What Are Equity Derivatives & Equity Options?

What Are Equity Derivatives?

Equity derivatives are trading instruments based on the price movements of underlying asset equity. These financial instruments include equity options, stock index futures, equity index swaps, and convertible bonds.

With an equity derivative, the investor doesn’t buy a stock, but rather the right to buy or sell a stock or basket of stocks. To buy those rights in the form of a derivative contract, the investor pays a fee, more commonly known as a premium.

How are Equity Derivatives Used?

The value of an equity derivative goes up or down depending on the price changes of the underlying asset. For this reason, investors sometimes buy equity derivatives — especially shorts, or put options — to manage the risks of their stock holdings.

4 Types of Equity Derivatives

1. Equity Options

Equity options are one form of equity derivatives. They allow purchasers to buy or sell a given stock within a predetermined time period at an agreed-upon price.

Because some equity derivatives offer the right to sell a stock at a given price, many investors will use a derivatives contract like an insurance policy. By purchasing a put option on a stock or a basket of stocks, can purchase some protection against losses in their investments.

Recommended: How to Trade Options

Not all put options are used as simple insurance against losses. Buying a put option on a stock is also called “shorting” the stock. And it’s used by some investors as a way to bet that a stock’s price will fall. Because a put option allows an investor to sell a stock at a predetermined price, known as a strike price, investors can benefit if the actual trading price of the stock falls below that level.

Call options, on the other hand, allow investors to buy a stock at a given price within an agreed-upon time period. As such, they’re often used by speculative investors as a way to take advantage of upward price movements in a stock, without actually purchasing the stock. But call options only have value if the price of the underlying stock is above the strike price of the contract when the option expires.

For options investors, the important thing to watch is the relationship between a stock’s price and the strike price of a given option, an options term sometimes called the “moneyness.” The varieties of moneyness are:

•   At-the-money (ATM). This is when the option’s strike price and the asset’s market price are the same.

•   Out-of-the-money (OTM). For a put option, OTM is when the strike price is lower than the asset’s market price. For a call option, OTM is when the strike price is higher than the asset’s market price.

•   In-the-money (ITM). For a put option, in-the-money is when the market price of the asset is lower than the option’s strike price. For a call option, ITM is when the market price of the asset is higher than the option’s strike price.

The goal of both put and call options is for the options to be ITM. When an option is ITM, the investor can exercise the option to make a profit. Also, when the option is ITM, the investor has the ability to resell the option without exercising it. But the premiums for buying an equity option can be high, and can eat away at an investor’s returns over time.

Recommended: How to Sell Options for Premium

2. Equity Futures

While an options contract grants the investor the ability, without the obligation, to purchase or sell a stock during an agreed-upon period for a predetermined price, an equity futures contract requires the contract holder to buy the shares.

A futures contract specifies the price and date at which the contract holder must buy the shares. For that reason, equity futures come with a different risk profile than equity options. While equity options are risky, equity futures are generally even riskier for the investor.

One reason is that, as the price of the stock underlying the futures contract moves up or down, the investor may be required to deposit more capital into their trading accounts to cover the possible liability they will face upon the contract’s expiration. That possible loss must be placed into the account at the end of each trading day, which may create a liquidity squeeze for futures investors.

Equity Index Futures and Equity Basket Derivatives

As a form of equity futures contract, an equity index futures contract is a derivative of the group of stocks that comprise a given index, such as the S&P 500, the Dow Jones Industrial Index, and the NASDAQ index. Investors can buy futures contracts on these indices and many others.

Being widely traded, equity index futures contracts come with a wide range of contract durations — from days to months. The futures contracts that track the most popular indices tend to be highly liquid, and investors will buy and sell them throughout the trading session.

Equity index futures contracts serve investors as a way to bet on the upward or downward motion of a large swath of the overall stock market over a fixed period of time. And investors may also use these contracts as a way to hedge the risk of losses in the portfolio of stocks that they own.

3. Equity Swaps

An equity swap is another form of equity derivative in which two traders will exchange the returns on two separate stocks, or equity indexes, over a period of time.

It’s a sophisticated way to manage risk while investing in equities, but this strategy may not be available for most investors. Swaps exist almost exclusively in the over-the-counter (OTC) markets and are traded almost exclusively between established institutional investors, who can customize the swaps based on the terms offered by the counterparty of the swap.

In addition to risk management and diversification, investors use equity swaps for diversification and tax benefits, as they allow the investor to avoid some of the risk of loss within their stock holdings without selling their positions. That’s because the counterparty of the swap will face the risk of those losses for the duration of the swap. Investors can enter into swaps for individual stocks, stock indices, or sometimes even for customized baskets of stocks.

4. Equity Basket Derivatives

Equity basket derivatives can help investors either speculate on the price movements or hedge against risks of a group of stocks. These baskets may contain futures, options, or swaps relating to a set of equities that aren’t necessarily in a known index. Unlike equity index futures, these highly customized baskets are traded exclusively in the OTC markets.

The Takeaway

Equity derivatives are trading instruments based on the price movements of underlying asset equity. Options, futures, and swaps are just a few ways that investors can gain access to the markets, or hedge the risks that they’re already taking.

For investors looking to build a portfolio or add to one, a SoFi Invest® account offers different options tailored to your investing personality. The active investing solution allows you to trade stocks and ETFs without paying commissions. And the automated investing solution invests your money for you based on your goals and risk, without charging a SoFi management fee.

Find out how to get started with SoFi Invest.

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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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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What Is Yield Farming in Crypto & DeFi? How Does It Work?

What Is Yield Farming in Crypto & DeFi?

Yield farming involves lending crypto in exchange for high returns, also called yield, typically paid out in crypto. It requires a liquidity pool (smart contract) and a liquidity provider (an investor).

Yield farming has been one of the biggest factors driving the growth of decentralized finance (DeFi), blockchain-based platforms providing financial services, such as borrowing and lending, without a centralized authority like a traditional bank or lender.

What is Yield Farming?

Yield farming crypto protocols reward liquidity providers (LPs) for locking up their crypto in a liquidity pool governed by smart contracts. In this way, the LPs are effectively lending their crypto. The rewards generally come in one of three forms:

•  A percentage of transaction fees

•  Interest from lenders

•  A governance token

Regardless of the method of payout, returns are expressed as an annual percentage yield (APY). The more funds added to the pool by investors, the lower the value of the issued returns will fall.

In the early days of yield farming, most investors staked stablecoins like USDC, DAI, or USDT. But today, the most well-known DeFi protocols run atop the Ethereum network and provide governance tokens as an incentive for “liquidity mining.” In exchange for providing liquidity to decentralized exchanges (DEXs), tokens are farmed in liquidity pools.

With liquidity mining, yield farming participants earn token rewards as an additional form of compensation. This type of incentive gained traction when the Compound network began issuing COMP, its rapidly appreciating governance token, to users of its platform.

The majority of yield farming protocols today reward liquidity providers in the form of governance tokens. Most of these tokens can be traded on centralized and decentralized exchanges alike.

How Does Yield Farming Work?

Yield farming uses an order-matching system known as the automated market maker (AMM) model.

The AMM model, which powers most decentralized exchanges, does away with the traditional order book, which would contain all “bid” and “ask” (buy and sell) orders on an exchange. Rather than stating the current market price of an asset, an AMM conjures liquidity pools through smart contracts. The pools then execute trades according to preset algorithms.

This DeFi yield farming method relies on liquidity providers to deposit funds into liquidity pools. These pools provide funding for DeFi users to borrow, lend, and swap tokens. Users pay trading fees, which are shared with liquidity pools based on how much liquidity they provide to the pool.

How to Calculate Returns in APY

Estimated DeFi yield farming returns are calculated on an annual basis. The key word here is “estimated,” because interest rates can change dramatically over the course of the year, or even the course of one week.

There’s no particular method to calculate exactly how much APY a protocol will earn. Word tends to spread quickly about a yield farming strategy that earns high returns. The masses then rush in, pushing down yields.

There’s another variable factor: the token in which rewards are denominated. If investors are paid in the form of a DeFi token of some kind, and that token drops in value relative to other currencies, even high percentage gains could be reduced or wiped out.

Yield Farming vs Staking

Staking is different from yield farming. Proof-of-stake (PoS) tokens allow users to become transaction “validators” who confirm transactions on the network by locking up tokens for a set period of time. In exchange, users earn interest on their tokens.

While both staking and yield farming involve depositing tokens and earning a kind of crypto dividend (which is why the terms “staking” and “locking up tokens” are sometimes used interchangeably), what’s going on behind the scenes is much different in each case.

Staking crypto involves validating network transactions and earning a portion of newly minted block rewards. This action happens directly on the blockchain of the network of the token being staked. Staking serves the same function on PoS networks as mining does on proof-of-work networks — that of achieving consensus. Through staking, all nodes in a network agree on which transactions are valid.

Yield farming is participating in a decentralized financial product, earning interest on crypto that has been loaned out to someone else. These transactions are facilitated by smart contracts, most commonly on the Ethereum network.

What Are the Risks of Yield Farming?

This application of DeFi is as risky as it is volatile. At best, LPs might find themselves earning far less interest than expected, since rates can swing upwards or downwards quickly. At worst, they can lose everything they invested — in some cases thanks to hackers, and in other cases to what’s known as a “rug pull” scheme.

How Can Yield Farming be Hacked?

Software-related vulnerabilities can lead to hacking. For example, in 2020 Harvest Finance was hacked when flaws in the smart contracts used to govern the protocols were exploited by attackers. It resulted in more than $420 million of investor funds being lost. Those funds can never be recovered and there is no regulatory authority that investors can appeal to.

What is a “Rug Pull” Scheme?

A rug pull involves a group of people creating a seemingly promising new platform that is in fact a scheme to steal user funds. Once enough unsuspecting liquidity providers have bought into the scam by depositing tokens, the protocol goes offline — and the creators make off with all the invested funds. Investors lose everything and have no recourse. Simply search for the term “defi rug pull” and a long list of related stories will come up.

Beyond the risk of hacks and schemes, there are also additional risks like high gas fees, the complexity of interacting with the protocols themselves, and the fact that DeFi applications depend on several underlying applications to work correctly. If something goes wrong on any layer, it could disrupt the whole thing.

Is Yield Farming Right for Me?

Yield farming is likely to appeal to a very select group of people — those who have both the required technical skill and high risk tolerance.

If you’re reading an introductory article on the idea of yield farming, chances are it’s not for you. This kind of risk-taking isn’t for crypto beginners or those who can’t risk losing much capital.

Recommended: A Beginner’s Guide to Cryptocurrency

Even billionaire and “Shark Tank” star Marc Cuban lost an investment in the Iron Finance protocol when their stablecoin dropped to 0.

The Takeaway

Yield farming can be a high-risk, high-reward venture for the curious, tech-minded few who are comfortable with the possibility of losing their principal investment.

Since the summer of 2020, when DeFi was at the height of its popularity, enthusiasm has waned somewhat. Tales of extravagant returns have been tempered by tragedies of hacks and rug pulls.

For investors curious about crypto, trading cryptocurrency is another way to invest in this sector. With SoFi Invest®, investors can trade dozens of cryptocurrencies including Bitcoin, Litecoin, Cardano, Dogecoin, Solana, Enjin Coin, and Ethereum.

Find out how to get started with SoFi Invest.

Photo credit: iStock/PeopleImages


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.
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.
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How Long Does a Mortgage Preapproval Last?

Mortgage preapprovals more than 3 months old are generally considered out of date, but letters can last as long as 180 days. Depending on how long your search is, you may need to renew it more than once before closing on a home.

Having a letter of preapproval from a financial institution can help ensure that you’re ready to snap up a home you love.

What Is a Mortgage Preapproval Letter?

A letter of preapproval can be an essential part of the home-buying process. It shows sellers that you are serious about buying a home and that a lender is likely to give you a mortgage quickly.

A preapproval letter is a lender’s written statement that it is willing to lend you a specified amount of money for a mortgage, although it’s not quite a commitment.

The lender will review your credit history, income, and assets to determine the amount you qualify for. The letter will then state that number and may outline stipulations to gain the loan, such as maintaining your employment or not taking on any additional debt.

A preapproval letter can help you focus on homes that are in your price range. This is important in competitive markets when you won’t want to waste time reviewing homes that are out of your budget. A preapproval letter can also signal to sellers that you are a serious buyer, and many sellers require one before accepting an offer.

Letters of preapproval may last anywhere from 90 to 180 days, though many view anything older than 3 months as out of date. That time frame tends to work, since homebuyers, on average, shop for a home for three to six weeks, according to the Home Buying Institute.

Recommended: Tips for Buying in a Hot House Market

Mortgage Prequalification vs. Mortgage Preapproval

Since they sound similar, it’s worth mapping out the difference between prequalification and preapproval.

Mortgage Prequalification

Prequalification is a key first step in the mortgage process.

You will tell lenders about your income, assets, and debts to get a sense of the loan programs and rates you might receive.

Lenders use that unverified information, and usually a soft credit inquiry, to give a ballpark estimate of how much you may be able to borrow and at what terms.

This estimate is useful because it can give you an idea of how much house you may be able to afford. Prequalification can also give you an idea of what your monthly mortgage payment would look like.

However, prequalification does not mean that a lender is guaranteeing a loan. At this stage, your loan qualifying information is typically not verified.

Mortgage Preapproval

The mortgage preapproval process is an examination of your income, employment, assets, debt, and creditworthiness, and it represents the next step in buying a home.

When considering you for preapproval, lenders will scrutinize:

•   Income: Employees will need to provide pay stubs, W-2s, and tax returns from the past two years, as well as documentation of any additional income, such as work bonuses. Self-employed workers often need two years’ worth of records and a year-to-date profit and loss statement, although many lenders and loan programs are flexible.

•   Assets and liabilities: You’ll need to provide proof of savings, investment accounts, and any properties. Lenders view assets as proof that you can afford your down payment and closing costs and still have cash reserves. The lender will also look at monthly debt obligations to calculate your debt-to-income ratio.

•   Credit score: Your credit score is a numerical representation of your credit history. It reflects debt you’ve taken on and whether you’ve made payments on time.

Recommended: What Is Considered a Bad Credit Score?

Once your lender has reviewed the information, it may offer a letter of preapproval stating the maximum mortgage amount that you have been preapproved for, how long the letter is good for, and any conditions that need to be met for final loan approval.

A preapproval may help you compete with homebuyers who are purchasing in cash. Some sellers won’t even consider offers that don’t have at least a preapproval, so this letter makes it more likely they will select your offer on a property.

It’s possible that even after preapproval, the lender may choose not to issue a mortgage. A lender, for example, might withhold final approval if it discovers previously undisclosed financial information that changes qualifying eligibility, or if the property you want to purchase is not eligible for lending because of its condition.

To sum it all up:

Mortgage Prequalification
Mortgage Preapproval

•   Doesn’t require a credit check

•   Checks credit history

•   Is based on financial assumptions

•   Is based on verified facts

•   Provides an estimated mortgage amount

•   Provides an offer to lend a specific amount

•   Is less reliable than preapproval

•   Is much more reliable than prequalification

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your home-buying journey.


How quickly a mortgage preapproval can be completed can vary by lender and how quickly documentation has been supplied, but it could range from 24 hours to 10 days.

Importantly, receiving preapproval from a lender does not obligate you to use them. If home loans with more desirable terms are available, it would be smart to look into them.

What to Do When Your Preapproval Expires

Lenders put an expiration date on preapproval letters because they need to have your most up-to-date financial information on hand. The credit, income, debt, and asset items they reviewed for your preapproval typically need to be updated after 90 days.

You might leave your job and no longer have a steady income, or a financial emergency may have taken a big bite out of your savings. As a result, the lender will want to reassess your finances.

If you’re using the same lender you will need to provide updated pay stubs and bank statements, and your credit may be checked again.

You can minimize the effect of “hard pulls” on your credit score by avoiding seeking a renewal when you’re not actively shopping for a home, and by working with only one lender during the preapproval stage.

If your finances have mostly stayed the same, your lender is likely to renew your preapproval.

Finalizing Your Mortgage

If you find a house while your mortgage preapproval is still valid, you can move on to finalizing your mortgage application. At this point, in many cases, lenders will check again to see if there have been any changes to your financial situation.

The mortgage underwriter will review all the information, order an appraisal of the chosen property, get a copy of the title insurance, and consider your down payment. Then comes the verdict: approved, suspended (more documentation is needed), or denied.

Your mortgage is not officially approved until you receive a final commitment letter. After you have the letter, a closing date can be scheduled.

Buyers may want to minimize changes, like applying for other loans or credit, when a home loan is in underwriting.

The Takeaway

How long is a mortgage preapproval good for? Ninety to 180 days, though a letter older than 3 months is generally considered out of date. Getting prequalified is a good precursor to getting preapproved.

If you’re ready to start house hunting, check out the fixed-rate home loans SoFi offers. You may be able to put as little as 5% down.

Get prequalified for a SoFi Home Loan in just two minutes.


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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more 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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What Are Liquid Assets?

Liquid assets are any assets that can be easily and quickly converted into cash. In fact, people often refer to liquid assets as cash or cash equivalents, because they know that the asset can be exchanged for actual cash without losing value.

Here’s a look at which assets are considered liquid — and which are not — and why liquid investments are important.

What Makes an Asset Liquid?

What is a liquid investment, and where does it fit into your financial picture? First it helps to understand liquidity. While you might own any number of valuable assets (e.g., your home, retirement accounts, collectibles), and these can be considered part of your overall net worth, only liquid assets can generate cash quickly, when circumstances demand it.

For an asset to be considered liquid it must be traded on a well-established market with a large number of buyers and sellers, and it must be relatively easy to transfer ownership. Think: stocks, bonds, mutual funds and other marketable securities.

Generally, you can sell stocks and obtain cash readily. By contrast, you probably couldn’t sell your home that fast, and even if you could there are a number of factors that might influence how much cash value you might obtain from the sale.

To recap: The number of willing market players, high trading volumes, and easy transfers mean that liquid investments can be sold for cash quickly and without losing much value in the process. And although cash and cash equivalents pose very little risk of loss, they also have little or no capacity for growth.

What Investments Are Considered Liquid Assets?

As you can see, the primary advantage of liquid assets is that they can be converted to cash in a short period of time. For example, stock trades must be settled within three days, according to Securities and Exchange Commission rules. Here are other assets that are considered liquid:

Examples of liquid assets

•   Stocks. Stocks are often considered liquid assets because they can be converted into cash when you sell them. Keep in mind, though, that the most liquid stocks might be the ones that many people want to buy and sell. You may have a more difficult time liquidating stocks that are in lower demand.

•   U.S. Treasuries and bonds. These instruments are relatively easy to buy and sell, and are usually done so in high volume. They have a wide range of maturity dates, which helps you to figure out when you want to liquidate them. Because U.S. Treasuries are often considered relatively safe and dependable, the interest rates are somewhat lower and could be a good fit for investors who are looking to mitigate risk.

•   Mutual funds. Mutual funds are pooled investment vehicles that hold a diversified basket of stocks, bonds, or other investments.

   Open-end mutual funds are considered more liquid than closed-end funds because they have no limit on the number of shares they can generate, and investors can sell their shares back to the fund at any time.

   Closed-end mutual funds, on the other hand, are less common. These funds raise capital from investors via an IPO; after that, the number of shares are fixed, and no new shares are created. Instead, closed-end funds shares can only be bought and sold on an exchange, and thus are considered less liquid than open-end fund shares because they’re more subject to market demand.

•   Exchange-traded funds and index funds. Like mutual funds, exchange-traded funds (ETFs) and index funds allow individuals to invest in a diversified basket of investments. ETFs are traded like stocks, throughout the day on the open market, which makes them somewhat more liquid than index funds, which only trade at the end of the day.

•   Money market assets. There are two main types of money market assets:

◦   A money market fund is a type of mutual fund that invests in high-quality short-term debt, cash and cash equivalents. It’s considered low-risk and offers low yields, and therefore thought of as relatively safe. You can cash in your chips at any time, making money-market funds a liquid investment.

◦   Money market funds are different from money market accounts, which are a type of FDIC-insured savings account.

•   Certificates of deposit. If you have money in a certificate of deposit or CD, this might be considered semi-liquid because your money isn’t available until the official withdrawal date. You can withdraw money if you need it, but if you’re doing so before the maturity date, you’ll likely pay a penalty.

What Assets Are Considered Non-Liquid?

There are, of course, many assets that are not easy to liquidate quickly. These assets typically take a long time to sell or for the deal to close. You’ll get your money, but most likely not right away, and there may be time or costs associated with the conversion to cash that could impact the final amount. That’s why assets like these are considered illiquid or non-liquid assets.

Examples of non-liquid assets

•   Collectibles. Items like jewelry and art work, and hobby collections like stamps and baseball cards may be hard to value and difficult to sell.

•   Employee stock options. While stock options can be a valuable form of compensation for employees, they may also be highly illiquid. That’s because employees must typically remain with a company for years before their options vest, they exercise them and they finally own the stock.

•   Land and real estate. These investments often require negotiation and contracts that can tie up real estate transactions for weeks, if not months.

•   Private equity. There are often strict restrictions about when you can sell shares if you’ve invested in private equity assets such as venture capital funds.

Liquid Assets in Business

If you’re running a business, accounts receivable — the money you’re owed from clients — are often considered to be a liquid asset, because you can typically expect to be paid within one year of the billing.

Any inventory you have on hand, such as office furniture or a product you’re selling, can also be considered liquid, because you could sell them for cash if need be. The liquid assets on your company balance sheet usually list cash first, followed by other assets that are considered liquid, in order of liquidity.

Having more liquid assets is desirable because it indicates that a company can pay off debt more easily. When businesses need to determine how cash liquid they are, they often look at the amount of their net liquid assets. When all current debts and liabilities are paid off, whatever remains is considered their liquid assets.

Are Retirement Accounts like IRAs and 401(k)s Liquid Assets?

Retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s are not really liquid until you’ve reached age 59 ½. Withdraw funds from your account before then and you may face taxes and a 10% early withdrawal penalty.

What’s more, you can hold a variety of assets inside retirement accounts. For example, if you hold a money-market fund inside your IRA, that is a liquid asset. But you could also hold real estate, which very much isn’t.

Reasons Why Liquid Assets Matter

Other than the most obvious reason, which is that cash gives you a great deal of flexibility and can be essential in a crisis, liquid assets serve a number of purposes.

•   Calculating net worth: To calculate your net worth, subtract your liabilities (your debt) from your assets (what you own, which can include your liquid assets).

•   Applying for loans: Lenders might look at your liquid assets when you apply for a mortgage, car loan, or home equity loan. If your liquid assets are high, you may get better terms or lower interest rates on your loans. Lenders want to know that if you were to lose your job or your income you would be able to continue to pay back the loan using your liquid assets.

•   Business interests: Having liquid assets on your balance sheet is a signal that your business is prepared for an emergency or a market shift that could require a cash infusion.

Are All Liquid Assets Taxable?

While income is money you earn or receive, an asset is something of value you possess that can be converted to cash at some point in the future. Thus owning an asset doesn’t make it taxable, but converting it to actual cash would, in most cases.

The IRS has many rules around how the proceeds from the sale of assets can be taxed.

The IRS considers taxable income to include gains from stocks, interest from bonds, dividends, alimony, and more. Gains on the sale of a home might be taxed, depending on the amount of the gain and marital status. If you aren’t sure whether income from the sale of an asset is taxable, it might be wise to consult a professional.

Is It Smart to Keep Cashing In Liquid Assets?

The point of maintaining a portion of your assets in liquid investments is partly for flexibility and also for diversification. The more access to cash you have, the more prepared you are to navigate a sudden change in circumstances, whether an emergency expense or an investment opportunity.

Having a portion of your portfolio in cash or cash equivalents can also be a hedge against volatility.

Thus, it may be worth keeping a mix of both liquid and non-liquid assets to help you reach your financial goals. And while cashing in liquid assets might be necessary, it’s also prudent to keep enough cash on hand, in case you need it.

There is no set formula for every investor’s situation, but beginning investors may want to focus on gathering a few months of liquid assets for the sole purpose of emergencies and unexpected expenses.

How Liquid Are You?

To figure out how liquid you are, make a list of all your monthly expenses, from rent/mortgage on down, even your streaming service subscription. Then, make a list of all your liquid assets and investments (being careful to pay attention to the definition of liquid assets vs. illiquid assets, as it can be confusing).

Then, total all your monthly expenses, and compare that sum to the liquid assets in your possession.

Does your total savings cover six months worth of monthly expenses? If so, congrats! If not, you’re not very liquid. Don’t despair, though. There are ways to build more liquidity.

Where to Start Building Liquid Assets

As you start to build your liquid assets, first consider saving a cash cushion in the form of an emergency fund, which should be enough to cover any unexpected expenses that might come along. Envision how much you might need in the event of a crisis (e.g., a job loss, divorce, health event, and so on).

Aim to save three to six months worth of expenses to cover basic bills, repairs, insurance premiums and copays, as well as any other personal or medical expenses.

One good way to build liquidity is to set money aside every week, month, or have a set savings amount auto-deducted from each paycheck. The digital age has made it easier than ever to put automatic deductions in place. Simple savings or checking accounts can be a good place to start.

From there, you may consider opening a retirement account or a taxable brokerage account where you can invest in potentially more lucrative liquid investments, such as stocks, bonds, mutual funds and ETFs.

The Takeaway

Liquid assets are simple enough on the surface. Unlike illiquid or non-liquid assets that can keep your money tied up and can be hard to sell (like a home, a car, collectibles), liquid assets can be converted into cash relatively easily — typically with little or no loss in value. Liquid assets can include cash equivalents like money market accounts, or marketable securities like stocks, bonds, mutual funds, and ETFs.

Liquid investments can play a surprisingly important role in your portfolio (as an individual investor) or your business.

While cash and cash equivalents can be relatively safe, they also offer more flexibility — which can be essential in life and in business. Having ready access to cash can help you pay off debt, cover a crisis, or be able to invest in new opportunities.

To start building more liquidity, you need access to an account like SoFi Money® — a cash management account that can hold your cash savings. You pay no annual, overdraft, or other account fees.

You can sign up for SoFi Money right on your phone. In fact, your phone allows you to make mobile transfers, photo check deposits, and access customer service. Your SoFi Money account is FDIC-insured up to $1.5 million, with additional protection against fraud.

Check out SoFi Money 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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Each business day, cash deposits in SoFi Money cash management accounts are swept to one or more sweep program banks where it earns a variable interest rate and is eligible for FDIC insurance. FDIC Insurance does not immediately apply. Coverage begins when funds arrive at a program bank, usually within two business days of deposit. There are currently six banks available to accept these deposits, making customers eligible for up to $1,500,000 of FDIC insurance (six banks, $250,000 per bank). If the number of available banks changes, or you elect not to use, and/or have existing assets at, one or more of the available banks, the actual amount could be lower. For more information on FDIC insurance coverage, please visit www.FDIC.gov . Customers are responsible for monitoring their total assets at each Program Banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. The deposits in SoFi Money or at Program Banks are not covered by SIPC.
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Understanding Your Mortgage APR

Your APR, or Annual Percentage Rate, is an important term for any potential homebuyer to know. Distinct from your interest rate, your mortgage APR tells you the overall cost of your mortgage loan, taking into account both your interest rate as well as any additional costs.

Understanding what an APR is and how it can impact your loans is critical when borrowing any loan, especially a mortgage. Here’s a primer on what elements make up an APR and how you can calculate it.

What Is APR?

APR stands for Annual Percentage Rate, and it’s used to measure the cost of borrowing money from lenders for various reasons, such as your mortgage loan. While it’s often presented at the same time as your interest rate, it isn’t the same thing.

APR is expressed as a percentage and takes into account not only the interest rate, but also many of the costs that are associated with the loan. When it comes to borrowing a mortgage, these costs can include items such as origination fees, application fees, processing fees, discount points, and other types of fees that lenders may charge.

APR provides a more comprehensive picture of the total cost of the mortgage loan since it gives you an overall view of the fees and costs you would have to pay that are included in the finance charge. If you compare just the interest rate, the additional fees and costs aren’t represented, which could give you an incomplete picture when it comes to determining the actual cost of the loan.

Since not all lenders charge the same fees or interest rates, comparing APRs is usually a better way to compare the total cost of your loan from one lender to another.

Why Is APR Important When Taking Out a Mortgage?

Knowing the APR can help consumers be more informed while comparison shopping for loan products. Thanks to the Truth in Lending Act , lenders are required to disclose the APR of their loans, as well as all fees and charges associated with a loan.

The APR should include all finance charge fees, which can make it easier for borrowers to sort through loan comparisons to find the right mortgage.

How Are Interest Rates Calculated?

As we’ve discussed, APR and interest rate aren’t the same, but your interest rate does impact your APR. So, how exactly are interest rates calculated?

Your interest rate is a percentage of your mortgage rate. What that percentage will be, depends on what type of mortgage loan you have. For instance, with a fixed-rate mortgage, you’ll pay the same interest rate for the entire time you have the loan. With an adjustable rate mortgage, on the other hand, your rate will fluctuate throughout the life of the loan. Also, keep in mind that any unpaid interest gets added to the mortgage principal. This means you’ll have to pay interest on that interest.

Your lender will determine your specific interest rate based on your financial specifics, such as your credit score, as well as the current economic conditions and market interest rates. Lenders usually use their own unique formula to calculate interest rates, which is why your rate can vary from lender to lender — and why it’s important to shop around for rates.

Recommended: APR vs. Interest Rate: What’s The Difference?

How to Calculate Your APR

If you want to be extra thorough and calculate the APR yourself, there’s a way to make that happen. Be warned, it’s not necessarily a super fun math project, but hey, where there’s a formula, there’s a way, right?

To get started, you’ll have to know the approximate monthly Principal and Interest (P&I) payment on your loan. Maybe your lender has already told you what it would be, but if not, you could calculate it with an online mortgage calculator or by hand. You’ll need to have a loan amount, interest rate and a term in years. And remember, right now, we’re just trying to give an idea of the difference between the interest rate and the APR.

Once you have the monthly P&I payment calculated, you’ll then be able to calculate the APR, which you can do with this calculator . Keep in mind that because we don’t know what your applicable APR loan fees will be, we suggest using a ballpark estimate. Let’s say that the loan costs that will impact your APR are 2% of your loan amount. So, if your loan amount is $200,000, your loan costs for calculating the APR will be $4,000.

Why You Need to be Careful When Using APR to Compare Mortgages

So you’ve got the APRs for all the mortgage offers you’re considering. Your APR is important to consider because it factors in the expense of additional fees over the life of your mortgage. If you’re applying for a 30-year mortgage, those fees are spread over 30 years.

But do you plan to live in your home for the full 30 years of your mortgage and never refinance your mortgage? If you sell your home after five years, rather than staying for the duration of your 30-year loan, you’ll still have to pay for the loan fees (such as origination fees).

That’s why it’s important to consider and compare APRs when choosing a mortgage. If you plan on living in the home for a limited time, a lender that offers fewer fees might be a better choice than a lender with a low APR but lots of fees. You’ll want to make sure to consult with your financial advisor before making this decision.

When you’re mortgage shopping, you also may want to proceed with caution when comparing the APRs of fixed-rate and adjustable-rate mortgages if you are using an online calculator. The APR on adjustable-rate loans may not be an accurate representation of the cost of the loan since some calculators cannot anticipate the frequency or amounts of the interest rate changes.

Recommended: Tips When Shopping for a Mortgage

The Takeaway

If you’re ready to take the next step in your home-buying journey, the first step is taking stock of your mortgage options. Comparing each loan’s APR is a quick and easy way to see how your offers stack up but remember it isn’t the only factor to take into account.

One way to start the process of mortgage shopping is by checking out SoFi mortgages. We offer a variety of mortgage loans, so you can select the option that works best for you. You can start the application online and find out if you’re pre-qualified in just minutes.

Learn how a mortgage with SoFi can help you buy the house of your dreams. Start today!


SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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