What Is Impact Investing?

Impact investing is a strategy that seeks to create both financial return and positive social or environmental impact. Impact investments can be made in both publicly traded companies and private companies or funds, and can take the form of equity, debt, or other assets.

In recent years investors have become increasingly aware of potential adverse societal effects to which their investments may contribute. These can include effects on health, the environment, and human rights. As such, large firms and foundations have increasingly decided to put capital to work to minimize these negative effects. For investors, it helps to be aware of the growing trend of impact investing to determine whether it is a suitable wealth-building strategy for a portfolio.

How Does Impact Investing Work?

Impact investing is usually done by large institutional investors and private foundations, though individual investors can do it as well. These organizations invest in various areas, including affordable housing, clean water, and renewable energy. Impact investments in these areas can benefit both developed and emerging markets.

The term “impact investing” is relatively new, but the concept of investing for both financial return and social good is not. Impact investing began in the early 1900s, as numerous philanthropists created private foundations to support their causes.

Over time, the assets of these foundations grew, and the foundation trustees began to look for ways to invest the assets to support their charitable activities. Many of these early foundations were created to support causes such as education, health care, and the arts.

Recommended: What Is Asset Allocation?

The concept of impact investing has expanded to include a broader range of investors and investment vehicles. Impact investing is now practiced by individuals, foundations, endowments, pension funds, and other institutional investors.

The growth of impact investing has been fueled by several factors, including the rise of social media and the increasing availability of data and analytics. Impact investing is also being driven by the growing awareness of businesses and investors’ role in solving social and environmental problems. Individual investors can take this new knowledge and consider index funds that focus on various causes.

Recommended: Investing for Beginners: Basic Strategies to Know

Characteristics of Impact Investments

As outlined by Global Impact Investing Network (GIIN), the following are considered characteristics of credible impact investments:

•  Investor intentionality: An investor must intend to make a measurable positive impact with their investment. This requires a certain level of transparency about both financial and impact goals. The investor’s intent is one of the main differentiators between traditional investments and impact investments.

•  Utilize data: Impact investments must use data and evidence to make informed decisions to achieve measurable benefits.

•  Manage impact performance: Specific financial returns and impact goals must be established and managed.

•  Contribute to the growth of the industry: The goal of impact investments is to further social, economic, or environmental causes. Impact investing toward these goals must be intentional and measured, not just guesswork.

Recommended: How to Analyze a Stock

Impact Investing vs Socially Responsible Investing

Impact investing is often associated with “socially responsible investing” (SRI). Both SRI and impact investing seek to generate positive social or environmental impact, but they differ in some ways.

SRI typically focuses on actively avoiding investments in companies involved in activities that are considered harmful to society, such as the manufacture of tobacco products or the production of weapons. SRI also typically focuses on promoting corporate policies considered socially responsible, such as environmental sustainability or gender diversity.

In contrast, impact investing focuses on making investments in companies or projects that are specifically designed to generate positive social or environmental impact.

Impact Investing vs ESG

The main difference between impact investing and ESG (environmental, social, and governance) is that impact investing is focused on investments that are expected to generate a positive social or environmental impact. In contrast, ESG considers a range of environmental, social, and governance factors in investing decisions.

Recommended: What is ESG Investing?

Why Is Impact Investing Important?

There are a few reasons why impact investing is important. First, it allows investors to put their money into companies or projects that they believe will positively impact society or the environment. This can be an excellent way for investors to make a difference while also earning a return on investment.

Second, impact investing can help attract more capital to social and environmental causes. When more people invest in companies or projects that aim to make a difference, it can help to increase the amount of money and resources available to make positive change happen.

Finally, impact investing can help create jobs and support businesses working to improve society or the environment. This can have a ripple effect, as these businesses often provide goods or services that benefit the community.

Examples of Impact Investing

Impact investing is usually done by institutional investors, large asset managers, and private foundations. Some of the largest foundations and funds focused on impact investing include:

•  The Bill & Melinda Gates Foundation: This foundation has a $2.5 billion Strategic Investment Fund. This fund makes direct equity investments, provides low-interest loans, and utilizes other impact investing tools in promoting global health and U.S. education.

•  The Ford Foundation: The foundation has committed to invest up to $1 billion of its endowment to address social problems while seeking a risk-adjusted market rate of financial return. Its mission-related investments are focused on affordable housing, financial inclusion, and other areas in the U.S. and across the Global South.

•  The Reinvestment Fund: The Philadelphia-based nonprofit finances housing projects, access to health care, educational programs, and job initiatives. With about $1.2 billion in assets under management, it operates primarily by assisting distressed towns and communities in the U.S.

Types of Impact Investments

There are various impact investment areas, including but not limited to microfinance, renewable energy, sustainable agriculture, and affordable housing.

Impact investments don’t have to be equity investments either; they come in many different investment vehicles, like bonds and alternative investments.

Is Impact Investing Profitable?

Impact investing may be profitable, though it depends on several factors, including the type of impact investments and the specific goals and objectives of the investor. Nonetheless, a 2020 GIIN study noted that 88% of impact investors reported that their investments met or surpassed their financial expectations.

In general, impact investing can be a good idea if investors approach it thoughtfully and strategically. As with any investment, there is always a risk of loss, but the profit potential is considerable if the investor does their homework and carefully selects their assets.

The bottom line is that you may not have to sacrifice your financial goals to make a positive impact with your investments. In fact, it’s possible that impact investments might be better for both your pocketbook and the world.

Evaluation Methods for Impact Investors

There are many ways to measure impact investments. The United Nations Sustainable Development Goals (SDGs) are a popular framework for measuring impact. The SDGs are a set of 17 goals that the United Nations adopted in 2015.

The SDGs include goals such as “no poverty,” “zero hunger,” and “good health and well-being.” Each SDG has a specific target to be achieved by the year 2030.

Impact investors often seek to invest in companies or projects that will help achieve one or more of the SDGs. For example, an impact investor might invest in a company working on a new technology to improve water quality, contributing to the SDG goal of ensuring access to water and sanitation for all.

Another popular framework for measuring impact is the Impact Management Project (IMP). The IMP is a global initiative that seeks to develop standards for measuring and managing impact.

How to Start an Impact Investment Portfolio

Though foundations and institutional investors are the heart of the impact investing world, individual investors can also make investments in companies and funds that positively impact society. It doesn’t take much to start an impact investment portfolio.

1.   Decide what type of investment you want to make, whether that’s in a stock of a company, an exchange-traded fund (ETF) with an impact investing strategy, or bonds.

2.   Next, research the different companies and funds, and find a diversified selection that fits your desires.

3.   Finally, make your investment with a brokerage and monitor your portfolio to ensure that your investments have a positive impact.

Recommended: Using Fundamental Analysis to Choose Stocks

In order to become an impact investor, it’s wise to consider both the financial potential of an investment, as well as its social, environmental, or economic impact.

Some investors have a higher risk tolerance than others, and some might be willing to take a lower profit in order to maximize the positive impact of their investments.

The Takeaway

There is no one-size-fits-all answer to how to balance financial return and social or environmental impact. Impact investors must make investment decisions that are aligned with their values and objectives.

Not all impact investments are created equal. Some impact investments may have a higher financial return potential than others but may also have a lower social or environmental impact. Similarly, some impact investments may have a higher social or ecological impact but may also have a lower financial return potential. Impact investors must consider both financial return and social or environmental impact when making investment decisions.

If you’re interested in investing in individual companies or a socially conscious ETF, SoFi Invest® can help. With SoFi’s active investing and automated investing tools, you can research various companies and investment funds. Once you decide what type of impact you’d like to have and your financial goals, you can trade stocks and ETFs with as little as $5 in the SoFi app.

Learn more with SoFi Invest


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

Pivot Points: Definition, Types, and Formulas

Pivot points are a tool that traders use to determine price levels of technical significance on intraday charts. A pivot point can help to identify a potential price reversal, which traders can then use — often in tandem with other technical indicators — as a cue to buy or sell.

When used alongside other common technical indicators, identifying pivot points can be part of an effective trading strategy. Pivot points are regarded as being important indicators for day traders.

What Is a Pivot Point?

Pivot points are predictive indicators that average the high, low, and closing price from the previous period to define future support levels. These pivot points can help inform a decision to buy or sell.

Analysts consider the main pivot point to be the most important. This point indicates the price at which bullish and bearish forces tend to flip to one side or the other — that is, the price where sentiment tends to pivot from. When prices rise above the pivot point, this could be considered bullish; prices falling below the pivot point could be considered bearish.

Pivot points got their start during the time when traders gathered on the floor of stock exchanges. Calculating a pivot point using yesterday’s data gave these traders a price level to watch for throughout the day. Pivot point calculations are considered leading indicators.

Today, traders around the world use pivot points, particularly in the forex and equity markets.

Types of Pivot Points

There are at least four types of pivot points, including the standard ones. Their variations make some changes or additions to the basic pivot-point calculations to bring additional insight to the price action.

Standard Pivot Points

These are the most basic pivot points. Standard pivot points begin with a base point, which is the average of the high, low, and closing prices from a previous trading period.

Fibonacci Pivot Points

Fibonacci projections — named after a mathematical sequence found in nature — connect any two points a trader might see as important. The percentage levels that follow represent potential areas of a trend change. Most commonly, these percentage levels are 23.6%, 38.2%, 50.0%, 61.8%, and 78.6%. Technical analysts believe that when an asset falls to one of these levels, the price might stall or reverse.

Technical traders love using Fibonacci projection levels in some form or another. These work well in conjunction with pivot points because both aim to identify levels of support and resistance in an asset’s price.

Woodie’s Pivot Point

The Woodie’s pivot point places a greater emphasis on the closing price of a security. The calculation varies only slightly from the standard formula for pivot points.

Demark Pivot Points

Demark points create a different relationship between the open and close price points, using the numeral X to calculate support and resistance, and to emphasize recent price action. This pivot point was introduced by a trader named Tom Demark.

How Does a Trader Read Pivot Points?

A trader might read a pivot point as they would any other level of support or resistance. Traders generally believe that when prices break out beyond a support or resistance level, there’s a good chance that the trend will continue for some time.

•   When prices fall beneath support, this could indicate bearish sentiment, and the decline could continue.

•   When prices rise above resistance, this could indicate bullish sentiment, and the rise could continue.

•   Pivot points can also be used to draw trend lines in attempts to recognize bigger technical patterns.

What Are Resistance and Support Levels in Pivot Points?

The numerals R1, R2, R3 and S1, S2, S3 refer to the resistance (R) and support (S) levels used to calculate pivot points. These six numbers combined with the basic pivot-point (PP) level form the seven metrics needed to determine pivot points.

•   Resistance 1 (R1): First pivot level above the PP

•   Resistance 2 (R2): First pivot level above R1, or second pivot level above PP

•   Resistance 3 (R3): First pivot level above R2, or third pivot level above the PP

•   Support 1 (S1): First pivot level below the PP

•   Support 2 (S2): First pivot level below the PP, or the second below S1

•   Support 3 (S3): First pivot level below the PP, or the third below S2

Which Pivot Points Are Best for Intraday Trading?

Because technical analysis has a large subjective component to it, traders will likely have their own interpretations of which pivot points are most important for intraday trading.

While some traders are fond of Fibonacci pivot points, others may prefer different points. There are communities online, like TradingView , where traders gather to discuss ideas like these.

Pivot Points Calculations

The PP is vital for the pivot point formula as a whole. It’s essential that traders to exercise caution when calculating the pivot-point level; because if this calculation is done incorrectly, the other levels will not be accurate.

The formula for calculating the PP is:

Pivot Point (PP) = (Daily High + Daily Low + Close) Divided By 3

To make the calculations for pivot points, it’s necessary to have a chart from the previous trading day. This is where you can get the values for the daily low, daily high, and closing prices. The resulting calculations are only relevant for the current day.

All the formulas for R1-R3 and S1-S3 include the basic PP level value. Once the PP has been calculated, you can move on to calculating R1, R2, S1, and S2:

R1 = (PP x 2) – Daily Low
R2 = PP + (Daily High – Daily Low)
S1 = (PP x 2) – Daily High
S2 = PP – (Daily High – Daily Low)

At this point, there are only two more levels to calculate: R3 and S3:

R3 = Daily High + 2x (PP – Daily Low)
S3 = Daily Low – 2x (Daily High – PP)

How Are Weekly Pivot Points Calculated?

Pivot points are most commonly used for intraday charting. But you can chart the same data for a week, if you needed to. You just use the values from the prior week, instead of day, as the basis for calculations that would apply to the current week.

The Takeaway

The pivot-point indicator is a key tool in technical stock analysis. This pricing technique is best used along with other indicators on short, intraday trading time frames. This indicator is thought to render a good estimate as to where prices could “pivot” in one direction or another.

As we discussed above, there are at least four different types of pivot points, including the standard ones. Some traders have their own interpretations about which pivot points are most useful for intraday trading, so they might choose to use the non-standard pivot points.

Each kind of pivot point brings its own set of variables, which can emphasize different aspects of a pricing scheme. Pivot points also may be used together to form a potentially successful trading strategy.

For hands-on investors, active investing with a SoFi Invest® online brokerage account lets members make trades and manage their account directly from the convenient mobile app.

Find out how to get started with SoFi Invest.


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

Beginner’s Guide to Crypto Trading Bots

Crypto trading bots are just what they sound like: programmable, virtual robots (bots) that make automatic trades. A human trader can program a trading bot to follow certain rules and execute particular trading strategies. A bot can either send signals to its user or execute trades automatically as market conditions change.

This type of trading is also sometimes referred to as “high-frequency trading” or “algo trading” because it allows for many trades to be placed quickly and relies on computer algorithms to follow pre-set rules. In the United States, the share of high-frequency trading in equity markets is estimated to be 50%. While similar data hasn’t yet been collected on crypto markets, a significant portion of the trading activity on most cryptocurrency exchanges may also happen at the hands of bots.

Understanding Crypto Trading Bots?

Trading cryptocurrency, or any asset for that matter, can be a lucrative but difficult task. So investors looking to build a well-balanced crypto portfolio might choose to use all available tools, including bots, to gain every advantage when trading crypto.

Timing the market is not easy to do. The vast majority of actively managed investment funds in the world of traditional finance (TradFi) never outperform the major benchmark indexes. It’s not unreasonable to assume that the same might be true for crypto markets when it comes to hedge funds or retail traders.

One of the many reasons that individual investors and institutional investors can fail to beat the market in the near term might have something to do with a preference for trading bots’ hard-to-beat alacrity. Bots can make decisions, and act on them, in milliseconds!

A crypto bot can accomplish this either by

•   Sending trade signals to the user, or

•   Executing buy or sell orders automatically.

In the first instance, users would be notified the moment certain market conditions are met, at which time they could execute a trade manually. This might be a simpler version of a crypto trading bot.

What most traders want from a trading bot is the second option: They’re seeking a bot that can do more than send real-time signals to a human trader — one that can track things like price movement, trading volume, demand, buying or selling pressure, and other technical indicators. Bots can execute many trades in a fraction of time it would take a human to place a single buy or sell order.

Crypto trading bots are designed to be used by traders to act on market changes the moment they happen, instead of after the fact. Human traders often must wait for a trigger to occur in the market before they trade, or they use simple stop-loss or stop-limit orders to try to hedge tier risk. Bots, on the other hand, can be programmed to wait for specific signals, then trade accordingly. Bots can trade more strategically and rapidly than a human — with human input.

How Do Crypto Trading Bots Work?

A crypto trading bot can execute trades automatically by interacting directly with a cryptocurrency exchange; placing buy or sell orders when certain predetermined conditions are met. Essentially, bots use technical indicators — which are based on mathematics relative to price movements — to make decisions.

In terms of the user interface, trading bots operate in various ways: Some come with an internet browser plug-in that allows the trader to interact with the bot. Others have standard operating-system clients that come as downloadable apps. And some are in the form of software designed for cryptocurrency exchanges.

Trading strategies involve multiple methods:

•   One common method relies primarily on exponential moving averages (EMA). A bot might be programmed to place particular trades when this indicator moves beyond a certain point.

•   Some bots use variants of the approach, such as double or triple EMAs. A moving average is derived from the average of price movements over a set time — such as a nine or fifty days, for example.

•   As a tool for making investment decisions, a double EMA combines data from two moving averages; a triple EMA uses data from three moving averages, and so on.

•   There are crypto trading bots that use other automatic indicators, such as the relative-strength index, and certain regression-analysis techniques.

Other Types of Bots

The bots we’ve discussed so far work on a single crypto exchange. Yet, bots can employ other technical trading techniques, such as charting and “inter-exchange arbitrage.”

Bots For Arbitrage

Arbitrage involves taking advantage of the price differences of a single asset across different trading platforms. If bitcoin or another cryptocurrency is trading at $10,000 on one exchange and at $9,950 on another, an arbitrage bot could buy the asset on the exchange where it’s cheaper and sell it on the one where the price is higher.

Bots For Technical Charting

Some traders use technical charting to map out their trading strategies. Charting can take a long time, even for the most experienced trader. A bot, on the other hand, can be programmed to look at the charts’ metrics and act almost instantaneously.

Are Trading Bots Legal?

Automated trading is a well-known and legal activity across most financial markets. Half of stock market trades in America are automated, and the process is 100% legal.

Likewise, in most countries and on most cryptocurrency exchanges, there are no laws that prohibit using crypto trading bots. That said, cryptocurrency rules and regulations are in flux, so it can be helpful for investors to familiarize themselves with current crypto trading rules before diving into automated trading.

Is Automated Trading Profitable?

Crypto Bots Need To Be Managed

A crypto trading bot may be profitable when used carefully and under the right circumstances. When placing large volumes of orders over a short time span, it is possible to rack up profits by squeezing out small gains on each trade. Of course, losses could mount quickly as well.

Using a crypto trading bot doesn’t work in a “set it and forget it” fashion. First, it’s important to develop a trading strategy. And once you’ve outlined a strategy, it’s critical to monitor the results you’re getting; you may want to adjust your strategy. Moreover, markets do not trade on technical analysis alone. In fact, it’s equally essential to apply fundamental analysis when trading any asset. Fundamentals are generally easier to understand and apply for many investors.

Emotions Can Color Trading Decisions

Perhaps one of the greatest benefits of a crypto trading bot is that it takes the emotion out of trading. Greed and fear can harm a portfolio and even the economy. When the market is going up, investors can become greedy. If a trader’s avarice makes them trade fast and furiously, they could miss changes in market conditions until it’s too late to take a profit.

When financial markets go down, investors tend to get fearful. A trader could make a bad decision while in a state of panic, like selling at the bottom of a downtrend.

Finally, bots are capable of recognizing fundamental market forces like big news headlines, events, or rumors — such as when PayPal (PYPL) announced it would allow users to buy and sell crypto on its platform. Nor can they sense macroeconomic trends like a rise in the price of lumber for housing starts, or how an oil spill might affect petroleum exports.

How to Choose a Crypto Trading Bot

Here are some factors that investors would want to consider carefully when choosing a crypto trading bot:

•   How complex is the bot? It’s important to ensure that you can understand and utilize the bot’s technology successfully.

•   What strategies does the bot use? For investors with a specific preference — such as arbitrage, for example — this matters.

•   If you’re just starting out trading crypto, or are new to trading with bots, it might make sense to use a bot that comes programmed with existing strategies.

•  Look for fees to be stated clearly and up front, with no hidden costs.

•   Do your due diligence on the team that develops a particular bot? Do they display their contact information, offer a support team, and provide a profile on their website?

•   Word of mouth counts. What do others have to say about the platform?

The Takeaway

Trading bots are one way to begin investing in cryptocurrency. A bot can send signals to its user or execute trades automatically, and lightning fast. And a crypto trading bot can take the emotion out of trading in cryptocurrencies — which usually have a higher degree of risk than traditional investments.

SoFi Invest® provides all the tools needed for novice and experienced investors alike.

Get started investing in crypto with just $10.


Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

Photo credit: iStock/CasPhotography
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Understanding Bond Valuation

What Is Bond Valuation?

Bond valuation is a way of determining the fair value of a bond. Bond valuation involves calculating the present value of the bond’s future coupon payments, its cash flow, and the bond’s value at maturity (or par value), to determine its current fair value or price. The price of a bond is what investors are willing to pay for it on the secondary market.

When an investor buys a bond from the issuing company or institution, they typically buy it at its face value. But when an investor purchases a bond on the open market, they need to know its current value. Because a bond’s face value and interest payments are fixed, the valuation process helps investors decide what rate of return would make that bond worth the cost.

Here’s a step-by-step explanation of how bond valuation works, and why it’s important for investors to understand.

How Bond Valuation Works

First, it’s important to remember that bonds are generally long-term investments, where the par value or face value is fixed and so are the coupon payments (the bond’s rate of return over time) — but interest rates are not, and that impacts the present or fair value of a bond at any given moment.

To determine the present or fair value of a bond, the investor must calculate the current value of the bond’s future payments using a discount rate, as well as the bond’s value at maturity to make sure the bond you’re buying is worth it.

Some terms to know when calculating bond valuation:

•   Coupon rate/Cash flow: The coupon rate refers to the interest payments the investor receives; usually it’s a fixed percentage of the bond’s face value and typically investors get annual or semi-annual payments. For example, a $1,000 bond with a 10-year term and a 3% annual coupon would pay the investor $30 per year for 10 years ($1,000 x 0.03 = $30 per year).

•   Maturity: This is when the bond’s principal is scheduled to be repaid to the bondholder (i.e. in one year, five years, 10 years, and so on). When a bond reaches maturity, the corporation or government that issued the bond must repay the full amount of the face value (in this example, $1,000).

•   Current price: The current price is different from the bond’s face value or par value, which is fixed: i.e. a $1,000 bond is a $1,000 bond. The current price is what people mean when they talk about bond valuation: What is the bond currently worth, today?

The face value is not necessarily the amount you pay to purchase the bond, since you might buy a bond at a price above or below par value. A bond that trades at a price below its face value is called a discount bond. A bond price above par value is called a premium bond.

How to Calculate Bond Valuation

Bond valuation can seem like a daunting task to new investors, but it is not that onerous once you break it down into steps. This process helps investors know how to calculate bond valuation.

Bond Valuation Formula

The bond valuation formula uses a discounting process for all future cash flows to determine the present fair value of the bond, sometimes called the theoretical fair value of the bond (since it’s calculated using certain assumptions).

The following steps explain each part of the formula and how to calculate a bond’s price.

Step 1: Determine the cash flow and remaining payments.

A bond’s cash flow is determined by calculating the coupon rate multiplied by the face value. A $1,000 corporate bond with a 3.0% coupon has an annual cash flow of $30. If it’s a 10-year bond that has five years left until maturity, there would be five coupon payments remaining.

Payment 1 = $30; Payment 2 = $30; and so on.

The final payment would include the face value: $1,000 + $30 = $1,030.

This is important because the closer the bond is to maturity, the higher its value may be.

Step 2: Determine a realistic discount rate.

The coupon payments are based on future values and thus the bond’s cash flow must be discounted back to the present (thanks to the time value of money theory, a future dollar is worth less than a dollar in the present).

To determine a discount rate, you can check the current rates for 10-year corporate bonds. For this example, let’s go with 2.5% (or 0.025 as a decimal).

Step 3: Calculate the present value of the remaining payments.

Calculate the present value of future cash flows including the principal repayment at maturity. In other words, divide the yearly coupon payment by (1 + r)t, where r equals the discount rate and t is the remaining payment number.

$30 / (1 + .025)1 = $29.26

$30 / (1 + .025)2 = 28.55

$30 / (1 + .025)3 = 27.85

$30 / (1 + .025)4 = 27.17

$1030 / (1 + .025)5 = 1,004.87

Step 4: Sum all future cash flows.

Sum all future cash flows to arrive at the present market value of the bond : $1,117.70

Understanding Bond Pricing

In this example, the price of the bond is $1,117.70, or $117.70 above par. A bond’s face or par value will often differ from its market value — and in this case its current fair value (market value) is higher. There are a number of factors that come into play, including the company’s credit rating, the time to maturity (the closer the bond is to maturity the closer the price comes to its face value), and of course changes to interest rates.

Remember that a bond’s price tends to move in the opposite direction of interest rates. If prevailing interest rates are higher than when the bond was issued, its price will generally fall. That’s because, as interest rates rise, new bonds are likely to be issued with higher coupon rates, making the new bonds more attractive. So bonds with lower coupon payments would be less attractive, and likely sell for a lower price. So, higher rates generally mean lower prices for existing bonds.

The same logic applies when interest rates are lower; the price of existing bonds tends to increase, because their higher coupons are now more attractive and investors may be willing to pay a premium for bonds with those higher interest payments.

Is Investing in Bonds Right for You?

Investing in bonds can help diversify a stock portfolio since stocks and bonds trade differently. In general, bonds are seen as less risky than equities since they often provide a predictable stream of income. All investors should at least consider bonds as an investment, and those with a lower risk tolerance might be better served with a portfolio weighted highly in bonds.

Performing proper bond valuation can be part of a solid research and due diligence process when attempting to find securities for your portfolio. Moreover, different bonds have different risk and return profiles. Some bonds — such as junk bonds and fixed-income securities offered in emerging markets — feature higher potential rates of return with greater risk. “Junk” is a term used to describe high-yield bonds. You can take on higher risk with long-duration bonds and convertible bonds. Some of the safest bonds are short-term Treasury securities.

You can also purchase bond exchange-traded funds (ETFs) and bond mutual funds that own a diversified basket of fixed-income securities.

The Takeaway

Bond valuation is the process of determining the fair value of a bond after it’s been issued. In order to price a bond, you must calculate the present value of a bond’s future interest payments using a reasonable discount rate. By adding the discounted coupon payments, and the bond’s face value, you can arrive at the theoretical fair value of the bond. A bond can be priced at a discount to its par value or at a premium depending on market conditions and how traders view the issuing company’s prospects.

Owning bonds can help add diversification to your portfolio. Many investors also find bonds appealing because of their steady payments (one reason that bonds are considered fixed-income assets). When you open an online brokerage account with SoFi Invest, you can build a diversified portfolio of individual stocks as well as exchange-traded bond funds (bond ETFs). You can also invest in a range of other securities, including fractional shares, IPOs, crypto, and more. Also, SoFi members have access to complimentary professional advice. Get started today!


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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