Jan
31
2022
Loss of Use Insurance: What is It, and What’s Covered?

Loss of Use Insurance: What Is It and What Does It Cover?

By | Home Ownership, Insurance, mortgage | Comments Off on Loss of Use Insurance: What Is It and What Does It Cover?

When most of us think of homeowners insurance, we think about getting coverage for major home repairs — the big-ticket items the insurance company can pay out for in the event of a loss or damage. We’re talking about things like a tree falling over in a storm and wrecking your roof or a robber making off with your electronics and jewelry.

Sure, you need that kind of protection, but your homeowner’s insurance policy should also include a very important kind of coverage beyond that: loss of use coverage. This is also sometimes known as additional living expenses (ALE) coverage or Part D coverage. Loss of use coverage is an important part of your home insurance (and some rental insurance policies) that kicks in when your home is rendered uninhabitable. Let’s say in the example above, where your roof needs major repair work. You may not be able to live in your home while this is underway. Since you have “lost the use” of your typical living space, the policy will help you pay for lodging and other expenses.

Read on to learn more about the loss of use coverage, including coverage limits and policy conditions. It’s an important consideration if a worst-case scenario ever happens to your home sweet home.

What Does Loss of Use Coverage Mean?

Loss of use coverage is the part of your homeowner’s insurance policy that covers the costs you’ll incur if you lose the usage of your home.

For example, if a fire destroys a significant portion of your house and it needs to be rebuilt, your typical home insurance policy will cover the cost of repairs. But (and this is a biggie) you may find yourself suddenly facing a whole lot of living expenses you otherwise wouldn’t. Hotel rooms and restaurant meals can add up quickly, and without your own kitchen and bedroom to cook in and retire to, you’d be pretty much forced to take advantage of these expensive options. Or perhaps you have to put your possessions in storage as your home is rebuilt, or even rent an apartment. These are the kinds of expenses that loss of use coverage will typically reimburse.

Recommended: Homeowners Insurance Coverage Options to Know

Coverage Limits

Like most other forms of insurance, loss of use coverage does come with certain limits — you don’t have carte blanche to go out and stay at a swanky hotel for months and eat exclusively Wagyu beef on the insurance company’s dime.

Generally, loss of use insurance is calculated and expressed as a percentage of your dwelling coverage limit — the amount of money up to which the insurer will pay out to repair or rebuild your home in the event of a qualified loss.

For example, if your dwelling insurance limit is $350,000, and your loss of use coverage is 20%, you’d have up to $70,000 to put toward living expenses during the time your home is being repaired. That may sound like a lot of money, but you’re likely to face a lot of expenses, especially since you’ll still be responsible, during that time, for paying your mortgage, insurance premiums, and other normal monthly bills.

Loss of use coverage is most commonly between 20% and 30% of the dwelling coverage limit, but it is possible to find plans with a higher loss of use limit — or a lower one.

In fact, although loss of use coverage is fairly standard, it is possible to purchase a homeowners or renters insurance policy that doesn’t include it, so always be sure to read your paperwork in full, including the fine print, to ensure you know what you’re getting.

Recommended: What Is Renters Insurance and Do I Need It?

Policy Conditions

Loss of use coverage is subject to additional conditions along with the coverage limit. For example, you’ll most likely be asked to prove your expenses to the insurance company in order to get the claim paid — so be sure to keep the receipts for all those hotel-room breakfasts!

Your policy may include other terms and conditions as well. Yet again, another good reason to get nice and cozy with that fine print.

Which Living Expenses Are Covered By Loss of Use Insurance?

Although the loss of use insurance covers many different kinds of living expenses while your home is being rebuilt or repaired, it doesn’t cover everything.

Once again, the only place to get verified information about what your specific policy covers is — you guessed it — your specific policy paperwork, but here are some of the most common covered costs.

•   Temporary housing, such as hotels, motels, or a temporary apartment

•   Moving costs

•   Public transportation

•   Grocery and restaurant bills beyond your typical expenditure

•   Storage costs

•   Costs to board a pet

•   Laundry costs

•   Parking fees

Once again, refer to your policy documentation in order to confirm which expenses are covered under your plan.

What Else Does Your Home Insurance Cover?

Loss of use coverage is only one small part of your overall homeowner’s insurance policy, which likely has several different coverages built in. A standard homeowners insurance policy offers coverage in the following categories:

•   Dwelling coverage, which covers the cost of repairing or rebuilding your house up to the given limit

•   Personal property coverage, which covers the costs of replacing your belongings in the event they are stolen, lost or damaged as part of a covered event

•   Personal liability coverage, which pays out to cover the medical or legal expenses you might incur if someone is accidentally hurt on your property (for example, if they’re bitten by your dog)

•   Additional coverages, such as coverage for additional structures on the property, specific damaging events (or “perils”) that aren’t listed in the standard policy, excess coverage for expensive belongings, etc.

As you can see, homeowners insurance is about way more than insuring the four walls of your home, though it should cover that, too. Keep in mind that each of these coverages comes with its own limits and policy conditions. (We’d remind you to read the fine print again, but at this point, you’ve probably got it. Right?)

In addition, homeowners insurance generally involves — as do most forms of insurance — paying a deductible when it comes time to file a claim. That means you’ll be responsible for a certain out-of-pocket cost to cover even coverage-eligible sustained damages, although the insurance company will likely pay out significantly more. (For example, a homeowners insurance deductible might be $1,000, which isn’t nothing… but is a lot better than paying $30,000 out of pocket to replace your entire roof. In this instance, you’d pay $1,000 while the insurer would pay $29,000.)

Deductibles are charged in addition to the premiums you pay on a monthly, quarterly, or annual basis simply to keep the insurance policy active. (Typically, the higher the deductible, the lower the premium, and vice versa.) Again, it may feel like a pain to have to pay so much money simply to have insurance just in case something happens, at which point you’d have to pay out your deductible as well… but for most of us, our homes are the single largest purchase we ever make and the biggest asset to our names. It’s an investment worth protecting, especially when you consider the often astronomical cost of even basic home repairs.

The Takeaway

Loss of use insurance is a type of coverage baked into most homeowners and many renters’ insurance policies. This coverage pays out toward the extra living expenses you’ll incur if your home is rendered uninhabitable by a qualified loss, such as the cost of hotel rooms, additional food expenses, pet boarding, and public transportation.

While homeowners insurance is a valuable financial tool, it’s not the only one to keep in your tool belt. If you have family members and loved ones who rely on your income in order to maintain their lifestyle and comfort, life insurance can be a great way to ensure your death is primarily an emotional, rather than financial, loss.

SoFi has teamed up with Ladder to offer high-quality life insurance plans that are quick to set up and easy to understand, and our overall policy limits go up to $8 million. You can get a decision in minutes today, right from the comfort of your home — which, after all, already has its own insurance policy. (Right?)

Photo credit: iStock/Ridofranz

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, Social Finance. Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
SoFi Agency and its affiliates do not guarantee the services of any insurance company.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

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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Jan
28
2022
Covered Calls: The Basics of Covered Call Strategy

Covered Calls: The Basics of Covered Call Strategy

By | Growing Wealth, invest, Investing | Comments Off on Covered Calls: The Basics of Covered Call Strategy

With most things in life, it helps to be covered — by a coworker, an insurance policy, or a roof over your head. In investing, it can also pay to be covered. When it comes to options contracts, a covered call is an option trading strategy worth knowing about.

Here’s all you need to know about putting together a covered call strategy, when to consider it, and how it may — or may not — pay off.

What is a Covered Call?

A covered call is an options trading strategy that opens up an additional avenue to generate income. In a covered call transaction, an investor sells call options on a security they own. This strategy can be beneficial to the investor if they don’t expect the value of the stock price to move much in either direction during the terms of the option.

Call Options Recap

A “call” is a type of option (you may be familiar with calls versus puts), that allows investors to buy shares of an underlying asset or stock at a specific, prearranged price, called the strike price. Usually, an investor dealing with call options holds a long position — that is, they think that the underlying stock is going to appreciate.

This opens up the opportunity to profit from their position. If you thought that a stock’s price was going to increase, you might want to buy that stock, hold onto it, allow the price to increase, and then sell it in order to generate a profit.

Call options allow investors to do more or less the same thing, but without having to buy or pay the full price for the underlying shares. Instead, a premium is paid for the right to execute the trade at the strike price.

What’s the Difference Between a Call and a Covered Call?

The main difference between a regular call and a covered call is that a covered call is “covered” by an investor holding an actual position. That is, if an investor sells call options on Company X stock, it would be “covered” if the investor actually owns, or holds a position, on Company X stock.

Conversely, if an investor does not hold a position on, or own any Company X stock and sells a call option, they’re selling a regular call option. This is also known as a “naked” option.

Example of a Covered Call

The point of selling covered calls to other investors is to boost your own investment income. If, for example, you have 100 shares of Company X stock, and were looking for ways to potentially increase your annual return from that holding, you could try selling covered calls to other investors.

Here’s what that might look like in practice:

Your 100 shares of Company X stock are worth $50 each: $5,000 total, at current market value. To make a little extra money, you decide to sell call options to your friend Harris, at a strike price of $70. Harris pays you $10 for the premium.

Let’s say that Company X stock’s price only rises to $60, and Harris doesn’t execute the option, so it expires. You keep the $10, plus your 100 shares. You’ve turned a profit of $10 selling call options, and your shares have appreciated to a value of $6,000. So, you now have a total of $6,010.

For all intents and purposes, the best-case scenario, for you, is that your shares rise in value to near the strike price, (say, $69) but Harris doesn’t exercise the option. In that scenario, you still own your shares (now worth $6,900) and get the $10 premium Harris paid you.

But the risk of buying call options is that you could lose out on bigger potential gains.

So, if Company X stock rises to $90 and Harris executes his option, you would then be obligated to sell your 100 shares to him, which are now worth $9,000. You would still get the $10 premium, plus the value of the shares at the predetermined strike price of $70 — netting you $7,010. Effectively, you’ve turned a holding valued at $5,000 into $7,010. Not bad!

On the other hand, had Harris not exercised his option, your shares could be worth $9,000. That’s the risk you run when selling covered calls.

Recommended: How to Sell Options for Premium

When and Why Should You Do a Covered Call?

There is no definite right answer in terms of the right time to use a covered call strategy — it involves weighing the risks involved and doing a bit of reading the tea leaves in terms of the market environment.

It’s generally best to write covered calls when the market is expected to climb — or at least stay neutral. Nobody knows what’s going to happen in the future, and investors might want to be ready and willing to sell their holdings at the agreed strike price.

As for why an investor might use covered calls? The goal is to increase the income they see from their investment holdings. Another potential reason to use covered calls, for some investors, is to offset a portion of a stock’s price drop, if that were to occur.

Pros and Cons of Covered Calls

Using a covered call strategy can sound like a pretty sweet deal on its face. But as with everything, there are pros and cons to consider.

Covered Call Pros

The benefits of utilizing covered calls are pretty obvious.

•   Investors can potentially pad their income by keeping the premiums they earn from selling the options contracts. Depending on how often they decide to issue those calls, this can lead to a bit of income several times per year.

•   Investors can determine an adequate selling price for the stocks that they own. If the option is exercised, an investor profits from the sale (as well as the premium). And since the investor is receiving a premium, that can potentially help offset a potential decline in a stock’s price. So, there’s limited downside protection.

Covered Cons

There are also a few drawbacks to using a covered call strategy:

•   Investors could miss out on potential profits if a stock’s price rises, and continues to rise, above the strike price. But that just goes with the territory. As does the possibility of an option holder executing the option, and an investor losing a stock that they wanted to keep.

•   An investor can’t immediately sell their stocks if they’ve written a call option on it. This limits the investor’s market mobility, so to speak.

•   Investors need to keep in mind that there could be capital gains taxes to pay.

The Takeaway

A covered call may be attractive to some investors as it’s an opportunity to try and make a little more profit off a trade. That said, as with all trading strategies, it may pay off in your favor, and it may not. There are no guarantees.

Calls, puts, and options trading can get complicated, and fast. That’s why it’s helpful if your options trading platform isn’t more complicated than it needs to be. SoFi’s options trading platform has an intuitive and approachable design. You can trade options from the mobile app or web platform, and reference the offered educational resources about options.

Trade options with low fees through SoFi.

FAQ

There are a lot of details and terms regarding options, and it can be hard to keep track of everything. Here are a few common questions about covered calls.

Are covered calls free money?

Covered calls are not “free money”. But covered calls can provide a boost to one’s investment earnings — though an investor does have to assume some risks associated with selling options.

The strategy is more of a game of risk and reward, and there’s always the risk that the strategy could end up backfiring, particularly if your stock’s value increases much more than you anticipated.

Are covered calls profitable?

They have the potential to be profitable: If you’re selling call options on your holdings, then you should be receiving a premium in return. In that sense, you’ve turned a profit. After all, the entire point of selling calls on your holdings is to increase your profits, too.

But how profitable the strategy is, and the risks involved, will depend on a number of factors, such as the underlying stock, market conditions, and the specifics of the call option.

What happens when you let a covered call expire?

If you’ve sold a covered call option to someone else and it expires, nothing happens — you keep the premium, and nothing changes.

Because an option is only that — an option to execute a trade at a predetermined price for a select period of time — the option holder’s reluctance to execute during the time period means that the option will expire worthless.

Can you make a living selling covered calls?

Living strictly off of income derived from covered calls is theoretically possible, but you’d need a big portfolio (against which to sell those options) to make it work. There are a lot of things to consider, too, like the fact that a lot of the income your covered calls do generate is going to be taxed as capital gains, and that the market isn’t always going to be in a favorable environment for selling covered calls.

Photo credit: iStock/millann

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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.
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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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Jan
28
2022

What Is Credit Card Consolidation?

By | Credit, Debt Payoff, Financial Independence, personal_loan | No Comments

First you take out a credit card because it has a great airline rewards program. Then you take out a card because it gives you a fabulous discount at your favorite retail spot.

Maybe you had some bills you couldn’t pay off right away, and so you decided to open up another card to cover those costs. And on and on you went, until suddenly you have a wallet full of credit cards—and a hard time keeping track of them.

If you find yourself in this situation, you may want to stop and assess to be sure you haven’t set yourself up to overspend, forget to make payments, and run up a heap of credit card debt. Consolidating your cards can sometimes provide a solution, allowing you to ditch keeping track of your excess cards and focus your energy on just one bill.

How Credit Card Consolidation Works

Credit card consolidation is the practice of combining your credit card balances with one new loan from a financial institution or another credit card company. Ideally, the new loan or credit card consolidation terms will allow for multiple credit cards—perhaps some with sky-high or variable interest rates—to be consolidated with one loan, ideally at a more manageable interest rate.

If you’re not quite sure how that could help your debt management, think of it this way: We all have that one closet or drawer that is just filled to the brim with random stuff—knick-knacks, boxes, childhood toys, and clothes that you just don’t have room for. It gets so bad that either you’re too afraid to open your closet, or the closet is so full that you physically can’t open it.

That closet represents your credit card debt. You might have one, two, three, or four or more cards—and you may even be making minimum payments—but with so many cards to juggle, you may not be paying attention to details on the bill, like how much interest and fees you’re accruing.

It may seem easiest to put this debt out of sight and out of mind. This feeling is understandable; credit card debt can be overwhelming to the point that it seems easier to just keep the closet door closed.

When you consolidate your credit cards, instead of having to remember multiple payment deadlines (and accruing multiple separate fees and interest balances), you’ll only have one payment.

Not only is debt easier to manage and pay off when you only have one loan, consolidating your credit card debt may mean that you could also get a lower interest rate, which may help reduce how much you pay over the long-term.

This factor may be especially helpful considering that the average credit card interest rate hovers around a whopping 17%.

Here’s a look at some of the common methods you may consider using in order to consolidate your cards.

Consolidating with a Credit Card Balance Transfer

One common way to consolidate your credit card debt is with a credit card balance transfer that puts all of your credit card debt onto one new card. In fact, many credit card companies will offer low interest—or even 0% interest—transfers for a certain period of time to encourage you to use a balance transfer for consolidation.

However, if you’re considering this route, there are a few things to remember. First, as mentioned, the low or 0% interest rate may only be introductory rates, which means you’ll have a limited amount of time to take advantage of them.

After the introductory period, rates my skyrocket, perhaps becoming even higher than your interest rates from before. So, this strategy may work best if you have a manageable amount of debt and could pay it off within the introductory period or shortly thereafter.

You may also have to pay a balance transfer fee, which may be a fixed fee or a percentage of the amount that you owe. If you carry a high balance on your cards, this fee could be prohibitively expensive.

Additionally, new purchases on this card may not be treated the same way as your transferred debt. For example, you may have to start making interest payments on new debt immediately.

Using a Debt Consolidation Loan

Your bank may offer a specific debt consolidation loan that allows you to corral your credit card debt—and even medical debt or personal loan debt—under one loan. One single loan can simplify your payments, and may even carry a lower interest rate than your credit cards.

As with credit card balance transfers, beware the teaser rate with these loans. Low interest rates may only last a short period of time before your bank hikes your interest rate. Consider the cost of fees to take out the loan as well.

Another important factor to consider is the term of the loan. While your interest rates may be lower, the length of time over which you’ll be paying may actually increase the amount of money you pay over time.

Taking out a Personal Loan

You may also want to consider a personal loan to help you consolidate your debt. Banks and lenders typically offer these unsecured loans. Interest rates may be lower than those you are currently paying, but you may want to consider that, depending upon your credit history and the lender’s criteria, the lowest interest rates may not be offered to you. Also, personal loans may come with origination fees, which may be between 1% and 8% of your loan.

Potential Benefits of Credit Card Consolidation

Credit card consolidation is an option to help make your debt more manageable. While it won’t magically whisk away your debt, better terms may give you the confidence, organization, and time you need to get rid of it altogether.

A credit card consolidation loan may help you pay the debt off sooner, or at a lower interest rate, and give you emotional and financial relief.

And because with consolidation all of your debt will be combined into one new loan, you’ll only have to remember one payment deadline, helping to reduce the likelihood of late payments and fees.

Unlike filing for bankruptcy or defaulting, although credit card consolidation may have an initial negative effect, if you do pay off your debt you may be able to raise your credit score in the long run. It may provide you with a tangible solution to tackle your credit card debt head on.

Should You Consider Credit Card Consolidation?

If you have a large amount of high-interest debt and want a simple, more streamlined way to manage your credit card payments, you may want to consider credit card consolidation via a fixed-rate, unsecured personal loan.

Understanding whether this is the right avenue for you also depends on your personal financial situation. Here are a few hypotheticals:

You…

Have a plan to pay off your debt.

Is credit card consolidation right for you?

Credit card consolidation isn’t a quick fix. It typically works best if you have a long-term debt management plan that includes budgeting and a plan to cut spending.

You…

Have manageable debt.

Is credit card consolidation right for you?

One possible way to figure out if your debt is manageable is if you answer “yes” to either of the following questions: Can you pay off your debt in five years? Is your debt less than half your yearly income?

You…

Are serious about paying off your debt.

Is credit card consolidation right for you?

Sometimes credit card consolidation can boost your confidence a little too much, resulting in a more relaxed approach to debt payoff. You can potentially avoid this pitfall by taking your debt payment plan seriously and committing to making the necessary payments (at least the minimums) each month.

You…

Can pay off your credit card debt in six months or less.

Is credit card consolidation right for you?

Probably not. If you can pay off your debt that quickly, then the savings you’d receive from consolidating your credit card debt would likely be minimal.

Potential Cons, and Other Factors to Consider

When you consolidate your credit cards, it’s easy to feel like you have a new lease on life. But in taking out a consolidation loan (or balance transfer), you are still taking on debt and will still need to make payments on time to avoid late fees and damaging your credit. Avoid simply kicking the proverbial can down the road by making a plan to pay off your new loan.

Lenders take your credit history, income, and other factors into account when considering you for a personal loan to consolidate your credit card or other debt.

If you’ve been making on-time payments, meet income criteria, and have a credit history that meets the lender’s eligibility requirements, then consolidating your credit card debt might be worth looking into. The sooner you can set yourself up to pay off your debt successfully, the better (generally), and credit card consolidation can be one way to go about it.

With a SoFi personal loan, you can check your rate and terms without affecting your credit score1 and if you like what you see you can apply to consolidate your credit card debt into a new loan with no origination, prepayment, or late fees—and that could help give you that confidence, organization, and time you need to get a better handle on your debt.

Visit SoFi to learn more about consolidating your credit card debt with a personal loan and see what rates you may qualify for.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Jan
28
2022
What Are Over-the-Counter (OTC) Options? Pros & Cons

What Are Over-the-Counter (OTC) Options? How Do They Work?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Over-the-Counter (OTC) Options? How Do They Work?

Over-the-counter (OTC) options are exotic options not listed on public exchanges. That means that investors may not be able to buy them through their brokerage accounts.

Instead, investors trade OTC contracts directly, between the buyer and the seller, without using a third-party platform.

OTC Options Definition

As a quick refresher, options are derivatives that give holders the right to buy or sell stocks or other assets. An options holder can buy or sell the asset at a certain date at a certain price, for instance, and are always tied to an underlying asset. So, an options trader can buy options relating to, say Stock A, or Bond X.

While most options trade through brokers via exchanges, over-the-counter options trade privately, between a buyer and a seller. Over the counter options are sometimes tied to an exotic asset — a stock that may not be available for purchase through most brokers’ platforms.

OTC options may also lack standard expiration dates or strike prices, instead allowing for the two parties to define those terms on their own, making them appealing to those with a more complex options trading strategy.

How Does OTC Trading Work?

OTC securities include any types of investments that do not appear on U.S. exchanges. That can include stocks in foreign companies and small or mid-sized domestic companies, over-the-counter options and OTC futures. Some brokerages do allow investors to trade OTCs on their platforms, though not all do, and there may be additional fees charged by the broker to do so.

With that in mind, if you plan on investing in the OTC market, you may need to do some research beforehand to ensure that the brokerage account allows for OTC trading. Once you’ve found the appropriate broker or platform, trading is as simple as funding an account, and executing the trade.

What is the Difference Between OTC Options and Stock Options?

OTC options and regular old stock options, or listed or exchange-traded options, have some key differentiators worth reviewing. Here is a short rundown of those differences:

OTC Options vs Stock Options

OTC Options

 Stock Options
Customized Standardized
Illiquid Liquid
No secondary market Secondary Market

1. Customization

A typical listed stock option is a standardized contract. The exchange, then, is determining expiration dates, strike prices, lot sizes, and other details. By standardizing contracts, exchanges can, as a result, increase the liquidity of the options contract.

Customization is the main and perhaps biggest difference between typical exchange-traded or listed stock options and OTC options. OTC options are customized with the terms hashed out by the involved parties.

2. Liquidity

OTC options are largely illiquid compared to their vanilla cousins. That’s because they’re more or less bespoke contracts — they’ve been customized according to the criteria set forth by the parties involved.

So, OTC options, with their customizations, may not be appealing to many traders, and as a result, not quite as easy to sell. In other words, there’s less demand for tailor-made options contracts like those in the OTC market, meaning they’re less liquid, and often more costly.

3. Secondary Markets

Another key difference between vanilla stock options and OTC options is the secondary market — or lack thereof, in the case of OTC options.

Primary markets are where investors buy fresh securities, when they’re first offered. Secondary markets are what most investors engage in when they’re buying or selling securities. These include exchanges such as the New York Stock Exchange.

While the primary market for OTC options is where parties meet to come to terms and develop an options contract, there is no secondary market. That means that there is one way to close an OTC option position, and that is by creating an offsetting transaction.

What are the Risks of Trading OTC Options?

Given the complex and bespoke nature of OTC options, trading them can come with some serious risks. Chief among those risks is the fact that OTC options lack the protection of exchanges. While exchange-traded or listed options are, once again, standardized, they are thus “guaranteed” by clearinghouses.

That means that they’re overseen, like other derivatives, by regulating authorities like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The guarantee cements into place that contract buyers can exercise their options, knowing that the counterparty will fulfill their obligation.

This is also known as counterparty risk. Essentially, a contract is a promise between two parties. If one party decides not to follow through on their end of the deal, when it comes to a traditional stock option, then the exchange will ensure that everything is smoothed out. But OTC options lack that protection from the exchanges.

Pros & Cons of OTC Options Contracts

Like just about every financial tool, instrument, or security out there, OTC options have their benefits and disadvantages.

Pros

The biggest and most obvious advantage to OTC options is that they’re tailored for specific parties. That means that the parties engaged in the options contract get precisely the terms that they want and a contract that fits with their specific goals.

Further, the OTC market allows for trading of both securities and derivatives (like options) for small companies (exotic options) that aren’t listed on the typical exchanges. That gives investors and traders more options.

Effectively, the OTC market, and OTC options, provide investors with more investment choices. That can increase the risk – but also the potential rewards – of such securities.

Cons

The drawbacks of OTC options concern the lack of standardization of contracts (which may be a con for some investors), and the illiquid nature of the market. Plus, that illiquidity can add additional costs. And, again, there’s no secondary market for OTC options.

The big thing investors should remember, too, is that there can be a lack of information and transparency in the OTC market. Many OTC stocks are hard to dig up reliable information on, which adds to their risk profiles. The same holds true for OTC derivatives.

While with standard options, you can find data and availability through your broker’s portal, such information can be harder to come by for OTC options.

The Takeaway

There are some benefits to trading OTC options, but it requires a thorough understanding of how the market works and the risks that it presents. That said, going over-the-counter can open up a whole new slate of potential investments.

Opting for an options trading platform that offers educational resources, like SoFi’s, can help you continue learning to improve your investing know-how. Plus, SoFi’s platform boasts an intuitive design which allows investors to trade options either from the mobile app or web platform.

Trade options with low fees through SoFi.

Photo credit: iStock/g-stockstudio

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Jan
28
2022
man reading the newspaper

How to Read a Profit & Loss (P&L) Statement

By | Growing Wealth, invest, Investing, Terminology | Comments Off on How to Read a Profit & Loss (P&L) Statement

A profit and loss statement (P&L) reveals how much a company earned over a designated period, like a quarter or year. A profit and loss statement is also called an “income statement,” as it presents the revenue and expenses that ultimately created profitability — or loss — for the period.

The P&L report is one of a business’s most important accounting tools, as it provides important insights into business operations. Investors can also use the P&L to assess certain aspects of company performance and compare it to other companies in the same industry.

If you want to learn how to read a profit and loss statement, here are some key points to know.

What Is a Profit and Loss Statement?

Ever heard someone ask, “What’s the bottom line, here?” That phrase comes from the literal “bottom line” of a P&L statement.

A profit and loss report shows how much revenue a company earned over a specific period, and then subtracts how much money was spent, which results in a net profit (or loss). It’s the final line in the grand calculation.

In addition to filing a P&L report, companies will also file a balance sheet, cash flow statement, and statement of shareholders’ equity. Filings are made quarterly (called 10-Q filings) and annually (10-K filings) with the Securities and Exchange Commission (SEC), and are publicly available. Investors can find this information by searching for the company within the SEC’s EDGAR database.

Companies are complex, and although having a basic overview of how to read a profit and loss statement can be helpful, it’s important to bear in mind that different companies and industries may include breakout different line items in their P&L report.

Generally speaking, it’s useful to think of each of the accounting statements as individual pieces in an overall puzzle. For example, compare a company’s P&L to its balance sheet, which is a snapshot of a company’s assets and liabilities for a specific date. The balance sheet alone won’t indicate whether the company is operating at a profit, and a profit and loss statement may not provide an accurate picture into a company’s indebtedness. But together, both statements provide important context for further analysis.

What Is a P&L Statement Used For?

Profit and loss statements are a particularly useful tool for looking into the operations of a company and identifying important trends in that business, often providing insights into where (and maybe why) a company is making or losing money. For example:

•   Where is most of the money being spent?

•   Are there expenses that could be trimmed?

•   Are gross sales covering the cost of production?

The P&L report is also useful when used to compare two or more time periods, or when comparing companies within the same industry.

As with almost any accounting report, the P&L can spark important questions. What changed from last year (or last quarter)? What has improved? What has not? In particular, has the company been able to decrease expenses or increase revenue in order to secure more profit?

Most important, the P&L report may provide additional clues as to the financial inner workings of the company. It can help identify problem areas as well as growth opportunities.

For example: Perhaps a company is profitable in one period but not the next, because of an increase in research and development (R&D) costs. This is valuable information, as it may indicate a crucial investment for a new product — which can lead to an evaluation of this investment.

Is this a wise use of capital, and will it pay off in terms of a new product’s success? Could the money be better spent elsewhere, or is there a more efficient way to develop the new product line?

How to Read a P&L

When learning how to read a profit and loss statement, investors should know that they generally follow a similar format.

Each begins, at the top of the page, with total revenue. This is how much money a company earned through sales. Next, costs and expenses are subtracted. Finally, at the bottom of the page, is the company’s bottom line: profit or loss.

Although a company’s “top line” revenue is a compelling figure, a company’s bottom line is typically a better indicator of whether it will be an enduring, successful business.

To illustrate the point, consider a simple example of two companies. The first company posted revenue of $10,000,000 last year, but incurred the same amount in expenses (– $10,000,000). They had high revenue, but earned no profit.

The second business earned $1,000,000, but incurred just $100,000 in expenses — resulting in a $900,000 profit. The second company brought in less revenue, but was more profitable than the first.

Understanding Each Section of the P&L

To really make sense of a P&L, though, you need to understand what each line item stands for and its relevance to the company’s overall operations.

Revenue (or sales)

To recap, one would find the total revenue at the top. This number is also called gross sales and it’s usually broken out by source. (A gross figure is one calculated before expenses are taken out.)

Net Revenue

On certain sales, a company may ultimately receive a modified amount. For example, items that are returned or are discounted must be accounted for. Therefore, the next line in the statement may include a figure that represents what a company does not expect to collect on overall sales, i.e. net revenue. (Net refers to a figure after the necessary deductions are made.) This is a more accurate picture of what incoming cash flow looks like.

Cost of Goods Sold (COGS)

Moving down the statement, direct costs or cost of goods sold usually comes next. This is what the company spent directly on the production of goods or services that were sold during that period. For example, if a company produces shoes, it would include money spent on supplies, labor, packaging, and shipping (but not rent, for example, as that’s not a direct cost).

Gross Profit

After COGS is subtracted from revenue, there may be a line titled gross profit or gross margin. This indicates the profit made on the goods sold before operating expenses.

Operating Expenses

Operating expenses include everything the company spent money on to stay in business: from IT to sales and marketing expenses to facilities costs and so on. These categories are often broken out into subcategories for specific expenses within each (for example, employee expenses might include payroll and benefits).

Total operating expenses are deducted from gross profit to get net operating income.

Net Operating Income

Net operating income, also known as EBITDA (earnings before interest, taxes, depreciation, and amortization are taken out), is a crucial part of the income statement. It reveals how much the company has after all the expenses are covered. If the number is positive, the company is able to cover the cost of doing business; if it’s negative, it means the company is operating at a loss. While that’s not uncommon, spending more than you earn is typically a red flag calling for some adjustments.

Interest Income and Expense

Interest income is money earned in interest-bearing bank accounts or other investment vehicles. Interest expense is the cost of borrowing money and paying a rate of interest on that debt. These numbers may or may not be combined into one figure.

Depreciation and Amortization

Depreciation is defined as the reduction in the value of an asset with the passage of time, due in particular to wear and tear (e.g. the depreciating value of computer systems or vehicles). Businesses are able to treat this depreciation as an expense.

Amortization is the distribution of a business expense over time (e.g. the ongoing cost of a certain software program over a few years).

Tax

Finally, any tax the company paid is also deducted. Typically, this is the last deduction before the final line in the statement: the net profit or the bottom line.

The bottom line represents the net profit or the net loss, and answers the question: During this accounting period, was this company able to turn a profit, or did they operate at a loss?

Note that profit is just one way to evaluate company performance — and it’s not the same as cash on hand. To understand how much actual cash a company has in the bank, you have to read the cash-flow statement.

Earnings Per Share

A profit and loss statement may also include an earnings per share (EPS) calculation. This is a representation of how much money each shareholder would receive if all net profit was paid out. EPS is calculated by dividing the total net profit by the number of shares a company has outstanding.

The EPS is a hypothetical calculation used by investors to assess the amount of profit created by a company. Do companies actually distribute total earnings? Not generally. Companies will typically keep some or all profits, and may make some payments to shareholders in the form of dividend payments. (The profit and loss statement may also include information on dividend payments.)

A large or a growing EPS is generally preferable but yet again, this metric alone is not sufficient in deciding whether a stock is a good investment. EPS should also be compared to the price of that stock. A company could boast a robust EPS, for example, but if the cost of the stock is relatively expensive, it might not be a good value. For a deeper look into the correlation between earnings and price, investors can consider the price-to-earnings (P/E) ratio, which divides the price of a stock by the EPS.

The Takeaway

A profit and loss statement can give an investor a look at a company’s bottom line in terms of earnings — and also allows them to compare statements from companies in the same industry, as well as statements from the same company over different time periods. Learning how to read a profit and loss statement can be an important part of researching a company in which one might want to invest.

While a profit and loss statement provides contextual insight into a company’s financials, these figures only tell us what has happened in the past, and not what will happen in the future. Given that, this information alone is not able to determine which is the “better” investment, but it is one of the many pieces of information needed to value a stock.

Ready to invest? It’s easy when you open an account with SoFi Invest®. You can get started with $5, and you can invest in stocks, ETFs, fractional shares, and more. There are no account minimums with SoFi Invest, and SoFi doesn’t charge any management fees.

Find out how to open an account and buy stocks fee-free with SoFi Invest.

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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