Aug
30
2022
Guide to Writing Put Options

Guide to Writing Put Options

By | Growing Wealth, invest, Investing | Comments Off on Guide to Writing Put Options

Puts, or put options, are contracts between a buyer – known as the holder of an option – and a seller – known as the writer of an option – that gives the buyer the right to sell an asset, like a stock or exchange-traded fund (ETF), at a specific price within a specified time period. The seller of the put option is obligated to buy the asset at the strike price if the buyer exercises their option to sell.

Writing a put option is also known as selling a put option. When you sell a put option, you agree to buy the underlying asset at a specified price if the option buyer, also known as the option holder, exercises their right to sell the asset. The premium you receive for writing the put option is your maximum possible profit.

Generally, traders who buy put options have a bearish view of a security, meaning they expect the underlying asset’s price to decline. In contrast, the put option writer has a neutral to bullish outlook of a security. The put writer should be willing to take the risk of having to buy the asset if it falls below the strike price in exchange for the premium paid by the put option holder.

Writing put options is just one of numerous trading strategies investors use to build wealth, speculate, or hedge positions. While there is potential to generate income by writing put options, it can also be a risky way to enhance a portfolio’s return. Only investors with the knowledge of how to write put options and risk tolerance to take on this strategy should do so.

Writing Put Options

When writing a put option contract, the seller will initiate a trade order known as sell to open.

As mentioned above, the put option writer is selling a contract that gives the holder the right to sell a security at a strike price within a specified time frame. The put option writer will receive a premium from the holder for selling this option. If the price of the security falls below the strike price before the expiration date, the writer may be obligated to buy the security from the holder at the strike price.

There are two main reasons to write a put option contract: to earn income from the premium or to hedge a position.

A naked, or “uncovered,” put option is an option that is issued and sold without the writer setting aside any cash to meet the obligation of the option when it reaches expiration. This increases the writer’s risk.

💡 Recommended: What Are Naked Options? Risks and Rewards, Explained

Maximum Profit/Loss

The most a put option writer can profit from selling the option is the premium received at the start of the trade. Many traders take advantage of this profit as a way to generate regular income by writing put options for assets that they expect will not fall below the strike price.

However, this strategy can be risky because there can be significant losses if the asset’s price falls below the strike price. For example, if a stock’s price plummets because a company announces bankruptcy, the put option writer may be obligated to buy the stock when it’s trading near $0. The maximum loss will be equal to the strike price minus the premium.

Breakeven

The breakeven point for a put option writer can be calculated by subtracting the premium from the strike price. The breakeven point is the market price where the option writer comes away even, not making a profit or experiencing a loss (not including trading commissions and fees).

Writing Puts for Income

There are many options trading strategies. As noted above, many traders will write put options to generate income when they have a neutral to bullish outlook on a specific security. Because the writer of a put option receives a premium for opening the contract, they will benefit from that guaranteed payment if the put expires unexercised or if the writer closes out their position by buying back the same put option.

For example, if you believe an asset’s price will stay above a put option’s strike price, you can write a put option to take advantage of steady to rising prices on the underlying security. By keeping the option premium, you effectively add a stream of income into your trading account, as long as the underlying asset’s price moves in your favor.

However, with this strategy, you face the risk of having to buy the underlying asset from the option holder if the price falls below the strike price before the expiration date.

💡 Recommended: How to Sell Options for Premium

Put Writing Example

Let’s say you are neutral to bullish on shares of XYZ stock, which trade at $70 per share. You execute a sell to open order on a put option expiring in three months at a strike price of $60. The premium for this put option is $5; since each option contract is for 100 shares, you collect $500 in income.

If you wrote the put option contract for income, you’re hoping the price of XYZ stock will stay above $60 through the expiration date in three months, so the option holder does not exercise the option and requires you to buy XYZ. In this ideal scenario, your maximum profit will be the $500 premium you received for selling the put option.

At the very least, you hope the stock does not fall below $55, or the breakeven point ($60 strike price minus the $5 premium). At $55, you may be obligated to buy 100 shares at the $60 strike price:

$5,500 market value – $6,000 price paid + $500 premium earned = $0 return

If XYZ stock falls to $50, the put option holder will likely exercise the option to sell the stock. In this scenario, you will be obligated to buy the stock XYZ at the $60 strike price and incur a $500 loss in this trade:

$5,000 market value – $6,000 price paid + $500 premium earned = -$500 return

However, the further the price of XYZ falls, your potential loss risk increases. In the worst-case scenario where the stock falls to $0, your maximum loss would be $5,500:

$0 market value – $6,000 price paid + $500 premium earned = -$5,500 return

Put Option Exit Strategy

In the example above, it is assumed that the option is exercised or expires worthless. However, a put option writer can also exit a trade in order to profit or mitigate losses prior to the contract’s expiration.

A put writer can exit their position anytime using a trade order known as buy to close. In this scenario, the writer of the initial put option will buy back a put option to close out a position, either to lock in a profit or prevent further losses.

Using the example above, say that after two months, shares of XYZ have increased from $70 to $85. The value put contract you sold, which still has one more month until expiration and a $60 strike price, has collapsed to $1 because of a share price rise and perhaps a drop in expected volatility. Rather than wait for expiration, you decide to buy to close your put position, buying back the put contract at $1 premium, for a total of $100 ($1 premium x 100 shares). You are no longer obligated to buy shares of XYZ in the event the stock drops below $60 during the next month, and you lock in a profit of $400:

$500 premium earned to sell to open – $100 premium paid to buy to close = $400 return

A buy to close strategy can also be used to mitigate substantial losses. For example, if stock XYZ’s price starts dropping, the value of puts with a $60 strike price and a similar expiration date will rise. Rather than wait for expiration and be obligated to buy shares of a stock you don’t want, potentially losing up to $5,500, you may exit the position at any time. If option premiums for this trade are now $8, you can pay $800 ($8 premium x 100 shares) to buy to close the trade. This will result in a loss of $300, a potentially more manageable loss than the worst-case scenario:

$500 premium earned to sell to open – $800 premium paid to buy to close = -$300 return

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The Takeaway

Writing a put option is an options strategy in which you are neutral to bullish on the underlying asset. Potential profit is limited to the premium collected at the start of the trade. The maximum loss can be substantial, however. Finally, there is the risk that you will be liable to buy the stock at the option strike price if the holder exercises the option. Because of all these moving parts, writing put options should be left to experienced traders with the tolerance to take on the risk.

Looking to try different investment opportunities? SoFi’s intuitive and approachable options trading platform is a great place to start. You can access educational resources about options for more information and insights. Plus, you have the option of placing trades from either the mobile app or web platform.

Trade options with low fees through SoFi.

FAQ

What happens when you sell a put option?

Selling a put option is the same thing as writing a put option. You profit by collecting a premium for selling the option or when the put options decline in value, which usually happens when the underlying asset price rises. A significant risk of writing a put option is that you might be required to buy shares of the underlying asset at the strike price.

How would you write a put option?

You write a put option by first executing a sell to open order. You collect a premium at the onset of the trade without owning shares of the underlying asset. This strategy can be risky, so it generally requires high-level options trading knowledge.

When would you write a put option?

If a trader believes an asset’s price will stay flat or increase over a period of time, they may choose to write a put option. If the underlying asset’s price increases, the put option’s value will decline as it nears expiration. A profitable outcome occurs when the value of the put option is zero by expiration, or if the put writer buys to close the position before expiration. The put writer will profit by keeping the premium received at the initiation of the trade.

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Aug
25
2022
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What Are Liquid Assets and How Do They Work?

By | Budgeting & Goals, invest, Terminology | No Comments

“Liquid assets” is a phrase that gets tossed around frequently in financial circles but what exactly does it mean? 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 closer look at the topic and how liquid assets can contribute to your financial wellbeing, including:

•   What makes an asset liquid?

•   What are examples of liquid assets?

•   What are examples of non-liquid assets?

•   Why are liquid assets important?

•   How can you start building liquid assets?

What Makes an Asset Liquid?

What is a liquid investment, and where does it fit into your financial picture? First, it helps to understand liquid assets’ meaning. Liquidity means that you can readily access an asset as cash. 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. If you needed cash quickly, you likely would not be able to sell your home overnight to get money.

For an asset to be considered liquid, it must be traded on a well-established market with a large number of buyers and sellers. It also 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 vintage watch collection 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 two days, according to Securities and Exchange Commission rules. Here, you’ll learn more about what are considered liquid assets.

Examples of liquid assets

•   Stocks. Are stocks considered liquid assets? They often are 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. Also, 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. It is therefore thought of as a relatively safe vs. risky investment. 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 savings account that’s insured by the Federal Deposit Insurance Corporation (FDIC).

•   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.

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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 artwork, as well as hobby collections like stamps and baseball cards, may be hard to value and difficult to sell.

•   Employee stock options. While employee stock options can be a valuable form of compensation, they may also be highly non-liquid. 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 or two months of 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.

Recommended: How to Start a Retirement Savings Plan

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 and/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. While owning an asset doesn’t make it taxable, 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 short-term financial goals as well as longer-term ones. And while cashing in liquid assets might be necessary, it’s also prudent to keep some 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’ worth of expenses in the form 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, including 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 up more liquidity by growing your emergency fund.

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 what you might need in the event of a crisis (e.g., a job loss, divorce, health event, and so on). In terms of how much to save in an emergency fund, aim to accumulate 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 Checking and Savings — an online bank account that can hold your cash savings. When you sign up with direct deposit, you will earn a competitive APY, plus you won’t pay any account fees. It’s simple to sign up, and you’ll enjoy features that make auto-savings especially easy.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

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SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

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SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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19
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When Is the Stock Market Closed?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on When Is the Stock Market Closed?

Generally, investors can buy and sell stocks Monday through Friday between 9:30am-4pm ET, but the exact schedule can vary based on time zone, market, and holiday season. The stock market is closed on weekends and many holidays. Additionally, the major stock exchanges may close or stop trading unexpectedly due to several reasons, like natural disasters or technical glitches. It’s all a part of how the stock markets work.

While a person can always access stock market data, the stock exchanges have strict operating hours during a typical work week. Knowing the stock market schedule and when the stock market is closed can help investors make better investment decisions.

U.S. Stock Market Holidays 2022

Even with standard operating hours, stock markets will close their markets completely for certain holidays. The New York Stock Exchange and Nasdaq recognize the following holidays:

•   New Year’s Day

•   Martin Luther King, Jr. Day – Monday, January 17

•   Washington’s Birthday – Monday, February 21

•   Good Friday – Friday, April 15

•   Memorial Day – Monday, May 30

•   Juneteenth National Independence Day – Monday, June 20 (observed)

•   Independence Day – Monday, July 4

•   Labor Day – Monday, September 5

•   Thanksgiving Day – Thursday, November 24

•   Christmas Day – Monday, December 26 (observed)

Additionally, the stock market closes early (at 1pm ET) on the following dates:

•   Black Friday

•   Christmas Eve, if the holiday falls on a weekday

Stock exchanges in other countries might have different national holidays and operating schedules.

Is the Market Closed the Following Monday After a Holiday?

For holidays with a fixed date, like Juneteenth (June 19), Independence Day (July 4), and Christmas (Dec. 25), the stock market will be closed on the preceding Friday if the holiday falls on a Saturday or the following Monday if the holiday falls on a Sunday.

However, if New Year’s Day (Jan. 1) falls on Saturday, the holiday is not observed; the stock market will be open on the preceding Friday and the following Monday.

Other Times the Stock Market Closes or Is Halted

In addition to planned holidays, historically, the stock market has closed trading in times of crisis or technical challenges.

At the beginning of the Covid-19 pandemic in early 2020, markets were halted multiple times due to unprecedented drops in the market. Called trading curbs or circuit breakers, these are temporary pauses mandated by the Securities and Exchange Commission in 2012. Each level follows different criteria:

•   Level 1: A 7% drop in the S&P 500 Index compared to closing the day before will trigger the market to be paused for at least 15 minutes.

•   Level 2: A 13% drop in the S&P 500 compared to closing the day before will trigger at least a 15-minute pause in the market.

•   Level 3: A 20% drop in the S&P 500 compared to closing the day before will trigger a premature close on trading for the rest of the day.

Trading curbs can occur for a single stock and a whole market. It’s more common for the curb to be tripped on a single stock, but unprecedented events can spark a whole market pause. Covid-19 caused three trading curbs in just over a week.

The stock market may also close unexpectedly due to unprecedented events. For example, the terrorist attacks of Sept. 11, 2001, caused the NYSE to close for a week, while Superstorm Sandy forced the NYSE to close for two days in Oct. 2012.

Additionally, the markets may close down to honor the death of a world figure, as was the case with George H.W. Bush and Martin Luther King Jr.

The market has also closed unexpectedly due to technical glitches and cybersecurity threats; in July 2015, the NYSE temporarily stopped trading because of a technical issue on the floor.

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Stock Market Operating Hours

In the United States, the major stock exchanges are generally open Monday through Friday, with core trading hours between 9:30am-4pm ET. The stock market does not operate during the weekend.

Because the different stock exchanges operate on eastern time, these trading hours are different throughout the U.S., depending on time zones and daylight savings time.

However, with so many global stock exchanges, a market may always open if an investor is interested in trading in foreign markets. Most markets operate during their time zone’s business hours.

💡 Recommended: Pros & Cons of Global Investments

Why Does the Stock Market Close Each Day?

The stock market closes each day for several reasons, notably because it allows for the settlement of all trades that have occurred. The close gives market professionals time to calculate the day’s trading results and prepare for the next day.

Additionally, the stock market close is helpful for investment brokers and traders to catch up on paperwork and other administrative tasks.

While the stock market closes each day at 4pm in the United States, other markets, like cryptocurrency and foreign exchange markets, offer trading 24 hours a day.

💡 Recommended: Is 24/7 Stock Trading Available?

When Does the Market Open for Premarket Trading?

The market opens for premarket trading at 4 am ET and operates until 9:30 am ET.

While most stock trading occurs during the normal 9:30am-4pm ET operating hours, investors can also take advantage of extended-hours trading. Investors may be interested in trading during the premarket because of the release of economic data, company earnings reports, and other major news events.

Investors must use an alternative trading system known as electronic communication networks (ECNs) to make trades during premarket trading.

However, investors must be aware of the risks associated with premarket trading. Because fewer buyers and sellers operate during the early hours, there is lower liquidity and higher volatility.

Premarket trading probably isn’t for a beginner investor; if you don’t need to buy or sell a stock immediately, you might prefer to wait until regular trading hours.

💡 Recommended: How to Invest in Stocks: A Beginner’s Guide

After-Hours Trading

The closing bell for the major U.S. stock exchanges might ring promptly at 4 pm ET, but there’s still after-hours trading: it’s possible to buy, sell, and trade stocks between 4pm-8pm ET. Electronic trading tools like ECNs mentioned above make it possible to conduct business after hours, but making moves during after-hours trading comes with its own risks, just like during premarket trading.

The Takeaway

Investors should be aware that the stock market is closed on weekends, designated holidays, and for world events and other disruptive circumstances. When the stock market is open, the exchanges generally operate on a 9:30am-4pm ET schedule, Monday through Friday. Knowing when the stock market is open and closed can allow investors to strategize the best time to make trades and investments.

If you’re ready to invest, SoFi Invest® can help. With a SoFi online brokerage account, you can trade stocks, exchange-traded funds (ETFs), and fraction shares with no commissions for as little as $5. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

Get started with SoFi Invest today.

FAQ

Is the stock market closed on holidays?

The stock market is generally closed on New Year’s Day, Martin Luther King Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

When is the stock market closed and opened?

The stock market in the United States is closed on weekends and some holidays. The stock market is generally open Monday through Friday from 9:30am-4pm ET.

Is the stock market open for extended hours?

The stock market is open for extended hours, from 4am-9:30am ET for premarket trading and 4pm-8pm for after-hours trading. However, trading during this period can be risky.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Aug
18
2022
cryptocurrencies

What Are Digital Assets in the Crypto World?

By | Growing Wealth, invest, Investing | Comments Off on What Are Digital Assets in the Crypto World?

The meaning of digital assets has morphed over time from commonly known digital items (e.g. data, images, video, audio files, etc.) to a broader definition that includes entities that can be created and/or stored using blockchain technology, are verifiably unique, and can be used to generate value.

Digital assets now include different cryptocurrencies, non-fungible tokens (NFTs), crypto assets such as utility or security tokens, and more. While trading crypto is one of the most common ways to invest in digital assets, there are many options to choose from.

What Is a Digital Asset?

Putting aside IRL forms of digital assets that can be created and stored on devices (e.g. text, images, video, audio), the real innovation in digital assetry began with the birth of blockchain technology.

Blockchain technology is a decentralized, transparent, append-only digital ledger that can be used to track or record almost any type of asset, from goods and services to patents, smart contracts, decentralized apps (dApps), and more.

Blockchain technology relies on cryptography and a system of peer-to-peer verification, or consensus mechanisms, to secure transactions and, in the case of cryptocurrency, to mine coins and tokens.

Although most people think cryptocurrency is synonymous with blockchain technology, in fact blockchain technology is increasingly common for a range of digital products and functions — especially the creation and storage of digital assets.

Types of Digital Assets

Broadly speaking, most digital assets fall into two general categories:

1.    Cryptocurrencies

2.    Cryptographic tokens

Cryptocurrencies

There are thousands of different types of cryptocurrency beyond Bitcoin (these are often referred to as altcoins). As of August 12, 2022, some of the top crypto include:

•   Ethereum (ETH)

•   Binance Coin (BNB)

•   Ripple (XRP)

•   Tether (USDT)

•   Polkadot (DOT)

•   Litecoin (LTC)

In general, though, crypto digital assets are decentralized forms of currency; they exist on a blockchain platform, and are secured by either a proof-of-work (PoW) consensus mechanism (which involves mining), or a proof-of-stake system (PoS), where users lock up or stake some of their coins in order to become validators.

Of the many types of crypto, the vast majority have emerged from new projects. But some are hard forks from existing blockchains (e.g. Litecoin launched in 2011 after a hard fork from Bitcoin).

Others are stablecoins, meaning they’re pegged to a fiat currency like the dollar, euro, or yen, and aim to keep a 1:1 value with that currency.

💡 Interested in crypto? Learn the basics with our Crypto 101 Guide.

Cryptographic Tokens

Tokens are digital assets that can serve a variety of purposes on a blockchain platform. One of the most common types of tokens is known as a utility token, which is a token that serves a specific function within a blockchain ecosystem.

For example, as blockchain technology has advanced and the DeFi space (decentralized finance) has grown, users typically need utility tokens native to each platform to execute certain functions on that platform.

One common example is how ERC20 tokens are used on the Ethereum platform to pay for goods and services (e.g. dapps and smart contracts).

Another example of a utility token would be the Basic Attention Token (BAT). BAT is the native token of the Brave web browser, which is built on Ethereum and seeks to protect users’ privacy with a new advertising model.

There are even digital assets for social networks that reward users in the form of crypto when they create and curate quality content, like Steemit does with the STEEM token.

Digital Assets in Marketing

These days, with so many types of digital and blockchain-based digital assets, many organizations have come to rely on Digital Asset Managers (DAMs).

DAM cloud software plays a vital role for businesses that need a way to catalog and store all the various forms of data and media relevant to that company, including images, video and audio files, social media, as well as cutting-edge material like VR and AR.

In particular, marketers make use of DAM software in order to manage the brand’s entire library of digital assets, to streamline online and offline channels.

Digital Assets in Investing

Perhaps the most important aspect of digital assets for investors is that each one is unique and stored on a blockchain, therefore they provide a form of real world value that can rise and fall like any other asset (e.g. stocks, bonds, mutual funds).

Digital assets present a range of new opportunities for investors. Not only can you buy and sell the many forms of crypto, you can trade NFTs, stake tokens, and more.

Legacy markets have certain limitations that crypto markets in general and digital assets in particular may help solve, especially in regard to cross-border transfers, minimum capital requirements, and the availability of certain asset classes. Because digital assets are decentralized, meaning they are created and stored without the need for middlemen, there are new possibilities for all market participants.

Virtual Assets vs Digital Assets

Virtual assets predate digital assets, in the sense that the acquisition and trading of virtual assets has been core to the online gaming industry for years. It’s important to note however that virtual gaming assets could not be traded in a liquid market initially, whereas the digital asset market allowed for limited liquidity trading.

History of Blockchain Digital Assets

The Bitcoin white paper, also known as the Satoshi Nakamoto white paper, was published on October 31, 2008. About two months later, on January 3, 2009, the Bitcoin network went live, the first Bitcoin was created, and a new asset class (cryptocurrency) was born thanks to the emergence of blockchain, a peer-to-peer, decentralized technology that would soon change the world.

While the pioneering Bitcoin protocol helped establish the market for crypto digital assets, it wasn’t long before developers and entrepreneurs seized on the potential of blockchain technology to innovate in the DeFi space.

In 2015, the Ethereum network launched (following a 2013 white paper). From the start, Ethereum was meant to build on Bitcoin’s foundation. It was built as more than a form of crypto, but rather a programmable blockchain platform with the capacity to support smart contracts, dapps (decentralized apps), and other DeFi projects.

Ethereum and other like-minded projects that emerged around the same time revolutionized how blockchain was used and how digital assets were formed.

Pros and Cons of Investing in Digital Assets

How should investors consider the various opportunities in the digital asset space? Here are some advantages and disadvantages.

Pros

Individual Sovereignty

Bitcoin allows people to become their own bank. When storing assets at a traditional bank or other financial institution, an individual becomes vulnerable to the risk of that institution going bankrupt or mismanaging their funds. This risk is known as counterparty risk.

Because digital assets and crypto are mainly decentralized, they can eliminate counterparty risk.

By holding their own private keys in a crypto wallet, investors can have total ownership of their digital assets and cryptocurrency. Other than gold or silver, no other asset has this quality.

Diversification

Bitcoin has been the best performing asset class of the last decade by far. During eight of those years, the returns from holding Bitcoin exceeded that of any other asset in the world. (That said, as with any investment past performance is not an indication of future performance.)

Cryptocurrency can diversify an investment portfolio in a way no other asset class can. Crypto is known as a “non-correlated asset,” meaning it tends to have little or no correlation to other traditional securities (although this has changed at times and is no guarantee of future performance).

Inflation Hedge

While all investing carries risk, investors often fail to factor in the one risk inherent in every investment denominated in fiat currency (stocks, bonds, mutual funds, ETFs, etc.): Inflation risk.

The law of supply and demand dictates that when the supply of something increases, its price will decrease absent an equal or greater increase in demand. With central banks creating tens of trillions of new currency units in recent years, some investors have begun looking toward digital assets and cryptocurrencies that have fixed supply limits, like Bitcoin.

It should be noted that the only cryptocurrencies that can serve as viable inflation hedges are those that have a fixed supply. Like gold, scarce commodities tend to increase in value during times of inflation.

In addition, global uncertainty and turmoil tend to increase demand for safe haven assets.

Cons

Digital assets can be extremely volatile, whether you’re talking about the ups and downs of cryptocurrencies or the value of NFTs.

In addition, while digital assets can be considered secure because they are created and stored using decentralized technology and peer-to-peer verification systems, the reality is that when blockchain networks are hacked, those digital assets are at risk. Also, many scams are built around fake digital assets.

The market for digital assets is largely unregulated. Investors have to proceed with caution, verifying procedures, and networks, in order to avoid losses.

Digital Assets and Risk

As noted above, the vast majority of altcoins are highly speculative in nature. Most have small market capitalizations of less than $1 billion or even less than $100 million, so their prices can swing dramatically in short periods of time due to a lack of liquidity. And in the long run, it’s not unheard of for altcoins to drop to zero, meaning investors lose everything.

Bitcoin might be a little different because it has the most secure network (due to having the highest hashrate), the longest track record, and the largest market cap by far. Still past performance is no guarantee of future results, so it’s important for crypto investors to understand the risks inherent in investing in digital assets.

Best Practices for Investing in Digital Assets and Cryptocurrency

Anyone considering investing in digital assets and cryptocurrency would do well to educate themselves on related subjects.

The more a potential investor familiarizes themselves with crypto terms like bitcoin halving, bitcoin forks, and how crypto exchanges work, the less confusing this type of investment will seem.

Due to the volatile nature of digital assets and cryptocurrency, one possible investing strategy is dollar-cost averaging. Rather than trying to time the markets, investors can buy fixed dollar amounts at certain intervals. An example would be an investor setting a recurring buy for an automatic purchase of $50 worth of crypto every two weeks.

The Takeaway

Digital assets is a broad term. It has morphed over time from more tangible digital items like text and images to a definition that includes entities that are created using blockchain technology. Unlike tangible digital assets, today’s digital assets generate real-world value and are an asset class unto themselves.

Digital assets not only include cryptocurrencies and non-fungible tokens (NFTs), but also crypto assets such as utility or security tokens, and more. Trading these assets comes with certain risk factors, but considering how new this area is, there are also many opportunities for investors.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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2022
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Average Stockbroker Commission Percentage

By | Growing Wealth, invest, Investing | Comments Off on Average Stockbroker Commission Percentage

Investing in the stock market is usually alluring for those trying to grow their money. But there are many things to consider before jumping in — chief among them stockbroker commissions. Stockbrokers often charge commissions and other fees for the use of their services, and these brokerage fees can vary widely.

Investors must pay attention to average brokerage fees when making investment decisions; finding the right broker can play a significant role in long-term financial outcomes. Before delving into how much stockbrokers typically charge for their services, it’s worth understanding their role in an individual’s investment strategy.

What Does a Stockbroker Do?

A stockbroker, or investment broker, is an individual or firm that charges a fee or commission to buy or sell stocks and other securities on behalf of their clients. Using a stockbroker is relatively common for people looking to invest in the market.

Buying stocks isn’t like making other purchases because the channels through which stocks are bought and sold are fairly controlled. While an individual buying a computer could choose to purchase directly from a manufacturer, a store, or a friend, the channels for buying stocks are much more limited. Generally, purchases of stock are required to flow through a stockbroker.

However, there are some instances when someone may buy stocks without a broker, including buying and selling through direct stock and dividend reinvestment plans.

A stockbroker has a license that allows them to trade registered securities, meaning the ability to buy and sell stocks on behalf of clients. But merely acting as an agent for buying and selling stocks doesn’t capture the full extent of what some brokers do. Many brokers offer additional services to clients, like money management and estate planning.

Because the types of services a stockbroker may offer, and the fees they levy on these services, can vary, it’s good to understand the main categories of brokers. In addition to selling shares of companies, a stockbroker may also sell other traded securities such as mutual funds and exchange-traded funds.

What Is the Average Stock Broker Commission Fee?

The amount charged by a brokerage firm for its services can vary greatly. Some firms may charge a flat fee for their services, while others may charge a percentage of the overall value of the transaction. The average fee charged by brokerage firms is typically between 1% and 2% of the total transaction value.

Full-Service vs Discount Stockbrokers

The main two categories of stockbrokers are full-service brokers and discount brokers. You want to understand the differences before opening a brokerage account.

As they sound, a full-service brokerage firm provides more hands-on service, helping clients balance their portfolios and providing other investment advice. Discount brokers allow an investor to buy and sell stock and other assets, but provide few add-ons but still. Commission rates and additional fees vary accordingly.

Because full-service stockbrokers provide an array of services over the year, they typically base their commissions on a more all-inclusive model determined by the value of the investments they manage. While there may also be additional fees, the typical commission structure for a full-service broker is known as the percentage of assets under management. The cost is charged annually and is listed within fee schedules as “x%/AUM” (assets under management).

Discount brokers, synonymous with online brokerage accounts, on the other hand, typically charge a per-transaction flat stock trade fee, regardless of the type of stock or number of shares being bought or sold.

For example, if the stock trade fee is $5 per trade, that’s what an individual would pay whether they were buying five shares of a stock valued at $50 a share ($250) or 500 shares ($25,000).

However, many discount brokers these days charge no commission for trading stocks.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Common Brokerage Fees

Various investment fees and costs are associated with the buying and selling of investments. Investors should consider these brokerage fees when choosing a broker and deciding what investments to make.

Management Fees

An investment’s management fee is the fee the investment manager charges for its services. This fee is typically a percentage of the investment’s assets under management and is deducted from the investment’s returns.

If you use a full-service brokerage that offers money management services, they will often charge a management fee. Some charge as much as 2% and others far less.

Generally speaking, the more money you have invested with a broker or money manager, the lower your management fee will be.

Commission For Trading

Many brokerage firms charge a commission for making trades on behalf of clients. Fees and commissions vary widely depending on the type of transaction and broker. Those fees can be based on a percentage of the transaction’s value — usually between 1% to 2% — or they can be a flat fee.

The commissions for trading depend on whether an investor uses a full-service or discount broker. Because full-service brokers offer a wide range of advice and services, their commissions per trade may be higher than a discount or online brokerage might charge.

Discount brokers offer fewer advice and services, so they can charge a lower flat fee per trade, from less than $5 to more than $30. In recent years, the biggest online brokerage firms have offered no commission trading, partly due to competition and because they instead get paid through a practice known as payment for order flow.

Retirement Account Fees: 401(k)

If you have a 401(k) savings account through your employer, there are several fees to keep in mind when making your investments.

First, you’ll likely be charged an administration fee to maintain the plan. These fees can range from 0.5% to 2% of your 401(k) balance. The 401(k) provider charges this fee to your employer, and the cost is usually passed down to the employees.

Additionally, the actual investments in your 401(k), like mutual funds and ETFs, charge management fees that you’ll have to pay.

Mutual Fund Fees

Investors interested in buying and selling mutual funds must consider the fees associated with these investment vehicles.

Expense Ratio

The expense ratio is the yearly cost that mutual funds and ETFs charge investors to cover operating costs. The expense ratio measures the total costs as a percentage of the fund’s total assets. The fund’s costs may include management, custodial, marketing, and other expenses.

The average expense ratio for an actively managed mutual fund ranges from 0.5% to 1.0%, while passive funds have an average expense ratio of 0.2%.

The costs of operating the mutual fund are deducted from your investment, reducing your returns each year.

Sales Load

Mutual fund investors may pay sales loads — also known as sales charges — when they buy or sell shares of the fund. The sales load is how the broker or advisor gets paid for their service.

A sales load isn’t a flat transaction fee, however. Instead, it’s a percentage of the assets invested.

FINRA caps mutual fund sales loads at 8.5%, though the common range is between 3% and 6%.

Brokerage Fee Impact on Investments Long-Term

Brokerage and investment fees and commissions can eat away at long-term gains. Thus, finding the right broker and investing in low-cost funds can help you achieve your long-term financial goals.

To illustrate, if full-service brokerage charges a 1.5% annual management fee on a $50,000 portfolio, that costs $750 for the investor during a single year. While that charge doesn’t seem significant for one year, those fees will add up and eat into overall returns over time.

Brokerage Fee Pros

One of the benefits of using a brokerage is that you have access to valuable resources, research, and advice. These services may help you make better investment decisions, leading to better financial outcomes. So, you may get what you pay for, even if you think the fees may be steep.

Brokerage Fee Cons

As noted above, brokerage fees can be expensive and eat into investment returns. This is especially a problem if you don’t do your homework and pay attention to all the fees charged by brokers and the kind of investments you make.

Additionally, high brokerage fees may discourage some people from investing, leading to poor long-term financial outcomes.

Is It Worth Using a Stockbroker?

Using a stockbroker, especially a full-service brokerage, can be ideal for investors intimidated by complicated financial markets. The idea of having a licensed professional guide novice investors through every investment decision and trade might seem like a good way to get more comfortable with the principles of investing. But as the above examples illustrate, the average full-service stockbroker commission can make the full-service approach expensive.

Free Trades and Chat With a Planner

With long-term returns that have historically outpaced interest rates on savings, investing in the stock market can be a powerful strategy for financial growth. Even beginners may find investing less intimidating than they thought — and possibly see clear of high stockbroker fees.

With a SoFi Invest® online brokerage account, you can start trading stocks and ETFs with no commissions for as little as $5. If you sign up for a SoFi account, you’ll even get complimentary access to financial planners, SoFi’s non-commissioned fiduciaries who are required to keep your best interests in mind.

Learn some of the advantages of investing with SoFi Invest

FAQ

How do stock brokerage fees work?

Stock brokerage fees are typically a commission that a broker charges for executing trades on behalf of their clients. These fees can vary depending on the type of trade being executed, as well as the broker’s commission structure.

Are there any alternatives to a brokerage fee?

A brokerage fee is a charge assessed by a broker for their services, which typically include advice, transaction execution, and asset management. There are a variety of alternatives to brokerage fees, including flat fees, subscription fees, and performance-based fees.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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