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Jul

2024

What Is Fibonacci Retracement in Crypto Trading

What Is Fibonacci Retracement in Trading?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Fibonacci retracement is a type of technical indicator that traders use to determine the support and resistance levels for a stock price.

The well-known Fibonacci sequence of numbers, where each number is the sum of the two previous numbers, is important to how this technical analysis tool works owing to the relationship between the numbers in the series.

These ratios, expressed as a percentage, capture how much a stock price has retraced with its recent movement. The most important Fibonacci retracement levels are: 23.6% 38.2%, 50%, and 61.8%, 78.6%, and they are applied as horizontal lines on a stock chart.

Traders can use these retracement levels to mark high and low points that may offer signals that a price is going to stall out or reverse.

What Are Fibonacci Retracement Levels?

Fibonacci retracement levels are based on the Fibonacci series where each number equals the sum of the two previous numbers. The most basic series is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc.

The relationship between these numbers has created the retracement levels commonly used by traders: 23.6% 38.2%, 50%, and 61.8%, 78.6%.

For example, each number is approximately 1.618 times greater than the preceding one. As a result, some analysts refer to 61.8% as “the golden ratio,” because it roughly equals the division of one number in the series by the number that follows it. For example: 13/21 = 0.6190, and 21/34 = 0.6176, and 34/55 = 0.6181

In fact, there are similar relationships to be found between other numbers in the series, and these have become the ratios used by technical traders to determine retracement levels in stock prices. For example, dividing a number in the series by the number three places to its right roughly equals 23.6%.

Note that 50% is somewhat of an exception to the rule: It’s not mathematically part of the Fibonacci-derived number set, but traders have nonetheless found it useful when gauging support and resistance levels.

Who Created Fibonacci Numbers?

The Fibonacci sequence is based on the work of a 13th-century mathematician Leonardo Pisano Bigollo, nicknamed Fibonacci. While Fibonacci was not the first to identify this series, he transformed mathematics in the West thanks to his introduction of the Hindu-Arabic system of numbers, a place-value system.

The Hindu-Arabic system, which we use today, replaced Roman numerals and the complex calculations that required.

In 1202, Fibonacci published Liber Abaci (“Book of Calculations”) to introduce Hindu-Arabic numerals. The Fibonacci series was included here, but the observation of this pattern had been identified and worked with for hundreds of years before, in India. Over time, its pattern has been observed in everything from the spiral of seeds in sunflowers to spirals in the double helix of DNA.

Because the Fibonacci sequence occurs frequently in various natural and mathematical contexts, it has been adopted for a number of uses, including as a technical analysis tool for stock traders. That said, the reason for the common occurrence of these numbers in contexts or applications that are unrelated, is not well understood.

How Does Fibonacci Retracement Work

Fibonacci retracement levels are not based on an exact formula that gets applied to the stock price movements. Rather, traders identify two static price points for analysis, e.g., a high and a low, and apply the retracement levels from the Fibonacci sequence to determine support and resistance levels.

If a stock price movement retraces a prior move, ending on a point that is represented by a Fibonacci number, it could indicate that a reversal is in store.

The use of Fibonacci ratios as a technical indicator is somewhat subjective, however, since the underlying numbers are a part of a mathematical pattern. They aren’t inherently related to stock prices or market movements.

For example, if a stock price rises to $20 from $15, a trader might set the retracement levels at 23.6% and 50%. Those would be, respectively: $18.82 ($20 – ($5 x 0.236) = $18.82) and $17.50 ($20 – ($5 x 0.50) = $17.50).

If the stock price retraced from $20 down to one of those levels, it could signal a reversal. But Fibonacci retracements can also be used to gauge the strength of an uptrend, by noting the support and resistance in relation to the retracement levels.

Support and Resistance

Support is the price level that acts as a floor, preventing the price from being pushed lower, while resistance is the high level that the price reaches over time. Analysts often illustrate these as horizontal lines on a graph.

A support or resistance level can also represent a pivot point, or point from which prices have a tendency to reverse if they bounce (in the case of support) or retreat (in the case of resistance) from that level.

Learn more: Support and Resistance: What Is It? How to Use It for Trading

What Does a Fibonacci Retracement Do?

Markets don’t go straight up or down. There are pauses and corrections along the way. Traders can use these retracements to find optimal prices at which to enter a trade. For example, if a stock moves up, but then retraces to the 61.8% level before moving higher again, that might be a signal to buy.

Why? Because the price retraced to a Fibonacci level during an uptrend. A trader could also use that retracement point to set a stop-loss order at the 61.8% level (remember, that’s the boundary of the price retracement, not the price itself). If the price drops down below that level, the rally may be a bust.

In other words, the Fibonacci retracement levels, while static, help to indicate potential inflection points where a stock might see a break or a reversal.

What Is a Fibonacci Extension?

As discussed, Fibonacci retracements may help indicate a price reversal. Fibonacci extensions apply the same logic to price moves in an upward trend.

With a Fibonacci extension, the trader uses three points to assess whether the price will continue on its trend. The first two points are similar to those used for a Fibonacci retracement: the trader picks two price points, a start and an end (e.g. a high and a low). The third point is the retracement level, which sets up the potential extension (if there is one).

Some of the key ratios used to calculate Fibonacci extensions are 61.8%, 100%, 161.8%, 200%, and 261.8%.

Limitations of Fibonacci Retracement

Fibonacci retracements may indicate potential price movements, especially when employed by experienced traders who are familiar with the application of this particular indicator. But over-relying on them can be counterproductive:

• Fibonacci retracements, like other indicators, are most informative when paired with at least one other technical analysis tool, such as moving averages.

• The use of Fibonacci retracement levels and extensions is generally a subjective endeavor. Although the numbers themselves do occur in a range of contexts in the natural world and in mathematics, there is no objectively tested rationale for how or when to use the Fibonacci numbers with stock prices.

• Fibonacci retracement sequences are often close to each other, therefore it may be tough to accurately predict future price movements.

Fibonacci Retracements and Trading

Traders typically use Fibonacci retracement levels to help anticipate price reversals, to set entry and exit points for trade, to create stop-loss orders, and more.

• Trend prediction. Fibonacci retracements have been known to predict the price reversals of a stock at early stages.

• Flexibility. Fibonacci retracement works for assets in any market and any time frame. Longer time frames could result in a more accurate signal.

• Gauge of market psychology. Fibonacci levels are built on both a set of mathematical calculations and the psychology of the market. Combined, these may convey a fair assessment of market sentiment.

The Takeaway

The Fibonacci retracement technical indicator can help identify hidden levels of support and resistance so that analysts may be able to better time their trades. The Fibonacci retracement levels are derived from the well-known mathematical phenomenon known as the Fibonacci sequence: a series where each number is the sum of the previous two numbers.

From this sequence, mathematicians dating back centuries were able to derive ratios based on the relationship between one number and another in the series. What makes these ratios significant is that they recur in a range of contexts, from the natural world to the stock market.

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FAQ

How accurate is Fibonacci retracement?

Fibonacci retracement levels can be useful for traders, although no indicator is perfect and they are best used in combination with other technical indicators. The accuracy levels often increase with longer time frames. For example, a 50% retracement on a weekly chart is a more important technical level than a 50% retracement on a five-minute chart.

What are the advantages of using Fibonacci retracement?

Fibonacci retracement is relatively easy to apply to any price chart. It’s not a formula, but a set of measurements that may help traders assess the importance of certain price movements and trends. When an experienced trader uses the Fibonacci ratios in combination with other technical indicators, it may be possible to set entry and exit points for trades and anticipate reversals.

What are the disadvantages of using Fibonacci retracement levels?

Although it’s well established that the Fibonacci numbers occur in plants, in galaxies, and in stock market movements, it’s not well understood why that is. Therefore, the use of the Fibonacci retracement levels tends to be subjective. For that reason, it may be more effective in combination with other indicators that can help confirm price trend analysis.

Photo credit: iStock/HAKINMHAN

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Jul

2024

What Is Stagflation & Will It Happen Again?

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | Comments Off

Stagflation is an economic term that is actually a combination of the words stagnation and inflation — and describes an economy that is both stagnant, and experiencing inflation. For investors, it’s worth being aware of what it means, because of the threat it poses to economies and markets.

Stagflation creates potentially disastrous conditions where people experiencing a decline in purchasing power also feel discouraged against investing. It can create a chain reaction of wealth-destroying events where unemployment climbs and economic output slows, contributing to a national economic malaise.

What Is Stagflation?

Stagflation is a term used to describe a situation when the economy is growing slowly (stagnation) and prices rise rapidly (inflation).

The term was coined by British Conservative Party politician Iain Norman Macleod in a 1965 speech to Parliament. At the time, the United Kingdom was in the midst of simultaneous high inflation and unemployment. In the speech to Parliament, Macleod said, “We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation and history in modern terms is indeed being made.”

Usually, economists and analysts will use the unemployment rate as a proxy for economic activity when discussing stagflation. So, a period of stagflation is when unemployment rises while inflation — as measured by the consumer price index (CPI) — accelerates above normally acceptable levels of price growth.

However, like many economic concepts, there is no standard definition of stagflation. Policymakers, elected officials, and investors will use the term stagflation in various economic scenarios.

Stagflation vs Inflation

Inflation is a general increase in the average prices of goods and services. In contrast, stagflation is a combination of stagnant economic growth and rising inflation.

Low levels of inflation are normal for an economy; there’s a reason why movie theater tickets cost more today than they did in the 1950s. Inflation doesn’t become an issue until prices get out of control and spiral upwards. Policymakers within the Federal Reserve like inflation to rise about 2% each year.

You can have inflation without stagflation, but you can’t have stagflation without inflation.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Has Stagflation Ever Happened?

Before the 1970s, economists didn’t think stagflation — a period of rising unemployment and inflation — was possible. Theoretically, inflation should decrease when unemployment increases because workers have less bargaining power to get higher wages. So, the theory goes, stagflation shouldn’t happen.

However, stagflation did occur in the United States from the mid-1970s. During the 1973-1975 recession, the U.S. experienced five quarters where the gross domestic product (GDP) decreased. Inflation peaked at 12.2% in November 1974, and the unemployment rate rose to 9.0% in May 1975.

This stagflation cycle was part of a larger sequence of events called the Nixon Shock.

Responding to increasing inflation in 1971, President Richard Nixon imposed wage and price controls and surcharges on imports. This created a perfect-storm condition where, when the 1973 oil crisis hit, those surcharges on imports made prices at the gas pump — and across many U.S. industries — skyrocket to then-record prices. The rising prices helped lead to a wage-price spiral, where inflation led to workers asking for higher wages, which led to more inflation, and so on.

The Federal Reserve raised interest rates to combat the inflation of the early-70s, but this only created a recession and high unemployment without tamping down inflation. Thus, a prolonged economic stagnation accompanying inflation occurred — a stagflation situation.

While the economy recovered slightly in the late 1970s, inflation remained a problem for the rest of the decade. Federal Reserve chairman Paul Volcker eventually hiked interest rates to 20% by 1981, triggering a recession to get inflation under control.

Will Stagflation Happen Again?

There are debates about whether stagflation will or could occur again in the United States. There’s always a chance, but the circumstances need to be just right for it to happen.

Most recently, the economy was in a precarious situation in early 2022, with inflation running high after the fallout of the Covid-19 pandemic, and the Federal Reserve raising interest rates at a historic pace to combat it. The Fed was trying to curb inflation with the hope of a soft landing, in which an economy slows enough that prices stop rising quickly but not so slowly that it sparks a recession.

As of July 2024, inflation has moderated, and the economy has not slipped into a recession – but things can always change. So, the economy has not, so far, seen widespread stagnation, and inflation has come down – it appears that stagflation has been avoided.

While no one can predict the future, it stands to reason that events that have happened in the past can happen again. Stagflation may occur again, but this doesn’t have to be a dire situation as long as you prepare your financial situation.

How Can Stagflation Impact Investors?

Economic stagnation can have several impacts on investors. Firstly, it can lead to lower returns on investment as companies are less likely to grow and expand in a stagnant economy. This can lead to investors becoming more risk-averse as they seek out investments that are more likely to provide stability and income.

Secondly, stagnation can also lead to higher levels of unemployment, which can, in turn, lead to social unrest and political instability. This can make it more difficult for companies to operate in a given country and lead to investors losing confidence in the economy.

A slowdown of economic activity lasting several months sounds like it can only be a bad thing. But a recession does not necessarily mean the death knell for your finances. For some investors, there are, perhaps surprisingly, compelling strategies to consider when the market is down. Volatility may allow investors to buy low and then make appreciable gains as the market corrects itself.

Recommended: How to Invest During Inflation

The Takeaway

Stagflation occurs when an economy experiences simultaneous high inflation and high unemployment. It’s a situation that often leads to decreased spending by consumers and businesses, which can further stall economic growth and investment returns.

Stagflation has occurred before in the U.S. — notably during the Nixon Shock of the early 1970s — and there is no reason to think it won’t happen again at some point.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Jul

2024

Should You Open a Joint Brokerage Account?

By Michael Flannelly | Family Finances, invest, Investing | No Comments

Determining whether to open a joint brokerage account with another person, whether a romantic partner, business associate, or relative, can be a difficult decision. Couples often use joint brokerage accounts to simplify household finances and build wealth together. However, this doesn’t mean they are suitable for everyone.

Two or more people may own and manage joint brokerage accounts. These accounts are used to combine investment activities with multiple people. But before investing together using a joint brokerage account with a spouse or partner, it’s essential to understand how joint ownership works and its potential impacts on your finances.

🛈 SoFi currently does not offer joint brokerage accounts.

Investing Together

The reason many couples decide to invest together is fairly simple: they live together, manage a household, and are planning a future together. It can make sense then, not just from a financial perspective but for a healthy relationship, to invest together to build wealth for future goals.

If you’re planning for these long-term financial goals together, like retirement or buying a house, then that might mean having a joint brokerage account in order to plan for your shared desires. But that doesn’t mean couples have to invest together; it could make sense for you to share some accounts as a couple and to keep some separate.

But opening a joint brokerage account to buy and sell stocks or other securities may also be practical in terms of financial returns. Combining your money to invest can potentially help your money grow faster than if investing individually, as you invest a larger initial pool of funds.

What Is a Joint Brokerage Account?

A joint brokerage account is a brokerage account shared by two or more people. Couples, relatives, and business partners typically use joint brokerage accounts to manage investments and finances together. However, any two adults can open a joint brokerage account.

Joint brokerage accounts typically allow anyone named on the account to access and manage its investments. There are multiple ways people can establish joint brokerage accounts, each with specific rules for how account owners can access funds or how the account contents are handled after one of the joint holders passes away.

In contrast, retirement accounts like 401(k)s or individual retirement accounts (IRAs) do not allow joint ownership, unlike many taxable brokerage accounts.

Advantages of Joint Brokerage Accounts for Couples

There are several advantages that couples may benefit from by establishing and using joint brokerage accounts.

Single Investment Manager

One person can be responsible for all of the investment decisions and transactions within the account. This can be useful when only one member of a couple has interest in managing financial affairs.

Recommended: Should I Hire a Money Manager?

Combined Resources

As mentioned above, combining resources can be beneficial as investment decisions are made with a larger pool of money that can be used to increase compounding returns. Additionally, combining resources into a single account may help reduce costs and investment fees, as opposed to managing multiple brokerage accounts.

Simplified Estate Planning

A joint brokerage account can also help simplify estate planning. With certain types of joint brokerage accounts, the surviving account owner will automatically receive the proceeds of the account if one account holder dies. This significantly simplifies estate planning and may allow the surviving account holder to avoid a costly legal battle to maintain ownership.

Challenges of Joint Brokerage Accounts for Couples

There are a few challenges that come with joint brokerage accounts for couples.

Transparency and Trust

Both parties who own a joint brokerage account need to be comfortable with the level of transparency that comes with shared ownership. This means that both partners need to be comfortable with sharing information about their investment objectives, financial goals, and risk tolerance.

Many couples today are comfortable sharing details about their finances, even when they are not yet married. According to SoFi’s 2024 Love & Money Survey of 450 adults in the U.S. who live with their partners and intend to get married in the next three years, 75% are comfortable discussing money before marriage.

Source: SoFi’s August 2024 Love & Money Survey

Additionally, owners of a joint brokerage account must trust one another. Because the other account holder is an equal owner of the assets and can make changes to the account without your permission, they can make unadvised investment decisions or even empty out the account without the other’s consent.

Breaking Up

It’s important to remember that a joint brokerage account is a joint asset. This means that if the relationship between the account holders sours, the account will need to be divided between the two parties. This can be a complex and time-consuming process, so it’s important to be sure that both partners are prepared for this possibility.

Tax Issues

If you open a joint brokerage account with someone other than a spouse, any deposits you make into the joint account could be deemed a gift to the other account holder, which could trigger gift tax liabilities.

Recommended: A Guide to Tax-Efficient Investing

Things to Know About Joint Brokerage Accounts

Before opening a brokerage account with a partner, business associate, or relative, it’s important to understand the differences between the types of accounts.

There are several types of joint brokerage accounts, each with specific nuances regarding ownership. If you are planning on opening a joint brokerage account, pay close attention to these different types of ownership so you can open one that fits your particular circumstances.

Type of Account	Ownership	Death of Owner	Probate Treatment
Tenancy by Entirety	Only married couples can utilize this type of account. Each spouse has equal ownership rights to the account.	If one spouse dies, the other spouse gets full ownership of the account.	Avoids probate.
Joint Tenants With Rights of Survivorship	Each owner has equal rights to the account.	If one owner dies, the ownership interest is passed to surviving owners.	Avoids probate.
Tenancy in Common	Owners may have different ownership shares of account.	If one owner dies, the ownership share passes to their estate or a beneficiary.	May be subject to probate court.

Ownership

How the ownership of a joint brokerage account is divided up depends on the type of account a couple opens.

• Tenancy by Entirety: If the couple is married, they can benefit from opening an account with tenancy by the entirety. Each spouse has an equal and undivided interest in the account. It is not a 50/50 split; the spouses own 100% of the account.

• Joint Tenants with Rights of Survivorship: This type of joint account gives each owner an equal financial stake in the account.

• Tenancy in Common: A joint brokerage account with tenancy in common allows owners to have different ownership stakes in the account. For example, a couple may open a joint account with tenancy in common and establish a 70/30 ownership split of the account.

Death of Owner

When an owner of a joint brokerage account passes away, their share of the account may pass on to the surviving owners or a beneficiary, depending on the type of account.

• Tenancy by Entirety: If a spouse dies, their ownership stake passes on to the surviving spouse.

• Joint Tenants with Rights of Survivorship: If one owner dies, the ownership interest is passed onto surviving owners.

• Tenancy in Common: If one owner dies, the ownership share passes to their estate or a beneficiary.

Probate Court

In many financial dealings, it can be challenging to determine who owns what when someone passes away. These questions are often brought into the legal system, with probate courts often resolving issues of ownership for financial accounts and property. This can also occur with joint brokerage accounts, depending on the type of account a couple may open.

• Tenancy by Entirety: This type of account avoids the need for probate court, as ownership stays with one spouse if the other spouse passes away.

• Joint Tenants with Rights of Survivorship: This type of account avoids the need for probate court, as ownership interest is passed to the surviving owners when one owner dies.

• Tenancy in Common: In this type of account, if one owner passes away without a will or a state beneficiary, their ownership share will likely have to pass through probate court.

However, regardless of the type of joint brokerage account, if all owners of an account pass away at the same time, the assets in the account may still be subject to probate court if a will does not clearly state beneficiaries.

Tips for Opening a Joint Brokerage Account

Here are some tips that couples may consider before opening a joint brokerage account with a spouse or partner. These tips apply to almost everything; in the end, it’s all about communication and compromise.

• Decide on your investment goals for your joint brokerage account upfront. That means deciding what you want to build wealth for, like a house, vacation, or retirement. This can also mean determining how much money you may be willing to set aside for investing.

• Having goals for your joint brokerage accounts is advisable, but it’s also acceptable to have individual financial goals as long as you’re on the same page. You can set aside some of your discretionary income, like 1%, for each of you to spend as individual fun money. Some couples may also maintain smaller separate accounts in addition to your joint accounts.

• Take a long view of your joint financial goals. While you may disagree about buying a new couch or how to remodel a kitchen, you should agree on when you want to retire.

• Establish a system for resolving disputes before you get started investing. Even in the healthiest of relationships, there are bound to be disagreements. Before you open a joint brokerage account, decide how you will resolve disputes about whether to invest in one asset or rebalance your portfolio.

The Takeaway

Just because you’re in a relationship doesn’t mean you have to open a joint brokerage account with a partner. For some couples, combining finances to build wealth for shared goals makes sense, while other couples may benefit from keeping money issues separate from one another. What matters most is determining what’s best for you and your partner, whatever that may look like for your specific financial needs.

FAQ

Can couples open a joint brokerage account?

Yes, couples can open a joint brokerage account. However, couples are not the only people who can open a joint brokerage account. Any two people, like relatives or business partners, can open joint accounts.

What are the benefits for couples opening a joint brokerage account?

The benefits of opening a joint brokerage account for couples are that they can pool their money and resources to make investments, and they can also make joint decisions about how to manage the account.

How can you start a joint brokerage account?

There are a few ways to start a joint brokerage account. The most common way is to go to a broker and open an account together. Another way is to open an account online.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Jul

2024

What Are Penny Stocks & How Do They Work?

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Penny stocks are shares of companies that usually trade for less than $5 per share. They are highly speculative investments, meaning they carry a high degree of risk. Usually, traders looking for short-term gains use penny stocks, rather than long-term investors looking to build wealth.

But investors are often allured by penny stocks because they are relatively cheap and offer the prospect of high returns – but there are significant risks associated with penny stocks, too. Before trying to use penny stocks to make quick gains, investors must know how they work and the risks involved.

What Are Penny Stocks?

Penny stocks are low-priced financial securities that trade for less than $5 a share, though they often trade for less than $1.

Penny stocks are generally considered to be highly speculative, or relatively higher-risk investments. This is because most penny stocks are issued by small, unknown companies with little or no operating history. In addition, these companies often lack the financial resources to continue operating for very long and are susceptible to fraud.

Despite the risks, some investors are attracted to penny stocks because they offer the potential for significant returns over a short period of time. For example, if a penny stock’s price doubles from $0.30 per share to $0.60 per share, that’s a 100% return on investment on just a $0.30 price increase. Of course, the flip side is that you could possibly also lose all of your investment just as quickly.

Exploring Penny Stocks & How They Work

Although some penny stocks trade on major exchanges, such as the New York Stock Exchange or Nasdaq, most penny stocks trade on the over-the-counter (OTC) market, through the OTC Bulletin Board (OTCBB) or on the pink sheets.

Penny stocks that trade on the OTC market do not have the same regulatory requirements as companies listed on major exchanges. Companies that list their shares on the major exchanges are subject to a high degree of regulatory scrutiny; these publicly traded companies must meet minimum listing standards and provide regular financial reports to the Securities and Exchange Commission (SEC).

In contrast, over-the-counter stocks have fewer hoops to jump through, as they do not have to meet minimum listing requirements. However, penny stocks that trade on the OTCBB must file financial statements with the SEC, while penny stocks listed on the pink sheet are not required to do so.

Because many penny stocks do not have to report periodic financial statements to a regulatory agency, it can be difficult for investors to find adequate information to make informed investment decisions on these securities. This lack of knowledge is one of the reasons penny stocks tend to be higher-risk investments.

Penny Stocks Are Highly Speculative

As noted above, penny stocks are highly speculative investments often bought and sold by traders who want to make short-term gains. Because of this potential for significant, short-term gains, many people view penny stocks as a way to generate outsized returns quickly. However, this is far from the case; penny stocks tend to carry a high degree of risk and, as such, may be better investment options for investors with the time, money, and risk tolerance to dabble in this market.

Who Can Buy Penny Stocks?

Anyone can buy and sell penny stocks, though it is recommended that they have the appropriate risk tolerance before investing in these speculative securities.

To trade penny stocks, you’ll need to open an account with a brokerage that offers OTC trading. Many online brokers offer this service, but do your research before selecting one, including what kind of fees they charge. Once you have an account, you can start buying and selling penny stocks.

Pros of Penny Stocks

Penny stocks may be attractive to investors for a couple of key reasons.

High Reward Potential

There is a belief by some penny stock traders that these small securities have more room to grow than large stocks, thus resulting in significant, short-term price appreciation. The potential for short-term gains means that penny stocks may provide high rewards, despite their risks, especially if traders utilize buying on margin to make their trades.

Enjoyment

Just as some people like to gamble, others like to trade stocks and other securities for fun. Plenty of people would consider analyzing stock charts, reading up on unknown companies, and making bets as one of their hobbies. Traders like this might consider penny stocks as “fun spending,” not necessarily a part of a long-term investing strategy.

Cons of Penny Stocks

Penny stocks also have some drawbacks that investors should be aware of.

Small Likelihood of Success

Making money on a penny stock can be a rare occurrence. Investors should be aware of this, despite the tales of sudden wealth they may hear. Also, finding success trading penny stocks may often take longer than some investors expect or anticipate.

Possibility of Losing it All

A small likelihood of success means that there will inevitably be many failures. It is common for small, unestablished businesses to fold and go under, flounder, or have unsuccessful stock. When stocks become worthless, investors effectively lose all of their investment.

Lack of Liquidity

Penny stocks usually do not have a lot of liquidity, meaning it can be challenging to find buyers when you want to sell. This can make it hard to get out of a position if the stock price declines.

Volatility

Penny stocks tend to be highly volatile, which means that their prices can change a lot, rapidly. This can happen in either direction, making them a difficult tool for building long-term wealth.

Scammers

The penny stock segment of the market is often rife with scammers and fraudsters. Numerous penny stock newsletters promise big wins, and penny stock “investors” manipulate both the market and potential customers.

Researching Penny Stocks to Buy

It’s often difficult for investors to adequately research what penny stocks to buy and sell. Because many penny stock companies do not have to file reports to regulators, investors do not always have great information about the company’s finances, management, and operations.

One of the first things investors should do is check online resources like the OTC Markets website to search for company information on the penny stocks you’re interested in. Once you’ve done that, you can see if the companies have filed reports with the SEC through its EDGAR database. Using this company and financial information, you can develop a sense of the company’s finances and business practices.

Also, it may help to look at penny stocks that trade on exchanges such as the NYSE or NASDAQ. Because these stocks are required to file regular financial reports to the SEC, there is more easily accessible research investors can use to make investment decisions. Additionally, these companies are usually more stable and have more liquidity than penny stocks trading on the pink sheets or OTCBB.

Overall, you’d want to review as much public information as possible when researching penny stocks to buy and sell. When you make investment decisions with inadequate public information, you may open yourself up to relying on shady information that could come from paid promoters or fraudsters looking to pump and dump a stock.

The Takeaway

The allure of making significant, short-term gains by trading penny stocks draws many people into the market. But with the potential of high rewards comes the increased risk and a probability that gains will be hard to come by. Before diving into penny stock trading, assessing your risk tolerance is essential to see if this strategy is right for you.

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

FAQ

Can you make money with penny stocks?

While making money with penny stocks is possible, it is also possible to lose money. Penny stocks are generally considered a high-risk investment, and as such, they may not be suitable for all investors.

Are penny stocks good for beginners?

Trading penny stocks is likely not advisable for beginners, as they are often very volatile, difficult to research, and can be challenging to trade. It may be best to consult with a financial professional before trading penny stocks.

Are penny stocks popular investments?

Penny stocks are sometimes popular investments for traders looking for high-risk, high-reward investments. These stocks are typically very volatile, which can lead to significant profits or losses.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q324-001

Jul

2024

Timberland Investment: Benefits and Risks

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

An increasing number of investors looking for diversification and long-term profits have turned their focus to timberland investments, a strategy that involves purchasing and managing forested land for profit.

Timberland provides a special combination of potential long-term land value appreciation, revenue from lumber sales, and in some cases environmental advantages. This strategy also, however, comes with a unique set of risks and challenges owing to climate and geographical factors.

What Exactly Is a Timberland Investment?

Buying forest land with the primary goal of managing and harvesting the timber for profit is known as a forestry investment. Because the growth and production of timber is not correlated with the stock or bond markets, timberland investing is considered an alternative asset class.

It also may be a hedge against inflation, as the demand for lumber and other wood-based products tends to grow over time, and rarely tracks the movement of stock and bond markets.

Periodic wood sales, land value appreciation, and prospective leasing opportunities for recreational use or conservation easements are some of the ways that a timberland investment may pay off over time.

Investments in timberlands that are managed responsibly may yield a renewable resource, and balance commercial interests with environmental management. This asset class combines aspects of real estate and agricultural investment to provide a practical investment in natural resources.

Ways to Invest in Timberland

Large institutional investors like pension funds and universities may own millions of acres of timberland outright. While land management on that scale may be difficult for retail investors, individuals can invest in this asset class through mutual funds as well as exchange-traded funds (ETFs) that are focused on forest land, and companies that supply infrastructure or produce timber-based goods.

REIT investing (real estate investment trusts) is another avenue that individual investors can use to access timberland investing. Certain types of REITs include lumber-producing properties, and related real estate.

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How Can Timberland Be Profitable?

Timberland can be a desirable alternative investment since it can provide income from a number of sources. The main source of income is the recurring sales of harvested timber, which is utilized in many different businesses such as energy, paper, and construction. But timberland offers a range of potential growth opportunities, including:

• The value of timber itself. Trees gain value over time as they grow, and the demand for timber tends to increase as well — a potential upside for investors long term.

• Land value. The land itself may also increase in value over time. By building infrastructure, such as roads, bridges, and trails that increase accessibility and appeal for a variety of applications, investors may also see higher land values, or profits from land use deals.

• Potential for development. After the trees have been harvested, a property may be developed for residential or commercial use.

• Recreational activities. Additionally, timberland can make money through leases for outdoor activities like fishing, hunting, and ecotourism, or by selling carbon credits. While preserving the forest’s natural health, long-term income can be realized through effective management and sustainable methods.

Benefits of Investing in Timberland

There are several advantages to investing in forestry that may provide both financial and environmental benefits. Timber is a tangible good with steady demand in sectors like building, paper, and energy — unlike stocks, which may be volatile and subject to market swings.

As a result, timberland investments typically have a low correlation with traditional asset classes such as stocks and bonds. One of the main advantages of investing in timberland is that it offers portfolio diversification, which can help investors manage risk.

The consistent biological development of trees — which, depending on species, temperature, age, and other factors, increases their volume by an average of 5% annually — makes forest investment attractive. Timberland may yield relatively consistent, long-term profits from the sale of timber, as well as possible increases in property values. As such, it offers a hedge against inflation, as timber prices tend to rise with general price levels.

While not exactly known as a green investing strategy, investments in timberland may promote environmentally sound forestry methods, and aid in carbon sequestration, which improves the ecological health of forests and the planet as a whole.

Additionally, owning timberland may result in tax benefits, such as possible deductions for land management initiatives like conservation easements.

Timberland investors can benefit greatly from the expansion of the housing sector in particular, since they can take advantage of the growing demand for building materials.

Risks and Challenges of Timberland Investing

Although investing in timberland has many advantages, there are also risks and challenges that potential investors need to take into account.

Timber prices may be subject to market volatility, which might result in inconsistent revenue from sales of timber. Furthermore, timberland is an illiquid asset, which means that selling it rapidly without risk of loss is challenging.

Wildfires, pests, and diseases are examples of environmental dangers that can seriously harm wood supplies and lower the investment’s value.

It can be expensive and time consuming to manage a timberland investment because it calls for specific knowledge and constant attention to forestry techniques and markets.

The profitability and operational flexibility of timberland investments may be impacted by modifications to laws and policies pertaining to environmental protection and land use.

Timberland Investing Pros and Cons

Potential Advantages	Risks and Challenges
Portfolio diversification	May succumb to volatility in certain markets
Potential for long-term profits	Highly illiquid
A hedge against inflation	Vulnerable to climate change and environmental risk factors
Environmental benefits	Political issues and land disputes
Potential tax advantages	Management/maintenance costs
Tends to rise with housing market	Regulatory hurdles

Alternative Investments With SoFi

Investing in timberland can be a wise alternative investment, since it can provide income as well as potential profits from a number of sources. And because the demand for timber is typically steady over time, investors in this asset class may be able to enjoy long-term growth.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What are the key advantages of investing in timberland?

Timberland investments offer several benefits, such as portfolio diversification, inflation protection, the potential for consistent long-term earnings, sustainable forestry, and possible tax advantages.

What are the major risks and challenges of timberland investments?

The major risks and challenges of timberland investments include market fluctuations affecting timber prices, illiquidity of the asset, environmental threats such as wildfires and pests, high management costs, and regulatory changes impacting land use and profitability.

Is timberland investment a good way to diversify?

Investing in forestry may help to lower overall investment risk because it has a low correlation with other conventional asset classes like stocks and bonds.

Photo credit: iStock/SimonSkafar

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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

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 emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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.

SOIN-Q224-1900857-V1

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Researching Penny Stocks to Buy

The Takeaway

FAQ

Can you make money with penny stocks?

Are penny stocks good for beginners?

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Timberland Investment: Benefits and Risks

What Exactly Is a Timberland Investment?

Ways to Invest in Timberland

Alternative investments, now for the rest of us.

Explore trading funds that include commodities, private credit, real estate, venture capital, and more.

How Can Timberland Be Profitable?

Benefits of Investing in Timberland

Risks and Challenges of Timberland Investing

Timberland Investing Pros and Cons

Alternative Investments With SoFi

FAQ

What are the key advantages of investing in timberland?

What are the major risks and challenges of timberland investments?

Is timberland investment a good way to diversify?

Alternative investments,
now for the rest of us.

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