Feb
27
2024
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Margin Calls: Defined and Explained

By | Growing Wealth, invest, Investing | Comments Off on Margin Calls: Defined and Explained

A margin call is when an investor is required to add cash or sell investments to maintain a certain level of equity in a margin account if the value of the account decreases too much.

Margin trading — when an investor borrows money from a brokerage firm to enhance trades — is a risky endeavor. Placing bets with borrowed funds can boost gains but can also supercharge losses. Brokers require traders to keep a minimum balance in their margin accounts for this reason.

If the margin account dips below a certain threshold, this is when the brokerage firm will issue a margin call. A margin call is one of several risks associated with margin trading.

Margin calls are designed to protect both the brokerage and the client from bigger losses. Here’s a closer look at how margin calls work, as well as how to avoid or cover a margin call

Key Points

•   A margin call occurs when an investor must contribute cash or sell investments to uphold a specific equity level in their margin account.

•   Margin trading involves borrowing money from a brokerage firm to enhance trades, but it comes with risks.

•   If the equity in a margin account falls below the maintenance margin, a margin call is issued by the brokerage firm.

•   Margin calls are designed to protect both the brokerage and the client from bigger losses.

•   To cover a margin call, investors can deposit cash or securities into the margin account or sell securities to meet the requirements.

What Is a Margin Call?

A margin call is when a brokerage firm demands that an investor add cash or equity into their margin account because it has dipped below the required amount. The margin call usually follows a loss in the value of investments bought with borrowed money from a brokerage, known as margin debt.

A house call, sometimes called a maintenance call, is a type of margin call. A brokerage firm will issue the house call when the market value of assets in a trader’s margin account falls below the required maintenance margin — the minimum amount of equity a trader must hold in their margin account.

If the investor fails to honor the margin call, meaning they do not add cash or equity into their account, the brokerage can sell the investor’s assets without notice to cover the shortfall in the account. This entails a high level of responsibility and potential risk, which is why margin trading is primarily for experienced investors, not for investing beginners.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How Do Margin Calls Work?

When the equity in an investor’s margin account falls below the maintenance margin, a brokerage firm will issue a margin call. Maintenance margins requirements differ from broker to broker.

Additionally, regulatory bodies like the Federal Reserve and FINRA have rules for account minimums that all firms and investors must follow to limit risk and leverage.

Regulation T

The Federal Reserve Board’s Regulation T states that the initial margin level should be at least 50% of the market value of all securities in the margin account. The minimum equity amount must be valued at 50% or more of the margin account’s total value. For example, a $10,000 trade would require an investor to use $5,000 of their own cash for the transaction.

Recommended: Regulation T (Reg T): All You Need to Know

FINRA

The Financial Industry Regulatory Authority (FINRA) requires that investors have a maintenance margin level of at least 25% of the market value of all securities in the account after they purchase on margin. For example, in a $10,000 trade, the investor must maintain $2,500 in their margin account. If the investment value dips below $2,500, the investor would be subject to a margin call.

Example of Margin Call

Here is how a margin trade works. Suppose an investor wants to buy 200 shares of a stock at $50 each for an investment that totals $10,000. He or she puts up $5,000 while the brokerage firm lends the remaining $5,000.

FINRA rules and the broker require that the investor hold 25% of the total stock value in his or her account at all times — this is the maintenance requirement. So the investor would need to maintain $2,500 in his or her brokerage account. The investor currently achieves this since there’s $5,000 from the initial investment.

If the stock’s shares fall to $30 each, the value of the investment drops to $6,000. The broker would then take $4,000 from the investor’s account, leaving just $1,000. That would be below the $1,500 required, or 25% of the total $6,000 value in the account.

That would trigger a margin call of $500, or the difference between the $1,000 left in the account and the $1,500 required to maintain the margin account. Normally, a broker will allow two to five days for the investors to cover the margin call. In addition, the investor would also owe interest on the original loan amount of $5,000.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.

*For full margin details, see terms.

Margin Call Formula

Here’s how to calculate a margin call:

Margin call amount = (Value of investments multiplied by the percentage margin requirement) minus (Amount of investor equity left in margin account)

Here’s the formula using the hypothetical investor example above:

$500 = ($6000 x 0.25%) – ($1,000)

Investors can also calculate the share price at which he or she would be required to post additional funds.

Margin call price = Initial purchase price times (1-borrowed percentage/1-margin requirement percentage)

Again, here’s the formula using the hypothetical case above:

$33.33 / share = $50 x (1-0.50/1-0.25)

💡 Quick Tip: When you trade using a margin account, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.

2 Steps to Cover a Margin Call

When investors receive a margin call, there are only two options:

1.    They can deposit cash into the margin account so that the level of funds is back above the maintenance margin requirement. Investors can also deposit securities that aren’t margined.

2.    Investors can also sell the securities that are margined in order to meet requirements.

In a worst case scenario, the broker can sell off securities to cover the debt.

How Long Do I Have to Cover a Margin Call?

Brokerage firms are not required to give investors a set amount of time. As mentioned in the example above, a brokerage firm normally gives customers two to five days to meet a margin call. However, the time given to provide additional funds can differ from broker to broker.

In addition, during volatile times in the market, which is also when margin calls are more likely to occur, a broker has the right to sell securities in a customer’s trading account shortly after issuing the margin call. Investors won’t have the right to weigh in on the price at which those securities are sold. This means investors may have to settle their accounts by the next trading day.

Tips on Avoiding Margin Calls

The best way to avoid a margin call is to avoid trading on margin or having a margin account. Trading on margin should be reserved for investors with the time and sophistication to monitor their portfolios properly and take on the risk of substantial losses. Investors who trade on margin can do a few things to avoid a margin call.

•   Understand margin trading: Investors can understand how margin trading works and know their broker’s maintenance margin requirements.

•   Track the market: Investors can monitor the volatility of the stock, bond, or whatever security they are investing in to ensure their margin account doesn’t dip below the maintenance margin.

•   Keep extra cash on hand: Investors can set aside money to fulfill the potential margin call and calculate the lowest security price at which their broker might issue a call.

•   Utilize limit orders: Investors can use order types that may help protect them from a margin call, such as a limit order.

The Takeaway

While margin trading allows investors to amplify their purchases in markets, margin calls could result in substantial losses, with the investor paying more than he or she initially invested. Margin calls occur when the level of cash in an investor’s trading account falls below a fixed level required by the brokerage firm.

Investors can then deposit cash or securities to bring the margin account back up to the required value, or they can sell securities in order to raise the cash they need.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 10%*

FAQ

How can you satisfy your margin call in margin trading?

A trader can satisfy a margin call by depositing cash or securities in their account or selling some securities in the margin account to pay down part of the margin loan.

How are fed and house calls different?

A fed call, or a federal call, occurs when an investor’s margin account does not have enough equity to meet the 50% equity retirement outlined in Regulation T. In contrast, a house call happens when an investor’s margin equity dips below the maintenance margin.

How much time do you have to satisfy a margin call?

It depends on the broker. In some circumstances, a broker will demand that a trader satisfy the margin call immediately. The broker will allow two to five days to meet the margin call at other times.

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.

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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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Feb
27
2024
How to Start Investing in Stocks

How to Invest in Stocks: A Beginner’s Guide for Getting Started

By | Growing Wealth, invest, Investing | Comments Off on How to Invest in Stocks: A Beginner’s Guide for Getting Started

Stocks are shares of ownership in a company. To start investing in stocks, you would find a company that you like and think might grow in value and then purchase its stock through a brokerage account. If the stock price rises, you could sell your shares and potentially make a profit — or not if share prices decline.

Of course, when it comes to investing for beginners, you need to learn some basics to invest in stocks and do it well. Thanks to technology and various educational resources, you can get started using an app or online brokerage account and learn as you go. It has never been easier to build investing confidence as you gain experience. Here is a step-by-step guide for those who want to start investing in stocks now.

Key Points

•   Stocks represent shares of ownership in a company and can be purchased through a brokerage account.

•   Before investing in stocks, determine your investing approach and consider your time horizon.

•   Different ways to invest in stocks include self-managed investing, using a financial advisor, or utilizing robo-advisors.

•   The amount you invest in stocks depends on your budget and financial goals.

•   Choose stocks based on thorough research, including analyzing a company’s financial statements and valuation metrics.

How to Start Investing in Stocks: 5 Steps

1. Determine Your Investing Approach

Before you get started investing in stocks, you need to determine your investing approach. Because every person has unique financial goals and risk tolerances, there is no one-size-fits-all strategy to begin investing in the stock market.

Most people will need to decide whether they want a hands-on approach to investing or whether they’d like to outsource their wealth building to some sort of financial advisor.

Additionally, investors need to consider their time horizons before investing in stocks. Some investors want to invest long-term — buying and holding assets to build wealth for retirement. In contrast, other investors are more interested in short-term trading, buying and selling stocks daily or weekly to make a quick profit. The type of investor you want to be will help determine what kind of stocks you should buy and your investing approach.

The Different Ways to Invest in the Stock Market

Fortunately, various options are available for every type of investor as they begin to invest in stocks.

As mentioned above, some investors like to have a hands-on approach to investing. These investors want to make decisions on their own, picking what stocks are right for them and building a portfolio from the ground up. This self-managed strategy can be time-consuming but an excellent option for investors who have a general understanding of the markets or would like to learn more about them.

Other investors like to have experts, like a money manager, manage the investing process for them. While this investing approach may cost more than doing it yourself, it can be an ideal choice for individuals who do not have the time or energy to devote to financial decision-making.

2. Decide How Much you Will Invest in Stocks

How much you invest depends entirely on your budget and financial goals. Many financial experts recommend saving between 10% and 15% of your after-tax annual income, either in a savings account or by investing. With that guideline in mind, you may decide to invest with whatever you can comfortably afford.

Fortunately, it’s much easier to invest these days, even if you only have a few bucks at a time. Many brokerage firms offer low or no trading fees or commissions, so you can make stock trades without worrying about investment fees eating into the money you decide to invest.

Additionally, many brokerage firms offer fractional share investing, which allows investors to buy smaller amounts of a stock they like. Instead of purchasing one stock at the value for which the stock is currently trading — which could be $1,000 or more — fractional share investing makes it possible to buy a portion of one stock. Investors can utilize this to use whatever dollar amount they have available to purchase stocks.

For example, if you only have $50 available to invest and want to buy stock XYZ trading at $500 per share, fractional share investing allows you to buy 10% of XYZ for $50.

Asset Allocation

Asset allocation involves spreading your money across different types of investments, like stock, bonds, and cash, in order to balance risk and reward. Determining a portfolio’s asset allocation can vary from person to person, based on financial goals and risk tolerance.

Asset allocation is closely tied with portfolio diversification. Diversification means spreading one’s money across a range of assets. Generally, it’s like taking the age-old advice of not putting all your eggs in one basket. An investor can’t avoid risk entirely, but diversifying their investments can help mitigate the risk one asset class poses.

3. Open an Investment Account

Once you determine your investing approach and how much money you can invest, you’ll need to open a brokerage account to buy and sell shares of companies or whatever other assets you’d like to invest in.

Several investment accounts might make sense for you, depending on your comfort level in managing your investments and your long-term financial goals.

Professional option: Full-service brokerages

Many investors may use traditional brokerage firms, also known as full-service brokerages, to buy and sell stocks and other securities. A full-service brokerage offers additional services beyond just buying and selling stocks, such as investment advice, wealth management, and estate planning. Typically, full-service brokerages provide these services at high overall costs, while discount and online brokerages maintain scaled-down services with lower overall costs.

A full-service brokerage account may not be the best option for investors just getting started investing in stocks. These firms often require substantial account minimum balances to open an account. This option may be out of reach for most in the early stages of their investing journey.

Do-it-yourself option: Online brokerage

An online brokerage account is ideal for most beginning investors looking to have a hands-on approach to trading stocks and building a financial portfolio. Many online brokers offer services with the convenience of an app, which can make investing more streamlined. If you feel confident or curious about how to start investing at a lower cost than a full-service brokerage firm, opening an account with an online broker could be a great place to start.

Hands-off, automated option: Robo-advisor

If you’re interested in investing but want some help setting up a basic portfolio, opening an investment account with a robo-advisor might be best for you. A robo-advisor uses a sophisticated computer algorithm to help you pick and manage investments. These automated accounts generally don’t offer individual stocks; instead, they build a portfolio with a mix of exchange-traded funds (ETFs). Nonetheless, it’s a way to become more familiar with investing.

Retirement option: 401(k) and IRAs

Retirement accounts like employer-sponsored 401(k)s or individual retirement accounts (IRAs) are tax-advantaged investment accounts that can be great for the beginning investor trying to build a retirement nest egg. These accounts offer investors a range of investment choices, including individual stocks. You may also have access to tutorials, advisors, or other resources to help you learn how to start investing in these accounts.

💡 Ready to start retirement investing? Consider opening an IRA online.

Tip: Compare Costs and Features

No matter where you decide to open your investment account, be sure to research and compare costs and features within the account. For example, many brokerage accounts charge investment fees and commissions for making trades. Although investment costs can be quite low — and you can trade stocks without paying a commission — any investment fee can add up over time and ultimately reduce your overall investment returns.

Additionally, it helps to check if the investment account requires a minimum deposit to open an account. A minimum deposit can be a barrier to getting started for the beginning investor who doesn’t have much money to invest. However, many firms do not have minimum deposit requirements any longer.

4. Choose Your Stocks

Deciding what individual stocks to invest in can be challenging for most investors. There are countless ways to evaluate stocks before you buy.

Before choosing your stocks, you generally want to do a deep dive into a company’s inner workings to understand the company’s overall valuation and the stock’s share price.

As a beginning investor, you want to get comfortable reading a company’s balance sheet and other financial statements. All publicly-traded companies must file this information with the Securities and Exchange Commission (SEC), so you shouldn’t have trouble finding these financials.

One of the most fundamental metrics for understanding a stock’s value compared to company profits is its price-to-earnings (PE) ratio. Others include the price-to-sales (PS) ratio and the price/earnings-to-growth (PEG) ratio, which may be helpful for companies that have little to no profits but are expanding their businesses quickly.

These metrics, and other financial ratios, can help you determine what stocks to buy. And the advantage of owning individual stocks is that you can get direct exposure to a company you believe has the potential to grow based on your research. The downside, of course, is that investing doesn’t come with guarantees, and your stock’s value could decline even with thorough research.

💡 Recommended: 15 Technical Indicators for Stock Trading

5. Continue Building Your Portfolio

After you’ve decided what stocks to invest in, you generally want to continue building a portfolio that will help you meet your financial goals.

One way to bolster your portfolio is by buying mutual funds and ETFs rather than individual stocks. A benefit to investing in funds that hold stocks is that you can avoid some of the risks of being invested in individual stocks that may not perform well.

Whether investing in individual stocks or funds, you may want to consider the level of diversification in your portfolio that feels right for you. There is no consensus about the right way to diversify investments. For one person, ideal diversification could mean owning 20 stocks in different industries. For another, it could mean owning the “whole” market via a handful of mutual funds.

Once you get more comfortable investing in stocks and funds, you can employ numerous other investing strategies. You can add various securities, like bonds, commodities, and crypto, to your portfolio.

The Takeaway

Historically, investing in the stock market has been a way for some individuals to build personal wealth. These days, it’s never been easier for new investors considering getting into stocks to start. Whether you choose to work with a financial advisor or use an online broker or app, there are several ways to find a method that makes stock investing easy, fun, and potentially profitable. Of course, there are no guarantees, so it’s wise to take a step-by-step approach, start small if you prefer, do some research using the many resources available, and see what comes as you gain experience and confidence.

Investors can open an online investing account with SoFi Invest® to trade individual stocks, ETFs, or fractional shares with no commissions. Additionally, SoFi’s Automated Investing builds, manages, and rebalances portfolios with no SoFi management fee for those interested in investing in stocks through a more hands-off approach.

Start investing with your SoFi Invest account today.

FAQ

How do I invest $100?

You can invest $100 by opening an investing account that does not require a minimum account balance and purchasing shares of a stock or ETF that are less than $100. You can also use your funds to purchase fractional shares of whatever stocks you want to own.

How do I open a brokerage account?

You’ll need to take a few steps to open a brokerage account. First, you’ll need to find a broker that fits your needs. Once you’ve found a broker, you’ll need to complete an application and submit it to the broker. The broker will then review your application and, if approved, will open an account for you.

What is the S&P 500?

The Standard and Poor’s 500, commonly known as the S&P 500, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ stock exchanges. It is one of the most commonly followed stock market indices in the United States, along with the Dow Jones Industrial Average and Nasdaq Composite.

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.

Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
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Feb
27
2024
Sell-to-Open vs Sell-to-Close: How They Work

Sell-to-Open vs Sell-to-Close: How They’re Different

By | Growing Wealth, invest, Investing | Comments Off on Sell-to-Open vs Sell-to-Close: How They’re Different

Sell-to-open and sell-to-close are two of the four order types used in options trading. The other two are buy-to-open and buy-to-close. Options contracts can be created, closed out, or simply exchanged on the open market.

A sell-to-open order is an options order type in which you sell (also described as write) a new options contract.

In contrast, a sell-to-close order is an options order type in which you sell an options contract you already own. Both types of options, calls and puts, are subject to these order types.

Key Points

•   Sell-to-Open involves selling a new options contract, while Sell-to-Close involves selling an existing options contract.

•   Sell-to-Open profits from decreasing option values, while Sell-to-Close profits from options that have increased in value.

•   Sell-to-Open can increase open interest, while Sell-to-Close can decrease open interest.

•   Sell-to-Open writes a new options contract, while Sell-to-Close closes an existing options contract.

•   Sell-to-Open benefits from time decay and lower implied volatility, but can result in steep losses and be affected by increasing volatility. Sell-to-Close avoids extra commissions and slippage costs, retains extrinsic value, but limits further upside before expiration.

What Is Sell-to-Open?

A sell-to-open transaction is performed when you want to short an options contract, either a call or put option. The trade is also known as writing an option contract.

Selling a put indicates a bullish sentiment on the underlying asset, while selling a call indicates bearishness.

When trading options, and specifically writing options, you collect the premium upon sale of the option. You benefit if you are correct in your assessment of the underlying asset price movement. You also benefit from sideways price action in the underlying security, so time decay is your friend.

A sell-to-open order creates a new options contract. Writing a new options contract will increase open interest if the contract stays open until the close of that trading session, all other things being held equal.

How Does Sell-to-Open Work?

A sell-to-open order initiates a short options position. If you sell-to-open, you could be bullish or bearish on an underlying security depending on if you are short puts or calls.

Writing an option gives the buyer the right, but not the obligation, to purchase the underlying asset from you at a pre-specified price. If the buyer exercises that right, you, the seller, are obligated to sell them the security at the strike price.

An options seller benefits when the price of the option drops. The seller can secure profits by buying back the options at a lower price before expiration. Profits are also earned by the seller if the options expire worthless.

Pros and Cons of Selling-to-Open

Pros

 Cons
Time decay works in your favor A naked sale could result in steep losses
Benefits from lower implied volatility Increasing volatility hurts options sellers
Collects an upfront premium Might have to buy back at a much higher price

An Example of Selling-to-Open with 3 Outcomes

Let’s explore three possible outcomes after selling-to-open a $100 strike call option expiring in three months on XYZ stock for $5 when the underlying shares are trading at $95.

1. For a Profit

After two months, XYZ shares dropped to $90. The call option contract you sold fell from $5 per contract to $2. You decide that you want to book these gains, so you buy-to-close your short options position.

The purchase executes at $2. You have secured your $3 profit.

You sold the call for $5 and closed out the transaction for $2, $5 – $2 = $3 in profit.

A buy-to-close order is similar to covering a short position on a stock.

Keep in mind that the price of an option consists of both intrinsic and extrinsic value. The call option’s intrinsic value is the stock price minus the strike price. Its extrinsic value is the time value.

Options pricing can be tricky as there are many variables in the binomial option pricing model.

2. At Breakeven

If, however, XYZ shares increase modestly in the two months after the short call trade was opened, then time decay (or theta) might simply offset the rise in intrinsic value.

Let’s assume the shares rose to $100 during that time. The call option remains at $5 due to the offsetting changes in intrinsic value and time value.

You decide to close the position for $5 to breakeven.

You sold the call for $5 and closed out the transaction for $5, $5 – $5 = $0 in profit.

3. At a Loss

If the underlying stock climbs from $95 to $105 after two months, let’s assume the call option’s value jumped to $7. The decline in time value is less than the increase in intrinsic value.

You choose to buy-to-close your short call position for $7, resulting in a loss of $2 on the trade.

You sold the call for $5 and closed out the transaction for $7, $7 – $5 = $2 loss.

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 Is Sell-to-Close?

A sell-to-close is executed when you close out an existing long options position.

When you sell-to-close, the contract you were holding either ceases to exist or transfers to another party.

Open interest can stay the same or decrease after a sell-to-close order is completed.

How Does Sell-to-Close Work?

A sell-to-close order ends a long options position that was established with a buy-to-open order.

When you sell-to-close, you might have been bullish or bearish an underlying security depending on if you were long calls or puts. (These decisions can be part of options trading strategies.) A long options position has three possible outcomes:

1.    It expires worthless

2.    It is exercised

3.    It is sold before the expiration date

Pros and Cons of Selling-to-Close

Pros

 Cons
Avoids extra commissions versus selling shares in the open market after exercising There might be a commission with the options sale
Avoids possible slippage costs The option’s liquidity could be poor
Retains extrinsic value Limits further upside before expiration

An Example of Selling-to-Close with 3 Outcomes

Let’s dive into three plausible scenarios whereby you would sell-to-close.

Assume that you are holding a $100 strike call option expiring in three months on XYZ stock that you purchased for $5 when the underlying shares were $95.

1. For a Profit

After two months, XYZ shares rally to $110. Your call options jumped from $5 per contract to $12.

You decide that you want to book those gains, so you sell-to-close vs sell-to-open your long options position.

The sale executes at $12. You have secured your $7 profit.

You purchased the call for $5 and closed out the transaction for $12, $12 – $5 = $7 in profit.

2. At Breakeven

Sometimes a trading strategy does not pan out, and you just want to sell at breakeven. If XYZ shares rally only modestly in the two months after the long call trade was opened, then time decay (or theta) might simply offset the rise in intrinsic value.

Let’s say the stock inched up to $100 in that time. The call option remains at $5 due to the offsetting changes in intrinsic value and time value.

You decide to close the position for $5 to breakeven.

You purchased the call for $5 and closed out the transaction for $5, $5 – $5 = $0 in profit.

3. At a Loss

If the stock price does not rise enough, cutting your losses on your long call position can be a prudent move. If XYZ shares climb from $95 to $96 after two months, let’s assume the call option’s value declines to $2. The decline in time value is more than the increase in intrinsic value.

You choose to sell-to-close your long call position for $2, resulting in a loss of $3 on the trade.

You purchased the call for $5 and closed out the transaction for $2, $5 – $3 = $2 loss.

What Is Buying-to-Close and Buying-to-Open?

Buying-to-close ends a short options position, which could be bearish or bullish depending on if calls or puts were used.

Buying-to-open, in contrast, establishes a long put or call options position which might later be sold-to-close.

Understanding buy to open vs. buy to close is similar to the logic with sell to open vs sell to close.

The Takeaway

Selling-to-open is used when establishing a short options position, while selling-to-close is an exit transaction. The former is executed when writing an options contract, while the latter closes a long position. It is important to know the difference between sell to open vs sell to close before you start options trading.

If you’re ready to try your hand at options trading, you can set up an Active Invest account and, if qualified, 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, see full fee schedule here, and members have access to complimentary financial advice from a professional.

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

FAQ

Is it better to buy stocks at opening or closing?

It is hard to determine what time of the trading day is best to buy and sell stocks and options. In general, however, the first hour and last hour of the trading day are the busiest, so there could be more opportunities then with better market depth and liquidity. The middle of the trading day sometimes features calmer price action.

Can you always sell-to-close options?

If you bought-to-open an option, you can sell-to-close so long as there is a willing buyer. You might also consider allowing the option to expire if it will finish out of the money. A final possibility is to exercise the right to buy or sell the underlying shares.

How do you close a sell-to-open call?

You close a sell-to-open call option by buying-to-close before expiration. Bear in mind that the options might expire worthless, so you could do nothing and avoid possible commissions. Finally, the options could expire in the money which usually results in a trade of the underlying stock if the option is exercised.

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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.

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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Feb
27
2024
What is an IRA?

What Is an IRA?

By | Growing Wealth, invest, Investing, Terminology | No Comments

An individual retirement account, or IRA, is a retirement savings account that has certain tax advantages. Brian Walsh is a CFP® at SoFi — he says “The tax advantage part is important because it allows your money to grow a little bit more efficiently, especially over a long period of time.” An IRA allows individuals to save for retirement over the long-term.

There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both types generally let you contribute the same amount annually (more on that below). One key difference is the way the two accounts are taxed: With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement.

For those planning for their future, IRAs are worth learning more about—and potentially investing in. Read on to learn more about the different types of IRAs, which one might be right for you, and how to open an individual retirement account.

Key Points

•   An IRA is a retirement savings account that offers tax advantages and allows individuals to save for retirement over the long-term.

•   There are different types of IRAs, including traditional and Roth IRAs, each with its own tax treatment and contribution limits.

•   Traditional IRAs allow for pre-tax contributions and tax-deferred growth, while Roth IRAs involve after-tax contributions and tax-free withdrawals in retirement.

•   Other types of IRAs include SEP IRAs for small business owners and self-employed individuals, and SIMPLE IRAs for employees and employers of small businesses.

•   Opening an IRA provides individuals with the opportunity to save for retirement, supplement existing retirement plans, and potentially benefit from tax advantages.

What Are the Different Types of IRA Accounts?

There are several types of IRAs, including traditional and Roth IRAs. Since it is possible to have multiple IRAs, an individual who works for themselves or owns a small business might also establish a SEP IRA (Simplified Employee Pension) or SIMPLE IRA (Savings Incentive Match Plan for Employees). Just be aware that you cannot exceed the total contribution limits across all the IRAs you hold.

Here is an overview of some different types of IRAs:

Traditional IRA

A traditional IRA is a retirement account that allows individuals to make pre-tax contributions. Money inside a traditional IRA grows tax-deferred, and it’s subject to income tax when it’s withdrawn.

Contributions to a traditional IRA are typically tax-deductible because they can lower an individual’s taxable income in the year they contribute.

Traditional IRAs have contribution limits. In 2024, individuals can contribute up to $7,000 per year, with an additional catch-up contribution of $1,000 for those aged 50 and up. In 2023, the contribution limit was $6,500 annually or $7,500 for those 50 and older.

When individuals reach a certain age, they must start taking required minimum distributions (RMDs) from a traditional IRA. RMDs are generally calculated by taking the IRA account balance and dividing it by a life expectancy factor determined by the IRS.

Saving for retirement with an IRA means that an individual is, essentially, saving money until they reach at least age 59 ½. Withdrawals from a traditional IRA taken before that time are typically subject to income tax and a 10% early withdrawal penalty. There are some exemptions to this rule, however — such as using a set amount of IRA funds to buy a first house or pay a medical insurance premium after an individual loses their job.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Roth IRA

Unlike a traditional IRA, contributions to a Roth IRA are made with after-tax dollars, and contributions are not tax-deductible. The money can grow tax-free in the Roth IRA account. Withdrawals made after age 59 ½ are tax-free, as long as the account has been open for at least five years.

Roth IRAs are subject to the same contribution limits as traditional IRAs, but the amount an individual can contribute may be limited based on their tax filing status and income levels.

For 2024, married couples filing jointly can contribute only a partial amount to a Roth if their modified adjusted gross income (MAGI) is $230,000 or more. If their MAGI is over $240,000, they cannot contribute to a Roth at all. For single filers, those whose MAGI is $146,000 or more can make a reduced contribution to a Roth, and those whose MAGI is more than $161,000 cannot contribute.

Individuals with Roth IRAs are not required to take RMDs. Additionally, Roth withdrawal rules are a bit more flexible than those for a traditional IRA. Individuals can withdraw contributions to their Roth IRAs at any time without having to pay income tax or a penalty fee. However, they may be subject to taxes and a 10% penalty on earnings they withdraw before age 59 ½.

SEP IRA

A simplified employee pension (SEP IRA) provides small business owners and self-employed people with a way to contribute to their employees’ or their own retirement plans. Contribution limits are significantly larger than those for traditional and Roth IRAs.

Only an employer (or self-employed person) can contribute to a SEP IRA. In 2024, employers can contribute up to 25% of their employees’ compensations or $69,000 a year, whichever is less. The amount of employee compensation that can be used to calculate the 25% is limited to $345,000 in 2024.

If an individual is the owner of the business and contributes a certain percentage of their compensation to their own SEP IRA —for example, 15%— the amount they contribute to their employees’ plans must be the same proportion of the employees’ salary (in other words, also 15% or whatever percentage they contributed).

When it comes to RMDs and early withdrawal penalties, SEP IRAs follow the same rules as traditional IRAs. However, in certain situations, the early withdrawal penalty may be waived.

SIMPLE IRA

A Savings Incentive Match Plan for employees, or SIMPLE IRA, is a traditional IRA that both employees and employers can contribute to. These plans are, typically, available to any small business with 100 employees or fewer.

Employers are required to contribute to the plan each year by making a 3% matching contribution, or a 2% nonelective contribution, which must be made even if the employee doesn’t contribute anything to the account. This 2% contribution is calculated on no more than $345,000 of an employee’s compensation in 2024.

Employees can contribute up to $16,000 to their SIMPLE IRA in 2024, and they can also make catch-up contributions of $3,500 at age 50 or older, if their plan allows it.

SIMPLE plans have RMDs, and early withdrawals are subject to income tax and a 10% penalty. The early withdrawal penalty increases to 25% for withdrawals made during the first two years of participation in a plan. (There are, however, certain exemptions recognized by the IRS.)

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

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Benefits of Opening an IRA

The main advantage of opening an IRA is that you are saving money for your future. Investing in retirement is an important financial move at any age. Beyond that, here are some other benefits of opening an IRA:

•   Anyone who earns income can open an IRA. It’s a good option if you don’t have access to an employee-sponsored plan, such as a 401(k) or a 403(b).

•   An IRA can supplement an employee plan. You could open an IRA to supplement your retirement plan at work, especially if you’ve already contributed the annual maximum.

•   An IRA might be a good rollover vehicle. If you’re leaving your job, you could roll over funds from a 401(k) or 403(b) into an IRA. That may give you access to more investment options—not to mention consolidating your accounts in one place.

•   A SEP IRA might be helpful if you’re self-employed. A SEP IRA may allow you to contribute more each year than you could to a Roth or Traditional IRA, depending on how much you earn.

Which Type of IRA Works for You?

There are many different types of IRAs and deciding which one is better for your particular financial situation will depend on your individual circumstances and future plans. Here are some questions to ask yourself when deciding between different types of IRAs:

•   Thinking ahead, what do you expect your tax income bracket to look like at retirement? If you think you’ll be in a lower bracket when you retire, it might make more sense to invest in a traditional IRA, since you’ll pay more in taxes today than you would when you withdraw the money later.

•   Will you likely be in a higher tax bracket at retirement? That can easily happen as your career and income grow and if you experience lifestyle inflation. In that case, a Roth IRA might give you the opportunity to save on taxes in the long run.

•   Do you prefer not to take RMDs starting at age 73? If so, a Roth IRA might be a better option for you.

•   Is your income high enough to prevent you from contributing the full amount (or at all) to a Roth IRA? In that case, you may want to consider a traditional IRA.

How Much Should You Contribute to an IRA?

If you can afford it, you could contribute up to the maximum limit to your IRA every year (including catch-up contributions if you qualify). Otherwise, it generally makes sense to contribute as much as you can, on a regular basis, so that it becomes a habit.

Until you’re on track for retirement, many financial professionals recommend prioritizing IRA contributions over other big expenses, like saving for a down payment on a first or second home, or for your kids’ college education.

Any money you put into an IRA has the opportunity to grow over time. Of course, everyone’s circumstances are different, so for specifics unique to your situation, it might help to talk to a financial advisor and/or a tax advisor.

How Can You Use IRA Funds?

Early withdrawals of your IRA funds, prior to the age of 59 ½, can trigger a 10% penalty tax. However, there are exceptions that may allow an individual to use their IRA funds before hitting the age of eligibility and without facing the 10% penalty, according to IRS rules. Just keep in mind that early withdrawals are generally considered a last resort after all other options have been exhausted since you don’t want to dip into your retirement funds unless absolutely necessary.

IRA withdrawal exceptions include:

•   Permanent disability

•   Higher education expenses

•   Certain out-of-pocket medical expenses totaling more than 10% of adjusted gross income

•   Qualified first-time homebuyers up to $10,000

•   Health insurance premiums while unemployed

•   IRS levy of the plan

•   Qualified military reservist called to active duty

•   Death of the IRA’s owner

The Takeaway

IRAs offer individuals an opportunity to save money for retirement in a tax-advantaged plan. There are several different IRAs to choose from to help you find an account that suits your needs and goals.

There are multiple options for opening an IRA, including online brokers and robo-advisors. With an online broker, you choose the investment assets for your IRA. A robo-advisor is an automated investment platform that picks investments for you based on your financial goals, risk tolerance, and investing time frame. Whichever option you choose, you decide on a financial institution, pick the type of IRA you want, and set up your account.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

How is an IRA different from a 401(k)?

While IRAs and 401(k)s are both tax-advantaged ways to save money for retirement, a 401(k) is an employer-sponsored plan that is offered through the workplace, and an IRA is an account you can open on your own.

What’s the difference between a Roth IRA and a Traditional IRA?

The biggest difference between a traditional IRA vs. Roth IRA is how and when your money is taxed. With a traditional IRA, you get a tax deduction when you make contributions. Your contributions are made with pre-tax dollars, and when you withdraw money in retirement, the funds are taxed.

With a Roth IRA, you make contributions with after-tax dollars. You don’t get a tax deduction upfront when you contribute, but your money grows tax-free. When you withdraw the money in retirement, you won’t pay taxes on the withdrawals.

When should I make IRA contributions?

One simple way to fund your IRA is to set up automatic contributions at regular intervals that puts money from your bank account directly into your IRA. You could contribute monthly or several times a year—the frequency is up to you. Some people contribute once annually, after they receive a year-end bonus, for example.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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.

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Feb
27
2024
NPV Formula: How to Calculate Net Present Value

Net Present Value: How to Calculate NPV

By | Growing Wealth, invest, Investing, SMB | Comments Off on Net Present Value: How to Calculate NPV

Net present value or NPV represents the difference between the present value of cash inflows and outflows over a set period of time. Knowing how to calculate NPV can be useful when trying to determine whether an investment — either business or personal — will eventually pay off.

In capital budgeting, calculating the net present value can help with estimating the profitability of an investment or expansion project. Meanwhile, investors use the net present value calculation to gauge an investment’s potential rate of return based on the present value of its future cash flows and a discount rate, based on the cost of borrowing or financing.

What Is Net Present Value (NPV)?

Net present value is a measure of the value of all future cash flows over the life of an investment, discounted to the present after factoring in inflows, outflows, and inflation, which can erode the value of money over time.

When applying the net present value formula, you’re looking at whether revenues are greater than costs or vice versa to determine whether an investment or project is likely to yield a gain or a loss.

As mentioned, net present value is often used in capital budgeting. Businesses and governments can use capital budgeting methods to determine how much of a return they’re likely to see on a project before funding it. The NPV formula takes into account the time value of money, a concept which suggests that a sum of money received now is worth more than that same sum received at a future date.

How to Calculate NPV

Calculating net present value is a fairly simple operation.

If you want to calculate net present value using the NPV formula, you’d first need to know the expected positive and negative cash flows for an investment or project. You’d also need to know the discount rate. From there, you could complete your calculations in this order:

•   List future cash flows for each year you expect to receive them.

•   Calculate the present value for each cash flow.

•   Add all present values for future cash flows together.

•   Subtract cash outflows from the present value sum of future cash flows.

You’ll need to know the present value calculation to complete the second step.

NPV Formula

Here’s what the NPV formula looks like:

PV = FV/(1 + k)N

In this formula, k is the discount rate and n is the number of time periods.

Again, net present value calculations follow a distinct formula. A positive NPV means earnings from the investment should outpace the cost. Negative NPV, on the other hand, means you’re more likely to lose money on the investment.

The application of the formula depends on the number of expected cash flows for an investment or project.

Example of NPV with a Single Cash Flow Investment

If you’re evaluating potential investments with a single cash flow, then you could use this formula to calculate NPV:

NPV = Cash flow / (1 + i)t – initial investment

In this formula, i represents the required return or discount rate for the investment while t equals the number of time periods involved. The discount rate is an interest rate used to discount future cash flows for a financial instrument.

Weighted average cost of capital (WACC) usually serves as the discount rate for calculating NPV. The WACC measures a company’s cost of borrowing or financing.

Example of NPV with Multiple Cash Flows

If you’re evaluating projects or potential investments with multiple cash flows, you’ll use a different net present value formula. Here’s what the NPV formula looks like in that scenario:

NPV = Today’s value of expected cash flows – Today’s value of invested cash

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Tools to Help Calculate NPV

If you want to simplify your calculations you could look for an online net present value calculator. Or you could use the NPV function in spreadsheet software, such as Microsoft Excel or something similar. The NPV function helps calculate net present value for an investment based on the discount rate and a series of future cash flows, both positive and negative.

To use this function, you’d simply create a new Excel spreadsheet, then navigate to the “Formulas” tab. Here, you’d choose “Financial”, then from the dropdown menu select “NPV”. This will bring up the function where you can enter the rate and each value you want to calculate.

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What Does NPV Show You?

The NPV formula should tell you at a glance whether you’re likely to make money from an investment, lose money or break-even. This can help when comparing multiple investments to decide where to put your money when you have a limited amount of capital to work with.

It works the same way in capital budgeting. Say a fast-food chain is trying to decide whether to expand into a new market which entails opening up 10 more locations. They could calculate the net present value for each location, based on expected cash flows, to determine whether moving ahead with the project is a financially sound business decision.

What Is a Good NPV?

Generally speaking, a net present value greater than zero is good. This means that the investment or expansion project is likely to yield a gain. When the net present value is below zero, you have negative NPV which means the project or investment is likely to result in a loss.

The higher the number produced by a net present value calculation, the better. But it’s important to remember that the results produced by applying the NPV formula are only as reliable as the data points used in the calculation.

Inaccurate cash flow projections could result in skewed numbers which may produce a net present value estimate that’s above or below the actual returns you’re likely to realize.

Comparing NPV

Here are some ways that NPV stacks up to other types of calculations.

NPV vs Present Value

NPV and present value may sound similar but they measure different things. Present value or PV is the present value of all future cash inflows over a set period of time. Companies use this calculation to estimate values for future revenues or liabilities. When you calculate present value, you’re trying to measure the value of future cash flows today.

Net present value, on the other hand, is the sum of the present values for both cash inflows and cash outflows. With the NPV formula, you’re trying to determine how profitable an investment might be, based on the initial investment required and expected rate of return.

NPV vs IRR

Analysts use IRR or internal rate of return to evaluate proposed capital expenditures. The IRR calculation determines the percentage rate of return at which a project’s cash flows result in a net present value of zero. Like NPV, internal rate of return is also a part of capital budgeting.

Both NPV and IRR measure potential profitability but in different ways. When calculating the net present value of an investment, you’re estimating returns in dollars. With an internal rate of return, you’re estimating the percentage return an investment or project should generate.

Depending on whether you’re trying to target a specific dollar amount or percentage amount for returns, you may apply one or both formulas when evaluating an investment.

NPV vs ROI

Net present value measures expected cash flows for potential investments. You’re looking at future discounted cash flows to determine whether an investment makes sense financially.

Return on investment, or ROI, measures the efficiency of an investment, in terms of the rate of return that the investment is likely to produce. With ROI, you’re looking at the cash flows you’re likely to gain from an investment. To find ROI, you’d add up the total revenues less the total costs involved, then divide that figure by the total costs.

NPV vs Payback Period

The payback period is the period of time required for a return on investment to equal the initial investment. Payback period calculations don’t account for the time value of money. Instead, they look at how long it will take for you to realize a return from an investment that’s equal to the dollar amount that you invested.

Calculating the payback period helps determine how long to hold onto an investment. You might use this method if you’re trying to compare multiple investments to see which one is a better fit for your personal investing timeline. But if you want to get a sense of the total return you’re likely to realize, then you’d still want to apply the net present value formula.

Benefits and Drawbacks of NPV

Net present value can help analyze and evaluate business projects or personal investments. You can easily see at a glance what you could stand to gain — or lose — from making a particular investment. But the NPV formula does have some limitations that are important to be aware of.

Benefits of NPV

Net present value’s main advantage is that it takes the time value of money into consideration. By looking at discounted cash flows you can get a better understanding of the viability of an investment, based on what you’ll get out of it versus what you’ll put in.

This can help with decision-making when choosing investments for your portfolio or making strategic capital investments in a business. Net present value calculations can also help companies with projecting future value based on the investments they make today.

Drawbacks of NPV

The biggest disadvantage or flow associated with net present value is that results depend on the quality of the information that’s being used. If your projections for future cash flows are off, that can produce inaccurate results when using the net present value formula.

NPV can also overlook some hidden costs involved in an investment or project which may detract from total returns. It also doesn’t take into account the margin of safety, or the difference between an investment’s price and its value.

Finally, it’s difficult to use net present value to evaluate projects or investments that are different in size or nature, as the input values are likely to be very different.

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How Investors Can Use NPV

You can use NPV to evaluate stocks and other securities, including alternative investments, based on your time frame and projected profits. With stocks, for example, net present value can give you an idea of whether a company is a good buy or not by calculating NPV per share.

To do that, you’d divide the company’s net present value by the number of outstanding shares in the company to get this number. If the net value per share is higher than the stock’s current market price, then the stock could be considered a good buy. On the other hand, if the net value per share is below the stock’s current market price that suggests you might lose money if you decide to buy in.

The Takeaway

As discussed, Net present value, or NPV, represents the difference between the present value of cash inflows and outflows over a set period of time. Understanding the net present value formula can help with making smarter investment decisions.

As with any tool, most investors use NPV along with other financial ratios and forms of analysis before deciding whether to purchase any asset. If you have questions about how NPV can be used as a part of an investment strategy, it may be worthwhile to consult with a financial professional.

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.

FAQ

Is a higher NPV better?

A higher NPV isn’t necessarily a good thing or means that an investment is better than another investment. But in general, a good NPV is a number that’s higher than zero.

What is the basic NPV investment rule?

The basic NPV investment rule is that projects or investments should only be pursued if they’ll lead to gains or productive gains.

Is NPV the same as profit?

NPV is not the same thing as profit, although a positive NPV is indicative of profit, while negative NPV is related to a loss.

Is a NPV of 0 acceptable?

An NPV of zero means that a project or investment isn’t expected to produce significant gains or losses. Whether that’s acceptable or not is up to the individual making the investment decision.

When should NPV not be used?

NPV might not be helpful or useful for comparing investments of drastically different sizes, or projects of different sizes.

Is Excel NPV accurate?

Excel’s NPV calculations should be accurate, but they’re only as accurate as the data that’s entered to make the calculation. So, it could be inaccurate, and it’s a good idea to double-check the calculation.

Photo credit: iStock/Sanja Radin

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.

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.
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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