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A Guide to Swing Trading Strategies

Swing trading is a type of stock market trading that attempts to capitalize on short-term price momentum in the market. The swings can be to the upside or to the downside and typically from a couple days to roughly two weeks.

The difference between swing trading and day trading is time. Whereas day traders typically stay invested for minutes or hours, swing traders invest for several days or weeks. Meanwhile, swing trading is more short-term than investors who buy and hold onto stock for many months or years.

Here’s a closer look at swing trading as an investment strategy.

What Is Swing Trading?

Generally, a swing trader uses a mix of fundamental and technical analysis to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, exchange-traded funds, and other market instruments that exhibit pricing volatility.

It is possible for a swing trader to hold a position for longer than a few weeks, though a position held for a month or more may actually be classified as trend trading.

A swing trading strategy is somewhere in between a day trading strategy and trend trading strategy. They have some methods in common but may also differ in some ways—so it’s important to know exactly which you plan to utilize.

Day Trading vs. Swing Trading

Like day traders, swing traders are highly interested in the volatility of the market.

Along with day traders and trend traders, swing traders are likely to analyze volatility charts and price trends to predict what a stock’s price is most likely to do next. This is using technical analysis to research stocks–a process that can seem complicated but is essentially trying to see if price charts can give clues on future direction.

The goal, then, is to identify patterns with meaning and accurately extrapolate this information to the future.

The strategy of a day trader and a swing trader may start to diverge in the attention they pay to a stock’s underlying fundamentals—the overall health of the company behind the stock.

Day traders aren’t particularly interested in whether a company stock is a “good” or “bad” investment—they are simply looking for short-term price volatility. But because swing traders spend more time in the market, they may also consider the general trajectory of a company’s growth.

Pros and Cons of Swing Trading

Pros of Swing Trading

To understand the benefits of swing trading, it helps to understand the benefits of long-term investing—which may actually be the more suitable strategy for some investors.

The idea behind set-it-and-forget-it, buy-and-hold strategies is quite simply that stock markets tend to move up over long periods of time. Also, unlike trading, it is not zero-sum, meaning that all participants can potentially profit by simply remaining invested for the maximum amount of time possible.

Further, long-term investing may require less time and effort. Dips in the market can provide opportunity to buy in, but methodical and regular investing is generally regarded higher than any version of attempting to short-term time the market.

Swing trading exists on the other end of the time-and-effort continuum, although it generally requires much less effort and attention than day trading. (Whereas day traders must keep a minute by minute watch on the market throughout the trading days, swing trading does not require that eyes be glued to the screen.)

Income

Compared to long-term investing, swing trading may create more opportunity for an investor to actively generate income.

Most long-term investors intend to keep their money invested—including profits—for as long as possible. Swing traders are using the short-term swings in the market to generate profit that could be used as income.

Greater Profits

Next, there is the potential to generate returns beyond a passive market strategy. If an investor’s only goal is to simply return the stock market’s average, this is easy to accomplish with a passive index strategy.

Investors who are interested in generating additional profit, or want to do so on an expedited timeline, may be interested in finding additional ways to increase risk in order to generate returns. (Whether an investor is successfully able to do this is another question altogether.)

Avoidance of Dips

Last, it may be possible for swing traders to avoid some downside.

Long-term investors remain invested through all market scenarios, which includes downturns. Because swing traders are participating in the market only when they see opportunity, it may be possible to avoid the biggest dips.

Cons of Swing Trading

Though there is certainly the potential to earn a pretty penny via swing trading, there’s also a substantial risk of losing money—and even going into debt.

As with any investment strategy, risk and reward are intrinsically related. For as much potential as there is to earn a rate of return, there is potential to lose money. Therefore it is smart to be completely aware—and comfortable—with the risks, no matter which investing strategy you decide to use.

Expense

Don’t trade (or invest) money that you can’t afford to lose.

Additionally, it can be quite expensive to swing trade. Although brokerage commissions won’t be quite as high as they would be for day traders, they can be substantial.

In order to profit, traders will need to out-earn what they are spending to engage in swing trading strategies. That requires being right more often than not and doing so at a margin that outpaces any losses.

Time

Swing trading might not be as time-consuming or as stressful as day trading, but it can certainly be both. Many swing traders are researching and trading every day, if not many times a day.

What can start as a hobby can easily morph into another job, so be honest if that’s the life that you want.

Efficacy

Within the investing community, there is significant debate as to whether the stock market can be timed on any sort of regular or consistent basis.

In the short term, stock prices do not necessarily move on fundamental factors that can be researched.

Predicting future price moves is nothing more than just that: trying to predict the future. Short of having a crystal ball, this is supremely difficult to do.

Swing Trading Strategies

Each investor will want to research their own preferred swing trading strategy, as there is not one single method. It might help to designate a specific set of rules. Not every trade will work in your favor, but that does not mean the strategy is broken.

Channel Trading

One such popular strategy is channel trading. Channel traders assume that each stock is going to trade within a certain range of volatility, called a channel.

In addition to accounting for the ups and downs of short-term volatility, channels tend to move in a general trajectory. Channels can trend in flat, ascending, or descending directions, or a combination of these directions.

When picking stocks for a swing trading strategy using channels, you might buy a stock at the lower range of its price channel, called the support level. This is considered an opportune time to buy.

When a stock is trading at higher prices within the channel, called the resistance level, swing traders tend to believe that it is a good time to sell or short a stock.

MACD

Another method used by swing traders is moving average convergence/divergence.

The MACD indicator looks to identify momentum by subtracting a 26-period exponential moving average from the 12-period EMA.

Traders are seeking a shift in acceleration that may indicate that it is time to make a move.

Other Strategies

This is not a complete list of the types of technical analysis that traders may integrate into their strategies.
Additionally, traders may look at fundamental indicators such as SEC filings and special announcements, or watch industry trends, regulation, etc., that may affect the price of a stock.

Similarly, they may watch the news or reap information from online sources to get a sense of general investor sentiment.

Traders can use multiple swing trading methods simultaneously or independent from one another.

The Takeaway

Swing traders, who invest for days or weeks, use different strategies to try to reap rewards greater or faster than they might with long-term investing. There is no one surefire method, but it might be best to find a strategy and stick with it.

SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

Ready to place a trade? Get started with SoFi Invest.



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.
Claw Promotion: For the full terms and conditions of SoFi’s Claw Promotion, click here. Probability of a customer receiving $1,000 is 0.028%.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

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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ETFs vs. Mutual Funds: Learning the Difference

Exchange-traded funds (ETFs) and mutual funds are both SEC-registered investment vehicles that offer investors a convenient way to build a diversified portfolio.

From a 20,000 foot view, they may look similar. Both are professionally managed and offer investors slices of the portfolio. Both can hold hundreds or thousands of securities. Both are not FDIC insured, which means an individual can lose their money. For decades, ETFs and mutual funds have provided retail and institutional investors an efficient way to invest in stocks, bonds and other asset classes.

Yet there are key differences. Here’s a closer look at ETFs and mutual funds and what to know about each investment type.

Differences Between ETFs and Mutual Funds

How to Buy Mutual Funds and ETFs

The biggest difference between mutual funds and ETFs is how they’re purchased and sold. Mutual funds transact once per day, with all investors selling or buying shares at the same closing price. ETFs trade throughout the day on public exchanges, with many shares exchanging hands at various prices as buyers and sellers react to changes in the market.

Data on Holdings

Mutual funds are required to report the total value of their portfolio once per day after the stock markets close. The fund then figures out how many shares they have and what each share is worth based on the total value. This is what is referred to in the industry as the Net Asset Value, or NAV. When investors buy or sell a share of the mutual fund, they transact at that NAV at the end of the day.

Meanwhile, ETFs have to report their holdings on a daily basis. The price of the ETF fluctuates throughout the day based on market conditions and the value of the ETF’s underlying holdings.

Passive vs. Active

ETFs tend to be considered “passive investments.” That’s because investors are not necessarily making active trades but rather tracking an underlying index.

However, actively managed ETFs have also cropped up, since the first ETF was launched in 1993.

Meanwhile, with mutual funds, it’s common to find an active fund manager who makes decisions on which holdings to buy and sell.

Fee Differences Between ETFs vs Mutual Funds

Mutual funds tend to charge different types of fees to cover their business costs. ETFs generally charge lower fees.

When versus active investing, passive investing usually incurs lower fees since they track a particular index, like the S&P 500 Index.

Tax Implications of ETFs vs Mutual Funds

You may get better tax efficiency with ETFs, because you are not buying or selling as much with them. There are fewer transactions to tax and ETFs are generally tax efficient given their unique creation and redemption mechanism that they employ.

You’ll have to pay capital gains taxes and dividend income taxes, but ETFs have a lower tax requirement than mutual funds. Due to the unique structure of ETFs, they’re often able to reduce the amount of capital gains they distribute each year relative to a comparable mutual fund.

Lower Initial Investment

As a general rule, mutual funds tend to require a higher initial investment. ETFs, on the other hand, allow investors to invest in as little as a single share. In some cases, brokerage firms allow investors to even buy ETF fractional shares, slices of a whole stock in an ETF.

Types of Mutual Funds

The first mutual fund was launched in the 1970s by the late Jack Bogle of Vanguard. Since then the investment type has steadily increased in popularity. Mutual funds registered in the U.S. accounted for $23.9 trillion in 2020.

Here are some of the different types of mutual funds:

Load Mutual Funds

Load mutual funds charge a sales commission that’s paid to a financial advisor or broker who helped the investor decide on which mutual fund to purchase.

There are typically two types of load mutual funds: 1. Front-end load funds, which means the fee is paid when the mutual fund is purchased, and 2. Back-end load funds, which means the fee is paid when the mutual fund purchase is redeemed. Generally, back-end load funds charge higher fees.

No-Load Mutual Funds

Investors could look for a “no-load” mutual fund, which means the shares are bought and sold without charging commissions.

This plan may be best for investors who plan to do a lot of trading. If investors have to pay a commission charge every time they buy or sell a security, frequent trading will reduce returns. However, the expense ratios for no-load mutual funds are often higher.

Active vs. Passive Mutual Funds

Most mutual funds are actively navigated by experienced money managers who steer the fund and invest in companies they believe will lead to outperformance.

However, there are also passive mutual funds that track indices, similar to the way ETFs do.

Open-Ended Funds

Purchases and sales of fund shares typically happen directly between an investor and the fund company. As more investors buy into the fund, more shares are added, which means that the number of eventual fund shares can be nearly unlimited.

However, the fund must undergo a daily valuation by law, which is called marking to market (see a deeper dive on this below). The result of this process is a new per-share price, which has been adjusted to sync with any changes in the value of the fund’s holdings. An investor’s share value is not affected by the quantity of outstanding shares.

Closed-End Funds

Unlike open-ended funds, closed-ended funds (CEFs) are finite and limited. Only a specific number of shares are issued and no further shares are expected to be added.

The prices of close-ended funds are influenced by the NAV of the fund, but are ultimately determined by the demand investors have for the fund. Since the amount of shares is fixed, the shares often trade above or below the NAV. If the fund is trading above the NAV (what it’s really worth), it’s said to be trading at a premium; if trading below the NAV, it’s said to be trading at a discount.

Different Types of ETFs

The SPDR S&P 500 ETF Trust was launched in 1993, becoming the first ETF in the investment landscape. The fund has since then amassed more than $350 billion in funds.

ETFs are just one class of funds within the broader exchange-traded product (ETP) universe. Here’s a closer look at the different types of ETPs and ETFs.

Exchange-traded notes (ETNs)

Exchange-traded notes (ETNs) are usually debt instruments issued by banks that seek to track an index.

Leveraged ETFs

Leveraged ETFs use derivatives to amplify returns from a fund. For instance, if an underlying index moves 1% on a trading day, a regular ETF tracking the index would also move 1%. However, a leveraged ETF could move 2% or 3% depending on whether it’s double levered or triple levered.

Inverse ETFs

Inverse ETFs are similar to shorting a stock. Investors can use inverse ETFs to bet that the price of a market or stock sector will go down. So if the underlying goes down 1% on a given day, the inverse ETF will go up 1%.

Thematic ETFs

Thematic ETFs tend to focus on a slice of the stock market and follow a specific trend. Thematic ETFs that have cropped in recent years include those that cover renewable energy, the gig economy, or even pet care.

The major pros and cons of thematic ETFs include capturing a specific trend that appeals to an investor, as well as being too narrowly focused.

The Takeaway

Both ETFs and mutual funds allow investors to pool funds with other investors’ funds to ultimately buy and sell baskets of securities in the market. The aim is portfolio diversification and reducing risk compared to investing in a single company. If a person were to put all of their money into one company instead, their investment isn’t diversified because their fortunes are tied to that single company.

Knowing the difference between ETFs and mutual funds is a lot to absorb and keep straight, but you don’t have to go it alone. Working with SoFi’s no-cost financial planners can help you understand how it relates to your personal financial plans. SoFi Invest users can also choose which ETFs to buy on the Active Investing platform.

Start investing today with SoFi Invest.


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.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Should We Expect a Bitcoin Bull Run in 2021?

2021 is only halfway through but the cryptocurrency has already experienced staggering volatility.

The price of Bitcoin, the biggest digital currency by market value, started the year at around $30,000, only to more than double and hit north of $60,000 by mid-April. Since then, the cryptocurrency has tumbled to around $30,000 again.

Let’s take a look at some of the key indicators, predictions, and possibilities for Bitcoin and other cryptocurrencies in 2021.

Past Crypto Trends

Anyone keeping track of Bitcoin likely remembers the bull run of 2017, during which the cryptocurrency reached a high of nearly $20,000. Much of that rally was fueled by hype over initial coin offerings (ICOs) and people who hoped to benefit in the short term. ICOs are when companies raise funds by issuing new tokens to investors who become backers of the blockchain project.

After the ICO bubble popped, Bitcoin’s price crashed in early 2018. Market observers commented that as a new market and industry, cryptocurrencies would see some turbulence and could take time to establish credibility.

Facebook announced its Libra cryptocurrency project in 2019, which contributed to another Bitcoin rally. However, when some supporters of the Libra project backed out and Congress questioned CEO Mark Zuckerberg about regulatory concerns, Bitcoin’s price declined to $6,000 and $7,500 in the second half of the year.

Bitcoin climbed to a new record in 2020, as stimulus packages meant to prop up economies during the Covid-19 pandemic made its way into fringe markets like cryptocurrencies.

However, there were also signs that different types of cryptocurrencies were gaining wider mainstream acceptance. Prominent investors announced they were buying Bitcoin as a hedge, and payment providers like PayPal announced they would allow customers to use cryptocurrencies.

What Determines Bitcoin’s Price?

Numerous factors affect Bitcoin’s price, and since it is a global currency the market can be affected by events around the world. No central actor determines Bitcoin’s price; it’s set by the market. The price can also vary from one exchange to another.

Market Demand

The main factor that determines Bitcoin’s price is whether investors want to buy or not. If good news comes out about Bitcoin or other cryptocurrencies, or bad news comes out about another type of investment, that can cause people to buy Bitcoins and hike the price up.

Conversely, bad news about cryptocurrencies can cause people to sell. News doesn’t necessarily have to be overtly negative to spook the market, either.

Similarly, the rules of supply and demand affect the Bitcoin market. Only 21 million Bitcoins will ever be created, and if investors see a strong long-term market for Bitcoin, they want to own a piece of the pie.

Recommended: Why Is Bitcoin So Volatile?

Altcoins

Although Bitcoin is the best known cryptocurrency, there are thousands of other altcoins available on the market. When good news comes out about other projects, investors sell off some of their Bitcoin to purchase altcoins. In 2021, altcoins like Dogecoin had a spectacular rally as fans and investors promoted the coin on social-media platforms.

Also, new projects offer ICOs which can sometimes have a high return in a short amount of time. If a promising ICO comes to market, it can draw attention away from Bitcoin.

Market Manipulation

Both large financial institutions and individual investors can have an effect on the market. Some Bitcoin holders, known as “whales,” own a significant enough amount of Bitcoin that they can move Bitcoin’s price if they make a large purchase or sale.

There have been cases of whales causing the market to temporarily crash when they sold off large amounts of Bitcoin.

Cost of Production

The main costs associated with producing Bitcoins are electricity and mining equipment. Although Bitcoin is a digital currency, it must still be mined. The way Bitcoin is designed, only about one block of Bitcoins can be mined every ten minutes.

If more miners join the network, the more competitive mining becomes, which makes the cost of producing each Bitcoin more expensive. Miners have to invest in new, faster equipment and are less likely to receive a pay out. These costs have an effect on Bitcoin’s price.

Recommended: How Does Bitcoin Mining Work?

Regulations

Each country has different definitions and regulations for Bitcoin and cryptocurrencies. When news comes out about regulatory decisions, it can cause investors to buy or sell. It is important to note that cryptocurrency is currently unregulated.

Cryptocurrencies faced regulatory hurdles in the U.S. in 2021. The Securities and Exchange Commission rejected several applications for a Bitcoin exchange-traded fund, damping hopes that an ETF version of the cryptocurrency will be trading on U.S. stock exchanges anytime soon.

In addition, cryptocurrencies experienced volatility after China clamped down on the market, issuing warnings about trading and mining.

Recommended: Are There Bitcoin ETFs?

Fiat Currency Crises

Bitcoin has become the preferred currency for many people around the world who may not have access to banking, or who are living in a country going through a fiat currency crisis.

In Venezuela, for example, Bitcoin’s popularity has grown as inflation and sanctions have resulted in the devaluation of the Venezuelan Bolivar.

What’s Holding Bitcoin Back?

A few factors have been holding Bitcoin back from seeing any significant growth over the past year. Some of these are predicted to take steps forward in 2021.

Adoption and Use

Since Bitcoin is a new technology, it takes time for companies to build up tools and use cases for it. At this point, the infrastructure is getting stronger and it’s easy for novice investors to buy and sell Bitcoin at the touch of a button. Take for instance, the PayPal announcement in 2020.

However, many people holding Bitcoin haven’t wanted to use it for everyday purchases because they view it as a long-term, safe-haven investment with a lot of potential upside. It should be noted that investing in Bitcoin and other cryptocurrencies is inherently very risky given the historic large price movements over short periods of time.

There also weren’t many retailers who would accept Bitcoin. Now, you can use bitcoin or other cryptocurrencies at Starbucks, Amazon, Nordstrom, and countless other retailers. However, there’s volatility in this area as well, with Tesla making a U-turn in 2021 on whether the electric-car maker will accept Bitcoin as payment.

Lack of Clear Regulation

Experienced investors tend to be very careful about what they invest in. If an asset doesn’t have clear legal regulations, they may not choose to take the risk of investing in it.

Regulations still are not clear with cryptocurrency, so that could be an important consideration for investors.

Waiting on Institutions

If large corporations start holding some of their wealth in Bitcoin, or financial institutions demonstrate support of cryptocurrencies, that adds legitimacy, which could drive new investors to the market.

A survey released in 2020 by Fidelity Investments found that 27% of institutional investors–including pension funds, family offices, investment advisers and hedge funds–owned digital assets like Bitcoin. The figure was up from 22% in the prior year.

However, a separate survey by JPMorgan released in 2021 found that 78% of institutional investors are not planning on investing in crypto. However, the survey also found that a majority also think crypto is “here to stay.”

What Will Happen in 2021?

This year presents an interesting combination of both global events and cryptocurrency-specific happenings.

The US Economy

The US is facing a number of major unknowns this year. With the economy still emerging from pandemic quarantine measures and speculation that asset prices have reached inflated levels, how will all of this affect the price of Bitcoin?

Some economists believe that a US recession will be rocket fuel for a Bitcoin bull run. If investors lose faith in the US dollar and the stock market, they may turn to the cryptocurrency market as a safe haven.

Since Bitcoin is a global currency, it can potentially ride out individual national economic crises and be that safe haven. However, if a recession hits, money might become tight, causing people to sell their Bitcoins.

Key Technical Indicators

Some technical indicators can signal that Bitcoin is heading towards a bull run. Bitcoin has been reaching higher lows as well as other positive trends.

However, technicals are not always trustworthy predictions. Depending on how you combine charts and analysis, the market can also look like it’s heading towards a downward spiral.

New Regulations

As mentioned, China has been cracking down on the cryptocurrency market, causing volatility in prices. Meanwhile, some market observers expect more regulatory measures down the road.

Stablecoins Around the World

Numerous countries are considering developing or already working on their own digital currencies and stable coins. The US, Russia and France and other nations have all announced plans to enter the digital currency market. China is probably the farthest along out of the major economies, having launched a central bank digital currency (CBDC).

As these projects progress, they could add legitimacy to the market and challenge some fiat currencies. Bitcoin’s price may go up in the short term as these announcements come out, but whether its value will hold in the long run as the world transitions towards digital currency has yet to be seen.

Market Competition

Of course, Bitcoin is not the only game in town and other players are giving it a run for its money.

The second and third-most-valuable cryptocurrencies are Ethereum and Tether. Ethereum has had a boom given the interest in non-fungible tokens, or NFTs, digital versions of art or collectibles that are linked to a blockchain. Tether, meanwhile, is a stablecoin that has a fixed value to the US dollar.

Dogecoin had a meteoric rise in 2021, mostly fueled by social platforms that have also been behind the rallies of meme stocks like GameStop and AMC. Elon Musk was a proponent before an appearance on the TV show Saturday Night Live, when he called Dogecoin a “hustle.” Since such developments, the price of Dogecoin has suffered, losing much of its value.

Cardano has also had a big rally and become one of the largest cryptocurrencies by market cap. It’s expected to have some features that make it the basis for decentralized finance (DeFi) and NFT projects. It’s another coin that developed a following on social-media platforms like Reddit.

Downside Risks

As is the case with any investment, it’s crucial for investors to do their own research and take expert predictions with a grain of salt. The cryptocurrency market is still in its infancy, so there isn’t much data to go on when making predictions, and unpredictable circumstances can have significant effects on the market.

Bitcoin is a risky investment. Investors should consider making their own decisions about their level of risk based on a proper analysis of all the various factors that come into play.

The past is not a prediction of the future, and just because trend lines indicate a bull run is coming doesn’t mean they’re correct. In such a complex, fast-changing market, it’s important to stay informed and do due diligence.

The Takeaway

2021 is looking to continue to be an eventful year for Bitcoin and cryptocurrencies. For keeping track of the market, buying crypto, or just desiring to stick to a more traditional portfolio of assets, there are helpful tools available for achieving those goals.


On SoFi Invest®, investors can trade their first cryptocurrency with as little as $10. Doing so will get them a bonus of $10 in Bitcoin. Unlike the stock market, investors can also trade cryptocurrencies like Bitcoin, Litecoin and Ethereum 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors' crypto holdings secure.
Get started trading crypto on SoFi Invest today.



IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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7 Factors that Cause Inflation

7 Factors that Cause Inflation

Inflation is when the prices of goods and services rise in relationship to the dollar, or the currency in use. The result is that the dollar or unit of currency will buy less of just about everything than it previously did.

For people on fixed incomes or those who are in professions where wages don’t rise along with price increases, inflation can be painful. And if inflation becomes hyperinflation – when prices increase by 50% or more in a year – it can destabilize an economy. Inflation is also difficult when it occurs during a recession, a phenomenon known as stagflation.

Here’s a closer look at how to track inflation and seven factors that cause prices to increase.

How to Track Inflation

The most commonly used measure to track inflation is the Consumer Price Index (CPI), which is compiled by the U.S. Bureau of Labor Statistics (BLS) each month. It tracks the average of prices of a set of goods and services in transportation, food, and healthcare.

While the CPI leaves out important aspects of consumer spending, such as real estate and education, it is considered a valuable gauge of the ever-changing cost of living.

Inflation also shows up in the wholesale price index (WPI), which measures and tracks the changes in the price of commodities and other goods that are traded between businesses.

Recommended: Hedging Against Inflation Tips

What Causes Economic Inflation?

1. The Economy Is Going Strong

When the economy is growing, more people have jobs, wages rise to hire and keep those workers, and more people have money to spend. As a result, they buy more necessities and some even splurge on new luxury items.

In this environment, businesses can increase their prices, and consequently, wholesalers can increase prices. The net result of this cycle of expansion is higher prices.

This scenario is why inflation isn’t always bad news. In fact, the Federal Reserve aims for a target annual inflation rate of around 2%, because it indicates a growing economy. This kind of inflation is sometimes called “demand-pull inflation,” because it is driven by consumer demand.

In fact, deflation–when the prices of goods fall for a period of time–can also be considered unhealthy because it can mean demand among consumers is weak.

2. There Is More Currency Available

Inflation can also occur when the Fed, or another central bank, adds fiat currency into circulation at a rate that exceeds that of the economy’s growth rate. That creates a situation in which there are more dollars bidding on fewer goods and services. The result is that goods and services cost more.

One reason that inflation has been a constant in the US since 1933 is that the Fed has continually increased the money supply. In response to the 2008 financial crisis, the Fed dropped its lending rate close to zero as a way to inject more liquidity into the economy, which led to increased inflation but not hyperinflation. While those increases have usually moved in step with growth, that hasn’t always been the case.

In response to the Covid-19 pandemic and subsequent lockdowns, the Fed released the equivalent of $3.8 trillion in new liquidity in 2020. That amount was equal to roughly 20% of the dollars previously in circulation. And it is one reason why many investors were watching the CPI closely in 2021.

3. Basic Materials Increase in Price

In the 1970s in the US, inflation was rampant. There were many reasons for this, but one major one was the OPEC oil embargoes. The embargoes led to a gas shortage, higher prices for home-heating oil, higher prices at the pump, and increases in the prices of manufacturing and shipping for nearly every single consumer good.

Between 1973 and 1974, inflation-adjusted oil prices jumped from $25.97 per barrel to $46.35. And as a result, inflation topped 11% that year.

Another one of the most dramatic periods of inflation was the period of 1979-1981, when inflation topped 10% for three straight years. Again, oil was a major contributing factor, as the Iranian Revolution set off further increases in the price of oil.

Recommended: Guide to Investing in Oil

4. The Housing Market Takes Off

The housing market is a major part of the U.S. economy. And it has an outsized impact on the broader economy. When the housing market is strong and home prices are rising, then homeowners have more equity to call upon to make major purchases, which can goose inflation.

At the same time, a strong housing market means that homeowners, contractors and builders are spending more on home improvements and buying the raw materials that make those new and improved homes possible. That, in turn, drives up the prices of those raw materials, such as steel, lumber and oil, which can lead to more inflation.

5. The Government Implements Expansionary Fiscal Policies

The federal government will occasionally try to jumpstart economic growth with new policies. These expansionary fiscal policies often seek to increase the amount of discretionary income that businesses and consumers have to spend.

Often, these policies take the form of reduced taxes with the belief that businesses will spend it on employee compensation and new hiring. That will allow more consumers to spend on goods and services.

Other times, those policies consist of massive infrastructure projects, which can increase the demand for goods and services. The increasing of overall liquidity due to central bank monetary policy is also considered an expansionary policy.

6. New Regulations Increase Costs

While a shortage of an essential commodity, like oil, can cause inflation, so can an increase in costs related to a commodity suddenly becoming more expensive because of government regulations.

Sometimes new tariffs can increase the costs of imported goods, which can lead to inflation. At the same time, new regulations that make a particular commodity or service more expensive or time-consuming to obtain can also increase the costs to consumers, leading to inflation

7. The Exchange Rate Changes

The value of the U.S. dollar in relation to all other foreign currencies is constantly in flux. If the dollar goes down, then imported commodities and consumer goods get more expensive. But it also makes goods exported from the U.S. cheaper abroad, which can actually be a boost for the economy.

The Takeaway

Inflation in the US has been a constant since 1933. Most years inflation is a slow drip of almost imperceptible price increases, but there have been times when it has risen sharply, as it did during the late 70s and early 80s. This was a painful period for many consumers and inflation became a major political issue.

Inflation has mostly been gradual since then, but in 2021, economists and market observers have been debating whether inflation could pick up in a significant way again, after stimulus packages during the Covid-19 pandemic and a reopening of the economy boosted asset prices and growth.

Inflation affects consumers and companies–developments that can eventually move the prices of stocks in financial markets as well. Investors can monitor share prices moves of stocks, exchange-traded funds (ETFs) and cryptocurrencies via SoFi Invest®. SoFi Invest offers an Active Investing platform that allows users to make trades without incurring SoFi commissions.

Photo credit: iStock/marchmeena29


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

What Are Cyclical Stocks?

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves through upturns and downturns. A cyclical stock is the opposite of a defensive stock, which tends to offer more consistent returns regardless of macroeconomic trends.

Investing in cyclical stocks could be rewarding during periods of economic prosperity. During a recession, however, certain types of cyclical stocks may suffer if consumers are spending less.

Whether it makes sense to invest in cyclical stocks, defensive stocks, or a mix of both depends on your investing timeline, risk tolerance, and overall goals. Understanding how cyclical stocks work and some common examples can help you decide whether to add them to an investment portfolio.

Recommended: Pros and Cons of Sector Investing

What Is a Cyclical Stock?

The stock market is not static; it moves in cycles that often mirror the broader economy. To understand cyclical stocks, it helps to understand how the market changes over time, with the understanding that this has a different impact on different types of stocks.

A single stock market cycle involves four phases:

Accumulation (trough)

After reaching a bottom, the accumulation phase signals the start of a bull market and increased buying activity among investors.

Markup (expansion)

During the markup phase more investors may begin pouring money into the market, pushing stock valuations up.

Distribution (peak)

In this phase investors begin to sell the securities they’ve accumulated, and market sentiment may begin to turn neutral or bearish.

Markdown (contraction)

The final phase of the cycle stock is a market downturn, when prices begin to significantly decline until reaching a bottom, at which point a new market cycle begins.

Cyclical Stocks Examples

The cyclicality of a stock depends on how they react to economic changes. The more sensitive a stock is to shifting economic trends, the more likely investors would consider it cyclical. Some of the most common cyclical stock examples include companies representing these industries:

•  Travel and tourism, including airlines

•  Hotels and hospitality

•  Restaurants and food service

•  Manufacturing (i.e. vehicles, appliances, furniture, etc.)

•  Retail

•  Entertainment

•  Construction

Generally, consumer cyclical stocks represent “wants” versus “needs” when it comes to how everyday people spend. That’s because when the economy is going strong, consumers may spend more freely on discretionary purchases. When the economy struggles, consumers may begin to cut back on spending in those areas.

Cyclical Stocks vs. Noncyclical Stocks

Cyclical stocks are the opposite of non cyclical or defensive stocks. Non Cyclical stocks don’t necessarily follow the movements of the market. While economic upturns or downturns can impact them, they may be more insulated against negative impacts, such as steep price drops.

Non Cyclical stocks examples may include companies from these sectors or industries:

•  Utilities, such as electric, gas and water

•  Consumer staples

•  Healthcare

Defensive or non cyclical stocks represent things consumers are likely to spend money on, regardless of whether the economy is up or down. So that includes essential purchases like groceries, personal hygiene items, doctor visits, utility bills, and gas. Real estate investment trusts that invest in rental properties may also fall into this category, as recessions generally don’t diminish demand for housing.

Cyclical stocks may see returns shrink during periods of reduced consumer spending. Defensive stocks, on the other hand, may continue to post the same, stable returns or even experience a temporary increase in returns as consumers focus more of their spending dollars on essential purchases.

Pros and Cons of Investing in Cyclical Stocks

There are several reasons to consider investing in cyclical stocks, though whether it makes sense to do so depends on your broader investment strategy. Cyclical stocks are often value stocks, rather than growth stocks. Value stocks are undervalued by the market and have the potential for significant appreciation over time. Growth stocks, on the other hand, grow at a rate that outpaces the market average.

If you’re a buy-and-hold investor with a longer time horizon, you may consider value cyclical stocks. But it’s important to consider how comfortable you are with investment risk and riding out market ups and downs to see eventual price appreciation in your investment. When considering cyclical stocks, here are some of the most important advantages and disadvantages to keep in mind.

Recommended: Value Stocks vs. Growth Stocks: Key Differences for Investors

Pros of Cyclical Stocks

•  Return potential. When a cyclical stock experiences a boom cycle in the economy, that can lead to higher returns. The more money consumers pour into discretionary purchases, the more cyclical stock prices may rise.

•  Predictability. Cyclical stocks often follow market trends, making it easier to forecast how they may react under different economic conditions. This could be helpful in deciding when to buy or sell cyclical stocks in a portfolio.

•  Value. Cyclical stocks may be value stocks, which can create long-term opportunities for appreciation. This assumes, of course, that you’re comfortable holding cyclical stocks for longer periods of time.

Cons of Cyclical Stocks

•  Volatility. Cyclical stocks are by nature more volatile than defensive stocks. That means they could post greater losses if an unexpected market downturn occurs.

•  Difficult to time. While cyclical stocks may establish their own pricing patterns based on market movements, it can still be difficult to determine how long to hold stocks. If you trade cyclical stocks too early or too late in the market cycle, you could risk losing money or missing out on gains.

•  Uneven returns. Since cyclical stocks move in tandem with market cycles, your return history may look more like a rollercoaster than a straight line. If you’re looking for more stable returns, defensive stocks could be a better fit.

How to Invest in Cyclical Stocks

When considering cyclical stocks, it’s important to do the research before deciding which ones to buy. Having a basic understanding of fundamental analysis and technical analysis can help.

Fundamental analysis means taking a look under a company’s hood, so to speak, to measure its financial health. That can include looking at things like:

•  Assets

•  Liabilities

•  Price to earnings (P/E) ratio

•  Earnings per share (EPS)

•  Price to earnings growth (PEG)

•  Book to value ratio

•  Cash flows

Fundamental analysis looks at how financially stable a company is and how likely it is to remain so during a changing economic environment.

Technical analysis, on the other hand, is more concerned with how things like momentum can affect a stock’s prices day to day or even hour to hour. This type of analysis considers how likely a particular trend is to continue.

Considering both can help you decide which cyclical stocks may be beneficial for achieving your short- or long-term investment goals.

The Takeaway

Cyclical stocks could be a good addition to your portfolio if you’re interested in value stocks, or you want to diversify with companies that may offer higher returns in a strong economy. If you’re interested in cyclical stocks, you can get started investing in them today with the SoFi Invest® brokerage platform.

SoFi makes it easy to build a portfolio of stocks without paying commission. You can get started with as little as $5 and begin purchasing whole or fractional shares of your favorite cyclical companies 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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

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