Aug
14
2023
How to Sell Options for Premium

How to Sell Options for Premium

By | Growing Wealth, invest, Investing | Comments Off on How to Sell Options for Premium

Many investors are looking to drive returns on their options trading strategies, and selling options for premiums is one way to do that. Option premiums are a sort of fee or initial price an option holder pays in order to trade contracts, and there is room to make a profit utilizing them.

But keep in mind that options trading is an advanced investment strategy, and that it may be over your head, particularly if you’re a new or young investor. That said, options premiums do have profit potential — if you know what you’re doing.

What Is An Option Premium?

An option premium is the price an option buyer pays to purchase options contracts at a fixed rate when the contract term ends. A seller, conversely, receives the payment. In other words, it is the current market price of an option contract, and the amount the seller makes when someone purchases the contract.

When investors buy options contracts, they are purchasing a derivative instrument that gives them the right to trade the underlying asset represented by the contract at a specific price within a predetermined period of time. The premium is the amount that the option writer receives if the contract holder exercises their right to buy or sell the asset.

The premium amount depends on how much time there is left until the option contract expires, the price of the underlying asset, and how volatile or risky it is.

Recommended: How To Trade Options: A Guide for Beginners

What Is Selling Options Premium?

Many investors are familiar with the process of investing in and trading options, but the other side of the market is to be on the seller side (writing options) and make a profit by selling for a premium.

Selling options is an options trading strategy in which an investor sells a buyer the right to purchase a stock at a predetermined price at some time in the future. The premium amount is collected upfront as a payment for the options seller taking on the risk that the underlying asset will rise or fall in value within the timeframe of the contract. The premium is not refundable.

The options seller can make a profit from the premium. In addition, if the buyer doesn’t exercise their right to trade the asset, when the contract expires the seller still holds the asset as well.

However, option selling also carries some investment risk. If the option ends up “in the money” for the buyer, the option writer could lose money, since they’ll have to sell the stock for less than its market price.

How Is an Options Premium Calculated?

The main factors that affect an option contract price are implied volatility, stock price, time value, and intrinsic value. Options writers receive premiums upfront when a buyer purchases a call or a put.

When an investor looks at options contract prices, they receive a per share quote, but each contract typically represents 100 shares of underlying stock. Investors will decide to either buy call or put options, depending on how they expect the stock’s price to perform in the future.

For example, an investor could decide to purchase a call option. The seller offers it to them for a $4 premium. If the investor purchases one contract which represents 100 shares of that stock, they would pay $400 for it. If the buyer never executes the contract (because the price of the stock is at or below the strike price when the contract expires), the seller’s profit is $400, or the entire premium.


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

Stock Price

If an investor buys a call option, they are hoping the underlying stock price increases, whereas if they buy a put option they hope it decreases. When the stock price goes up, the call option premium goes up and the put option premium goes down. And vice versa.

Recommended: What Makes Stock Prices Go Up or Down?

Time Value

Time value reflects the expiration date of the option contract. If the option has a longer time left until its expiration date, it has more time to pass the strike price. That makes it more valuable because it gives the investor more time to exercise their right to trade for a profit. The decrease in time value over time is called time decay.

The closer the option gets to expiring, the more the time decay increases. The value of the options contract declines over time due to time decay, which is a risk investors should consider. Options buyers want the stock to quickly move up and down so that the time decay doesn’t affect their profits, whereas options sellers want the premium to decrease, which happens with every day that goes by.

Time value is calculated by subtracting intrinsic value from the premium.

Intrinsic Value

The intrinsic value of options is the difference between the current underlying stock price and the option’s strike price. This difference is referred to as the “moneyness” of the option, where the intrinsic value of the option is how far in the money the option is.

If the price of the underlying asset is higher than the option strike price, a call option is in the money, making it worth more and priced higher. If the stock price is lower than the option contract strike price, this makes a put option in the money and worth more. If an option is out of the money it has no intrinsic value.

Implied Volatility

High premium options often reflect securities with higher volatility. If there is a high level of implied volatility, this means there is a prediction that the underlying asset will have bigger price moves in the future, making the option more expensive.

A low level of implied volatility will make it cheaper. It’s best for investors to purchase options that have steady or increasing volatility, because this can lead to bigger profits and a higher likelihood that the option will reach the investor’s desired price. Those who are selling options prefer to have decreasing volatility, because this lowers the premium and allows them to buy back the option at a lower price.

Other Factors

Other factors that influence premium prices include:

•   Current interest rates

•   Overall market conditions

•   The quality of the underlying asset

•   Any dividend rate associated with the underlying asset

•   The supply and demand for options associated with the underlying asset

Options Premiums and the Greeks

Certain Greek words are associated with types of risks involved in options trading. Investors can look at each type of risk to figure out which options they want to buy.

•   Delta: The sensitivity of an option price to changes in the underlying market

•   Gamma: The amount that an option’s delta moves with each point of movement of the underlying market asset

•   Theta: That amount that an option price decays over time

•   Vega: The amount that underlying market volatility affects the option

•   Rho: The amount that interest rate changes affect the option price


💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

The Takeaway

Options are one type of derivatives that give the buyer the right, but not the obligation, to buy or sell an asset. To sell options for a premium, options writers must consider several factors that could determine the future price of that asset. Selling options for premium is potentially a profitable trading strategy.

Note, though, that trading options is risky and advanced. It can be a confusing, muddled section of the financial markets, and it can be very easy for investors to get in over their heads. If you’re interested in trading options, it may be best to speak with a financial professional first.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/sefa ozel

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

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

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
14
2023
What Are Discount Brokers? What to Look For in a Broker

What Are Discount Brokers? What to Look for in a Broker

By | Growing Wealth, invest, Investing | Comments Off on What Are Discount Brokers? What to Look for in a Broker

Discount brokers make it possible for investors to buy and sell securities, without paying the higher fees associated with a full-service brokerage. Using a discount brokerage could make sense for investors who are comfortable making trading decisions without the help of an investment professional.

The rise of discount brokerage firms has made investing more accessible for a wider variety of people. Discount stockbrokers can offer both tax-advantaged and taxable investment accounts. It’s possible to build a portfolio with a discount broker that includes different types of investments, including stocks, exchange-traded funds (ETFs) and other securities.

What Is a Discount Broker?

Discount brokers offer investors access to lower-cost securities trading. Many discount brokerage firms operate online or via mobile investment apps. They’re often geared to the DIY investor who’s interested in self-directed trading.

Some of the characteristics of discount brokers can include:

•   Investment selection that can include stocks, ETFs, mutual funds, bonds

•   Low or zero commission fees to trade stocks and exchange-traded funds (ETFs)

•   Fractional share trading

•   Low minimum investment thresholds

•   Investor-guided trading

While discount brokers offer a flexible way to invest they’re still subject to government regulation. Discount brokerage firms must register with the Securities and Exchange Commission (SEC). They must also belong to the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corp (SIPC).


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

History of Discount Brokers

Discount brokerages have grown in popularity in recent years but online trading has its roots in the 1980s.

In 1984, Charles Schwab introduced The Equalizer, the first DOS-based portfolio management and trading tool. Shortly after, competitors entered the market, including TeleBroker, the first phone-based keypad trading application, and StreetSmart, a PC-based trading software program.

In 1992, E-Trade became the first online brokerage service provider. By 1995, E-Trade generated 80% of its revenues from trading commissions and the number of new discount brokerages joining the fray continued to grow. Larger firms, such as Charles Schwab and Fidelity began offering discount broker services. Over the last decade or so, they’ve been joined by newer startups.

Along with the introduction of new online trading platforms and expanded investment options, the discount broker industry has evolved from a pricing perspective. Many, if not most brokerages now offer commission-free trades, for instance.

How Do Discount Brokerages Work?

Discount stock brokerages put the investor in the driver’s seat. You decide which type of account to open with a discount broker. This may be a tax-advantaged account, such as a traditional or Roth Individual Retirement Account (IRA). Or you may choose to open a taxable brokerage account instead.

Once you open your account, you can then decide how to allocate it and how much to invest.

Recommended: Active vs Passive Investing: What You Should Know

With a discount brokerage, you decide how much to invest in each fund or stock. You also have control over how long you hold those investments and when you decide to sell. When you’re ready to execute trades, you may pay low or no commission fees to do so.

Discount brokerages can also open the door to new investment opportunities, beyond stocks or ETFs. For instance, you may be interested in investing in IPO stocks. With a discount brokerage account, you may have tools on hand to help you understand how the IPO process works and how companies set an IPO price. You can then compare IPOs and decide whether you want to invest, based on your investment goals and risk tolerance.

Discount brokers work well for newer investors and more advanced investors alike. They’re not as well suited for venture capitalists or investors with large portfolios who might be interested in crowdfunding options for investing or investors who want access to things like hedge funds and private equity.

Full-Service Brokers vs Discount Brokers: Key Differences

Brokerage firms help investors to execute trades of stocks and other securities. There are two main types of brokers to choose from: full-service and discount brokers.

Full-service Brokerages

Full-service brokerages assist clients with making trades. But they can also provide other services, including offering investment advice. For instance, a broker might recommend specific stocks or mutual funds to invest in. In exchange for this advice, investors pay fees on top of the commissions they may pay to complete trades.

Discount Brokerages

A discount brokerage differs in the scope of services provided and the fees investors pay. With discount stockbrokers, investors receive little to no direct personalized financial advice or analysis from investment professionals. Instead, it’s up to the investor to decide which securities to buy or sell.

Discount brokerage firms are effectively a link between investors and the market, as they help to carry out trade transactions. But they don’t have the higher fees associated with full-service brokerage firms.

Pros and Cons of Working With a Discount Stock Broker

Choosing a discount broker in place of a full-service broker can offer both advantages and disadvantages. While full-service brokers have a longer track record, discount brokers are making it easier for a broader group of investors to gain entry to the market.

Whether using a discount broker makes sense depends on what you need from a brokerage and what you’re willing or able to pay to build a portfolio. Here’s an overview of the main pros and cons to consider when comparing discount stockbrokers against a full-service option.

Pros of Using a Discount Broker

•   Cost. Arguably, the best reason to consider discount brokers in lieu of full-service brokers is cost. Discount brokers charge lower commission fees to trade, and you’re not paying additional costs for their professional investment research or advice since you’re responsible for making investment decisions.

•   Convenience. Discount stock brokerages make it easy to invest from virtually anywhere, since you can execute trades online or via mobile apps. If you come across a buying opportunity, for example, you can log in and complete the transaction in minutes without having to connect with a human broker first.

•   Variety. Another advantage of using a discount stock broker is the selection of investments to which you have access. That may include not only stocks, mutual funds, ETFs and bonds but you may also be able to buy IPO stock, commodities, or options. Discount brokers make it easier to build a diversified portfolio in one place, with minimal costs.

•   Self-directed trading. If you prefer making investment decisions yourself, a discount brokerage account allows you to do so. You can choose when to buy or sell and how much of your portfolio to allocate to one security versus another.

Cons of Using a Discount Broker

•   No access to professional advice. While discount stockbrokers can be cost-friendly, they’re typically missing one big thing: professional advisors to guide you through the investment process and discuss potential investment risks. Whether this is a con for you depends on how comfortable you are charting your own course with investing.

•   Customer support. Every discount brokerage is different in terms of the level of customer service and support they provide. Some may be more helpful than others, which is something to consider when choosing a discount broker.

•   Not fee-free. While many discount brokers charge $0 commissions to trade U.S. stocks and ETFs, that doesn’t mean there are no fees for trading. You may pay fees to trade mutual funds, for example. Or the brokerage may charge an extra fee if you need to complete a trade by phone.

•   Some limits: While discount brokerages give investors access to many types of investments, they don’t typically offer access to some riskier investments, such as hedge funds or crowdfunding.

What to Look for When Choosing a Discount Brokerage to Work With

If you’re interested in opening a brokerage account, researching your options is the first step. While picking the right brokerage won’t guarantee returns, it can make it easier for you to manage your portfolio and focus on your investments. When comparing discount brokers, here are some of the most important things to keep in mind.

•   Cost. First, consider what you’ll pay to trade stocks and other securities at a particular brokerage. Also, be sure to check the full fee schedule to see what additional trading or account fees may apply.

•   Investment selection. Next, consider what investments you can add to your portfolio with a particular discount stock broker. Some discount brokers may not offer certain options.

•   Minimum investment. Depending on where you are on your investing journey, you may have a lot of money or a little to start trading. So consider the minimum investment required to open an account at different discount brokerage firms.

•   User experience. If you’re going to be making trades online or via a mobile device, it’s important that the platform you use be easy to navigate. Check out websites and mobile apps for different discount brokers to see how they compare in terms of features and ease of use.

•   Research tools. Discount stock brokerages may offer research and analysis tools to help you construct your portfolio. Consider what types of tools, (i.e. tickers, stock simulators, etc.) may be available to help with your investment decision-making.

•   Customer support. Look at what type of customer support is available to help investors with a particular discount broker. The more ways you can communicate, such as email, by phone or live chat, the easier it may be to get help managing your account when you need it.

•   Reputation. Finally, consider how well a discount broker stands out compared to the competition. Does it have a great reputation for low-cost trading, for example? Has it won any major industry awards? What are investors saying about the brokerage? Looking at a discount stockbroker’s overall reputation and track record can help decide if it’s a good fit.



💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Discount Brokers Make Investing Affordable

Opening an account with a discount broker can be a first step toward growing wealth. Because they’re generally a low-cost way to invest, you’re able to preserve more of your investment returns over time. These days, most brokers have had to adjust to account for discount brokers in the market, which is generally a good thing for investors.

But remember that discount brokers have their pros and cons, and that investors would do well to do some research before picking a broker. Each broker won’t be the right fit for each investor, so again, take the time to look into potential options before taking the plunge.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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

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

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.

SOIN0723022

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Aug
14
2023
Eurex Exchange: European Futures and Options Market

What Is the Eurex?

By | Growing Wealth, invest, Investing | Comments Off on What Is the Eurex?

If you’re thinking about trading futures and options, it’s important to understand the exchanges where such transactions take place. The Eurex Exchange — the shorter name for the European Futures and Options Market — is one of the largest derivatives markets in the world.

Here’s what you need to know about the Eurex.

Defining Eurex Exchange

What exactly is the Eurex definition? The Eurex Exchange facilitates the European-based derivatives market, handling digital trading volume and contract settlement for global traders in 700 markets across the world. Large volumes traded on the Eurex include common stock indexes and more complex securities, such as derivatives, which are securities that derive their price from their underlying assets.

Eurex is one of several global derivatives exchanges, including the Chicago Board Options Exchange.


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

History of the Eurex

The Eurex Exchange was co-founded in 1988 by Deutsche Börse AG and the SIX Swiss Exchange and was billed as one of the largest and one of the first all-electronic trading exchanges. That partnership lasted until 2012, when Deutsche Börse AG bought out SIX Swiss and now stands as the sole owner of the Eurex.

Headquartered in Frankfurt, Germany, the exchange has nine offices spread across the globe, in Chicago, London, Paris, Tokyo, Hong Kong, Singapore, Leipzig, Eschborn, Zurich, and Frankfurt (headquarters). That makes it easier for the Eurex to trade in non-European bourses and thus gives the Eurex a thoroughly global presence.

Recommended: Exploring Different Types of Investments

Understanding Eurex Exchange and What It Does

The Eurex definition is this: The Eurex Exchange is an international exchange that facilitates trading for European-based derivatives. The Eurex products include European stocks, bonds, and stock indexes. The Eurex also handles clearing (the timely transfer of funds) and contract settlements.

The Eurex Exchange network is totally electronic, and it’s widely considered one of the best in the world.

The Eurex’s Trading Technology and Management

Eurex launched as an all-digital trading exchange at a time when manual “open cry” trading still remained the primary way of doing business. At that time, buyers and sellers would gather in closed areas (called “trading pits” in Wall Street lingo) and shout trade orders to market makers, who would gather the trades and execute them on behalf of traders.

In strictly electronic trading, buyers and sellers execute options and futures contracts from thousands of miles away via a digital-based trading platform. That also provides increased liquidity for traders. Since Eurex is 100% automated, market investors have quick access to a wide array of investment products, making it easier to move in and out of volatile positions in fast-moving markets.

Rolled out in 2013, the Eurex’s trademark T7 trading platform handles all the exchange’s electronic derivative trading volume, connecting traders from 35 countries who execute about seven million futures and options trading contracts for each daily trading session.

That makes Eurex one of the most widely used derivatives trading platforms in the world for listed and over-the-counter futures and options trading.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Eurex Exchange Products

Eurex offers a wide range of trading options, including various Euro-based debt instruments, common Euro-based stocks and stocks indices, along with its mainstay futures and options derivative trading products.

Here’s a list of the exchange’s most widely-traded investment vehicles.

•   Stock derivatives, including more than 1,000 futures and approximately 900 options

•   Interest rate derivatives, including fixed-income, money market, and interest rate swaps

•   Equity index derivatives, including derivatives from 12 primary European index, such as EURO STOXX and MSCI

•   Dividend-based derivatives, including singles stocks and indexes

•   Volatility derivatives

•   Exchange-traded fund derivatives

•   Foreign currency (FX) derivatives

•   Commodity-based derivatives

•   Property/real estate derivatives

The exchange recently launched a platform for trading digital assets.

Recommended: The Black-Scholes Model, Explained

The Takeaway

The Eurex is an important exchange that global derivatives traders use to execute their strategy. Individual investors can typically access the exchange through their brokers.

However, it’s not necessary to invest on the Eurex or trade derivatives in order to build a portfolio, especially for beginning investors. For instance, individuals could instead set up an investment account if they don’t already have one, and start exploring assets that could help them achieve their financial goals and make sense for their situation.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/Halfpoint

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

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

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

SOIN0723111

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Aug
14
2023

Investment and Financial Brokers Explained

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Investment and Financial Brokers Explained

A number of investors trade stocks and bonds through an investment broker. What is a broker? A broker — or brokerage firm — is the middleman between the buyer and seller and can help make a transaction go smoothly.

But an investment broker is not strictly necessary. Some companies offer a direct stock plan, allowing investors to purchase shares straight from the company without a broker.

In order to decide if you need an investment broker, it’s essential to know how a broker works, what exactly they do, and how to shop around for one that fits your needs.

What Is an Investment Broker?

Investment brokers enable individuals to buy and sell financial securities, like stocks or bonds, on an exchange market.

What does a broker do? Reputable brokers act as a boon to both buyers and sellers: They ensure that each party actually has the money to buy assets or the assets to sell.

Brokers settle trades by delivering securities and payments to each party, while also taking care of all the bookkeeping and tax-related documentation required. In many cases, going through a brokerage firm is the easiest and most accessible way for individuals to get started with investing.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Pros and Cons of Using an Investment Broker

As with any financial service, there are both benefits and drawbacks to using a brokerage firm to facilitate your trades.

Pros of Using a Broker

Accessibility

Thanks to the internet, you can open a brokerage account in minutes and start trading stocks as soon as your account is funded. That means employing a financial broker is one of the easiest ways to start an investment journey as quickly as possible.

Simplicity

When you buy and sell through a broker, a lot of the tedious footwork — like keeping tabs on your interest earnings for tax purposes — is taken care of for you. Depending on the type of brokerage firm you go with, you may also have access to professional financial advice and other advisory services that could help you make the most of your portfolio.

Cons of Using a Broker

Fees and Commissions

Although they’ll vary based on the specifics you choose and the type of account you open, some brokers charge maintenance fees and trade fees — also known as commissions — which can eat away at your nest egg. In fact, the average stock broker commission charged by brokerage firms is usually 1% to 2% of the value of the total transaction.

That said, you can minimize your investment fees, or even eliminate them, by shopping around for brokers with the lowest costs. For example, many online brokers offer no commission trading.

Required Portfolio Minimums

Although it’s not true of every brokerage firm, some require you to keep a minimum amount of money in your account to use their services. These minimums might be $1,000 or more, which can be a barrier to entry for some beginner investors.

Recommended: What Is Broker Call Rate?

Two Types of Brokerage Accounts

If you’re still asking yourself, what does a broker do?, it’s important to understand that not all brokers are created equal. There are many kinds of brokerage accounts to choose from. For instance, you may want to choose between a brokerage account vs. a cash management account, both of which are offered by brokerages.

The best product for you will depend on your individual financial goals and your budget. Here’s what you need to know to help make an informed decision.

1. Full-service Brokerage Accounts

Along with the ability to buy and sell assets, a full-service brokerage account might also include advice from human financial planners and portfolio management to help you make the best investment decisions possible.

However, these perks don’t come cheap. Full-service brokerage accounts and wealth-management companies usually calculate their charges as a percentage of your total portfolio, and may have account minimums as high as $250,000. They may also collect trade commissions and annual management fees.

2. Discount Brokerages

Discount brokers offer less consultation and guidance, allowing you to DIY your investment portfolio cheaply. Many have $0 account minimums and may charge less than $10 per trade — or even offer commission-free assets trading.

Both full-service and discount brokerages typically offer both cash and margin accounts. In a cash account, you’ll need the actual cash to buy your assets. In contrast, in a margin account, the broker will lend you some capital to make purchases, using the securities you already own as collateral.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Regulations for Investment Brokers

Investment brokers are regulated by the Financial Industry Regulatory Authority (FINRA). Brokers must register with FINRA, and they are required to follow a standard of conduct known as the suitability rule. Under this rule, brokers need to have suitable grounds for recommending particular investments to clients.

The rule also encompasses something called “know your customer,” which spells out the various steps brokers need to use to identify clients and their goals for savings, including making a reasonable effort to ascertain a client’s financial and tax situation when recommending investments.

Different Types of Investment Accounts

Aside from deciding what type of brokerage you’d like to do business with (and how much you’re willing to pay for financial services), you’ll also need to decide what type of investment account works best for your goals.

Maybe you’re investing for a shorter-term objective, like purchasing a house — or perhaps you’re trying to ensure you’ll have a comfortable retirement. Either way, specific investment account types, or “vehicles,” are designed to help you get there.

Recommended: Understanding a Taxable Brokerage Account vs an IRA

Taxable Brokerage Account

Think of this as a default investment vehicle. It may be a good choice if you’re looking to grow wealth and want to be able to add or withdraw funds on your own terms without waiting to reach a certain age or life circumstance. However, you pay taxes on earnings, so there are no tax advantages to this type of account. If you don’t make any specific investment vehicle choices when you open your brokerage account, this is most likely the one you’re getting.

Individual Retirement Account (IRA)

An individual retirement account, or IRA, is a type of investment account designed specifically for retirement goals and is available to self-employed people and those working for a company. IRAs carry specific tax incentives; for example, contributions to traditional IRAs are deductible, while Roth IRAs allow for tax-free distributions. However, you can’t access the funds without paying a penalty until you reach age 59 ½ or meet certain circumstantial requirements, such as purchasing your first home.

A broker may offer other savings or investment vehicles, such as a 529 college savings plan, a tax-incentivized plan to help people save for educational costs. For full details on the type of accounts available, it makes sense to check with your broker directly.

Alternatives to Investing With a Broker

Although using a broker to invest in the stock market might be a smart money move for some, there are other ways to get started with investing, including the following options.

Recommended: Buying Stocks Without a Broker

Automated Investing

Automated investment products, or robo-advisors, are platforms that utilize a combination of computer algorithms and human financial planners to create and manage diversified portfolios at low costs to users.

Your funds will be invested in a diversified portfolio, and the platform typically offers goal-planning tools and rebalancing services to help keep your funds moving in the right direction.

If you don’t want to pay the high prices for a full-service broker, but self-managing your portfolio makes you more than a little nervous, a robo-advisor may be right for you.

Buying Stocks and Fractional Shares Directly

Depending on whose stocks you’re interested in purchasing, you may be able to buy them directly from the issuer without needing to go through a brokerage firm.

It pays to read the fine print, however: Buying stocks directly may save you money on trade commissions, but you may also be subject to proprietary fees from the company or minimum purchase amounts. And if you’re buying fractional shares (fractions of shares of stock), you need to have an investment account, such as one with an online broker or robo-adviser.

Diversifying your assets can still be helpful for investors who buy stocks directly. If all of your investments are tied up in a single company, you may not be in a great position if that company begins to falter. In contrast, if you’ve invested in several different firms and other asset classes, you will likely have a wider margin for error.

Choosing Alternative Investments

Although the stock market is one of the most popular and generally low-effort ways to invest, there are plenty of other ways to try turning your money into more money.

You might consider exploring alternative investments. For example, you could invest in real estate and sell the property at a profit or turn a condo into a passive income source by putting it up for rent. Or you might invest in art; the value of paintings is not necessarily correlated with the behavior of the stock market, giving it the potential to rise even during a stock market crash.

That said, many alternative investments require significantly more time, work, and know-how than crafting a diversified portfolio of stock market assets. And as always, every investment involves risk. There’s no such thing as a sure thing.

Controlling Your Investments With SoFi

If you’ve decided stock market investments are the right move for you and your money, going through a broker can be a relatively simple and low-cost way to gain access to the market. However, if you’d rather avoid potential downsides, like fees or required account minimums, you may want to consider the option to invest directly. The choice is yours.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is the role of a stock broker?

A stock broker is a financial professional who buys and sells stocks on behalf of clients. A broker generally earns a fee or commission for their services.

How do brokers make money?

Brokers typically work on commission. The average stock broker commission is usually 1% to 2% of the value of the total transaction.

Why do people use brokers?

People use brokers to help them buy and sell stocks and bonds. Brokers also handle the necessary bookkeeping and tax-related documentation. For many individuals, using a broker is the easiest way to start investing.

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

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

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

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Aug
14
2023
How to Buy Bonds: A Guide for Beginners

How to Buy Bonds: A Guide for Beginners

By | Growing Wealth, invest, Investing | Comments Off on How to Buy Bonds: A Guide for Beginners

Investing in bonds is a method of lending money to a company or government. Governments, municipalities, and companies issue bonds to investors who are willing to lend them money for a set period of time. In exchange, the issuer pays interest over the life of the loan and returns the principal when the bond “matures” at the end of a predetermined period known as the bond term.

For diversification, many investors want to include a mix of equities (stocks) and fixed income (bonds), since the two securities have different attributes and often behave differently throughout the economic cycle.

Why Invest in Bonds

As investors choose between the different types of investments, there are several reasons they might opt for bonds. Bonds pay interest at regular intervals, such as twice a year, which provides investors with a predictable stream of income. Also, if investors hold the bond to maturity, they get back their entire principal. In this way, investors can preserve their savings while investing.

Bonds are also an important tool for building a diversified portfolio. Compared with stocks, bonds are less volatile, so they can offset some of the risk inherent to stock investing.

Recommended: Bonds vs. Stocks: Understanding the Difference

While investors typically consider bonds a less risky investment, it’s still possible to lose money when investing in bonds if the issuer is unable to fulfill its obligation. In addition, inflation can eat away at bond returns, since fixed returns are worth less during periods of high inflation.

Where Can You Buy Bonds?

The best way to purchase bonds will depend on the type of bond and the bond market exposure that you want.

The Government

If you’re 18 or older, you can buy government bonds directly from the federal government through the TreasuryDirect website. The site is available at all times and gives investors access to Treasury bills, notes, bonds, Floating Rate Notes, Treasury Inflation-Protected Securities and savings bonds.

A Brokerage

Investors can buy a variety of bonds, including corporate, municipal, and government bonds, through their brokerage account. Bond prices vary depending on transaction fees and markups.

An ETF or Mutual Fund

Investors who don’t want to buy bonds directly can gain access to the asset class by buying shares of exchange-traded funds (ETFs) or mutual funds that invest in bonds.

Diversification is the main reason for investing in funds. Because issuers typically sell individual bonds in large units (a single bond might cost $1,000) the average investor may only be able to purchase a few of them on their own, making it tricky to put together a diversified bond portfolio.

Meanwhile, funds typically hold a diversified basket of bonds that tracks a bond index or a certain sector of the bond market, making it much easier for individuals to diversify. It’s important to note that while the yield of individual bonds is fixed, the yield on bond mutual funds or ETFs can fluctuate over time.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

What Type of Bonds Can You Buy?

There are a few basic types of bonds you may consider buying:

Corporate Bonds

Corporate bonds are a type of debt security issued by public and private corporations. Investment banks typically underwrite the debt and issue it on the entity’s behalf. Companies use the money they raise through bond sales for a variety of purposes, such as investing in new equipment, research and development, paying investor dividends, and stock buybacks.

Municipal Bonds

States, cities, and counties issue municipal bonds, sometimes called “munis”, to finance capital expenditures like the building of new roads or bridges. There are three general types of municipal bonds:

•   General obligation bonds aren’t backed by assets, but rather the “full faith and credit” of the issuer. Governments have the power to tax residents to pay bondholders back.

•   Revenue bonds are backed by revenue from a specific source, such as highway tolls. That said, some revenue bonds are “non-recourse” meaning that if the revenue source disappears, bondholders have no claim to it.

•   Conduit bonds are issued on behalf of private entities like hospitals.

US Treasuries

The Department of the Treasury issues U.S. Treasury bonds for the federal government. Investors typically consider Treasuries one of the safest investments, since they have the full faith and credit of the U.S. government backing them.

•   Treasury bills are short-term debt obligations that mature within one year or less.

•   Treasury notes are longer-term debt securities that mature within 10 years.

•   Treasury bonds mature in 30 years and pay bondholders interest every six months.

•   Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy tips with maturities of five, 10 and 30 years, and they pay interest every six months.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Bond Mutual Funds

A mutual fund is a pool of money that’s invested by an investment firm according to a set of stated objectives. A bond mutual fund focuses specifically on bonds. They may focus on one type, such as corporate bonds, or they may contain all types. Unlike traditional bonds, investors don’t get their principal returned with bond mutual funds, and there may be ongoing fees and expenses associated with owning shares of the mutual fund.

Bond ETFs

Like bond mutual funds, bond ETFs represent a way for investors to pool their money and spread it across many different investments. While investors can only trade mutual funds once a day, they can trade ETFs throughout the day. ETFs may have lower fees than mutual funds.


💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

How to Invest in Bonds

As investors decide which bonds to buy, they may want to consider the following factors:

Credit Ratings

Credit ratings are a way to gauge the creditworthiness of companies or governments that issue bonds. The ratings give investors an idea of how likely the bond issuer is to default. Standard & Poor’s, Moody’s and Fitch are the three private companies that control most bond ratings. The rating system is slightly different at each company, but generally speaking, a mark of AAA represents the highest rated and least likely to default issuers, while C or D denotes the riskiest issuers.

Duration

A bond’s duration is not the same at its term, or maturity. Rather it is a measure of how sensitive a bond’s price will be to changing interest rates. The longer a bond’s duration, the more likely its value will fall as interest rates rise. However, you can avoid duration issues by holding the bond to its maturity date.

Fees

If you buy bonds through a broker, you should expect to pay transaction fees. Brokers typically markup the price of a bond when they sell it to you in lieu of charging a commission. Markups may be anywhere from 1% to 5% of the bond’s original value. Look for brokerages that have low fees and markups.

Risk Level

Before buying a bond, investors should understand the associated risks, including:

•   Credit risk: The risk that issuers may fail to make interest payments and default on the bond.

•   Interest rate risk: The possibility that changes in interest rate will raise or lower a bond’s value if sold before maturity.

•   Inflation risk: The risk that inflation will decrease the value of bond returns.

•   Liquidity risk: The risk an investor won’t be able to sell their bond when they want to due to low or no demand.

Recommended: Investment Risks and Ways to Manage

Timing

You might consider matching the maturity date to your investment timeline. For example, if you need your principal in five years to make a down payment on a house, you may not want to buy a 10-year bond. While you could sell the 10-year bond after five years, market conditions could make it less valuable than if you waited until maturity.

The Takeaway

Whether purchased individually or accessed through mutual funds and ETFs, bonds provide a way for investors to diversify their portfolios. They can also typically help investors develop a reliable stream of income, which can become increasingly important as they move toward retirement.

Before buying a bond, you should research issuers and credit ratings to be sure you aren’t taking on undue risk. And above all, you should be sure that whatever you buy fits into your long-term investment plan.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/ILIA KALINKIN

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.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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