Investing in Bitcoin ETFs

Bitcoin ETF are designed to track the price of Bitcoin. That means when the price of Bitcoin in U.S. dollars goes up, a Bitcoin ETF trading on the stock exchange should also go up, and vice versa.

Bitcoin ETFs have a much narrower focus than most other exchange-traded funds, which started out with the aim of giving investors broad exposure to the stock market.

In this article, we’ll discuss the benefits and risks of investing in a Bitcoin ETF and the future of Bitcoin ETFs. But first, let’s break down the basics of Bitcoin and ETFs.

What Is Bitcoin?

Bitcoin was the very first cryptocurrency. It aims to be a decentralized financial network, meaning it isn’t backed by a central authority like a country or government in the way fiat currencies are. Cryptocurrencies are instead created through a network of computers that “mine” for Bitcoin.

Bitcoin is sometimes referred to as “digital gold.” That’s partly because it has a fixed supply limit of 21 million and requires physical resources (electricity and computing power) to create additional supply. Like gold, Bitcoin also functions among investors — particularly younger ones — as a store of value.

What Exactly Are ETFs?

An exchange-traded fund, or ETF for short, is a type of security that can be made up of many other assets, like stocks or bonds. ETFs often track an underlying index, but there are many ways ETFs can be structured to invest in any kind of asset.

It’s common for ETFs to focus on a group of stocks that have a common theme that binds them together, such as renewable energy, legal cannabis companies, or video-game and e-sports businesses. A cryptocurrency-focused ETF would be another example of a thematic ETF.

Recommended: Pros & Cons of Thematic ETFs

Creation of Bitcoin ETFs

The invention of Bitcoin created a new asset class, and many different types of cryptocurrencies have sprung up in the years since. Investors and ETF providers have been eager to introduce this new asset class to the stock market through ETFs.

But while many have tried, the vast majority have failed. Cameron and Tyler Winklevoss–famed for their dispute with Mark Zuckerberg over Facebook–tried in 2013 with a proposal that was eventually rejected by regulators four years later.

ETFs of any kind must be approved by the Securities and Exchange Commission (SEC) before being listed on a U.S. stock exchange. And so far, the SEC has been very hesitant to grant most proposed Bitcoin ETFs the right to become tradable securities.

In May 2021, SEC Chair Gary Gensler further disappointed investors hopeful for a Bitcoin ETF approval by saying “there are many challenges and gaps for investor protection in [crypto] markets.”

Recommended: Are There Bitcoin ETFs?

Existing Bitcoin Funds

An application by the crypto investment firm Grayscale was also rejected, and the company eventually went on to launch a fund in the over-the-counter market, meaning it’s not listed on a stock exchange. While there currently may not be any additional approved Bitcoin ETFs on the U.S. market, there are other ETFs out there that provide exposure to bitcoin-related securities such as stocks related to blockchain, the technology that underlies the bitcoin network. Bitcoin ETFs do exist on stock markets of other countries.

Benefits of Bitcoin ETFs

Here are some reasons why an investor might choose to invest in a Bitcoin ETF rather than the cryptocurrency itself.

Convenience & Ease

Buying a Bitcoin ETF requires little tech know-how beyond knowing how to use a computer, open a brokerage account, and place a buy order.

ETFs provide a seemingly easy way to profit from rising asset prices without having to actually own those assets. On the other hand, holding actual Bitcoin requires a somewhat advanced level of technical expertise.

Bitcoin can be confusing for less-than tech-savvy users. The process often involves setting up an account on a cryptocurrency exchange, most of which are largely unregulated. Buying an ETF negates the need for this step.

Safe Storage

An option for owning Bitcoin directly would be holding coins on an exchange. Some cryptocurrency exchanges might be trustworthy, but some have also had a controversial history of being hacked, stolen from, or defrauded. Even reliable exchanges open investors up to risk.

Securely storing cryptocurrencies—for example, storing the private keys to a Bitcoin wallet—is most often done by using either a paper wallet that has the keys written in the form of a QR code and a long string of random characters, or by using an external piece of hardware called a hardware wallet.

Social media and cryptocurrency forums are rife with horror stories about users who sent coins to the wrong address, misplaced their backup passphrase, forgot their PIN number, or experienced other sad scenarios that created a world of hurt for investors.

Less Counterparty Risk

Counterparty risk arises whenever a third party holds onto something for someone else. In certain situations, the third party’s interests might run contrary to that of the investor’s assets that they hold.

Over the years, some service providers have sprung up promising to securely hold coins for users. This may or may not be a desirable or promising solution, but even if it were suitable in all cases, there would still be risk.
At best, an unforeseen event like a bankruptcy or market disruption could cause a business to withhold customer funds for a period of time, making them inaccessible when people might need those assets most.

Risks of Bitcoin ETFs

The risks of a Bitcoin ETF come from both the traditional investment world and the world of cryptocurrency markets. There are two considerations many investigators look at.

High Volatility

The volatility comes from the occasional wild swings experienced in the price of bitcoin against most other currencies. A Bitcoin ETF, which is intended to mimic the price action of bitcoin, should also experience similar price swings. This could scare investors that have a lower risk tolerance, enticing them to panic sell.

Fund Fees

One risk that comes from holding an ETF of any kind involves its expense ratio. This number refers to the amount of money a fund’s management charges in exchange for providing the opportunity for investors to invest in their fund.

If a fund comes with an expense ratio of 2%, for example, the fund management would take $2 out of a $100 investment each year. This figure is usually calculated after profits have been factored in, cutting into investors’ gains. In other words, Bitcoin ETFs may be expensive for investors to hold.

Fraud or Manipulation

Regulators like Gensler have cited fraud and market manipulation as reasons for why they’re cautious about approving a Bitcoin ETF. A Bitcoin ETF would give investors exposure to the digital coin, but they would not actually hold the asset, exposing the risk of fraud.

The Takeaway

For investors curious about the cryptocurrency market but not yet ready to take the plunge, a Bitcoin ETF may represent a more convenient, comfortable option. However, U.S. regulators haven’t approved a Bitcoin ETF because of concerns about the cryptocurrency’s volatility as well as the risk of fraud and manipulation.

If an investor is still eager to try their hand at buying cryptocurrencies, they can use SoFi Invest®, which offers Bitcoin and other digital currency exchanges on a secure platform. Investors can also trade 24/7 and monitor their cryptocurrency holdings alongside investments in stocks, ETFs, and fractional shares.

Get started on 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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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What Are Stock Delistings and Why Do They Occur?

What Are Stock Delistings and Why Do They Occur?

When a stock is delisted, that means it’s been removed from its exchange. All publicly traded stocks are listed on an exchange. In the United States, that typically means the New York Stock Exchange (NYSE) or the Nasdaq.

There are different reasons for delisting stock, it can occur voluntarily or involuntarily. Owning a delisted stock doesn’t mean you can no longer trade it, but it does change how trades take place.

If you own a delisted stock, it’s important to understand what it may mean for your portfolio.

Recommended: Understanding the Differences between Major Stock Exchanges

How Stock Listings Work

Before diving into stock delisting, it’s helpful to know more about how stocks get listed in the first place. Stock exchanges can either be physical or digital locations in which investors buy and sell stocks and other securities. The NYSE is an example of a physical exchange, while the Nasdaq is an electronic stock exchange.

To get listed on any stock exchange, companies must meet certain requirements. For example, Nasdaq-listed companies must meet specific guidelines relating to:

•  Pre-tax earnings

•  Cash flows

•  Market capitalization

•  Revenue

•  Total assets

•  Stockholder equity

•  Minimum bid price

Companies must also pay a fee to be listed on the exchange. The NYSE has its own requirements that companies must meet to be listed.

Once a stock is listed, it can be traded by investors. But being listed on an exchange doesn’t guarantee the stock will remain there permanently. Stocks get added to and removed from exchanges fairly regularly.

What Does Delisting a Stock Mean?

When a stock is delisted, either the company itself or the exchange decides to remove the stock from the exchange.

Exchange-Initiated Stock Delisting

When an exchange delists a stock, it’s typically because it no longer meets the minimum requirements for listing or its failed to meet some regulatory requirement. Using Nasdaq-listed stocks as an example, a delisting can happen if a company’s pre-tax earnings, market capitalization, or minimum share price fall below the thresholds required by the exchange.

Exchanges set listing requirements to ensure that only high-quality companies are available to trade. Without stock listing requirements, it would be easier for financially unstable companies to find their way into the market. This could pose a risk to investors and the market as a whole.

In delisting stocks that don’t meet the basic requirements, exchanges can minimize that risk. When and if a company addresses the areas where it falls short, it can apply for relisting. Assuming it meets all the necessary requirements, it can once again trade on the exchange.

Exchanges typically give companies opportunities to rectify the situation before delisting stocks. For example, if a company is trading under the minimum bid price requirement, the exchange can send notice that this requirement isn’t being met and specify a deadline for improvement. That can help companies that experience temporary price dips only to have share prices rebound relatively quickly.

Company-Initiated Stock Delistings

A delisted stock can also reflect a decision on the part of the listed company. There are different reasons a company voluntarily delists itself. Scenarios include:

•  A move from public to private ownership

•  Merger with or acquisition by another company

•  Bankruptcy filing

•  Ceased operations

In some cases, a company may ask to be delisted as a preemptive measure if it’s aware that it’s in danger of being delisted by the exchange. For example, if the latest quarterly earnings report shows a steep decline in market capitalization below the minimum threshold, the company may move ahead with voluntary delisting.

What Happens If a Stock Is Delisted?

Once a stock has been delisted from its exchange, either voluntarily or involuntarily, it can still be traded. But trading activity now happens over-the-counter (OTC) versus through an exchange.

An over-the-counter trade is any trade that doesn’t take place on a stock exchange. Investors can trade both listed or delisted stock shares over-the-counter through alternative trading networks of market makers. The OTC Markets Group and the Financial Industry Regulation Authority (FINRA) are two groups that manage OTC trading activity.

Unless the company that issued a now-delisted stock cancels its shares for any reason, your investment doesn’t disappear. If you owned 500 shares of ABC company before it was delisted, for example, you’d still own 500 shares afterward. You could continue trading those shares, though you’d do so through an over-the-counter network.

What can change, however, is the value of those shares after the delisting. Again, this can depend on whether the exchange or the company initiated a delisting, and the reasoning behind the decision.

For example, if a stock is being delisted because the company is filing for bankruptcy its share price could plummet. That means when it’s time to sell them, you may end up doing so at a loss.

Even if a stock’s value doesn’t take a nosedive after delisting, it can still be a sign of financial trouble at the company. If you own delisted dividend-paying stocks, for instance, dividend payments may shrink or dry up altogether if the company begins making cutbacks to preserve capital or reduce expenses.

What to Do If a Stock You Own Is Delisted

If you own shares in a company that delists its stock, it’s important to consider how to manage that in your portfolio. Specifically, that means thinking about whether you want to hold on to your shares or sell them.

It helps to look at the bigger picture of why the reason for the delisting and what it might say about the company. If the company pulled its stock because a bankruptcy filing is in the works, then selling sooner rather than later might make sense to avoid a sharp drop in value.

Also, consider the ease with which you can later sell delisted stock if you decide to keep them. Some online brokerages allow you to trade over-the-counter but not all of them do. If you prefer to keep things as simple as possible when making trades, you may prefer to unload delisted stocks so you no longer have to deal with them.

Recommended: How to Open a New Brokerage Account

The Takeaway

When a stock becomes delisted, it’s removed from an exchange, either because it no longer met the requirements of the exchange, or because the company chose to delist for financial reasons. You can still trade a company after it’s delisted, but transactions occur over-the counter, rather than on an exchange.

Having a stock you own become delisted can be frustrating, but it shouldn’t stop you from continuing to build an investment portfolio. One great way to build that portfolio is by using the SoFi Invest® brokerage platform. It allows you to invest with U.S. stocks and low-cost exchange-traded funds (ETFs.) It’s possible to invest online and own top companies through fractional share investing, so consider getting started today.

Photo credit: iStock/wacomka


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

What is Scalp Trading?

Scalp trading, or scalping, is a style of short-term trading used with stocks, cryptocurrencies, and other assets. The goal of this trading style is to make profits off of small changes in asset prices.

Generally this means buying a stock, waiting for it to increase in value by a small amount, then selling it. The theory behind it is that many small gains can add up to a significant profit over time. Scalp trading is one of the most popular day trading strategies.

Scalping requires a lot of focus, quick decision-making, the right trading tools, and a strategy—and even then, it’s no sure thing. Since traders make many small gains, one big loss could wipe out all their profits.

Let’s dive into the details of how scalping works, different scalp trading strategies, and how to get started with this type of trading.

Recommended: Understanding Popular Day Trading Strategies

How Scalping Works

The goal of scalping is to make many small profits during a trading session. This is the opposite of a buy-and-hold or long term trading strategy, where one hopes to see their portfolio grow over time. Scalpers might make anywhere from 10 to 100+ trades in a single day, taking a small profit on as many of them as possible. And they might only stay in each position for a few minutes.

With each trade they assess the risk-to-reward ratio with a goal of profiting on more than 50% of their trades. Each win may be small, but the profits can add up over time if they outnumber the losses. Often, scalpers make use of stop losses and leverage when making trades.

Scalp trading reduces risk exposure, since traders only have their money in the market for a short amount of time. It can also be an easier day trading strategy than some others because the goal is to capitalize on small price movements. Small moves happen constantly in the market, and it’s easier to make a profit of a few cents or dollars than a larger amount.

However, any type of day trading involves a significant amount of risk. Scalping is challenging and can result in large losses. This is just one reason why some traders use scalping along with other trading methods.

Recommended: Managing Risk with Stop Loss Orders

Scalp Trading Strategies

There are many different scalp trading strategies, some of which can be used together.

Systematic Planning

Technical analysis helps scalp traders spot trading opportunities and plan exits ahead of time. Traders use one-minute charts, Level II quotes, moving averages, exchange order books, and other tools while scalping. Since positions may be entered and exited within seconds or minutes, five- or 10-minute charts aren’t very useful.

On the Fly

Although fundamental analysis doesn’t play a large role in scalping, it can help to identify stocks that are currently in the news or of interest based on a current event, which may lead to more price movement and trading opportunities. Higher volatility is generally a good sign for scalpers.

Shorting Stocks

Some scalpers also short stocks and sell when they decrease in value. This can be done with the same asset repeatedly, or with different assets throughout a trading session.

Bid/Ask Profiting

Some scalpers prefer to earn profits off of the bid/ask spread rather than actual stock price movements. This takes a significant amount of experience and is a particular trading skill that takes time to learn. It entails looking for trades with a wide spread, meaning a large difference between the broker’s ask price and the price at which a trader buys the asset.

Range Trading

With this strategy, the trader waits for an asset to enter a specific price range before they start trading. Generally, the range is between a support and a resistance level.

Market Making

Market making is when traders post a bid and an offer on a stock at the same time. This only works with stocks that trade a large volume but have low volatility, and the profits are small.

How to Scalp Trade

While there is no one way to engage in scalp trading, these are the general guidelines that scalpers follow to make decisions:

•  Create a watchlist each day based on fundamental analysis and news

•  Trade stocks with enough liquidity that there will be price movement and more options for exit points

•  Quickly sell a stock isn’t increasing in value

•  Make a daily profit goal

•  Set goals for each stock trade and stick to them

•  Buy stocks at breakouts

•  Keep trades short for more chance at a profitable exit

•  Adjust exit points as stocks move

Pros and Cons of Scalp Trading

Scalp trading is a particular day trading strategy which works well for some people, there are many risks associated with day trading.

Pros of Scalp Trading

•  Small gains can add up to significant profits

•  It reduces risk exposure to market due to short trade times

•  It may be easier than some other day-trading strategies

•  It can be easier to make profitable trades when the goal is to profit off of small movements rather than large price movements

•  There are many trading opportunities, no matter what the market conditions are.

Cons of Scalping

•  Even one large loss can cancel out any gains made during a trading session

•  It requires a lot of focus to watch the charts for several hours and execute trades, and can be tedious

•  It requires knowledge and experience with technical analysis

•  Transaction and commission fees can add up quickly if making multiple trades per day—and potentially cancel out profits. It’s key to use a broker that doesn’t charge commissions or one that offers discounts to high volume traders.

•  If traders experience a few losses it can be distressing, and it’s easy to let emotions get in the way of good trading habits. Scalping is one of the most stressful trading strategies.

•  Scalpers often use margin trading and leverage to increase their positions, which can be very risky.

The Takeaway

Scalping is best suited for more experienced traders, since it requires an understanding of technical analysis, fast trades, and an understanding of how to set up and execute trades in specific ways.

But scalp trading is just one of many different strategies when it comes to trading stocks and other assets. While trading can seem complex, there are simple ways to get started building a portfolio.

One great tool for managing a portfolio is the SoFi Invest® stock trading app. Using the trading platform, you can buy and sell stocks, cryptocurrencies, and other assets right from the mobile app. You can research and track your favorite stocks and see all your investments in one simple dashboard. The platform offers both active and automated investing options, so you can hand select each stock or choose from pre-selected groups of stocks and ETFs.

Find out how to get started 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.
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.
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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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What Is Book Value Per Share (BVPS)?

What Is Book Value Per Share (BVPS)?

One of the most popular and trusted forms of fundamental analysis is Book Value Per Share (BVPS), or a company’s ‘book value.’ Book value per share is an accounting metric that calculates the per-share value of a company’s equity.

The book value per share of an undervalued stock is higher than its current market price, so book value per share can help investors appraise a stock price.

What is Book Value Per Share?

Book Value per Share (BVPS) is the ratio of a company’s equity available to common shareholders to the number of outstanding company shares. This ratio calculates the minimum value of a company’s equity and determines a firm’s book value, or Net Asset Value (NAV), on a per-share basis. In other words, it defines the accounting value (i.e. book value) of a share of a company’s publicly-traded stock.

Book Value Per Share vs Market Value Per Share

The Book Value Per Share provides information about how the value of a company’s stock compares to the current Market Value Per Share (MVPS), or current stock price. For example, if the BVPS is greater than the MVPS, the company’s stock market may be undervaluing a company’s stock.

The market value per share is forward-looking, since it’s based on what investors think a company should be worth, while book value per share is an accounting measure that uses historical data.

Recommended: Intrinsic Value vs Market Value, Explained

What Does Book Value Per Share Tell You?

Commonly used by stock investors and analysts, the Book Value Per Share (BVPS) metric looks at a company’s stock price to determine whether it’s undervalued compared to the stock’s current market price. An undervalued stock will have a BVPS higher than its current stock price.

If the company’s BVPS increases, investors may consider the stock more valuable, and the stock’s price may increase. On the other hand, a declining book value per share could indicate that the stock’s price may decline, and some investors might consider that a signal to sell the stock.

Book Value Per Share also theoretically reflects what shareholders would receive in a company liquidation after all its assets were sold and all of its liabilities paid. However, because assets would hypothetically sell at market value instead of historical asset values, this may not be an entirely accurate measurement.

If a company’s share prices dip below its BVPS, the company can potentially be vulnerable to a takeover by a corporate raider who could buy the company and liquidate its assets risk-free. Conversely, a negative book value indicates that a company’s liabilities exceed its assets, making its financial condition ‘balance sheet insolvent.’

Book Value Per Share solely includes common stockholders’ equity and does not include preferred stockholders’ equity. This is because preferred stockholders are ranked differently than common stockholders in the event the company is liquidated. If a corporate raider intends to liquidate a company’s assets, the preferred stockholders with a higher claim on assets and earnings than common shareholders are paid first and that amount gets deducted from the final shareholders’ equity distributed among common stockholders.

How to Calculate Book Value Per Share

An investor can apply BVPS to a stock by analyzing the company’s balance sheet. Specifically, an investor will need total asset value, cost of acquiring an asset, and accumulated depreciation of corporate assets which helps provide the most accurate BVPS figure.

Whereas some price models and fundamental analyses are complex, calculating book value per share is fairly straightforward. At its core, it’s subtracting a company’s preferred stock from shareholder equity and dividing that sum by the average amount of outstanding shares.

Book Value Per Share = (Shareholders’ Equity – Preferred Equity) / Total Outstanding Common Shares
Shareholders’ Equity = Total equity of all shareholders.
Total Outstanding Common Shares = Company’s stock currently held by all shareholders, including blocks held by institutional investors and restricted shares owned by preferred stockholders. This number may fluctuate wildly over time.

Example of Book Value Per Share

Company X has $10 million of shareholder’s equity, of which $1 million are preferred stocks and an average of 3 million shares outstanding. With this information, the BVPS would be calculated as follows:

BVPS = ($10,000,000 – $1,000,000) / 3,000,000
BVPS = $9,000,000 / 3,000,000
BVPS = $3.00

How to Increase Book Value Per Share

A company can increase its book value per share in two ways.

Repurchase Common Stocks

A common way of increasing BVPS is for companies to buy back common stocks from shareholders. This reduces the stock’s outstanding shares and decreases the amount by which the total stockholders’ equity is divided. For example, in the above example, Company X could repurchase 500,000 shares to reduce its outstanding shares from 3,000,000 to 2,500,000.

The above scenario would be revised as follows:

BVPS = ($10,000,000 – $1,000,000) / 2,500,000
BVPS = $9,000,000 / 2,000,000
BVPS = $4.50

By repurchasing 1,000,000 common shares from the company’s shareholders, the BVPS increased from $3.00 to $4.50.

Increase Assets and Reduce Liabilities

Rather than buying more of its own stock, a company can use profits to accumulate additional assets or reduce its current liabilities. For example, a company can use profits to either purchase more company assets, pay off debts, or both. These methods would increase the common equity available to shareholders, and hence, raise the BVPS.

The Takeaway

There are many methods that investors can use to evaluate the value of a company. By leveraging useful and insightful formulas such as a company’s Book Value Per Share, investors can determine a company’s value relative to its current market price. While it has limitations, the BVPS can identify companies that are undervalued (or overvalued) according to core fundamental principles, and it’s a relatively straightforward calculation that even beginner investors can use.

No matter which methods you’re using to analyze stocks, if you’re ready to start building a portfolio, the SoFi Invest® brokerage platform is a great way to get started. You can either select stocks on your own and construct a custom portfolio, or you can take a more hands-off approach, allowing SoFi to select investments for you based on factors such as your time horizon and risk profile.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Tempura


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 Does Network Effect Mean?

What Does Network Effect Mean?

The “network effect” is one of the most powerful ideas in technology and business. The idea is that the more users there are in a network, the more valuable the network becomes.

Network effects are a big deal for both businesses and investors. For companies that have critical masses of users and have established lock-in, it can mean profits that grow and grow and grow. It also means that investors may be willing to have a company they fund lose money for a while if they have a shot at becoming the number one business in a field with network effects.

We can see networks in all sorts of businesses, but especially ones based around the internet, which connects individuals to one another. There are network effects in the internet, in social networks, and in digital products like cryptocurrencies.

What Is a Network Effect?

The basic idea behind network effects comes from a relatively old form of technology: the telephone. Imagine you’re the first person with a landline telephone installed. You can pick it up and listen to a dial tone, but without anyone else with a telephone, it’s merely a sculpture plugged into your wall. If you had to pay for it, the phone is perhaps of negative value, unless you really like how it looks.

But there’s value for the second person getting a phone installed—after all, they can call you up and you can call them. As more phones get installed, the value of the phone network increases. When there are strong network effects, the value of new users rises for existing users as more and more users are added to the network.

How Does the Network Effect Work?

Network effects are crucial for basically any internet-related business, including the web itself. One of the most influential attempts to quantify network effects comes from Robert Metcalfe, the co-inventor of Ethernet. He maintained that the value of a network grew as the square of its number of users.

Following this line of thinking, the value of the network to the customers or users would grow exponentially while the cost of adding new users grows linearly. For businesses that can establish network effects, then, it may make sense to invest very very heavily in user growth, even if it means losing money in the short run.

What are Businesses with Network Effects?

There are a number of modern-day industries that benefit from network effects.

Communications Networks

Network effects apply to parts of communications infrastructure that are not exactly businesses per se. For example, the World Wide Web, which is a platform for all sorts of nonprofit and for-profit activity and is not controlled by any one company, is characterized by network effects.

Marketplaces

Online marketplace eBay is a useful look at how network effects work in marketplace businesses, where a service tries to connect buyers and sellers. One reason eBay was so successful in its early years was that it achieved “lock-in” (the point where it doesn’t make sense to go to other services) for individuals wanting to auction items online. It did this in part by making the service free for sellers in its early days, attracting new users eager to make money off their items.

Social Networks

Perhaps the most prominent example of businesses characterized by network effects are social networks. Facebook, YouTube, Twitter, and other social networks improve for users as more users, usually people they know or are interested in, use them. Once everyone you know is on a social network, it may become harder to avoid and easier to simply succumb to signing up.

Cryptocurrency

If the previous examples of network effects were internet infrastructure or internet businesses, cryptocurrency may be a combination of both. Some cryptocurrencies, like Bitcoin and Ethereum, are incredibly valuable and have built up an ecosystem of service around them.

As more people consider Bitcoin to have value, it creates an incentive for miners to secure the network—the network effect at work. In the case of Ethereum, as more apps are deployed, each one becomes a building block. This drives increased usage, and ultimately more demand for Ethereum.

In both cases network effects are a sign that the cryptocurrency could have staying power: If it does something useful for its holders, it may do something useful for people who buy in.

Granted, many other cryptocurrencies have flamed out. One big question going forward is the extent to which crypto can be characterized as having network effects—that at a certain point people will almost feel compelled to start using them, rather than only viewing cryptocurrency as an investment.

The Takeaway

A network effect is an idea that as a product or service gets more users, it will inherently attract more users—thus creating a pattern of success. The network effect can be seen most clearly in communication technology, including digital products and services like social media and cryptocurrency account. For investors, it can be smart to keep an eye on the network effect in businesses you’re invested in, or are considering.

For investors just starting out, or established investors looking to expand their holdings, the SoFi Invest® online trading app offers an active investing solution that allows you to choose your investments—including crypto—as well as an automated investing solution that invests your money for you based on your goals and risk.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Eva-Katalin


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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