Terminology Archives | Page 39 of 76

May

2023

What Determines a Stock Price?

By Laurel Tincher | Growing Wealth, invest, Investing, Terminology | Comments Off

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.

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.

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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 Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

May

2023

What Are Convertible Bonds?

By Colin Dodds | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Convertible bonds are a form of corporate debt that also offers the opportunity to own the company’s stock. Like regular bonds, they offer regular interest payments. But they also allow investors to convert the bonds into stock according to a fixed ratio. As such, they’re often referred to as “hybrid securities.”

Most convertible bonds give investors a choice. They can hold the bond until maturity, or convert it to stock. This structure protects investors if the price of the stock falls below the level when the convertible bond was issued, because the investor can choose to simply hold onto the bond and collect the interest.

How Do Convertible Bonds Work?

Companies will often choose to issue convertible bonds to raise capital in order to not alienate their existing shareholders. That’s because shareholders often react badly when a company issues new shares, as it can drive down the price of existing shares, often through a process called stock dilution.

Convertible bonds are also attractive to issue for companies because the coupon — or interest payments — on them tend to be lower than for regular bonds. This can be helpful for companies who are looking to borrow money more cheaply.

Every convertible bond has its own conversion ratio. For instance, a bond with a conversion ratio of 5:1 ratio would allow the holder of one bond to convert that security into five shares of the company’s common stock.

Every convertible bond also comes with its own conversion price, which is set when the conversion ratio is decided. That information can be found in the bond indenture of convertible bonds.

Convertible bonds can come with a wide range of terms. For instance, with mandatory convertible bonds, investors must convert these bonds at a pre-set price conversion ratio. There are also reverse convertible bonds, which give the company — not the investor or bondholder — the choice of when to convert the bond to equity shares, or to keep the bond in place until maturity.

But it also allows the investor to convert the bond to stock when they’d make money by converting the bond to shares of stock when the share price is higher than the value of the bond, plus the remaining interest payments.

How Big Is the Convertible Bond Market?

In 2022, the size of the global convertible bond market was estimated to be about $375 billion. Securities have been issued by hundreds of companies. But note that these numbers are miniscule compared to the U.S. equity market, which has trillions in value and thousands of stocks.

The total size of the convertible bond market does expand and contract, though, often with the cycling of the economy. As such, it’s likely that the market could be bigger or smaller a year from now.

Reasons to Invest in Convertible Bonds

Why have investors turned to convertible bonds? One reason is that convertible bonds can offer a degree of downside protection from the bond component during stock volatility. The companies behind convertibles are obligated to pay back the principal and interest.

Meanwhile, they can also offer attractive upside, since if the stock market looks like it’ll be rising, investors have the option to convert their bonds into shares. Traditionally, when stocks win big, convertibles can deliver solid returns and outpace the yields offered by the broader bond market. However, when stocks retreat, convertibles tend to deliver short-term losses.

For example, In 2020, the U.S. convertibles market returned a blockbuster 43%, making it one of the top performing global asset classes. The convertibles market also did well in 2009, just as the global economy was recovering from the financial crisis, when it returned 49%.

Downsides of Convertible Bonds

One of the biggest disadvantages of convertible bonds is that they usually come with a lower interest payment than what the company would offer on an ordinary bond. And the chance to save on debt service is a big reason that companies issue convertibles. So for investors who are primarily interested in income, convertibles may not be the best fit.

There are also risks. Different companies issue convertible debt for different reasons, and they’re not always good. Convertible financing is sometimes labeled “death spiral financing.”

The death spiral is when convertible bonds drive the creation of an increasing number of shares of stock, which drives down the price of all the shares on the market. The death spiral tends to occur when a convertible allows buyers with a large premium to convert into shares at a fixed conversion ratio in which the buyer has a large premium.

This can happen when a bond’s face value is lower than the convertible value. That can lead to a mass conversion to stock, followed by quick sales, which drives the price down further.

Those sales, along with the dilution of the share price can, in turn, cause more bondholders to convert, given that the lower share price will grant them yet more shares at conversion. Being one of the shareholders who makes something out of such a catastrophe can be a matter of close study and good timing.

How to Invest in Convertible Bonds

Most convertibles are sold through private placements to institutional investors, so retail or individual investors may find it difficult to buy them.

But individual investors who want to jump into the convertibles market can turn to a host of mutual funds and exchange-traded funds (ETFs) to choose from. But because convertibles, as hybrid securities, are each so individual when it comes to their pricing, yields, structure and terms, each manager approaches them differently. And it can pay to research the fund closely before investing.

For investors, one major advantage of professionally managed convertible bonds funds is that the managers of those funds know how to optimize features like embedded options, which many investors could overlook. Managers of larger funds can also trade in the convertible markets at lower costs and influence the structure and price of new deals to their advantage.

Recommended: How to Trade Options

The Takeaway

Convertible bonds are debt securities that can be converted to common stock shares. These hybrid securities offer interest payments, along with the chance to convert bonds into stock.

While convertible bonds are complex instruments that may not be suitable for all investors, they can offer diversification, particularly during volatile periods in the equity market. Investors can gain exposure to convertible bonds by putting money into mutual funds or ETFs that specialize in them.

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

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

May

2023

Tips on Evaluating Stock Performance

By Laurel Tincher | Growing Wealth, invest, Investing, Terminology | Comments Off

Evaluating stock performance is not an exact science, and there are many factors, indicators, and tools that investors have at their disposal. However, it can be easy to get overwhelmed by the amount of information, charts, and choices available. After all, no amount of analysis can truly make accurate predictions about stock performance.

With this all in mind, for most investors, using a few simple strategies to evaluate stocks can provide a good understanding in order to help make an investment decision. Every investor has their own goals, investing and diversification strategies, and risk tolerance, so it’s beneficial for each person to come up with their own stock evaluation strategy.

Evaluating Stock Performance

Stock evaluation can involve both quantitative and qualitative analysis. Quantitative analysis involves looking at charts and numbers, whereas qualitative analysis looks into industry trends, competing firms, and other factors that can affect a stock’s performance. Both forms of analysis provide valuable information for investors, and they can be used in tandem to come up with a comprehensive picture of performance.

Here are a few key steps investors can take to evaluate stock performance or analyze a stock.

Total Returns

One of the most important metrics to look at when evaluating a stock’s performance is the total market return over different periods of time. A stock may have increased significantly in value within the past few days or months, but it could still have lost value over the past year or five years.

Investors may want to consider how long they plan to hold a stock and look into each stock’s historical performance. Some common periods to look at are the past year (52 weeks), the year to date (YTD), the five-year average return, and the 10-year average return. Investors can also look at the average annual return of a stock.

Every investor has different goals and expectations for returns. One investor might be happy with a 3% return over five years, while another might not be.

Using Indexes

Another step investors may want to take to evaluate a stock’s performance is comparing it with the rest of the stock market. A stock might seem like an attractive investment if it has had a 7% return over the past 52 weeks, but if the rest of the stock market has increased by more than that, there might be a better choice.

A single stock can be compared to the overall stock market using stock indexes. Indexes show averages of the market performance of a handful or even hundreds of stocks. Index performance metrics show how any particular stock compares to the broader market. If a stock has been performing similarly or better than the market, it may be a good investment.

Looking at Competitors

An additional way investors might consider evaluating a stock’s performance is by comparing it to other companies within the same industry. One might discover that an entire industry is doing well in the current market, or that another stock within the industry would actually be a better investment. There are numerous industries and market sectors.

Not every company within an industry will be a good comparison, so it’s best to look at companies of a similar size, those that have been around for a similar amount of time, or that have other similarities. Even if a giant, established corporation offers a similar product or service to a small startup, they may not be the best two stocks to compare within an industry.

Two questions investors might consider asking are:

• Does the company have a competitive advantage? If the company has a unique asset or ability, such as a patent, a new research or manufacturing method, or great distribution, it may be more likely to succeed within the industry.

• What could go wrong? This could be anything from poor management to a new form of technology making a company irrelevant. Nobody can predict the future, but if there are any red flags it’s important to pay attention to them.

Reviewing Company Revenue

Looking at stock returns is useful, but it’s also a good idea to look into the actual revenue of a company through its profit and loss statement, or earnings reports. Stock prices don’t necessarily follow a company’s revenue, but looking at revenue gives investors an idea about how a company is actually performing.

Like stock returns, investors can look at revenue over different periods of time. Revenue is categorized as operating revenue and nonoperating revenue. Operating revenue is more useful for investors to look at because non-operating revenue can include one time events such as selling off a major asset.

Using Stock Ratios in Evaluations

There are several financial ratios that can be used to evaluate a stock and find out whether it is currently under or overpriced in the market. These ratios can help investors gain an understanding about a company’s liquidity, profitability, and valuation. Some of the most commonly used ratios are:

Price to Earnings (P/E) Ratio

The most popular ratio for evaluating stock performance is the price to earnings ratio, or P/E ratio, which compares earnings per share to the share price. P/E is calculated by dividing stock share price by the company’s earnings per share. It’s important because a stock’s price can shoot up based on good news, but the P/E ratio shows whether the company actually has the revenues to back up that price. One can compare the P/E ratios of companies in the same industry to see which is the best investment.

There are two different ways to calculate P/E. A trailing P/E ratio can be calculated by dividing current stock price by earnings per share. A forward P/E ratio is a prediction that can be calculated by dividing stock price by projected earnings.

Price to Earnings Growth (PEG) Ratio

P/E is a useful ratio, but it doesn’t take growth into account. PEG looks at earnings, growth, and share price all at once. To calculate PEG, divide P/E by the growth rate of the company’s earnings. If the PEG is higher than 2, the stock may be overpriced, but if it’s under 1, the stock may be underpriced.

Price to Sales (P/S)

The price to sales ratio is calculated by dividing the company’s market capitalization by its 12-month revenue. If the P/S is low in comparison to competitors, it may be a good stock to buy.

Price to Book (P/B)

The P/B ratio looks at stock price compared to the book value of the company. The book value includes assets such as property, bonds, and equipment that could be sold. Essentially, the P/B looks at what the value of the company would be if it were to shut down and be sold immediately. This is useful to know because it shows the value of a company in terms of assets, rather than valuing it based on growth.

If the P/S is low, the stock may be a good investment because the stock might be underpriced.

Dividend Yield

Dividend yield is calculated by dividing a stock’s annual dividend amount by the current price of the stock. This gives investors the percentage return of a stock’s price. If the dividend yield is high, this means an investor may earn more cash from the stock. However, this can change at any time so isn’t a good long-term indicator.

Dividend Payout

The dividend payout ratio tells investors what percentage of company profits get paid out to shareholders. Companies that don’t pay out dividends or pay low dividends are likely reinvesting their profits back into the business, which could help the business continue to grow. Paying out dividends isn’t a negative thing, but if a company pays out high dividends they will have less money to reinvest and may not be able to continue to grow.

Return on Assets (ROA)

The ROA ratio compares a company’s income to its assets, which gives investors an indicator of how they handle their business.

Return on Equity (ROE)

ROE provides a calculation of how much profit a company makes with every dollar that shareholders invest. To calculate ROE, divide a company’s net income by shareholder equity. This gives an indication of how a company handles its resources and assets. However, as with every calculation, ROE doesn’t always provide a full and accurate picture of a stock’s performance. Companies can temporarily boost their ROE by buying back shares, which lowers the amount of equity held by shareholders.

Profit Margin

Profit margin compares a company’s total revenues to its profits. If a company has a high profit margin, this shows that a company is good at managing expenses, because they are able to keep revenue rather than spending it.

Current Ratio

The current ratio is calculated by dividing a company’s current assets by its current liabilities. This shows if a company will have enough money to pay off its debts. Current assets include cash and other highly liquid property. Current liabilities are any debts that a company must pay within one year.

Earnings Per Share (EPS)

This ratio is just what it sounds like, how much profit is a company generating per share of stock. A high EPS is a positive indicator. It’s a good idea for investors to look at EPS over time to see how it changes, because EPS could be boosted in the short term if a company has cut costs.

EPS is also useful for comparing different companies, since it gives a quick indication of how well each stock is doing. However, EPS doesn’t give a full picture of how a company is doing or how they manage their money, because some companies pay out earnings in the form of dividends, or they reinvest them back into the business.

Debt to Equity Ratio

Even if a company is growing and earning more profit, they could be doing so by getting into more and more debt. This could be a bad sign if they become unable to pay back their debts or if borrowing becomes more difficult. An ideal debt equity ratio is under 0.1, and over 0.5 is considered to be a bad sign.

Additional Factors

Aside from all the tools above, there are other factors to consider when evaluating a stock.

• Dividends: If a stock pays dividends, investors may want to consider how those payments affect the overall returns of the stock.

• Inflation: Factoring in how much inflation will affect stock returns is another helpful factor. This can be done by subtracting inflation amounts from a stock’s annual returns.

• Analyst Reports: Another resource available to investors is Wall Street analyst reports put together by professional analysts. These can give in-depth insights into the broader market as well as individual companies.

• Historical Patterns: Looking at past trends to get a sense of what the market might do in the coming months and years can help investors make informed decisions. Past trends aren’t predictions for the future, but they can still be useful.

The Takeaway

There are many tools available to help investors who are just getting started researching stocks and building a portfolio, and there’s no right or wrong way to evaluate stock performance. It can take a lot of time to gather information and research stocks, but investors can use tools to see everything at once and make quicker, more informed investment decisions.

If you’re ready to put your evaluation skills to the test, you can start investing in stocks and other securities to see if you’re on-point. But be aware that investing always involves risk.

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

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

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May

2023

Understanding Inverse ETFs

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

An inverse ETF — or short ETF — is a portfolio of securities that allows investors to make a bet that either the broader markets or a particular asset class or market sector will go down in the short term.

There are a wide range of inverse ETFs to choose from — there are currently 89 traded in U.S. markets. They allow investors to make short-term investments in the likelihood that the price of a given asset will go down. Investors can use inverse ETFs to find returns when there are price dips in equities, fixed-income securities, and certain commodities.

How Does an Inverse ETF Work?

To understand inverse ETFs, an investor first needs to know about Exchange Traded Funds (ETFs). An ETF is a portfolio of stocks, or bonds or other securities that trades on an exchange, like a stock. Its share price fluctuates throughout the day, as investors buy and sell shares of the fund.

As with regular ETFs, investors can buy and sell inverse ETFs throughout the day. Unlike the way ETFs work, however, inverse ETFs are designed not to invest in a given index, but to deliver the opposite result. If the index goes down, the ETF is meant to go up, and vice versa.

What Do Inverse ETFs Invest In?

Inverse ETFs — or short ETFs — use complex trading strategies, involving a heavy use of futures contracts, to deliver the opposite result of the markets. Futures contracts are essentially agreements to buy or sell a given asset at a given date and price, regardless of the market price at the time. Using futures contracts, an investor can bet that a given asset, like a stock, will go up or down, without actually owning that asset.

Put simply, investors who think the price of a given stock will go down may buy a futures contract that allows them to sell a stock at a higher price than they think it will trade at by the expiration of the contract. If the price of that stock does go down, they can buy it on the open market cheaply and sell it to the other person or institution at the agreed-upon higher price, and pocket the difference.

An inverse ETF does that with a group of stocks, every trading day. The largest inverse ETFs aim to deliver the opposite returns of major stock indexes, like the Nasdaq or the S&P 500. For example, if the S&P 500 goes down 1% on a given day, then a corresponding inverse ETF could be designed to go up 1% that day.

Leveraged Inverse ETFs

There are other inverse ETFs that take the formula one step further, using leverage. That means they buy the futures contracts in their portfolios partially with borrowed money. That gives them the ability to offer outsized returns — two and three times the opposite of the day’s return — but it also exposes them to sizable single-day losses, and larger losses over time.

For example, on that same hypothetical day when the S&P 500 goes down 1%, the corresponding inverse ETF could be designed to go up by 2%.

Who Invests in Inverse ETFs?

An inverse ETF might seem like a good choice for an investor who is generally pessimistic about the prospects for the broader markets over the next few months or years. But that’s not necessarily the case.

Inverse ETFs only invest in one-day futures contracts. The futures contracts they invest in expire at the end of the trading day, locking in the ETFs’ gains and losses.

With an inverse ETF, it’s not enough to be right about the general direction of a given market, asset class or sector. The performance of inverse ETFs isn’t the exact opposite of the index it tracks over longer periods of time. So, the investor has to be correct on the right days, as well.

Inverse ETFs get a lot of attention in the media during market swoons, when they post eye-popping returns. But most financial professionals probably don’t recommend them as long-term investments. They’re generally best for sophisticated investors with a high tolerance for risk.

What Are the Risks of Inverse ETFs?

Investors who purchase inverse ETFs take on risks that are common to all investors, and also some that are unique to this specific investment vehicle.

• Loss: If an investor buys an inverse ETF and the index that it shadows goes up, then the investor will lose money. If the given index goes up by 1% that day, then the fund offering the inverse of that index will go down by 1%; with a leveraged ETF, it could even go down by 2% or 3%.

• Fees: While most ETFs have very low management fees, inverse ETFs may have higher fees, which may take a bite out of returns over time. (It’s worth noting that the management fee can be typically lower than the time and expense of shorting the stocks directly.)

The risks are significant enough that in 2019, the Securities and Exchange Commission proposed new regulations about inverse ETFs, requiring companies that manage leveraged and inverse ETFs to specifically make sure customers understood those risks. The regulation was not approved, which means the onus is still very much on investors to understand the risk.

The Takeaway

Inverse ETFs are designed as tools to allow investors to bet against the market, or specific asset classes. While they come with unique risks, inverse ETFs can help investors find returns during market dips — giving them the chance to short the market with one trade. These ETFs go up as the index goes down, offering opportunity when it might otherwise seem there is none.

The trick: choosing the right inverse ETF on the right day, in order to gain rather than lose. The funds are risky, but can be popular among investors who want to hedge their exposure to a given asset class or market sector, and investors who believe that a given market is due for a big drop.

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

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

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

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.

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

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May

2023

Common Health Insurance Terms & Definitions

By Diana Kelly Levey | Terminology | Comments Off

When shopping for a new health insurance policy — or when your employer introduces a new health plan — you might wonder what certain health insurance terms mean.

In this guide, you’ll discover health insurance terminology for beginners and anyone who’s ever been confused about a policy, so you can make informed decisions.

Top Health Insurance Terms to Know

Discover the health insurance definitions that can help you better utilize health insurance for you and your family.

Accident-Only Policies

These policies pay only in cases that were due to an accident or injury.

Benefits

These are the health care services covered by the insurance plan for an individual. Your health benefits might also be called a “benefits package.”

Claim

An itemized bill that shows all of the services and procedures that were provided to the member.

Coinsurance

This refers to the percentage of the medical charge you must pay out of your own pocket after meeting your deductible. The rest will be paid by your health insurance company. If you have a 15% coinsurance plan, you would pay 15% of each medical bill (after paying the full deductible), and the insurer would cover the rest.

Contract

In most cases, this means the insurance policy, which is a contract between the insurance company and the policyholder.

Copayment

The amount you pay out of pocket when you receive medical care or a prescription drug. A copayment is typically paid in person at the doctor’s office.

Deductible

This refers to the amount you must pay out of pocket before your insurance starts paying some of your health care expenses. The deductible resets at the beginning of the year or when you enroll in a new health insurance plan.

If your deductible is $2,000, your health insurance plan won’t cover any services until you have paid $2,000 out of pocket for the year. Someone with a high deductible and lots of medical costs could consider getting help in the form of medical loans, which are personal loans for medical and dental procedures.

Disability Benefits

If you are unable to work because of an illness or injury, the insurance company pays for lost wages. You’ll receive a portion of your income until you are able to return to work. Each policy defines what constitutes a “disability,” so you’ll need to meet those requirements and submit medical paperwork before receiving payment.

Health Insurance

Health insurance terminology 101: This is a contract that requires your health insurer to pay some or all of your health care costs in exchange for a premium.

Health Maintenance Organization (HMO)

An HMO is a health plan that provides health care services to members through a network of doctors, hospitals, and other health care providers.

HMOs are popular alternatives to traditional health care plans because they usually have lower-cost premiums while still offering a variety of services.

Health Savings Account (HSA)

This is pretax money you set aside to pay for qualified medical expenses. You and your employer may contribute.

HSA funds roll over if you don’t spend them by the end of the year.

Indemnity Plan

Sometimes referred to as a fee-for-service plan, an indemnity plan allows you to go to any physician or provider you want, but requires that you pay for the services yourself and file claims in order to get reimbursed.

Mandated Benefits

This refers to the health care benefits that state or federal law say must be included in health care plans. Mandated health insurance benefit laws may require plans to cover substance abuse treatment or maternity services; cover treatment by providers like chiropractors, acupuncturists, and midwives; or include dependents and domestic partners.

Out-of-Pocket Maximum

This is the most you’ll pay for expenses covered by the plan in a calendar year. If you reach your deductible, insurance will begin paying some expenses covered by the plan. If you hit your out-of-pocket maximum, insurance will pay all expenses covered by the plan. (Monthly premiums don’t count toward your out-of-pocket maximum or deductible.)

Out-of-Network Services

This is when you seek out services from providers who aren’t in your HMO’s or PPO’s network. Usually, HMOs will only pay for care received within its network. If you’re in a PPO plan, you will have to pay more to receive services outside the PPO’s network.

Preexisting Condition

This health insurance term refers to a medical problem or illness you had before applying for health care coverage. If you have a preexisting condition, it’s a good idea to shop around and educate yourself when choosing an individual health plan.

Preferred Provider

This refers to a provider who has a contract with your health plan to provide services to you at a discount. If you have a favorite doctor, you might want to see if they are a preferred provider or “in network” for any new insurance plan.

When you’re looking to find a new physician, choosing a “preferred provider” found via the plan’s website will help keep medical costs down.

Your health insurance or plan may have preferred providers who are also “participating” providers. Participating providers can also have a contract in place with your health insurer, but you may have to pay more.

Preferred Provider Organization (PPO)

PPO plans provide more flexibility than HMOs when choosing a doctor or hospital. They also feature a provider network, but have fewer restrictions on seeing out-of-network providers.

PPO insurance will pay if you see a provider out of the network, though it may be at a lower rate.

PPO plans usually cost more than HMO plans.

Premium

This is the amount paid to the insurance company to obtain or maintain an insurance policy. Usually it’s a monthly fee.

Provider Network

This is a list of all the doctors, specialists, hospitals, and other providers who agree to provide medical care to the members of an HMO or PPO.

Waiting Period

This is the time an employer may make employees wait before they are eligible for coverage under the company’s insurance plan.

The Takeaway

Do you know your HMO from your PPO and HSA? Have you looked closely at copays, deductibles, and out-of-pocket maximums? Knowing health insurance terms can help you make an informed decision when looking at health insurance policies.

Speaking of insurance, check out a variety of insurance offerings at SoFi Protect, bringing you fast, easy, and reliable insurance.

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

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