Relative Strength Index (RSI) Explained

Relative Strength Index (RSI) Explained

Relative Strength Index, or RSI, is a momentum indicator used to measure a stock’s price relative to itself and its past performance. Developed by technical analyst J. Welles Wilder, the Relative Strength Index focuses purely on individual stock price movements to identify trading trends for a specific security, based on the speed and direction of those price changes.

RSI allows swing investors to compare the price of something to itself, without factoring in the performance of other stocks or the market as a whole. Investors use RSI to pinpoint positive or negative divergences in price for a security or to determine whether a stock is overbought or oversold.

The RSI indicator is useful in technical analysis, which revolves around finding trends in stock movements to determine optimal entry and exit points. Understanding what the Relative Strength Index measures and how it works is central to a technical trading strategy.

What is RSI in Stocks?

The Relative Strength Index is a rate of change or momentum oscillator that tracks stock price movements. You can visualize it as a line graph that moves up or down, based on a stock’s price at any given time. The Relative Strength Index operates on a scale from 0-100. Where the RSI indicator is within this range can suggest to trend traders whether a stock has reached an overbought level or if it’s oversold.

RSI is not the same thing as Relative Strength analysis. When using a Relative Strength Comparison (RSC), you’re comparing two securities or market indexes to one another to measure their relative performance.

How Does the RSI Indicator Work?

The Relative Strength Index operates on a range from 0-100. As stock prices fluctuate over time, the index can move up or down accordingly. Traders typically use the RSI to track price movements over 14 periods (i.e. trading days), though some may use shorter or longer windows of time.

When the RSI indicator reaches 70 or above, it could mean the underlying asset being measured is overbought. An RSI reading of 30 or below, on the other hand, suggests that the asset is oversold. The length of time a stock remains in overbought or oversold territory depends largely on the strength of the underlying trend that’s driving price movements.

The Relative Strength Index can throw off different patterns, depending on whether stocks are in a bull market or bear market. Investors compare the movements of the RSI indicator with actual price movements to determine whether a defined pricing trend actually exists and, if so, in which direction it might be heading. Analyzing moving averages for the stock can help determine the presence of a clear pricing trend.

Recommended: 5 Bullish Indicators for a Stock

RSI Formula

Here’s what the Relative Strength Index formula looks like:

RSI = 100 – (100 / (1 + RS))

In this formula, RS represents the ratio of the moving average of the tracking period’s gains divided by the absolute value of the moving average of the tracking period’s losses.

Here’s another way you might see the Relative Strength Index formula displayed:

RSI = 100 – [100 / ( 1 + (Average of Upward Price Change / Average of Downward Price Change ) ) ]

The RSI formula assumes that you’re able to follow a stock’s pricing changes over your desired tracking period. More importantly than that, however, is knowing how to make sense of Relative Strength Index calculations, which investors often display via a stock oscillator.

Interpreting RSI Results

Reading the Relative Strength Index isn’t that difficult when you understand how the different ranges work. Depending on where the RSI indicator is for a particular stock or market index, it can tell you whether the market is bullish or bearish. You can also use the RSI, along with other technical analysis indicators, to determine the best time to buy or sell.

Above 70

An RSI reading of 70 or higher could indicate that a stock is overbought and that its price might move back down. This could happen through a reversal of the current price movement trend or as part of a broader correction. It’s not unusual for stocks to have an RSI in this range during bull market environments when prices are rising. If you believe that the stock’s price has reached or is approaching an unsustainable level, an RSI of 70 or higher could suggest it’s time to exit.

Below 30

When a stock’s RSI reading is 30 or below, it typically means that it’s oversold or undervalued by the broader market. This could signal a buying opportunity for value investors but it could also indicate the market is turning bearish. It’s more common to see RSI readings of 30 or below during downtrends when stock prices may be in decline across the board.

40 to 90 Range

During bull markets, it’s not uncommon to see the Relative Strength Index for a stock linger somewhere in the 40 to 90 range. It’s less common to see the RSI dip to 30 or below when prices are steadily moving up. An RSI reading of 40 to 50, roughly the middle of the 0-100 scale can indicate support for an upward trend.

10 to 60 Range

In bear markets, or those filled with fear, uncertainty, and doubt, it’s more common to see the Relative Strength Index hover somewhere in the 10 to 60 range. It’s not unusual for stocks to reach 30 or below when the market is already in a downward trend. The middle point of the RSI can act as a support point, though the range shifts slightly to between 50 and 60.

Common RSI Indicators

Relative Strength Index indicators can help investors spot pricing trends. That includes identifying up and down trends, as well as sideways trends when pricing levels consolidate. The reliability of these indicators often hinges on the current phase of a stock or the market as a whole. When reading RSI indicators, it’s important to understand divergence and swing rejections.

Divergence

A divergence represents a variation or disagreement between the movement of the RSI indicator and the price movements on a stock chart. For example, a bullish divergence means the indicator is making higher lows while the price movement is establishing lower lows. This type of divergence can hint at increasing bullish momentum with a particular stock or the greater market.

A bearish divergence, on the other hand, happens when the indicator is making lower highs while prices are establishing higher highs. This could indicate that investor sentiment is becoming less bullish.

Swing Rejections

A swing rejection is a specific trading technique that involves analyzing RSI movements when pushing above 30 or below 70. Swing rejections can be bullish in nature or bearish.

For example, a bullish swing rejection has four parts or steps:

•   RSI is at an oversold level

•   RSI moves above 30

•   A dip is recorded without rating as oversold

•   RSI passes its recent high

Meanwhile, a bearish swing rejection also has four parts or steps:

•   RSI reaches an overbought level

•   RSI drops below 70

•   RSI hits new highs without dropping back to overbought levels

•   RSI passes recent lows

Swing rejections make it possible to utilize divergence indicators to spot bullish or bearish trends in their earliest stages.

Is RSI a Good Indicator to Use?

Yes, in certain circumstances. Relative Strength Index can be a good indicator to use in technical analysis, as it can make it easier to detect when a stock or the broader market is overbought or oversold. Understanding how to interpret RSI and its correlation to price movements could help you spot buy or sell signals and detect bull market or bear market trends.

That said, RSI also has some limitations. For example, the RSI can produce false positives or false negatives when bullish or bearish trends don’t align with the way a stock’s price is moving. Like other technical analysis indicators, it’s not an exact way to gauge the market’s momentum. So if stocks are hovering somewhere in the 40 to 60 range, it may be difficult to decipher whether the mood is bearish or bullish.

When using RSI, it’s helpful to incorporate other technical analysis indicators to create a comprehensive picture of the market. Exponential moving average (EMA), for example, is a type of moving average that uses the weighted average of recent pricing data to draw conclusions about the market.

Traders often use RSI in conjunction with other trend indicators, such as the Moving Average Convergence Divergence, the Stochastic Oscillator, or the Volume-Weighted Average Price.

RSI vs MACD

Moving Average Convergence Divergence (MACD) is a technical analysis indicator that investors may use alongside RSI. This indicator can help them determine when to buy or sell, based on the correlation between two moving averages for the same security.

Specifically, it requires looking at a 12-period moving average and a 26-period moving average. To find the MACD line, you’d subtract the 26-period from the 12-period, resulting in a main line. The next step is creating a trigger line, which is the nine-period exponential moving average of the main line. The interactions between these two lines can generate trading signals.

For example, when prices are strongly trending in a similar direction the main line and trigger line tend to move further apart. When prices are consolidating, the lines move closer together. If the main line crosses the trigger line from below, that can produce a buy signal. If the main line crosses the trigger line from above, that can be construed as a signal to sell.

While RSI and MACD are both trend indicators, there are some differences. Relative Strength Index measures the distance between pricing highs and lows. So you’re looking at the average gain or loss for a security over time, which again usually means 14 periods. The MACD, on the other hand, focuses on the relationship between moving averages for a security. It’s a trend-following signal that, like RSI, can indicate momentum.

RSI vs Stochastic Oscillator

The stochastic oscillator is a momentum indicator for technical analysis that shows where a stock’s closing price is relative to its high/low pricing range over a set period of time. The stochastic oscillator can also be used to track pricing for a market index.

Central to the use of the stochastic oscillator is the idea that as a stock’s price increases, the closing price inches closer to the highest point over time. When the stock’s price decreases, the closing price lands closer to the lowest low. Investors use this indicator to determine entry and exit points when making trades.

However, investors interpret RSI and stochastic oscillator readings differently. For example, with a stochastic oscillator, a reading of 20 or below generally means a stock is oversold, versus the 30 or below range for RSI readings. When used together, Relative Strength Index and stochastic oscillators can help with timing trades to maximize profit potential while minimizing the risk of losses.

Can You Use RSI to Time the Crypto Market?

Stocks are not the only asset class for which investors use the RSI. Investors also use the Relative Strength Index to assess conditions in the crypto markets and whether it’s time to sell or continue to HODL.

Cryptocurrency traders may use RSI to gauge momentum for individual currencies. Again, they’re looking at the highs and lows to get a sense of which way prices are moving at any given time. The RSI indicator can help with choosing when to buy or sell, based on previous price movements.

The same rules apply to crypto that apply to stocks: An RSI reading of 70 or above means overbought while a reading of 30 or below means oversold. Likewise, a reading above 50 signals a bullish trend while a reading below 50 can signal a bearish trend. Investors can also use a bearish divergence or bullish divergence to spot a pullback or an upward push.

As with stocks, however, it’s important to remember that RSI is not 100% accurate.

Recommended: Crypto Technical Analysis: What It Is & How to Do One

The Takeaway

If you’re interested in technical analysis and trending trading, RSI can be a useful metric for making investment decisions. The RSI is just one tool that you can use to devise a strategy for your portfolio.

When you’re ready to start building that portfolio, a SoFi Invest® brokerage account can help. You use it to trade stocks, ETFs or crypto and participate in IPOs to create a diversified portfolio. And if you prefer a more hands-off approach, you can try automated portfolios for a streamlined investing experience.

Photo credit: iStock/


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.
SOIN0921400

Read more
What You Need to Know About Margin Balance

What You Need to Know About Margin Balance

Trading stocks and other securities on margin allows investors to expand their purchasing power. Margin trading simply means borrowing money from a brokerage to purchase securities. Margin balance is the amount of money an investor owes to the brokerage.

When an investor uses the brokerage’s funds to buy securities, this results in a margin debit balance. Similar to a credit card or traditional loan, a margin balance is a line of credit that the borrower must repay with interest.

Having a margin balance outstanding is common in margin trading, but investors should understand the implications of owing money to a brokerage — and what can happen if you’re subject to a margin call.

What Is Margin Balance?

Margin balance is the amount of money an investor owes to its brokerage at any given time in a margin trading account. When an investor opens a margin account, they must make an initial deposit, called the “minimum margin.” The Financial Industry Regulatory Authority (FINRA) requires a minimum margin of at least $2,000, though some brokerages may require a higher minimum.

After making that deposit to their brokerage account, investors can then trade using an initial margin. Federal Reserve Board Regulation T allows investors to borrow up to 50% of the purchase price of securities when trading on margin. So, for example, a margin trader could purchase $10,000 worth of stocks using their own funds and another $10,000 using the brokerage’s funds. The $10,000 borrowed from the brokerage -represents the investor’s margin balance.

You can trade a variety of securities in a margin account, including stocks, and derivatives such as options or futures.

The rules for margin balance forex are slightly different. In forex trading, margin represents collateral or security that an investor must deposit with the brokerage to start trading. The brokerage typically sets this as a percentage of the trading order.

How Margin Balance Works

Margin balance allows investors to borrow money, then repay it to the brokerage with interest. A negative margin balance or margin debit balance represents the amount subject to interest charges. This amount is always either a negative number or $0, depending on how much an investor has outstanding.

Unlike other types of loans, margin balance loans do not have a set repayment schedule. Investors can make payments toward the principal and interest through their brokerage account at a pace convenient for them. They can also deposit cash into their margin accounts or sell off margin securities to reduce their margin balance.

Margin Calls

While there is some flexibility associated with paying off a negative margin balance, investors should understand their interest charges as well as the possibility of being subject to a margin call. Margin calls essentially act as a stopgap risk management tool for the brokerage.

In addition to the minimum margin and the initial margin requirements, investors must observe maintenance margin guidelines. This represents a minimum amount of equity the investor must keep in their account. Under FINRA rules, the maintenance requirement is at least 25% equity, based on the value of the margin account. Some brokerages may raise this to 30%, 40% or more.

Using the previous example, assume that an investor deposits $10,000 of their own money and borrowers $10,000 from their brokerage to invest in marginable securities. Now, say that the investment doesn’t go as planned and the stock’s value drops. That initial $20,000 investment is now worth $10,000. When the margin debit balance of $10,000 is subtracted, that results in a net balance of $0, meaning the trader has zero equity and does not meet the maintenance margin requirements.

At this point, the brokerage may initiate a margin call which would require the investor to deposit more cash into their account in order to continue trading. If an investor can not add more cash to cover the maintenance margin requirement, the brokerage may sell off securities from the account to recoup the negative margin balance.

Negative Margin Balance

A negative margin balance in a margin account represents what’s owed to the brokerage. Depending on the brokerage, the margin debit balance may be listed inside parentheses or have a negative symbol in front of it.

Margin Balance Example

For example, an investor who has a negative margin balance of $12,225 may see one of the following when logging into their account:

•   Margin balance: -$12,225

•   Margin balance: ($12,225)

They both mean the same thing: that investor owes the brokerage $12,225 for trading on margin.

If a trader’s margin balance shows as a positive amount, that means they have a margin credit balance rather than a margin debit balance. A credit balance can occur if an investor sells off shares to clear their negative margin balance but the settlement amount is more than what they owe to the brokerage.

How Margin Balance Is Calculated

Brokerages can lend investors money on margin but in exchange for this convenience, they can charge those investors interest, or margin rates. The level of those rates depends on the brokerage and the type of securities that you’re trading. Many brokerages use a benchmark rate, known as a broker call rate or call money rate, then tier that rate across different margin account balances.

Brokerages can use this as a baseline rate, then add or deduct percentage points. Generally, the larger the margin account balance, the deeper the margin rate discount. Meanwhile, traders who maintain lower margin balances tend to pay higher interest rates. So, an investor with less than $25,000 in their account might pay 7%-8% for margin rates while an investor with over $1 million in their account might pay 4%-5% instead.

Brokerages typically calculate margin interest on a daily basis and charge it to an investor’s account monthly. The interest charges on a margin account can directly affect the net return realized from an investment. Higher margin rates can increase the rate of return needed to break-even on an investment or realize a profit on a stock.

Managing Your Margin Balance

Managing a margin account and margin balances begins with understanding the risks involved, including the possibility of a margin call. The value of your securities can impact your margin balance, and increased volatility could cause the value of margin securities to drop, which could put you below the maintenance margin requirements. You’d then need to deposit more money to your account to continue trading.

Maintaining a cushion of funds inside your margin account could help avoid margin calls. Alternatively, you may keep a reserve of funds elsewhere that you could transfer to your margin account if increased volatility threatens to diminish the value of margin securities in your portfolio.

It’s also important to consider how much money you’re comfortable owing to your brokerage at any given time. Setting a cap on the maximum margin can help you avoid overextending yourself. You can also keep margin balances under control by scheduling regular cash deposits or routinely selling securities to reduce what’s owed. One strategy is to pay enough to cover the interest each month to keep your balance from ballooning.

The Takeaway

When you open a brokerage account, you can choose either a cash account or a margin account that allows you to engage in margin trading. Margin trading is a more advanced investment strategy that requires some know-how of the markets and a willingness to accept higher levels of risk. If you’re just getting started with trading, you may prefer to stick with stocks, exchange-traded funds (ETFs) or cryptocurrency instead.

One way to get started trading is by opening an online brokerage account on the SoFi Invest® investment platform. You can begin building a portfolio online in minutes, with low investment minimums and no hidden fees.

Photo credit: iStock/AndreyPopov


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.
SOIN1021447

Read more
Inherited IRA: Distribution Rules for Beneficiaries

Inherited IRA Distribution Rules Explained

When an IRA or 401(k) account holder passes away, they might choose to leave their account to a loved one. But whether the recipient is surprised or knew about the inheritance ahead of time, they may have questions about what to do with this inherited IRA.

The key to properly handling an inherited IRA is to understand what it means for you as a beneficiary. Your relationship with the deceased, for example, could impact the tax consequences on the inheritance. But having an inherited IRA on your hands can also be a tremendous financial opportunity. Here’s what you should know moving forward if you’re the beneficiary of an IRA.

What is An Inherited IRA?

An inherited IRA, also called a beneficiary IRA, is a type of account you open to hold the funds passed down to you from a deceased person’s IRA. The original retirement account could have been any IRA, such as a Roth, traditional IRA, SEP IRA, or SIMPLE IRA. The deceased’s 401(k) plan can also be used to fund an inherited IRA.

Spouses won’t necessarily need to open an inherited IRA, because spouses are allowed to transfer any inherited assets directly into their own retirement accounts. However, any other beneficiary of the deceased’s account will need to open an inherited IRA, whether or not they already have a retirement account.

Some people prefer to open their inherited IRA account with the same firm that initially held the money for the deceased. It can make it simpler for the beneficiary while planning after the loved one’s passing. However, you can set up your account with almost any bank or brokerage.

Recommended: What is an Inherited 401(k)?

How Does an Inherited IRA Work?

When it comes to IRAs, there are two types of beneficiaries: designated and non-designated. Designated includes people, such as a spouse or friend. Non-designated beneficiaries are entities like estates, charities, and trusts.

This article focuses on designated beneficiaries. While your relationship with the deceased may impact your options and any rules surrounding your inherited IRA account, as can the age of the deceased at the time of death, certain rules apply to everyone:

1.    You cannot make additional contributions to the inherited IRA. You can only make changes to the investments or buy and sell assets held by the IRA.

2.    You must withdraw from the inherited IRA. The required minimum distribution (RMD) rules depend on your age and relationship to the deceased, but withdrawals are required even if the original IRA was a Roth IRA (which typically does not have RMD requirements).

What are The RMD Rules For Inherited IRAs?

When it comes to required minimum distributions, different rules apply to spouses and non-spouses.

One recent difference between the rules for spouse and non-spouse beneficiaries is a result of the SECURE Act, established in early 2020. It states that non-spouse beneficiaries have to withdraw all the funds from their inherited IRA within a maximum of 10 years. After that time, the IRS will impose a 50% penalty tax on any funds remaining.

Spouses, on the other hand, can enjoy the benefits of what’s called a “stretch IRA”. You take yearly distributions from the account based on your own life expectancy, even if the original owner was older than 72. In this way, you “stretch” the distributions to match your lifetime, rather than that of the original account holder.

RMD Rules for Spouses

Once a spouse takes ownership of the deceased’s IRA account, they can either roll the assets into their own pre-existing IRA within 60 days, or transfer funds to their newly opened inherited IRA, they can withdraw based on their age.

Note that taking a distribution from the account if you are under age 59 ½ results in a 10% early withdrawal penalty.

RMD Rules for Non-Spouses

For non-spouses (relatives, friends, and grown children), once you’ve opened an inherited IRA and transferred the inherited funds into it, RMDs must start before December 31st following a year from the death. All assets must be withdrawn within 10 years, though there are some exceptions: if the heir is disabled, more than a decade younger than the original account owner, or a minor.

How Do I Avoid Taxes on An Inherited IRA?

Money from IRAs is generally taxed upon withdrawals, so your ordinary tax rate would apply to any tax-deferred IRA that was inherited — traditional, SEP IRA, or SIMPLE IRA.

However, if you have inherited the deceased’s Roth IRA, which allows for tax-free distributions, you should be able to make withdrawals tax-free, as long as the original account was set up at least five years ago.

Spouses who inherit Roth accounts have an extra opportunity to mitigate the bite of taxes. Since spousal heirs have the power to take ownership of the original account, they can convert their own IRA into a Roth IRA after the funds roll over. Though the spouse would be expected to pay taxes on the amount converted, it may ultimately be financially beneficial if they expect higher taxes during their retirement.

Recommended: Is a Backdoor Roth IRA Right For You?

The Takeaway

Once you inherit an IRA, it’s up to you to familiarize yourself with the inherited IRA rules and requirements that apply to your specific situation. No matter what your circumstance, inheriting an IRA account has the potential to put you in a better financial position in your own retirement.

SoFi Invest® offers Traditional, Roth, and SEP IRAs. And investors curious about other investment opportunities can also explore active or automated investing with SoFi.

Find out how to get started with SoFi Invest.

Photo credit: iStock/shapecharge


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
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.
SOIN0821342

Read more
What are Smart Contracts: 2021 Guide

2022 Guide to Smart Contracts

While the best known use of the blockchain is to store and transmit digital currencies, the blockchain also has many other uses. Among those uses are smart contracts, which makes use of the blockchain technology to automatically execute all or part of the agreements between two parties.

Some users are already using them to do business in the real estate and insurance industries, and they’re a big part of the decentralized finance industry.

Recommended: 9 Blockchain Uses and Applications in 2022

What Is a Smart Contract?

A smart contract is a digitally facilitated agreement between two parties that’s written in code into the blockchain technology. The code automatically executes the terms of the contract when agreed upon conditions occur. There is no third-party required to enforce the terms of the agreement.

How Do Smart Contracts Work?

Rather than having people and institutions back up a contract’s provisions, the blockchain automatically enforces it — “every node in the network holds a copy of the transaction and smart-contract history of the network. Every time a user performs some action, all of the nodes on the network need to come to agreement that this change took place,” according to Coindesk. This feature of smart contracts leverages the security of blockchain technology.

A Short History of Smart Contracts

The idea behind smart contracts predates the blockchain technology that made them possible. Cryptography and digital currency pioneer Nick Szabo, first used the term in the 1990s to describe “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

What makes smart contracts “smart,” according to Szabo is that the contract is specified in a computer program or in code, that the contract is executed digitally, and that the exchange of goods that happens due to fulfillment or non-fulfillment happens in the same code or program in which the contract itself was written.

What helped make self-executing, smart contracts a reality was the development of the cryptocurrency Ethereum blockchain, which enables Ethereum.

Smart Contract Examples

While smart contracts are still a relatively new technology, several use cases for them have already emerged.

Decentralized Finance

Perhaps the most obvious arena for smart contracts is, well, money. After all, cryptocurrency is used as just that, a currency, and finance often consists of contracts between two parties surrounding the exchange of money over time.

Think of a typical loan payment, it’s a contract under which one party provides another with a certain amount of money and the other party agrees to transfer money back to the first party at certain dates and in certain amounts, if the borrower does not pay the lender, the lending party can commence legal action against the borrower.

Decentralized finance” seeks to use smart contracts to create financial products like loans that do not rely on third parties. Decentralized finance or “DeFi,” is one of the hottest areas of blockchain technology.

There are several examples of smart contracts in decentralized finance. One of the most prominent are “stablecoins” — cryptocurrency tokens with a fixed value. One stablecoins, Dai, is pegged at a one-to-one value with the dollar. Dai uses smart contracts for the creation of new tokens and governance of the entire token ecosystem.

Recommended: What Is a Stablecoin? A Closer Look

In practice, that means that if a user wants to issue new Dai tokens, they need to stake ethereum as a collateral. If the value of that underlying collateral falls below a certain threshold, the smart contract automatically sells the collateral in order to make up the difference.

Real Estate

One of the most enticing areas to use blockchain is in real estate. When purchasing a home, for example, you set up a contract with a bank and money transfers with the previous owners in exchange for what are essentially a set of legal rights to a property. This process is time-intensive, requires various agents and lawyers on both sides, as well as several complex transfers of money both at one time and over years. This is an area where smart contract developers have been hungry to get into.

While it’s unlikely that you’ll move into the house of your dreams by executing a smart contract, blockchain developers are looking into real estate by “tokenizing” properties, divvying up real estate into slices that investors can own or trade (including through smart contracts).

Here are a few companies already using smart contracts in real estate:

•  Harbor is using smart contract to tokenize a $100 million real estate fund.

•  DigiShares allows real estate developers to tokenize their projects using smart contracts.

•  Ubiquity uses black-chain based smart contracts to tokenize real estate and help reduce costs during escrow.

•  SmartZip, a real estate software company, has partnered with blockchain firm Chainlink to provide real estate pricing data to smart contracts.

•  Propy is a blockchain startup that facilitates real estate escrow through smart contracts.

Insurance

Insurance is another example of a complicated financial contract that many entrepreneurs and developers are looking to deploy blockchain technology in. Blockchain in insurance can mean a lot of things.

One possible model for it is “parametric insurance,” which pays out automatically under certain conditions that are definable in code in a smart contract. This is still an emerging area, but since the insurance industry relies on millions of contracts, it’s a natural area for blockchain smart contract developers to look into.

Here are a few ways smart contracts are actually being used in the insurance industry:

•  The Institutes RiskStream Collaborative is a consortium of 40 insurance industry members working together to build blockchain applications for industry use

•  IBM uses its blockchain technology to automate insurance underwriting using smart contracts.

•  Etherisc is a decentralized insurance protocol insurers are using for smart contracts and other services.

•  Sprout is an insurer that uses smart contracts to provide crop insurance to farmers.

•  Nexus Mutual serves as a decentralized insurance platform that aims to eliminate the need for third-party insurers.

The Takeaway

Smart contracts are one use for the blockchain, made possible in many cases through the adoption of cryptocurrency. Many investors view cryptocurrency, and the blockchain that makes it possible, as an important part of their investment portfolio.

An easy way to get started investing in crypto is by opening an account on the SoFi Invest® brokerage platform. SoFi Invest offers access to a range of cryptocurrencies including Bitcoin, Litecoin, and Ethereum, with up to a $10 bonus for your first trade.

Photo credit: iStock/fizkes


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
SOIN0421179

Read more
hands passing cash

The Fastest Ways to Get Your Tax Refund

Learning that you are eligible for a tax refund can be a welcome surprise.

And, if you have any pressing expenses–maybe you’re behind on a few bills or have been putting off going to the dentist because of the cost–you may be wondering how you might be able to get that money into your hands quickly.

Fortunately, there are a few simple things any taxpayer can do to help ensure that their refund comes as fast as possible.

This includes e-filing with the IRS (rather than physically mailing in your return), and also setting up direct deposit, so there’s no waiting for that refund check to come through the mail.

How Can I Get My Tax Refund Faster?

Here are some key steps you may want to take (starting well before April 15th) to help ensure that you get your tax refund ASAP.

Starting Planning in January

In general, the fastest way to get your tax refund is to file your taxes early, and certainly by the tax deadline.

This means that, starting in January, you may want to begin collecting all the necessary information for filling out your tax forms, and decide whether you are going to file on your own, or hire a tax preparation service or accountant to help.

Choosing Electronic Filing Instead of Mail

To get your refund faster, it’s a good idea to choose electronic filing instead of sending in your return by mail.

That way, your refund can begin moving through the system immediately, rather than having to wind its way through snail mail and hands-on refund processing.

A paper tax return can take about six to eight weeks to process, but with electronic filing, or e-filing, taxpayers can typically expect to receive their refund within 21 days.

The Internal Revenue Service (IRS) offers a few options for e-filing .

If taxpayers make an adjusted gross income (AGI) of $72,000 or less per year, then they can use IRS Free File to turn in their tax forms.

For taxpayers whose AGI is greater than $72,000, they can use the IRS’s Free File Fillable Forms service, which lets you simply input your data onto your tax forms so you can e-file (if you choose this option, you’ll need to know how to prepare your own tax return).

The IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) programs also provide help and e-file for taxpayers who qualify.

Most states also offer free e-filing options for state returns.

Taxpayers can also use tax preparation software such as TurboTax, TaxSlayer, TaxAct, or H&R Block. You can use these program to file your taxes yourself, or
go to a professional who knows how to use this type of software.

The IRS has a helpful tool on their website where taxpayers can find an authorized IRS e-file Provider Locator . All taxpayers have to do is input their zip code and choose what kind of provider they need.

Setting Up Direct Deposit

The fastest way to get your tax refund is to have it electronically deposited into your financial account. This is known as direct deposit, and the service is free.

It’s also possible to break up your refund and have it deposited into one, two or even three accounts.

You can set up direct deposit simply by selecting it as your refund method through your tax software, and then inputting your account number and routing number (which you can find on your personal checks, or through your financial institution).

Or, you can tell your tax preparer that you want direct deposit.

It’s also possible to select direct deposit if you’re filing by paper and sending your return through the mail (you may want to double check to make sure you didn’t make any errors inputting your financial account information).

What Is the Fastest Tax Refund Time?

As long as taxpayers have e-filed by the deadline and chosen direct deposit, then the refund should hit their account within 21 days. According to the IRS , nine out of 10 refunds arrive in less than 21 days.

Finding Out Where Your Refund Is

Once everything is filed, taxpayers can check their tax refund status on the IRS’s Where’s My Refund? page.

This requires inputting your Social Security number or ITIN, filing status, and the exact amount of the refund, which can be found on the tax forms that were submitted.

Taxpayers can check Where’s My Refund? Starting 24 hours after e-filing.

The site is updated daily, usually at night. The IRS cautions that you may experience delays in getting your refund if you file by mail, or you are responding to a notice from the IRS.

If it’s been more than 21 days and you still haven’t received your refund, you can call the IRS at (800) 829-1040 for help. You may also want to contact the IRS if Where’s My Refund? instructs you to do so.

Can You Get Your Tax Return Back the Same Day?

Unfortunately, there is currently no way to get a tax refund back the same day.

However, if taxpayers are in a bind, some tax preparation services offer 0% interest tax refund loans.

Tax refund loans, also called “refund advances,” allow you to access your refund early, but you may want to keep in mind that tax preparers typically charge fees for filing tax returns.

If you are paying a tax preparer just to get the advance, you’ll essentially be paying a company in order to access your refund. In addition, some providers may charge an additional fee for the advance service.

These short-term loans range from $200 to $4,000. In some cases, there may be a minimum amount your refund must meet in order to qualify for a refund advance (how much can vary from one company to another). Also, you may only get part of your expected refund in advance.

Some companies may offer to give you a prepaid card with the loan amount on it within 24 hours.

Once your tax refund is issued, the tax preparer will typically deduce the loan amount from your refund.

If you’d rather not pay any fees, however, you may also want to look into other options.

For instance, if you have bills that are due, it may be worth calling up your providers or credit card companies to see if they can extend their due date while you are waiting for your refund.

Or, if you have a 0% interest credit card, you might want to charge an urgent expense on that card, and then pay it off as soon as the refund comes in.

What’s the Best Way to Spend Your Tax Refund?

If you are carrying any high interest debt, one smart move might be to put your tax refund towards minimizing that debt, or, if possible, wiping it out all together.

Doing this can help you avoid spending more money just on interest charges, and may also help boost your credit score (which may help you qualify for loans and credit cards with lower interest rates in the future).

Or, you might consider using your tax refund to jump-start one of your current savings goals, such as building up an emergency fund, a downpayment on a home, or buying a new car.

For an emergency fund or savings goals you hope to accomplish within the next few years, you may want to put your refund in a high-yield savings account or cash management account.

These options typically offer a higher return than a traditional savings account, but allow you access your money when you need it.

Your tax refund can also help you start saving for the longer term, such as retirement or paying for a child’s education. Using a tax refund to buy investments can help you create additional wealth over time.

The Takeaway

To get your tax refund as quickly as possible, it’s a good idea to file early, and, if possible, avoid the mail.

That means filing electronically (using the IRS’s free service or tax software, or hiring a tax pro), and signing up for direct deposit when you file.

It’s also wise to keep track of your refund on the IRS site, and reach out to the agency if you haven’t received your refund within three weeks.

Getting a refund and looking for a good place to put it? Consider opening a SoFi Money® account.

SoFi Money is a cash management account that allows you to earn a competitive interest rate, save, as well as spend, all in one place. And you’ll pay zero account fees to do it.

You can have your tax refund directly deposited into your SoFi account, and also set up direct deposit for your paycheck (all you need to do is fill out a form, sign it, and submit it to your employer’s payroll department).

Sign up now and start reaping the benefits of a SoFi Money account today.


SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
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.
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.
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.
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.
SOCO20114

Read more
TLS 1.2 Encrypted
Equal Housing Lender