May
31
2023
Option Assignment: Defined and Explained

Option Assignment: Defined and Explained

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Option Assignment: Defined and Explained

Option assignment happens when the owner of an options contract elects to exercise their puts or calls. That means they wish to trade the underlying security at the strike price which requires the options contract seller to fulfill their obligation.

While relatively few options contracts are ever exercised, options writers must be aware of assignment risk. Options assignment requires buying or selling the underlying security at the strike price.

As with all options trading, it’s important to know and understand all the key risks. American-style options can be exercised at any time before expiration, which means sellers might be faced with option assignment whenever they hold a short position. Option assignment is also more likely as expiration nears.

What Is Option Assignment?

Writers/sellers of option contracts assume the obligation to buy or sell shares to satisfy the terms of the options contract. Buyers/holders of options contracts purchase the option to exercise these options under the terms of the options contract.

Option assignment is the process of matching an exercised option with a writer of an option. In the rules laid out in a basic options trading guide, the individual short an options contract is obligated to fulfill their duty by either purchasing or selling a specific number of shares of the underlying stock should the holder choose to exercise their option.

The option contract owner, also called a holder, has the right but not the obligation to buy (in the case of a call option) or sell (in the case of a put) a predetermined number of shares at a strike price. It is only when the option contract holder elects to exercise, that option assignment happens. The individual short the options must then abide by the contract’s provisions.

How Does Option Assignment Work?

Option assignment works when the seller completes the terms outlined in an options contract after the call or put contract owner chooses to exercise. By selling an option, you issue the buyer the right to own a certain number of shares of stock at a predetermined price in the future. Any option strategy that has a short leg, such as a bull put credit spread, has assignment risk.

Call options offer the owner the right but not the obligation to buy stock while put options give the holder the right but not the obligation to sell shares. The call option seller, on the other hand, would potentially be required to buy stock in order to sell it to the call option owner.

Writers of bond options also face assignment risk.

A Peek Under the Hood

The mechanics of this process can seem unclear since there are so many options contracts traded, and it’s hard to determine who is on the other side of your trade.

Options trade through exchanges, and since they are standardized contracts, the exchange is essentially the counterparty. The entity in charge of facilitating exercises and assignments in the U.S. is the Options Clearing Corporation (OCC). Option assignment rules are followed, and the OCC ensures a fair process.

An options assignment happens when the holder exercises a contract. The OCC then randomly allocates this assignment to brokerage firms that have account holders who are short that contract. The brokerage firms then use their own rules and processes to allocate the assignment to a specific holder.

The two parties to the assignment are not required to be the same two parties that entered into the original options contract.

Can You Know If a Position Will Be Assigned?

According to the Options Industry Council (OIC), it’s hard to know when you will be assigned, as it can happen any time up to expiration for American-style options. Many index options, or index futures options, are European-style however.

It may be helpful to know that just 7% of option holders exercise their right, and that percentage has not budged much over the years, according to the OIC.

Can You Do Anything If a Position Is Assigned?

You must meet your option assignment duties once you are assigned. What’s nice, though, is that many brokers handle the process automatically for you. Traders should be prepared to see their account balances fluctuate when an assignment happens. When trading futures options, you might also see a cost of carry with the underlying futures contracts.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

What Happens After a Position Is Assigned?

A writer facing an options assignment will be notified through their brokerage firm.

A seller of call options must deliver shares at the strike price and in return receives cash. If the seller wrote covered calls — and therefore owns the shares in their account — their brokerage can simply transfer the shares from one account to the other, and the seller will receive the strike price for each sold share.

If the seller sold naked calls, they will be required to buy shares on the open market to provide them to the options holder, but will also receive the strike price per share. If the seller has pursued a combination options strategy, it might be possible to exercise another option to satisfy the terms of the assigned option.

For someone short puts facing option assignment, they are obligated to buy shares at the exercise price from the holder of the option. If the put seller pursued a cash secured put strategy, they will have the cash in their account to make the purchase. If the seller does not have the cash, they will have to deposit sufficient funds or sell account assets to fund the obligatory assignment purchase.

Option Assignment Example

It helps to run through an options assignment example to grasp how the process works.

Let’s say you were bearish or neutral on the price of XYZ stock over the coming 30 days. You also want to take advantage of what you believe to be high implied volatility of call options on that stock.

After analyzing the option Greeks, you decide to sell $100 strike call options while the shares trade at $95. The option premium you collect is $10.

After three weeks, the stock has jumped to $105, and the short calls are worth $6. You are alerted that you now face a call option assignment. While a small percentage of options contracts are exercised, you are among the few who are chosen to be assigned.

To meet the requirements of option assignment, you must deliver shares to the individual who exercised the call option. You can buy shares in the market or, if you own shares and wrote a covered call, your shares might be called away.

For puts, the purchaser of the option sells (or “puts”) shares to the writer by way of a short position.

Option Assignment and Multi-Leg Strategies

Some of the more complex options trading strategies, like those involving many legs, can face more option assignment risks. If just one leg of a broader trade is assigned, the writer must act. That might involve closing the entire strategy or simply adjusting the other legs to manage risk.

Once an option seller’s position is assigned, the trader must meet the contract’s terms to buy or sell shares of the underlying security, regardless of what other legs the writer has active. That is part of the risk of selling options as part of a multi-leg strategy.

What Does Assignment Mean for Individual Investors?

Options assignment is just another risk to be mindful of when selling puts and calls. While there are plenty of upshots to writing options, such as collecting premium, assignment risk is present. It’s important that you check with your brokerage firm to know their option assignment process and cut-off times. Some firms might have significant costs while others might feature option assignment free trading.

The Takeaway

Option assignment happens to writers of contracts when the owner of puts or calls elects to exercise their right. Options sellers are then required to purchase or deliver shares to the individual exercising. The OCC randomly selects sellers through the option assignment process.

Only option sellers face assignment risk, so you can avoid the risk by only being on the long side of contracts.

If you’re ready to try your hand at trading options online, you can set up an Active Invest account and trade trade options from the SoFi mobile app or through the web platform.

And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commissions, however other fees do apply, and members have access to complimentary financial advice from a professional.

With SoFi, user-friendly options trading is finally here.

FAQ

How is option assignment determined?

Option assignment is determined by the OCC which randomly assigns firms that have accounts short options. This only happens once an options contract holder chooses to exercise. While a small portion of options contracts are exercised, traders should understand the risks, particularly as expiration nears, as that is when assignments are more likely.

Are options assigned before or after expiration?

American-style options can be exercised, and thus assigned, any time before expiration. European-style options, however, are only allowed to be exercised during a specific period right before expiration, so options assignment can only happen then. Be sure to know the style of options contract you are selling so that you know your option assignment risk.

What are option assignment fees and how much are they?

Options assignment fees vary by brokerage. These days, trading commissions to fulfill obligations from being short an options contract are generally reasonable. There could be a base options trading fee plus a per contract charge, but some brokers do not have options assignment fees at all.

Photo credit: iStock/nortonrsx

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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May
31
2023
Diamond Hands? Tendies? A Guide to Day Trading Terminology

A User’s Guide to New Day Trading Lingo

By | Growing Wealth, invest, Investing, Terminology | Comments Off on A User’s Guide to New Day Trading Lingo

A new interest in trading and investing in recent years has sparked new nicknames, jargon, and day trading lingo. For most, the jargon used on Wall Street and in other facets of the financial industry was largely unknown outside of the markets. But with more and more people trading and investing, it can be helpful to know what certain terms and phrases actually mean.

Note, of course, that language is always evolving, and that there may be even newer phrases out there that we’ve yet to include!

Popular Day Trading Lingo in 2023

Tendies

This term is short for chicken tenders, which is a way of saying gains or profits or money. The phrase originated with self-deprecating jokes by 4Chan users making fun of themselves as living with their mothers, who rewarded them with chicken tenders, or tendies.

STONKS

This is a playful way of saying stocks, or of referring more broadly to the world of finance. The obvious misspelling is a way of making fun of the market, and to mock people who lose money in the market. It became a popular meme — of a character called Meme Man in front of a blue board full of numbers — used as a quick reaction to someone who made poor investing or financial decisions.

Diamond Hands

This is an investor who holds onto their investments despite short-term losses and potential risks. The diamond refers to both the strength of their hands in holding on to an investment, as well as the perceived value of staying with their investments.

Paper Hands

This is the opposite of diamond hands. It refers to an investor who sells out of an investment too soon in response to the pressure of high financial risks. In another age, they would have been called panic sellers.

YOLO

When used in the context of day trading or investing, the popular acronym for the phrase “you only live once” is usually used in reference to a stock a user has taken a substantial and possibly risky position in.

Bagholder or Bag Holder

This is a term for someone who has been left “holding the bag.” They’re someone who buys a stock at the top of a speculative runup, and is stuck with it when the stock peaks and rolls back.

To the Moon

This term is often accompanied by a rocket emoji. Especially on certain online stock market forums, it’s a way of expressing the belief that a given stock will rise significantly.

GUH

This is similar to the term “ugh,” and people use it as an exclamation when they’ve experienced a major loss. It came from a popular video of one investor on Reddit who made the sound when they lost $45,000 in two minutes of trading.

JPOW

This is shorthand for Jerome Hayden “Jay” Powell, the current Federal Reserve Chair, also popular on online forums as the character on the meme “Money Printer Go Brrr.” Both refer to Federal Reserve injections of capital in response to the COVID-19 pandemic, as well as “quantitative easing” policies.

Position or Ban

This is a demand made by users on the WallStreetBets (WSB) subreddit to check the veracity of another user’s investment suggestions. It means that a user has to deliver a screenshot of their brokerage account to prove the gain or loss that the user is referencing. It’s a way of eliminating posters who are trying to manipulate the board. Users who can’t or won’t show the investments, and the gain or loss, can face a ban from the community.

Recommended: What is a Brokerage Account and How Do They Work?

Roaring Kitty

This is the social media handle of Keith Gill, the Massachusetts-based financial adviser who’s widely credited with driving the 2021 GameStop and meme stock rally with his Reddit posts and YouTube video streams.

Apes Together Strong

This refers to the idea that retail investors, working together, can shape the markets. It is sometimes represented, in extreme shorthand, by a gorilla emoji. And the phrase comes from an earlier meme, which references the movie Rise of Planet of the Apes, in which downtrodden apes take over the world. In the analogy, the apes are retail investors. And the idea is that when they band together to invest in heavily-shorted stocks like GameStop, they can outlast the investors shorting those stocks, and make a lot of money at the expense of professional traders, such as hedge funds.

Hold the Line

This is an exhortation to fellow investors on WSB. It is based on an old infantry battle cry. But in the context of day traders, it’s used to inspire fellow board members not to sell out of stocks that the forum believes in, but which have started to drop in value.

DD

This refers to the term “Due Diligence,” and is used to indicate a deeply researched or highly technical post.

HODL

“HODL” is an abbreviation of the phrase “Hold On For Dear Life.” It’s used in two ways. Some investors use it to show that they don’t plan to sell their holdings. And it’s also used as a recommendation for investors not to sell out of their position — to maintain their investment, even if the value is dropping dramatically. HODL (which is also used in crypto circles) is often used by investors who are facing short-term losses, but not selling.

KYS

This is short for “Keep Yourself Safe,” and it is a rare bearish statement on WSB and other boards. It’s a way of advising investors to sell out of a given stock.

The Takeaway

Many retail traders have found a new home on message boards — and created a new language in the process. Some of the phrases are based on pop culture and memes, others are appropriated from terms used for decades. No matter the origins, it’s clear that the investors using these phrases are evolving the way retail investors talk about investing online and maybe IRL as well.

Learning to speak the language of the markets can be helpful, too, so that you don’t miss anything important when researching investment opportunities. That doesn’t mean it’s absolutely necessary, but it may help decipher some of the messages on online forums.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.

Photo credit: iStock/FG Trade

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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May
31
2023

What Is a Financial Crisis?

By | invest, Investing, Terminology | Comments Off on What Is a Financial Crisis?

A financial crisis is a situation in which the financial sector and economy of a country, or the world, is thrown into a state of temporary upheaval. A financial crisis can have several causes, whether stock market crashes, political instability, and even global pandemics.

Financial crises are also not a new phenomena, and the United States has experienced many in its history.

Financial Crisis Definition

During a financial crisis, asset prices drop rapidly, usually over the course of days or a few weeks. This drop is often accompanied by a stock market crash as investors panic and pull money from the market. It may also be associated with bank runs in which consumers withdraw assets for fear they will lose value if they remain in the bank. This type of downturn may signal the beginning of a recession.

Recessions are a general period of economic decline during which unemployment may rise, income and consumer spending may fall, and business failures may be up. (To stay up-to-date on the current financial crisis and possible recession visit SoFi’s Recession Help Center.)

Common Causes of Financial Crises

There are a number of situations that can cause a financial crisis, including the bursting of financial bubbles (such as the dotcom bubble), defaults on debt, and currency crises.

Stock market bubbles occur when stock prices rise precipitously, often driven by speculation and investors overvaluing stocks. As more people jump on the bandwagon and buy stocks, prices are driven higher, a cycle that is not based on the stock’s fundamental value. Eventually, the situation can become unsustainable, and the bubble bursts. Investors sell and prices drop quickly.

A failure to meet debt obligations can also lead to a financial crisis. For example, a country may be unable to pay off its debts. This may happen as a country starts to face higher interest rates from lenders worried that the country may not be able to pay back their bonds. As lenders require higher bond yields to offset the risk of taking on a country’s debt, it becomes more and more expensive for that country to refinance. Eventually, the country could default on its debt, which can cause the value of its currency to drop.

A currency crisis occurs when a country’s currency experiences sudden volatility as a result of factors such as central bank policies or speculation among investors. For example, a currency crisis may occur when a country’s central bank pegs its currency to another country’s floating currency (one whose value depends on supply and demand) and fails to maintain that peg.

Examples of Financial Crises

Financial crises date back hundreds of years, and perhaps the first was the South Sea Bubble of 1720. Here’s a look at a handful of other well-known financial crises that have happened in the United States and around the world:

America’s First Financial Crisis

The United States’ first financial crisis occurred in 1790. At that time, the U.S. had few banks, and Alexander Hamilton wanted to model the U.S. financial system after the systems that existed in Britain and Holland. He created the first central bank, known as The First Bank of the United States (BUS). To get the bank off its feet, the public could buy shares in the bank with a mixture of cash and government bonds.

Two problems arose: The demand for government bonds to buy shares led some investors to try and corner the bond market by borrowing widely to buy bonds, and the BUS quickly grew, becoming the nation’s largest lender. Investors, flush with credit, began to use their newfound cash to speculate in futures contracts and short sales markets.

In spring of 1792, the BUS ran low on hard currency and cut lending. The BUS’ leadership was forced to take on new debt to pay off old debt, and tightening credit, led U.S. markets on a downward spiral.

With the system on the verge of collapse, Hamilton was forced to use public funds to buy back U.S. bonds and prop up the price of those bonds. Additionally, he had to direct money to failing lenders, and allowed banks with collateral to borrow as much as they wanted with a penalty rate of 7%. Not only was this America’s first financial crisis, it was also the first instance of a government bailout, setting a precedent for future financial crises.

The Stock Market Crash of 1929

Perhaps the granddaddy of financial crises, the 1929 stock market crash came at a time when stock speculation led to booming markets. At the same time, however, consumer prices were falling and some established businesses were struggling, creating tension within the economy.

The Federal Reserve raised interest rates, in an effort to slow the overheated markets. Unfortunately, the hike wasn’t big enough to slow the economy. It ended up further hurting already weakening businesses, and industrial production continued to fall.

The market crashed on October 28 and October 29, 1929. The 29th came to be known as Black Tuesday. By mid-November, the market was down 45%. By the next year, banks began to fail. Customers began withdrawing cash as fast as they could, causing bank runs.

The crisis devastated the economy, forcing businesses to close and causing many people to lose their life savings. It also sparked the Great Depression, the worst recession in U.S. history, and the Dow wouldn’t climb to its previous heights for 25 years.

The crash led to a number of financial reforms. The Glass-Steagall legislation separated regular banking, such as lending, from stock market operations. It also gave the government power to regulate banks at which customers used credit to invest.

The government also set up the Federal Deposit Insurance Commission (FDIC) to help prevent bank runs by protecting customer deposits. The creation of the FDIC helped stabilize the financial system, because individuals no longer felt they needed to withdraw their money from the bank at the slightest sign of economic trouble.

The 1973 OPEC Oil Crisis

In October 1973, the 12 countries that make up the Organization of Petroleum Exporting Countries (OPEC) agreed to stop exporting oil to the United States in retaliation for the U.S. decision to offer military aid to Israel. As a result of the embargo, the U.S. experienced gas shortages, and oil prices in the U.S. quadrupled.

Though the embargo ended in March of 1974, its destabilizing effects are largely blamed for the economic recession of 1973–1975. High gas prices meant American consumers had less money in their pockets to spend on other things, lowering demand and consumer confidence.

Other factors beyond the embargo, including wage-price controls and the Federal Reserve’s monetary policy, exacerbated the financial crisis. Wage-price controls forced businesses to keep wages high, keeping them from hiring new employees. In a series of monetary moves, the Federal Reserve quickly raised and lowered interest rates. Businesses unable to keep up with the changes protected themselves by keeping prices high, which contributed to inflation.

The period’s high unemployment, stagnant economic growth, and inflation came to be known as “stagflation.”

The Asian Financial Crisis of 1997–1998

The Asian financial crisis began in Thailand in July 1997. It spilled over to other East Asian nations and eventually had ripple effects in Latin American and Eastern Europe.

Before the crisis began, Thailand had pegged its currency to the U.S. dollar. After months of speculative pressure that depleted the country’s foreign exchange reserves, Thailand devalued its currency, allowing it to float on the open market. Malaysian, Indonesian and Singapore currencies were devalued as well, causing high inflation that spread to East Asian countries, including South Korea and Japan.

Growth fell sharply across Asia, investment rates fell, and some countries entered into recession.

The International Monetary Fund (IMF) stepped in, providing billions of dollars of loans to help stabilize weak Asian economies in Thailand, Indonesia, and South Korea.

In exchange for its loans, the IMF required new rules that led to better financial regulation and oversight. Countries that received the loans had to raise taxes, reduce public spending, and raise interest rates.

The Global Financial Crisis of 2007–2008

The origins of the global financial crisis of 2007 and 2008 are complicated. They started with government deregulation that allowed banks to use derivatives in hedge fund trading. To fuel this trading, the banks needed mortgages and began lending to subprime borrowers who had questionable credit. When interest rates on these mortgages reset higher, borrowers could no longer afford their payments.

At the same time, housing prices dropped as demand for homes fell, and borrowers who could no longer afford their payments were now unable to sell their homes to cover what they owed on their mortgage. The value of the derivatives collapsed and banks stopped lending to each other, resulting in a financial crisis and eventually the Great Recession.

As a result of the financial crisis, the government took over mortgage giants Fannie Mae and Freddie Mac, and bailed out investment banks on the verge of collapse. Additionally, Congress passed the Dodd-Frank Wall Street Reform Bill to prevent banks from taking on too much risk again in the future.

The European Sovereign Debt Crisis

The European Sovereign Debt Crisis followed swiftly on the heels of the global financial crisis in 2007 and 2008. The crisis largely began in Greece in 2009 as investors and governments around the globe realized that Greece might default on its national debt.

At that point the nation’s debt had reached 113% of its GDP. Debt levels within the European Union were supposed to be capped at 60%, and if the Greek economy slowed down it might have trouble paying off its debt. By 2010, the E.U. discovered irregularities in the Greek accounting system which meant that its budget deficits were higher than previously suspected. Bond rating agencies subsequently downgraded the country’s debt.

Investors were concerned that similar events might spread to other members of the E.U., including Ireland, Spain, Portugal and Italy, which all had similar levels of debt. In response to these concerns, investors in sovereign bonds from these countries demanded higher yields to make up for the increased risk they were taking on. That meant the cost of borrowing rose in these countries. And because rising yields lowers the price of existing bonds, eurozone banks that held these bonds began to lose money.

Eurozone leaders agreed on a €750 billion rescue package that eventually reached €1 trillion by 2012.

Investing During a Financial Crisis

Investing during a recession or financial crisis may not sound like a good idea. Watching stock prices plummet can give even the most seasoned investor reason for pause. But keeping an investment plan on track during a crisis is critical to future success. In the face of a financial crisis, there are a few considerations to make.

First, watching a market fall may inspire panic, tempting investors to pull their money out of a stock. However, that may be exactly the wrong instinct. Bear markets are typically followed by a recovery, although not always immediately, and selling assets may mean that investors lock in losses and miss out on subsequent gains.

Second, some investors engage in a strategy that involves buying more stock when markets are down. Purchasing stock when prices are low during a bear market may provide the opportunity for increased profits as the market turns around, though there are no guarantees.

The Takeaway

A financial crisis can have many causes, but usually leads to falling stock market prices, and often, a recession. There have been many financial crises around the world over the years, and in all likelihood, there will be more in the future. Down markets can be a good opportunity for investors to stress-test their risk tolerance, or to embrace more conservative strategies.

If you have questions about building a portfolio, allocating your wealth or how market conditions will affect your financial situations, it can help to talk to a financial professional.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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May
31
2023
candlestick stock chart

Important Candlestick Patterns to Know

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Important Candlestick Patterns to Know

Candlestick charts are one of many popular tools used for technical stock analysis. They are also called Japanese candlestick charts or patterns, because they were first invented in Japan in the 1700s to track the prices of rice. Today, candlestick patterns reveal patterns in stock prices.

They are also one of multiple types of charts that traders use to analyze stock prices, and there are some general patterns that are helpful to know and understand if you’re participating in the markets.

What Is a Candlestick Pattern?

A candlestick pattern is a sequence of price changes that can be identified as a formation on a chart. Each candlestick in a chart represents stock price increases or decreases within a specified time frame. Watching out for particular candlestick patterns in charts is a popular day trading strategy, and one that involves trying to predict whether a stock will go up or down in value, and make trades based on those predictions.

Again, this is a form of technical analysis, as opposed to fundamental stock analysis, which is different.

Candlestick patterns are also useful for specifically timing entry and exit points for trades. Based on how stock price movements have repeatedly occurred in the past following a pattern, traders can decide whether to put faith in them moving in a similar way again. The reason these patterns form is that human perceptions, actions, and reactions to stock price movements repeat.

Past events are not predictions of the future — no candlestick pattern is perfect, and it’s important to remember that there are always risks when trading stocks. But they can be useful guidelines and one more piece of information for those looking to make informed trading decisions.

Reading Single Candlesticks

Even a single candlestick chart can provide valuable insight into where stock prices may head. Each candlestick is composed of four parts:

•   The top “wick” or shadow of a candlestick marks the highest price the stock traded within the specified time period.

•   The bottom wick marks the lowest price the stock traded. If a candlestick wick is long, this means the highest or lowest trading price is significantly different from the opening or closing price. A shorter wick means the high or low trade was close to the opening or closing price. The difference between the top and bottom of the candlestick wicks is called the range.

•   In a red candlestick, the top of the thicker body of the candlestick, called the “real body,” marks the opening price of the stock within the specified time period, and the bottom marks the closing price. Red candlesticks mean the price has decreased.

•   In a green candlestick, the bottom marks the opening price, and the top marks the closing price. Green candlesticks show that the price has increased.

Candlesticks can represent different time frames. One popular time frame is a single day, so each candlestick on a chart will show the price change of one day. A one-month chart would have approximately 30 candlesticks.

Trending Candles vs Non-Trending Candles

If a candle continues an ongoing price trend, this is called a trending candle. Candles that go against the trend are non-trending candles.

Candles that don’t have an upper or lower wick can also show that there is a strong trend, support, or resistance in either direction. This means the opening or closing price was close to the high or low trade. And vice versa — a long wick can be an indicator that high or low prices aren’t holding.

Doji Candles

When a candle’s opening and closing price are almost the same, this forms a doji candle, which looks like a black cross or plus sign. The wicks of doji candles can vary in length.

A doji can either be a sign of a reversal or a continuation. It shows equal forces from buyers and sellers, with no gain in either direction.

Long Shadow Candles

Candles with a long wick or shadow can be a strong indicator. A candle with a long upper shadow can indicate a continuation of a bullish trend or reversal towards one, while long lower shadows can indicate a bearish trend or reversal.

Types of Candlestick Patterns

Candlestick patterns are used to help predict stock price action. There are dozens of candlestick patterns that some traders use to help recognize trading opportunities and better time their entries and exits, but there are four distinct ways to define potential outcomes of candlestick patterns:

1.    Bullish candlestick patterns show that a stock’s price is dominated by buyers and the price is likely to increase.

2.    Bearish patterns show that the stock is dominated by sellers, and the price is likely to decrease.

3.    Reversal candlestick patterns predict that the price trend of a stock is going to reverse.

4.    Continuation patterns predict that the price will continue to head in the direction it’s currently going.

It’s important to remember that some patterns are a signal not to trade. Knowing when not to buy or sell is just as important as knowing when to take action.

Bullish Candlestick Patterns

A bullish candlestick pattern can either be an indication of a continued bullish trend, or it could be a reversal from a bearish trend. There are a number of popular bullish candlestick patterns, each of which can tell a trader something different.

Morning Star: The Morning Star is a three-candlestick pattern indicating a reversal towards a bullish trend, so named because it gives traders hope of a reversal during a bearish trend. The first candle is long-bodied and red. The second candle opens lower and has a short body, it can be either red or green but its body doesn’t overlap with the body of the first candle. The third candle is green and closes at or above the center of the first candle body.

Morning Star Doji: This three-candlestick pattern tends to be a reversal from a bearish trend. The first candle has a long body showing a downtrend. The second candle opens at a lower price and trades within a narrow price range, then the third candle reverses in a bullish direction, closing at or above the center of the first candle body.

Bullish Engulfing: In this two-candle pattern, the first candle is bearish and the second is bullish. The body of the first candle fits completely within the body of the second candle, “engulfing” it. Although both candles are important, the higher the high of the second candle’s body, the stronger the indication of a reversal.

Three Line Strike: A four-candlestick bullish pattern that consists of three red candles followed by a long green candle. The red candles all fit inside the body of the green candle.

Hammer: This single-candle pattern can occur during or at the end of a bearish trend. The hammer candle looks like a hammer, with a short red candle body and a long lower shadow. This indicates that the low of the day is significantly lower than the close of the day, which can be a sign that the bearish trend is ending. However, it’s important for traders to wait and see if the reversal happens, because sometimes the hammer occurs during a continuing downtrend.

Bullish Harami: This reversal pattern happens during a downtrend and can indicate a switch toward upward price movement. It looks like a short green candlestick that follows several red candlesticks. The green candlestick body fits within the body of the previous red candlestick.

Abandoned Baby: This reversal pattern is made up of three candles. The middle candle is a doji which gaps up from the bottom of the previous red candle. The third candle is green and gaps up from the doji. The first and third candles have relatively long bodies. It’s so named because the gaps have space between the doji candle’s wick and both wicks of the first and third candle.

Dragonfly Doji: This is a strong indicator of a reversal. In this pattern, a doji candle opens and closes at or near the highest trade of the day. The lower shadow tends to be long, but it can vary in length.

Hanging Man: This is a single candlestick pattern which can indicate a coming bullish trend. The candle has a long lower wick and a short candle body.

Piercing Line: In this two-candle pattern, the first candle is long and red, followed by a green candle that opens at a new low but closes higher than the midpoint of the first candle. This can indicate a reversal away from a bearish trend.

Candlestick Sandwich: This is a three-candle pattern which consists of a long green candle sandwiched between two long red candles. The closing prices of the two red candles are similar, creating support that indicates a coming bullish trend.

Three Green Soldiers: A three-candle pattern that looks like a staircase towards higher prices. It consists of three green candles, each of which opens at a higher price than the previous day.

Bearish Candlestick Patterns

Bearish candlestick patterns may indicate an ongoing bearish trend, or they may indicate a reversal from a bullish trend. These are some common bearish candlestick patterns.

Evening Star: This three-candle pattern is the opposite of the Morning Star, indicating that a bullish trend is reversing into a bearish one. The first candle is long and green. The second candle opens higher and has a short body. The body can be either red or green but doesn’t overlap with the body of the previous candle. This shows that buying interest is coming to an end. The third candle is red and closes at or below the center of the first candle body.

Evening Star Doji: This three-candle pattern is the opposite of the Morning Star Doji. It indicates a possible reversal towards a bearish trend. The first candle is a long green candle. The second candle is a doji or very narrow and opens at a higher price. The third candle is red and closes at or below the center point of the first candle body.

Inverted Hammer: The inverse of the hammer pattern, this is a single-candle pattern which can indicate the end of a downtrend and reversal towards a bullish price movement. This candle has a short green body and a long upper shadow, making it look like an upside down hammer.

Shooting Star: This is a single-candle pattern in which there is a green candle with a short body, very little or no lower shadow, and a long upper shadow. The shooting star can mark the top of an upcycle and signal a reversal.

Dark Cloud Cover: A three-candlestick pattern that occurs when a red candle has an opening price that’s higher than the closing price of the previous day’s candle, and a closing price below the middle of the previous one. The first candle is green. To complete the pattern, the third candle is bearish.

Bearish Harami Cross: A trend-reversal pattern consisting of a series of green candlesticks followed by a doji, this pattern indicates that the uptrend may be losing momentum and preparing for a reversal.

Falling Tree: This is a five-candlestick pattern which signals a possible interruption of a bearish trend, with a continuing downtrend. The first is a long red candle, followed by three small green candles, which all stay within the range of the first candle. The last candle is another long red one. This pattern shows that bulls are unable to reverse a downtrend.

Two Black Gapping: This pattern happens when there is a new high in an uptrend, followed by two red candles that gap down. This can be a good indicator of a coming bearish trend.

Gravestone Doji: This is an inverted dragonfly pattern, in which the opening and closing price are at or near the low of the day. The upper candle shadow tends to be long, but can vary in length. It can indicate either a reversal towards a bearish trend, or an ongoing bearish trend.

Three Black Crows: In this pattern, a new high is followed by three long red candlesticks that each close with lower lows.

Reversal Patterns

The Harami Cross can indicate a reversal in either a bullish or a bearish trend. It’s a two-candlestick pattern in which the first candle opens or closes at a new high or low. The second candle is a doji which is inside the range of the previous candle’s body.

Other Patterns

These two patterns don’t fit into the bullish, bearish, reversal, or continuation categories.

Spinning Top: A short-bodied candlestick with equal top and bottom wicks that looks like a spinning top. This is an indication of indecision in the market. After the spinning top the market will likely move quickly one way or another, so if there’s a pattern prior to the top that may be an indicator of which way the spinning top will fall.

Supernova: If there’s a high volume stock with low float that experiences a price explosion, followed by a significant price drop, this is a supernova. There can be trading opportunities on the way up, and then opportunities to short sell on the way down as well.

The Takeaway

Candlestick charts are a stock analysis tool, and traders who can identify patterns within them may gain trend insights and try to predict security price movements. It can help them make a decision of when or if to buy, sell, or stand pat. There are numerous types of candlestick patterns, though it’s important to remember that patterns do not always lead to the predicted outcome.

Reading stock charts is only one small part of the investing world, and a rather complicated part, too. There are simpler, less-intensive ways to participate in the markets, too.

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For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.

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2023

What Determines Stock Price?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Determines Stock Price?

Stock share prices go up and down throughout each trading day, and on a basic level, share prices for stocks traded on public stock exchanges are determined through supply and demand. Demand is determined by expectations and emotions.

What this means is if there is less supply of a stock, there may be more demand for it since it’s more rare. In that situation, the price of the stock will rise. Conversely, if there is more supply and less demand, the stock price will decrease. If either of these trends continues for a lengthened period of time, it can lead to a bull or bear market in which there’s an ongoing trend of increasing or decreasing prices.

7 Factors That Determine Stock Price

Beyond the basic principles of supply and demand, there are other factors that contribute to changes in stock prices. Those include investor behavior, the news cycle and earnings data, and more.

Investor Behavior

A current stock price is based on a prediction of the future success of a company. Hypothetically, if investors have reason to believe that a company will be successful in the future, they will invest in the company, causing the price of shares to increase. Similarly, if the outlook for a company is negative, investors may sell off the shares they own, causing the price to decrease.

Basically, if a few million people think that Company X is going to be successful in the near future and that shares of Company X will see price appreciation, that will lead them to buy the stock and its price will increase.

Emotions such as fear, panic, anxiety, greed, and hope can have a significant impact on investor behavior. This is the basis of the field of behavioral finance. There are a few different ways investors try to predict the future success of companies.

Company News and Data

You should know that stock price predictions can be made based on reading charts and making calculations, as well as looking at news stories, fundamental analysis like reading over company earnings and reports, and other information. News about changes in management, production, scandals, and other stories can cause share prices to quickly change.

World Events

Beyond news and outlooks specifically related to companies, outside factors can also influence investor behavior. For instance, a presidential election, a pandemic, political unrest, or signs of a recession can create panic in the market, influencing investors to sell off stock shares in order to protect from losses or put their money into safer investments.

Usually there is some up or down price movement in stock prices, and some stocks are more volatile than others. It’s rare for prices to completely stop moving or remain static. It’s also rare for prices to drastically increase or decrease suddenly, but this is what happens during a market crash.

A market crash can happen when many investors begin to sell, creating a snowball effect where more and more investors pull their money out of the stock market. At that point, the market could crash, resulting in actual losses that wouldn’t have occurred if people hadn’t sold.

Stock Buybacks

Another factor that can affect stock price is company buybacks of stocks. Companies will sometimes buy back their own stock from investors, thereby reducing the supply of shares to the public. They do this in an attempt to increase stock prices. If companies issue more shares of stock, they are then increasing the supply, which can cause the price to decrease.

Primary and Secondary Markets

When some companies first start selling stock to the public, they hold an IPO, or initial public offering. At the time of the IPO, an initial share price is set and investors can begin to buy the stock at that price. After the IPO ends, the stock gets listed on stock exchanges and the price starts to fluctuate as shares get bought and sold — and supply and demand begin to play a role in share price.

When companies don’t have an IPO, their shares get bought and sold privately, in which case share price is determined between the buyer and seller.

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Stock Valuation

The valuation of a stock is made by looking at the company’s past and projected earnings, large trades made by institutional investors, overall market trends of the S&P 500, and ratios and calculations made by analysts.

Four ratios and calculations that are used to determine the valuation of a stock are price-to-earnings (P/E) ratio, price-to-book (P/B ratio), price-to-earnings-to-growth (PEG) ratio, and dividend yield. These calculations can help investors figure out whether a stock is currently under- or overvalued.

Bid and Ask Price

A share price ultimately gets determined through the bid, ask, and sale price on stock exchanges. The bid price is the maximum amount an investor will pay for shares of a stock, while the ask price is the lowest price a seller will accept. When the two prices match up, a sale is made, and that price sets the new price per share of the stock. Ultimately it gets down to what someone is willing to pay and if a stock owner is willing to sell to them at that price.

What someone is willing to pay or sell for is determined by psychological and market factors, as discussed. If a buyer thinks the stock is undervalued at the asking price, they will buy, and vice versa. Generally the difference between the bid and ask price isn’t very large, but if a stock doesn’t have a large trading volume it can be.

Companies that are a similar size or have a similar valuation can have very different share prices because the number of shares each company issues can differ greatly. Because of different market caps and numbers of liquid shares, the share price doesn’t say much about the actual value of the company, and one can’t use share prices to compare companies. However, the share price does reflect what investors currently think the stock of a company is worth.

How to Handle Changes in Stock Price

Attempting to time the market is extremely challenging, and can result in significant losses, not to mention anxiety. Once an investor sells a stock, they are then in the difficult position of trying to figure out when and whether to buy back into it at a lower price, if it even continues to decrease in value. Likewise, they could sell at what they think is the peak of the market, only to watch the price continue to rise.

Historically, the stock market has continued to rise over the long term, with plenty of ups and downs along the way. Although past trends are never a guarantee of future outcomes, it’s likely that investors with a longer time horizon, who are willing to hold onto their stocks throughout up and down cycles, will eventually see positive returns.

That said, market volatility can provide opportunities to invest when the stock market is down, or sell at higher prices, especially if they were already considering buying or selling a stock.

The Takeaway

Ultimately, supply and demand drive stock prices — which is informed by market conditions, world events, and investor behavior, among other influences. Although there is no way to look into the future to predict share prices, investors tend to look at past performance, charts, and market trends to attempt to predict price movements. In general, it’s best not to try and time the market, but to focus on building a solid long-term portfolio that will grow over time.

There are numerous investing strategies to explore, too, and some of them don’t involve investors worrying too much about stock prices in the immediate term.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.

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The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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).
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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 prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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