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

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

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

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

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

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

What Are Music NFTs?

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

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

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

How Do Music NFTs Work?

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

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

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

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

How Music NFTs Are Created

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

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

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

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

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

From there, it can be sold to an investor.

Where Music NFTs Are Bought and Sold

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

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

How NFT Music Is Valued

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

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

Pros and Cons of NFT Music

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

Pros

Cons

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

Notable NFT Music

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

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

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

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

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

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

The Future of NFT Music

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

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

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

The Takeaway

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

While NFTs are not necessarily everyone’s investment of choice, they do offer up some interesting potential assets to interested investors, and a way for artists to connect more directly with their fans. To get into the NFT space, you need to have crypto — and that’s just a couple of steps away when you open an Active Invest account with SoFi Invest. You can buy and sell dozens of different types of crypto starting with as little as $10, and you can trade 24/7 from SoFi’s secure app.

Get started building your portfolio and purchasing cryptocurrency today!

FAQ

What is NFT music?

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

How can you buy NFT music?

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

How is NFT music used?

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


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.

Photo credit: iStock/Passakorn Prothien
SOIN0221027

Read more
Guide to Zero-Coupon Certificates of Deposit (CDs)

Guide to Zero-Coupon Certificates of Deposit (CDs)

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

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

What Is a Zero-Coupon CD?

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

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

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

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

Recommended: CD Loans, Explained

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

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

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

How Do Zero-Coupon CDs Work?

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

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

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

Real World Example of a Zero-Coupon CD

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

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

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

Tips When Investing in a Zero-Coupon CD

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

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

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

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

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

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

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

Recommended: How to Invest in CDs: A Beginner’s Guide

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


Pros of Zero-Coupon CDs

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

•   Higher return potential than regular CDs

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

•   Suited for longer-term goals

•   Can be federally insured

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

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

Cons of Zero-Coupon CDs

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

•   No periodic interest payments

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

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

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

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

How to Collect Interest on Zero-Coupon CDs

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

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

How to Value Zero-Coupon CDs

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

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

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

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

The Takeaway

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

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

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

If you’re eager to earn a higher rate on your savings, you’ve got a lot of options — including the new high yield bank account with SoFi. With SoFi, you don’t pay management fees or account fees, and if you have direct deposit you can earn 1.25% APY.

Learn more about banking with SoFi today.

FAQ

What is a coupon on a CD?

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

Is a certificate of deposit a zero-coupon bond?

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

Are CDs safer than bonds?

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


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Photo credit: iStock/Joyce Diva
SOBK0422011

Read more

Understanding Stock Volatility

Conversations about the stock market are usually tied to comments about its volatility — how frequently share prices go up and down. The choppy nature of share prices can be intimidating to some investors, especially those who are just beginning to invest, nearing retirement, or have been burned by volatility in the past.

Stocks are considered an important part of an investment portfolio and can be a tremendous source of wealth-building for investors. And while there are some lower volatility equities versus higher volatility ones, it’s undeniable that they are a turbulent asset class. That’s why understanding volatility is key to being a good stock investor.

What Is Stock Volatility?

Volatility in the stock market occurs when there are big swings in share prices. Share prices can change quickly for a multitude of reasons. And while volatility in the stock market usually describes significant declines in share prices, volatility can also happen to the upside.

Volatility is often synonymous with risk for investors. That’s because investors generally prefer a steady source of returns rather than an erratic one.

However, volatility in the equity market can also represent significant opportunities for investors. For instance, investors might take advantage of volatility to buy the dip, purchasing shares when prices are momentarily lower.

💡 Recommended: What Types of Stocks Do Well During Volatility?

How to Measure Stock Volatility

Investors often measure an investment’s volatility by its standard deviation of returns compared to a broader market index or past returns. Standard deviation is a calculation determining the extent to which a data point deviates from an expected value, also known as the mean.

A low standard deviation indicates that the data points tend to be close to this expected value. Therefore, an investment with a low standard deviation is considered to have low volatility. A high standard deviation indicates that the data points are spread out over a larger range. For investments, a high standard deviation generally translates to high volatility.

Investors can also monitor the risk in their stock holdings by finding their portfolio beta – its sensitivity to price swings in the broader market. Beta is the financial risk that stems from the entire market and can’t be diversified away.

Another popular measure of tracking volatility is the Cboe Volatility Index, otherwise known as the VIX. The VIX measures the short-term volatility of the U.S. stock market via a formula that uses options trading or the price of call and put contracts based on the S&P 500 Index.

What Causes Market Volatility?

The stock market is known for having boom-and-bust cycles, which is another way of describing volatility.

Long periods of booming share prices tend to drive investors to take on more risk by entering into more speculative positions and buying riskier assets; investors and traders don’t want to miss out on the rally. They thus make themselves more vulnerable to shocks in the financial system, leading to market busts when investors need to sell their holdings en masse when the market is shaky.

💡 Recommended: What Is Flight to Quality? – A look at the herd-like investor behavior.

Regarding individual stocks, events tied to the company’s performance, such as earnings or a product announcement, can drive volatility in its shares. But when it comes to broader market volatility, various causes can trigger more significant swings in share prices, like changes in economic policy or uncertainty over geopolitical events.

For instance, the early stages of the coronavirus pandemic in February and March 2020 brought shockwaves into the markets. As economies across the globe shut down, investors began to sell off risky assets, bringing about high levels of volatility in the financial markets. Governments enacted extraordinary fiscal and monetary stimulus programs to calm this volatility and bring stability to the markets.

Other factors that can drive volatility include liquidity and the derivatives market. Liquidity is the ease with which an asset can be bought and sold without affecting prices. If an asset is tough to unload and gets sold at a significantly lower price, that could inject fear into the market and cause other investors to sell, ramping up volatility.

Separately, there’s sometimes a debate whether derivatives — contracts that are based on an underlying asset — can cause volatility. For instance, in 2020, investors debated whether large volumes of stock options trading caused sellers of the options, typically banks, to hedge themselves by buying stocks, exposing the market to sudden ups and downs when the banks had to purchase or sell shares quickly.

💡 Recommended: What Is a Derivative? A Beginner’s Guide

How to Manage Volatility When Investing

Let’s pretend that it’s 2007, and an investor has money invested in the U.S. stock market. Unfortunately, this investor is facing one of the largest stock market crashes in history. The S&P 500 fell by 57% during this crash.

This drop in the stock market isn’t typical, but it can be traumatic even for the savviest and most experienced investor. So the first step to handling stock market volatility is understanding that there will be some price fluctuation. The second step is to know one’s risk tolerance and financial goals, then invest and readjust a portfolio accordingly.

Generally speaking, higher rewards sometimes come with higher risks. For example, younger investors in their 20s might want to target high growth and be open to more volatile stocks. The reverse is true for someone approaching retirement who wants stable portfolio returns. Some strategies a more cautious investor can take to mitigate volatility in their portfolio. One way is diversification.

Here is why portfolio diversification matters: lower volatility stocks, such as utility or consumer staple companies, can add stability to a stock portfolio. Meanwhile, energy, technology, and consumer discretionary shares tend to be more turbulent because their businesses are more cyclical, or tied to the broader economy.

Another way to diversify one’s portfolio is to add bonds, alternative investments, or even cash. When deciding to add bonds or stocks to a portfolio, it’s helpful to know that the former is generally a less volatile asset class.

How Much Stock Volatility Is Normal?

The average stock market return in the U.S. has been 10% annualized over time. But 10% is an average — share prices returns can be much higher or lower. For example, as measured by the S&P 500, equity prices closed out 2008 down 38%. Then, in 2009, they rallied by 23%.

Past performance is not indicative of future returns, but looking at history can help an investor gauge how much volatility and market fluctuation is normal. Since World War II, the S&P 500 has posted 12 drops of more than 20%. These prolonged downturns of 20% or more are considered bear markets.

Recommended: Bear Market Investing Strategies

The table below shows the S&P 500’s returns from the highest point to the lowest point in a downturn. According to this data, bear markets average a decline of 34%, lasting a little more than a year. Bear markets have occurred as close together as two years and as far apart as nearly 12 years.

Peak (Start)

Trough (End)

Return

Length (in days)

May 29, 1946 May 17, 1947 -29% 353
June 15, 1948 June 13, 1949 -21% 363
August 2, 1956 October 22, 1957 -22% 446
December 12, 1961 June 26, 1962 -28% 196
February 9, 1966 October 7, 1966 -22% 240
November 29, 1968 May 26, 1970 -36% 543
January 11, 1973 October 3, 1974 -48% 630
November 28, 1980 August 12, 1982 -27% 622
August 25, 1987 December 4, 1987 -34% 101
March 27, 2000 October 9, 2002 -49% 926
October 9, 2007 March 9, 2009 -57% 517
February 19, 2020 March 23, 2020 -34% 33
Average -34% 414

The Takeaway

Stock volatility is the pace at which the market moves up or down during a certain period. It’s a complex topic that often sparks debate among investors, traders, and academics about what causes it. While equities are considered an important part of any investment portfolio, they are also known for being volatile, and some degree of turbulence is something most stock investors have to live with.

However, for long-time investors, periods such as when the dot-com bubble burst in the early 2000s and the financial crisis in 2008 are defining moments when market volatility seemed to get out of hand. While such events are rare, investors should make sure to diversify their portfolios, monitor the share prices of their stock holdings, and seek protection when possible.

If an investor wants to pick stocks and exchange-traded funds (ETFs) for their portfolio with no commissions, a SoFi online brokerage account might be a good option. But investing is not something that someone has to do on their own. They might consider help from a professional or robo advisor service, such as SoFi automated investing.

Check out SoFi Invest® today.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN19069

Read more

How to Calculate Expected Rate of Return

When investing, you often want to know how much money an investment is likely to earn you. That’s where the expected rate of return comes in; it’s calculated using the probabilities of investment returns for various potential outcomes. Investors can utilize the expected return formula to help project future returns.

Though it’s impossible to predict the future, having some idea of what to expect can be critical in setting expectations for a good return on investment.

What Is the Expected Rate of Return?

The expected rate of return — also known as expected return — is the profit or loss an investor expects from an investment, given historical rates of return and the probability of certain returns under different scenarios. The expected return formula projects potential future returns.

Expected return is a speculative financial metric investors can use to determine where to invest their money. By calculating the expected rate of return on an investment, investors get an idea of how that investment may perform in the future.

This financial concept can be useful when there is a robust pool of historical data on the returns of a particular investment. Investors can use the historical data to determine the probability that an investment will perform similarly in the future.

However, it’s important to remember that past performance is far from a guarantee of future performance. Investors should be careful not to rely on expected returns alone when making investment decisions.

💡 Recommended: Building An Investment Portfolio

How To Calculate Expected Return

To calculate the expected rate of return on a stock or other security, you need to think about the different scenarios in which the asset could see a gain or loss. For each scenario, multiply that amount of gain or loss (return) by its probability. Finally, add up the numbers you get from each scenario.

The formula for expected rate of return looks like this:

Expected Return = (R1 * P1) + (R2 * P2) + … + (Rn * Pn)

In this formula, R is the rate of return in a given scenario, P is the probability of that return, and n is the number of scenarios an investor may consider.

For example, say there is a 40% chance an investment will see a 20% return, a 50% chance that the investment will return 10%, and a 10% chance the investment will decline 10%. (Note: all the probabilities must add up to 100%)

The expected return on this investment would be calculated using the formula above:

Expected Return = (40% x 20%) + (50% x 10%) + (10% x -10%)

Expected Return = 8% + 5% – 1%

Expected Return = 12%

What Is Rate of Return?

The expected rate of return mentioned above looks at an investment’s potential profit and loss. In contrast, the rate of return looks at the past performance of an asset.

A rate of return is the percentage change in value of an investment from its initial cost. When calculating the rate of return, you look at the net gain or loss in an investment over a particular time period. The simple rate of return is also known as the return on investment (ROI).

💡 Recommended: What Is the Average Stock Market Return?

How to Calculate Rate of Return

The formula to calculate the rate of return is:

Rate of return = [(Current value − Initial value) ÷ Initial Value ] × 100

Let’s say you own a share that started at $100 in value and rose to $110 in value. Now, you want to find its rate of return.

In our example, the calculation would be [($110 – $100) ÷ $100] x 100 = 10

A rate of return is typically expressed as a percentage of the investment’s initial cost. So, if you were to sell your share, this investment would have a 10% rate of return.

💡 Recommended: What Is Considered a Good Return on Investment?

Best Investment App of 2022

– Motley Fool

Trade stocks, ETFs, and crypto – or start an IRA.
Get up to $1k when you open an account today.


**No purchase necessary.
Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Different Ways to Calculate Expected Rate of Return

How to Calculate Expected Return Using Historical Data

To calculate the expected return of a single investment using historical data, you’ll want to take an average rate of returns in certain years to determine the probability of those returns. Here’s an example of what that would look like:

Annual Returns of a Share of Company XYZ

Year

Return

2011 16%
2012 22%
2013 1%
2014 -4%
2015 8%
2016 -11%
2017 31%
2018 7%
2019 13%
2020 22%

For Company XYZ, the stock generated a 21% average rate of return in five of the ten years (2011, 2012, 2017, 2019, and 2020), a 5% average return in three of the years (2013, 2015, 2018), and a -8% average return in two of the years (2014 and 2016).

Using this data, you may assume there is a 50% probability that the stock will have a 21% rate of return, a 30% probability of a 5% return, and a 20% probability of a -8% return.

The expected return on a share of Company XYZ would then be calculated as follows:

Expected return = (50% x 21%) + (30% x 5%) + (20% x -8%)

Expected return = 10% + 2% – 2%

Expected return = 10%

Based on the historical data, the expected rate of return for this investment would be 10%.

However, when using historical data to determine expected returns, you may want to consider if you are using all of the data available or only data from a select period. The sample size of the historical data could skew the results of the expected rate of return on the investment.

How to Calculate Expected Return Based on Probable Returns

When using probable rates of return, you’ll need the data point of the expected probability of an outcome in a given scenario. This probability can be calculated, or you can make assumptions for the probability of a return. Remember, the probability column must add up to 100%. Here’s an example of how this would look.

Expected Rate of Return for a Stock of Company ABC

Scenario

Return

Probability

Outcome (Return * Probability)

1 14% 30% 4.2%
2 2% 10% 0.2%
3 22% 30% 6.6%
4 -18% 10% -1.8%
5 -21% 10% -2.1%
Total 100% 7.1%

Using the expected return formula above, in this hypothetical example, the expected rate of return is 7.1%.

Calculate Expected Rate of Return on a Stock in Excel

Follow these steps to calculate a stock’s expected rate of return in Excel:

1. In the first row, enter column labels:

•   A1: Investment

•   B1: Gain A

•   C1: Probability of Gain A

•   D1: Gain B

•   E1: Probability of Gain B

•   F1: Expected Rate of Return

2. In the second row, enter your investment name in B2, followed by its potential gains and the probability of each gain in columns C2 – E2

•   Note that the probabilities in C2 and E2 must add up to 100%

3. In F2, enter the formula = (B2*C2)+(D2*E2)

4. Press enter, and your expected rate of return should now be in F2

If you’re working with more than two probabilities, extend your columns to include Gain C, Probability of Gain C, Gain D, Probability of Gain D, etc.

If there’s a possibility for loss, that would be negative gain, represented as a negative number in cells B2 or D2.

Limitations of the Expected Rate of Return Formula

Historical data can be a good place to start in understanding how an investment behaves. That said, investors may want to be leery of extrapolating past returns for the future. Historical data is a guide; it’s not necessarily predictive.

Another limitation to the expected returns formula is that it does not consider the risk involved by investing in a particular stock or other asset class. The risk involved in an investment is not represented by its expected rate of return.

In this historical return example above, 10% is the expected rate of return. What that number doesn’t reveal is the risk taken in order to achieve that rate of return. The investment experienced negative returns in the years 2014 and 2016. The variability of returns is often called volatility.

💡 Recommended: A Guide to Historical Volatility

Standard Deviation

To understand the volatility of an investment, you may consider looking at its standard deviation. Standard deviation measures volatility by calculating a dataset’s dispersion (values’ range) relative to its mean. The larger the standard deviation, the larger the range of returns.

Consider two different investments: Investment A has an average annual return of 10%, and Investment B has an average annual return of 6%. But when you look at the year-by-year performance, you’ll notice that Investment A experienced significantly more volatility. There are years when returns are much higher and lower than with Investment B.

Year

Annual Return of Investment A

Annual Return of Investment B

2011 16% 8%
2012 22% 4%
2013 1% 3%
2014 -6% 0%
2015 8% 6%
2016 -11% -2%
2017 31% 9%
2018 7% 5%
2019 13% 15%
2020 22% 14%
Average Annual Return 10% 6%
Standard Deviation 13% 5%

Investment A has a standard deviation of 13%, while Investment B has a standard deviation of 5%. Although Investment A has a higher rate of return, there is more risk. Investment B has a lower rate of return, but there is less risk. Investment B is not nearly as volatile as Investment A.

Systematic and Unsystematic Risk

All investments are subject to pressures in the market. These pressures, or sources of risk, can come from systematic and unsystematic risks. Systematic risk affects an entire investment type. Investors may struggle to reduce the risk through diversification within that asset class.

Because of systematic risk, you may consider building an investment strategy that includes different asset types. For example, a sweeping stock market crash could affect all or most stocks and is, therefore, a systematic risk. However, if your portfolio includes bonds, commodities, and real estate, you may limit the impact of the equities crash.

In the stock market, unsystematic risk is specific to one company, country, or industry. For example, technology companies will face different risks than healthcare and energy companies. This type of risk can be mitigated with portfolio diversification, the process of purchasing different types of investments.

Expected Rate of Return vs Required Rate of Return

Expected return is just one financial metric that investors can use to make investment decisions. Similarly, investors may use the required rate of return (RRR) to determine the amount of money an investment needs to generate to be worth it for the investor. The required rate of return incorporates the risk of an investment.

What is the Dividend Discount Model?

Investors may use the dividend discount model to determine an investment’s required rate of return. The dividend discount model can be used for stocks with high dividends and steady growth. Investors use a stock’s price, dividend payment per share, and projected dividend growth rate to calculate the required rate of return.

The formula for the required rate of return using the dividend discount model is:

RRR = (Expected dividend payment / Share price) + Projected dividend growth rate

So, if you have a stock paying $2 in dividends per year and is worth $20 and the dividends are growing at 5% a year, you have a required rate of return of:

RRR = ($2 / $20) + 0.5
RRR = .10 + .05
RRR = .15, or 15%

What is the Capital Asset Pricing Model?

The other way of calculating the required rate of return is using a more complex model known as the capital asset pricing model.

In this model, the required rate of return is equal to the risk-free rate of return, plus what’s known as beta (the stock’s volatility compared to the market), which is then multiplied by the market rate of return minus the risk-free rate. For the risk-free rate, investors usually use the yield of a short-term U.S. Treasury.

The formula is:

RRR = Risk-free rate of return + Beta x (Market rate of return – Risk-free rate of return)

For example, let’s say an investment has a beta of 1.5, the market rate of return is 5%, and a risk-free rate of 1%. Using the formula, the required rate of return would be:

RRR = .01 + 1.5 x (.05 – .01)
RRR = .01 + 1.5 x (.04)
RRR = .01 + .06
RRR = .07, or 7%

The Takeaway

There’s no way to predict the future performance of an investment or portfolio. However, by looking at historical data and using the expected rate of return formula, investors can get a better sense of an investment’s potential profit or loss.

There’s no guarantee that the actual performance of a stock, fund, or other assets will match the expected return. Nor does expected return consider the risk and volatility of assets. It’s just one factor an investor should consider when deciding on investments and building a portfolio.

If you’re ready to build your portfolio, SoFi Invest® can help. With a SoFi Invest investment account, you can trade stocks and exchange-traded funds (ETFs) with no commission for as little as $5. And if you would like help creating an investment portfolio, SoFi automated investing uses a portfolio of ETFs based on your goals, risk tolerance, and projected timeline.

Ready to start investing? Download the SoFi app to get started.

FAQ

How do you find the expected rate of return?

An investment’s expected rate of return is the average rate of return that an investor can expect to receive over the life of the investment. Investors can calculate the expected return by multiplying the potential return of an investment by the chances of it occurring and then totaling the results.

How do you calculate the expected rate of return on a portfolio?

The expected rate of return on a portfolio is the weighted average of the expected rates of return on the individual assets in the portfolio. You first need to calculate the expected return for each investment in a portfolio, then weigh those returns by how much each investment makes up in the portfolio.

What is a good rate of return?

A good rate of return varies from person to person. Some investors may be satisfied with a lower rate of return if its performance is consistent, while others may be more aggressive and aim for a higher rate of return even if it is more volatile. Ultimately, it is up to the individual to decide what is considered a good rate of return.


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.
SOIN0522031

Read more
Row of houses

Investment Property Guide: Definition, Types, Pros and Cons

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

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

What is an Investment Property?

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

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

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

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

Types of Investment Properties

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

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

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

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

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

Who Is an Investment Property Right For?

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

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

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

Pros of Investing in Property

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

Potential for High Returns

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

Passive Rental Income

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

Hedge Against Inflation

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

Potential Tax Advantages

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

Cons of Investing in Property

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

High Upfront Costs

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

High Maintenance Costs

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

Illiquidity

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

Real Estate Market Risks

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

How to Invest in Property

Rental Properties

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

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

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

Real Estate Investment Trust (REIT)

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

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

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

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

💡 Recommended: Pros & Cons of Investing in REITs

Interest Rates on Investment Properties

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

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

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

The Takeaway

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

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

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


SoFi Invest®
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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOIN0522024

Read more
TLS 1.2 Encrypted
Equal Housing Lender