prices up over that period and divide by 90.

Technical Analysis vs. Fundamental Analysis

Fundamental analysis is another school of thought you may encounter when evaluating stocks. This strategy is a bit in opposition to technical analysis. For technical analysts, price is king. That’s why technical analysts are always looking at price and always looking for price patterns then can take advantage.

The fundamental analysis school of thought takes a deeper dive into a stock’s intrinsic value by looking at factors such as the underlying company’s financial statements, its assets and liabilities, how the company is governed, and the overall market and economy.

Whereas technical analysis is focused almost entirely on numbers, fundamental analysis looks at both qualitative and quantitative measures to determine the fair market value of a stock and compare whether its current price on the market is over- or under-valued.

That said, technical analysts would argue that the factors examined through fundamental analysis are already accounted for in the price of stock. As a result, they might say that examining price and trends is a more efficient form of analysis.

Technical Analysis and the Average Investor

The average investor interested in experimenting with technical analysis can turn to a variety of sources to find data sets and indicators. If you know where to look, there are reams of charts, data, and indicators, such as moving averages, that investors can use to track the past price and performance of stocks.

It should be noted that predicting the future price movement of stocks is very difficult. In fact, the efficient market hypothesis states that because markets are efficient, stock price reflects all available information about a stock. And nobody has a crystal ball – so, no matter how confident you are about a stock’s future movement, remember that there’s always risk involved.

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SOIN1023170

Dec

2023

What Is Initial Margin? Initial Margin Definition & Examples

What Is Initial Margin? Examples and Minimums

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

When an investor buys a security using a margin account, the initial margin or initial margin requirement is how much of the purchase price – represented as a percentage – that the investor must cover with either cash or the collateral in that account.

The Federal Reserve Board’s Regulation T sets the minimum initial margin at 50%, meaning investors trading on a margin account must have cash or collateral to cover at least half of the market value of the securities they buy on margin.

Using Initial Margin

Investors who want to open a margin account at a brokerage must first deposit the initial margin requirement. They can make that deposit in the form of cash, securities or other collateral, and the amount they deposit will vary depending on how much trading the investor plans to do on margin, and where the brokerage firm sets its initial margin.

Once the investor makes that initial margin deposit as collateral, they essentially have a line of credit with which they can begin margin trading. That line of credit allows the investor to buy securities with money borrowed from the brokerage.

As noted, Regulation T sets minimum initial margin levels. It’s important to note, however, that the Federal Reserve Board’s Regulation T only sets the minimum for margin accounts. Brokerage firms offering margin accounts can set their initial margin requirement higher than 50% based on the markets, their clients, and their own business considerations. But brokerages cannot set the initial margins for their clients any lower than 50%. The level that a brokerage sets for margin is known as the “house requirement.”

Risks of Margin Trading

Trading on margin brings its own unique set of opportunities and risks. It can lead to outsized profits if investors buy appreciating stocks on margin. But if investors buy sinking securities on margin, they can lose even more than if they’d purchased the securities outright.

In the unfortunate situation where the securities purchased on margin lose all value, the investor must deposit the full purchase price of the securities to cover the loss. Given these risks, you’re typically not able to trade on margin in retirement accounts such as an IRA or a 401(k).

Sometimes investors use margin to short a stock, or bet that it will lose value. In that instance, they’d borrow shares from the brokerage firm that holds a position in the stock and sell them to another investor. If the share price goes down, the investor can purchase them back at a lower price.

In general, investors looking for safer investments might want to avoid margin trading, due to their inherent risk. Investors with a high appetite for risk, however, might appreciate the ability to generate outsize returns.

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How Do You Calculate Initial Margin?

An investor who wants to trade in a margin account, must first determine how much to deposit as an initial margin. While that will depend on how much the investor wants to trade, and how big a role margin will play in their strategy, there are some guidelines.

The New York Stock Exchange and some of the other securities exchanges require that investors have at least $2,000 in their accounts. For day traders, the minimum initial margin is $25,000. Each brokerage has its own set of requirements in terms of the amount clients need to keep as collateral, and the minimum size of the account necessary to trade on margin.

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Initial Margin Requirement Examples

It’s possible, for example, that a brokerage firm might require 65% initial margin. That’s the first number an investor needs to know. The next is how much they plan to invest. The initial margin calculation simply requires the investor to multiply the investment amount by the initial margin requirement percentage. For an investor who wants to buy $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.

The advantage for the investor is that they get $20,000 of exposure to that stock for only $13,000. In a scenario where the investor is buying a stock at a 50% margin, that investor can buy twice as many shares as they could if they bought them outright. That can double their return if the stock goes up. But if the stock drops, that investor could lose twice as much money.

If the price falls far enough, the investor could get a margin call from their broker. That means that they must deposit additional funds. Otherwise, the broker will sell the stock in their account to cover the borrowed money.

Initial Margin vs Maintenance Margin

For investors who buy securities on margin, the initial margin is an important number to know when starting out. But once the investor has opened a margin account at their brokerage, it’s important to know the maintenance margin as well.

The maintenance margin is the minimum amount of money that an investor has to keep in their margin account after they’ve purchased securities on margin. It is generally lower than the initial margin.

Currently, the minimum maintenance margin, as set by the Financial Industry Regulatory Authority (FINRA,) is 25% of the total value of the margin account. As with the initial margin requirements, however, 25% is only the minimum that the investor must have deposited in a margin account. The reality is that brokerage firms can – and often do – require that investors in margin accounts maintain a margin of between 30% to 40% of the total value of the account.

Some brokerage firms refer to the maintenance margin by other terms, including a minimum maintenance or a maintenance requirement. The initial margin on futures contracts may be significantly lower.

Maintenance Margin Example

As an example of a maintenance margin, an investor with $10,000 of securities in a margin account with a 25% maintenance margin must maintain at least $2,500 in the account. But if the value of their investment goes up to $15,000, the investor has to keep pace by raising the amount of money in their margin account to reach the maintenance margin, which rises to $3,750.

Maintenance Margin Calls

If the value of the investor’s margin account falls below the maintenance margin, then they can face a margin call, or else the brokerage will sell the securities in the account to cover the difference between what’s in their account and the maintenance margin.

With a maintenance margin, the investor could also face a margin call if the investment goes up in value. That’s because as the investment goes up, the percentage of margin in relation by comparison goes down.

The Takeaway

Initial margin requirements and maintenance margins are just two considerations for investors who are looking to trade on margin. They allow investors to understand how much cash they need to hand on hand in order to trade on margin — and when they might be susceptible to a margin call.

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FAQ

What is an example of initial margin?

If initial margin is 65% and an investor wants to purchase $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.

Is initial margin refundable?

Yes, initial margin is refundable, as it acts as a deposit put forward to enact a transaction or trade.

Why is initial margin important?

Initial margin is important because it acts as a form of collateral to cover a loss in the event loses money using borrowed funds. It helps the lender – or brokerage – recoup some of those losses.

Why is initial margin paid?

Initial margin is paid or put forth to act as a deposit or a form of collateral and establish good faith between a borrower and lender, typically an investor or trader and their brokerage.

Who sets the initial margin requirement?

Initial margin requirements are established by the Federal Reserve’s Regulation T. But there can also be other requirements put in place by an individual brokerage, and FINRA’s additional margin rules can further increase the amount.

Does initial margin have to be cash?

Generally, initial margin needs to be in the form of cash deposits, but it’s possible that some brokerages will allow it to take the form of other securities, such as government bonds.

Is initial margin a cost?

Initial margin is not a cost per se, but a form of collateral, and is money that is returned or refunded like a deposit. As such, it’s not spent or a typical “cost,” though it may be a financial barrier of sorts for some traders.

Photo credit: iStock/FG Trade

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

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

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1023155

Dec

2023

Putting Goals-Based Investing Into Practice

By Samuel Becker | Growing Wealth, invest, Investing | No Comments

Using a goal-based investing strategy means to focus more on specific outcomes related to an individual’s goals, rather than trying to outperform the market or certain market benchmarks. Investment goals will and do vary from investor to investor, so a goal-based investing approach will vary as well – the specifics will all depend on an investor’s individual goals.

If goal-based investing sounds appealing, learning the basics does amount to a big lift. Read on to learn what you need to know to piece together a goal-based investment strategy.

What Is Goals-Based Investing?

Goal-based investing, also known as goals-driven investing, is exactly what it sounds like; it’s an investment approach focused on your financial goals, rather than on market benchmarks.

Traditionally, investment strategy focuses on portfolio returns and measuring risk tolerance, or, how much risk you want in your investments. Those factors would then determine your investment strategy and portfolio makeup. Investments can make money in a number of different ways, including yielding interest or dividends which translate to earnings for the investor.

What you choose to invest in, and how much, is known as your asset allocation. And your asset allocation is determined by what you want out of your investment returns and your investment timeline.

For example, your investment strategy might be different if you’re going to retire in five years compared to someone who plans to retire in 25 years. Goals-based investing, by contrast, measures your portfolio against your goals. That allows you to plan for different goals with different investment strategies.

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Crafting and Implementing a Goal-Based Investment Strategy

The key to goal-based investing is figuring out short-term and long-term financial goals.

Identifying Financial Goals and Assessing Risks

In the short term, goals could include saving for a vacation or a wedding; something like a down payment on a house might be a medium-term goal; and setting aside money for retirement — whatever kind of retirement you envision — is perhaps the longest-term goal.

Some common financial goals include: saving up an emergency fund; accumulating enough for a large purchase, like a car or a trip; paying for your kids’ colleges; putting a down payment on a house; caring for elderly parents and other loved ones; and planning for retirement. These all require different strategies and different timelines.

The Process: Discover, Advise, Implement, and Track

The first step in developing your goals and implementing them into a goal-based investment strategy is to take a realistic look at your current financial situation. Talking to a financial professional or advisor may help you refine and clarify your financial objectives. Then, create targets and separate accounts for your various goals.

From there, you’ll want to actually implement your strategy as they align with your goals. That likely includes actually figuring out the investment strategy for each of your investment accounts. For example, you might have a different investment strategy for savings you’re going to use in five years, versus your retirement savings that you’re going to use in 20 years.

Tracking is the final item on the list – you’ll want to keep an eye on your accounts and make sure that you stay on track with your goals, or change gears when needed.

Practical Aspects of Goal-Based Investing

Goal-based investing has some practical advantages, such as that you can adapt your investment strategy to meet your actual needs. Many households have far more goals than just retiring — and have not, historically, had a way to plan for them. The other benefit of goals-based investing is a bit more psychological.

A number of recent studies and research also suggest goals-based investing can have a behavioral impact on how you act—including, how invested you are in your investments and how emotionally you react to market fluctuations. Having a goal helps you focus your efforts. But where to focus them?

Typical Goals and Associated Risks

Some typical investing goals include retirement, a child’s education fund, or even a vacation or new car – there really isn’t a limit. Some people may simply want to accrue a massive amount of money in a retirement account, like $1 million. For some people, that’s doable – given enough time, resources, and fortunate market swings.

But each of those goals has its own risks. For instance, investing to try and accrue enough money to retire likely involves a long-term strategy, and an aggressive one. That may mean investing in riskier assets that are more volatile. Alternatively, investing with the goal of accruing enough money to take a vacation – in three years – may mean using a less-risky strategy, and investing in different types of stocks, bonds, or other securities.

Bucketing Goals into Broad Categories

Many, if not most investors will likely have many goals. As discussed, those can include retirement (a long-term goal), with vacations, tuition, or other goals that are shorter-term. For some investors, it may be helpful to mentally “bucket” those goals into different categories to help reach them.

For example, it may be helpful for some investors to group their shorter-term goals together, and utilize a higher-risk, higher-potential-reward strategy to try and reach them sooner. They could use a less-risky approach to their longer-term goals, such as retirement or funding a child’s education.

Goal-Based Investing with Professional Guidance

As discussed, some investors may find developing a goal-based investing approach to be easier with some professional guidance.

Working with Financial Advisors for Goal-Based Planning

Investors may opt to work with a financial professional for any number of reasons, and developing some goals and implementing those goals into an investing plan could easily be one of them. There are financial professionals out there who specialize in goal-based planning approaches, too.

Effectively, working with a professional to develop a strategy would likely involve identifying or tagging the specific goals or objectives an investor is trying to reach, and then creating a specialized investing plan or roadmap to get them there. Again, the specifics of such will depend on an individual investor, but in general, investors could probably expect some introspection into their hopes for the future, and some discussion as to how, specifically, to achieve those hopes.

Evaluating and Adjusting Your Investment Strategy

Many investors will implement a strategy and then need to tweak or adjust it as they go along – the market isn’t static, after all, and things change. As such, it’s important to be ready to evaluate and adjust your strategy over time.

Keeping Your Investment Plan Up to Date

While the market will see its ups and downs over time, other things will change, too. The economy will expand and contract, investors may have different jobs and income levels, and interest rates may change, too. This can all have an effect on your investment plan, and may require changes.

An investor can do those with the helping hand of a professional, of course, but the point is that a static plan likely won’t be the most efficient in a dynamic world.

Adapting to Changes in Goals and Market Conditions

Goals-based investing also gives you more buy-in as an investor, and more of a say in the process. However, the danger of goals-based investing is you might not fully know what your goals are — or, more likely, what your goals will be down the road. Researchers have found that we often fail to predict how much we will change in the next decade, and in turn, that can have a distorting effect on our goals and how we plan for them.

For example, right now, you might think you want a low-key retirement in a rural woodsy cabin, but what happens if you only invest enough to purchase a small cheap plot of land and then you change your mind in 20 years and need more money? That’s also why you want to re-evaluate your goals regularly and change your investing strategy as appropriate.

Goal-Based Investing Examples

Here’s a simple example of a goal-based investing example: Let’s say an investor’s goal is to accrue enough money to purchase a house. So, they’re aiming for a 20% down payment on a $500,000 home – a total of $100,000. And, they want to start with an initial investment of $50,000, and reach their goal within three years.

Accordingly, the aim is to return 100% over a three-year period. With that goal in mind, the next step is to implement a strategy that has the best possibility of attaining that goal. That means choosing how to deploy or allocate the initial investment to try and give themselves the best chance of reaching their goal.

Again, it may be helpful to have some professional guidance, but an investor may look at investing in specific ETFs or mutual funds, and certain stocks – there’ll be risks to consider, and a bit of tea-leaf reading to try and sense where the market is going. It won’t be easy, but it’s possible to reach that goal.

Similar strategies could be enacted for other goals, too, like building an emergency fund, or retiring. But the nuts and bolts of it all will depend on the individual investor.

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Dec

2023

The Essentials of Stock Float and Its Impact on Investing

By Pam O’Brien | Growing Wealth, Investing | No Comments

Whether you’re a veteran or a rookie when it comes to the stock market, you likely have come across the term “stock float.” And regardless of your experience, the question, “What is a stock float?” may have you stumped.

Finding out the answer can play a major role in your investing future. Read on to learn about stock float.

Unpacking the Concept of Stock Float

So, what is a stock float exactly? Floating stock is the number of shares available for trade of a particular stock. The number of floating shares is referred to as the stock float or simply “the float.” Stock float is important because it indicates how many shares of a stock can be bought and traded by investors in general.

To calculate the amount of floating stock available, subtract the number of locked-in shares and restricted stock from a firm’s total outstanding shares.

Restricted stock generally refers to shares that cannot be traded without special exception from the Securities and Exchange Commission (SEC). One such example of this is stocks that are restricted by the SEC from sale during a lock-up period after an initial public offering, where certain shareholders (such as employees and major investors) are not allowed to sell their stock for that given period. This may be done in an attempt to stabilize the price of the stock.

No matter the reason, if there are shares that are not available for trade in the market, then they will not be tallied in the final float count.

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How Stock Float Influences Market Dynamics

Stock float is something investors find helpful because it indicates the ownership structure of a company. Also, the lower the stock float, the more volatile the stock may be. If there is more demand from investors than available stock to buy, that could send the price of the stock up. And if demand for the stock drops, the stock’s price could fall.

The Significance of Stock Float in Investing

Investors find stock float useful because it tells them how many shares of stock are available to be publicly bought and sold. It also offers an indication of a stock’s volatility, as noted above. A stock float that’s low could push up the price of the stock if there is great demand for it.

Analyzing the Impact of Float on Stock Performance

Stock float can indicate to investors how many shares of stock are available to buy and sell, and thus, how volatile a stock may be. Stocks with a higher float tend to be less volatile, while those with a lower float tend to have higher volatility.

Stock float is just one metric or tool investors can use to analyze a stock and how it might potentially perform.

Stock Float Compared: Authorized, Outstanding, and Floating Shares

Authorized shares are the most shares of stock that a company can issue. Outstanding shares are the number of shares the company actually has issued. A company does not have to issue all of its authorized shares.

Floating shares refers to the number of a company’s shares that can be bought and sold. Stock float is calculated by subtracting a company’s restricted shares from their outstanding shares. If a company has 100 million outstanding shares, with 15 million of them locked in, this company’s float would be 85 million.

This means that 85 million shares of this company’s stock are available for trade on the open market. These are the shares that you could hypothetically purchase with a broker, brokerage account, or other trading platforms that have access to the major stock exchanges.

Identifying and Interpreting the Float of a Stock

Identifying the float of a stock requires a fairly simple calculation. You can find a stock’s float by subtracting any restricted shares of the stock from the outstanding shares.

Typically, you can also look at a company’s balance sheet to find the number of outstanding shares and floating shares.

Interpreting What the Float Tells You About a Stock

The float of a stock tells you how many shares of that stock are available for buying or selling. Low float stocks (those with fewer shares available to buy and sell) tend to be more volatile, as discussed earlier, because there are fewer shares available for trading.

The Implications of Low vs High Stock Float

When considering low float stocks and high float stocks, the following are some things investors might want to keep in mind.

Advantages and Risks of Low-Float Stocks

The benefits of low-float stocks apply mainly to day traders who hope to earn big profits in a short period of time. Each trade of a low-float stock could have a big impact on the value of the stock. For example, if there’s good news about a company whose stock float is low, demand for the stock may rise, and the stock’s price could go up.

Conversely, if news about the company is bad, demand for the stock could plummet, along with the stock’s price. This leads to a greater level of risk for investors.

The Stability and Volatility Factor in High-Float Stocks

High-float stocks tend to be less volatile because there are more shares available for public trading. That makes them more stable overall because there are more shares of the stock in circulation. The price of high-float stocks tends to be more stable than low-float stocks.

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The Investor’s Guide to Low-Float Stocks

Trading low-float stocks can be one strategy day traders use. Here’s what to know about evaluating and trading these stocks.

Best Practices for Trading Low-Float Stocks

Trading low-float stocks involves risks. Because there are few shares available, it may be difficult to buy them when an investor wants them and also to sell them in time to make a profit — this is referred to as a lack of liquidity.

One way traders might handle this is to look for stocks with low float and high volume, which is the number of shares of stock being traded daily. The more shares being traded, the lower the chances might be that an investor will have to deal with lack of liquidity.

Strategies for Evaluating Low-Float Stock Potential

Traders can use technical analysis and look at indicators like candlestick charts and moving averages to help evaluate a low-float stock. This typically requires some knowledge and experience as an investor.

Other methods of evaluating a low-float stock include:

Low-float stocks with a high relative volume. Relative volume is a way to help gauge a stock’s liquidity. It indicates a stock’s volume currently compared to other times in the company’s history. A stock with low liquidity might be difficult for an investor to sell.

News about the company. Both good and bad news about a company can affect a low-float stock’s value. It could quickly go up or down.

Float percentage. This refers to the percentage of total shares of stock available for trading. Most traders look for a percentage between 10% and 25%.

Insights Into Stock Float and Market Manipulation

Stocks with a low float may be more vulnerable to market manipulation. When a stock has fewer shares available for trading, it could easily be affected by comments on social media, for instance. There are also schemes such as a “pump and dump” in which unscrupulous investors buy up many of the shares of a low-float stock, which could affect the price dramatically. They might then dump the stock.

Day trading is risky and can result in investors losing significant amounts (although they could potentially make significant gains). And low-float stocks can be susceptible to practices like market manipulation. Those with a low tolerance for risk may find that low-float stocks are not the best investment for them.

Deep Dive: Case Study and Example of Floating Stock

One recent example of a low-float stock is General Electric (GE). In early fall 2023, there were 1.088 billion outstanding shares of GE stock. Of this number, approximately 76% of shares were not available for public trading. The float in this case was 260 million shares. Consequently, GE’s stock price is considered fairly volatile.

Practical Tips for Trading and Investing in Floating Stocks

Low-float stocks can be highly volatile and their price can go up and down in minutes or even seconds. This volatility could eliminate a significant chunk of an investor’s portfolio. Of course, low-float stocks could also present substantial profit opportunities with potentially big gains. But they are risky.

Low-float stocks are typically appealing to those who are hoping to make larger gains in a short amount of time, such as day traders.

To successfully trade low-float stocks, investors should look at technical indicators and also follow the news. Watching the market every day is critical since the prices of these stocks can change so quickly.

Whether you’re investing in low-float stocks or any stock, remember that diversifying your portfolio is important and can help mitigate risk and potentially increase your returns, studies show.

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FAQ

Is a Low-Float Stock Good for Day Trading?

A low-float stock could potentially lead to big profits for day traders if the stock is in high demand. However, these stocks can be very risky since they are volatile. If demand drops, a trader could lose large sums.

How Does a Stock’s Float Affect Its Liquidity?

Stocks with a higher float have more liquidity, which can make it easier for investors to buy and sell them. Low-float stocks have less liquidity, which could make it more challenging to buy or sell them.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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SOIN1023144

The Consumer Price Index (CPI): A Comprehensive Guide

What Is the Consumer Price Index (CPI)?

Definition and Significance

How the CPI Works

CPI Formulas

Annual CPI Calculation

Diverse Categories Within CPI

The Consumer Price Index (CPI) in Practice

Usage in Economic Policy

The Federal Reserve’s Utilization

Implications for Other Government Agencies

CPI’s Influence on Market Sectors

CPI Versus Other Economic Indicators

CPI vs Unemployment: Understanding the Relationship

CPI vs PPI (Producer Price Index)

Analyzing and Critiquing the CPI Methodology

CPI’s Broader Impact and Usage

Breaking Down the Monthly CPI Report

Anticipating the Next CPI Report

Contemporary Relevance of CPI

Educational Resources and Further Reading on CPI

Learning More About CPI

CPI-Related Statistics and Where to Find Them

The Bottom Line: Why the CPI Matters to Everyone

Using Technical Analysis to Research Stocks

What Is Technical Analysis?

Approaches to Technical Analysis

The Basics of Technical Analysis

Price

Investor Behavior

Stock Charts

Trends

Momentum Indicators

Volume

Support and Resistance Levels

Moving Averages

Technical Analysis vs. Fundamental Analysis

Technical Analysis and the Average Investor

What Is Initial Margin? Examples and Minimums

Using Initial Margin

Risks of Margin Trading

How Do You Calculate Initial Margin?

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Initial Margin Requirement Examples

Initial Margin vs Maintenance Margin

Maintenance Margin Example

Maintenance Margin Calls

The Takeaway

FAQ

What is an example of initial margin?

Is initial margin refundable?

Why is initial margin important?

Why is initial margin paid?

Who sets the initial margin requirement?

Does initial margin have to be cash?

Is initial margin a cost?

Putting Goals-Based Investing Into Practice

What Is Goals-Based Investing?

Crafting and Implementing a Goal-Based Investment Strategy

Identifying Financial Goals and Assessing Risks

The Process: Discover, Advise, Implement, and Track

Practical Aspects of Goal-Based Investing

Typical Goals and Associated Risks

Bucketing Goals into Broad Categories

Goal-Based Investing with Professional Guidance

Working with Financial Advisors for Goal-Based Planning

Evaluating and Adjusting Your Investment Strategy

Keeping Your Investment Plan Up to Date

Adapting to Changes in Goals and Market Conditions

Goal-Based Investing Examples

Choose how you want to invest.

Ready to do-it-yourself?

Want to take a hands-off role?

The Essentials of Stock Float and Its Impact on Investing

Unpacking the Concept of Stock Float

How Stock Float Influences Market Dynamics

The Significance of Stock Float in Investing

Analyzing the Impact of Float on Stock Performance

Stock Float Compared: Authorized, Outstanding, and Floating Shares

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