InvestGen Archives | Page 60 of 83

Jul

2022

Investing for Beginners: Considerations and Ways to Get Started

By Michael Flannelly | Growing Wealth, Investing | No Comments

Investing can be a great way to secure your financial future, but it can also be an intimidating minefield for the uninitiated. Fortunately, modern technology has made it easier to start an investment portfolio. You could get started today if you have an internet connection and a bank account.

It’s worth understanding what you’re doing before you put your money into the nebulous financial markets. You’ll want to know the basics of investing, from the different types of investments to the various strategies you can make money from them. With this knowledge, you should have a good idea of what sorts of investments are right for you and how to get started.

Table of Contents

Why Is Investing Important?
Things to Consider as a Beginner Investor
How to Start Investing
4 Types of Investments for Beginners
Investment Strategies for Beginners
When Should You Start Investing?
How Much Money Do You Need to Start Investing as a Beginner?
FAQ

Why Is Investing Important?

Investing is important because it helps you build wealth. Investing is simply the process of putting your money into assets that have the potential to grow in value over time. Doing this may increase your wealth and achieve financial goals, like saving for retirement.

You may wonder why you’d want to risk putting your hard-earned money in the financial markets, where it has the chance to decline, rather than simply stashing it in a savings account or even under your mattress. It’s because inflation can eat away at your money’s purchasing power if you don’t invest.

Your money sitting in a savings account earning little interest will eventually decrease in value because of inflation. The money you put into the market may be at risk, but it also has the potential to grow. By investing, you can ensure your money keeps up with inflation or even outpaces it. And historically, the market tends to increase, even accounting for significant stock market crashes like the Great Depression and the 2008 crisis.

💡 Recommended: How to Protect Your Money From Inflation

Of course, that doesn’t mean there’s no place for a healthy savings account, especially for money that you need in the short term.

Many people hold off putting money into the financial markets because they believe common investment myths, like that you have to be an expert or that you need to devote a lot of time to your finances. But even novices can set aside a little time and money to start investing.

Things to Consider as a Beginner Investor

There are a few important pieces of information you want to determine and understand before you begin investing.

Investment Goals

You want to establish your financial goals before you start investing. Since investments have such strong growth potential over time, many people use their portfolio’s gains to fund future financial goals, like purchasing a home or retirement. Figuring out which investment strategy is right for you starts by assessing and understanding your goals, because they’re not the same for everyone.

Time Frame

After establishing your investing goals, you can think about how long it may take you to reach them. For example, investing for your retirement nest egg will likely take longer than investing to save money for a downpayment on a house.

Determining these time horizons for investing involves taking your age into account. A younger investor saving for retirement has a longer runway to achieve their goals and, thus, can take more risks, like investing in stocks or cryptocurrencies, to meet those goals. In contrast, an older investor will likely employ a conservative investment strategy, like investing in low-risk bond funds, to protect their portfolio’s value from declining at a time when they are less able to afford it.

Risk Tolerance

Every investor must determine the amount of investment risk they are willing and able to accept in their investing decisions. This risk tolerance is essentially the loss an investor can withstand in their portfolio. Age, investing goals, and income may contribute to your risk tolerance.

Certain assets, like growth stocks, commodities, and cryptocurrencies, are risky investments, while bonds and blue chip stocks are considered less risky. With increased risk comes the potential for higher returns, albeit with the possibility of significant losses.

Portfolio Diversification

Portfolio diversification involves investing your money across a range of assets, like stocks, bonds, and real estate, rather than concentrating all of it in one area. After all, you don’t want to put all your financial eggs in one basket. By diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

How to Start Investing

If you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

Step 1: Open an Investment Account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks, mutual funds, and other securities.

You can also utilize an employer-sponsored retirement plan, like a 401(k), or an individual retirement account to make your investments. One benefit of retirement investment accounts is that they are tax-advantaged, meaning your investments can grow tax-free within the accounts. However, you may have to pay taxes when withdrawing money from the account.

💡 Need more help? Follow our guide on how to open a brokerage account.

Step 2: Do Your Research

It’s important to research different companies, funds, and assets to find a diversified selection of investments that fit your desires and priorities. Diversification will help to reduce your risk and maximize your returns.

Step 3: Invest and Monitor Your Portfolio

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio are performing well based on your investment strategy.

Keep in mind that investing is a long-term game; it’s important to be patient and resist the urge to sell when the markets are down. If you stick to your plan and invest for the long haul, you’ll be more likely to reach your financial goals.

4 Types of Investments for Beginners

There are a wide variety of investment options available to beginner investors. Some people may invest in cryptocurrencies or commodities, while others may be interested in annuities and penny stocks. However, the following assets are generally best suited for the beginning investor.

1. Stocks

When you think of investing, you probably think of the stock market. A stock gives an investor fractional ownership of a publicly-traded company in units known as shares. Investing in stocks as a beginner can be an ideal way to build wealth.

Investors make money on stocks through capital appreciation, dividends, or both. Capital appreciation occurs when you buy a stock at one price, then sell it for a higher price in the future. The company may pay dividends if it distributes part of its profits to its shareholders.

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

2. Bonds

Bonds are loans you make to a company or a government — federal or local — for a fixed period. In return for loaning them money, they promise to pay you periodic interest and, eventually, your principal at the end of the period.

Bonds are typically backed by the full faith and credit of the government or large companies. They’re often considered lower risk than stocks.

However, the risk varies, and bonds are rated for quality and creditworthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered some of the least risky investments. However, they also tend to have lower returns.

💡 Recommended: How to Buy Bonds: A Guide for Beginners

3. Mutual Funds and ETFs

A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry, or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Exchange-traded funds (ETFs) are similar to mutual funds, but the main difference is that ETFs are traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day.

Mutual funds and ETFs allow investors to diversify their holdings in one investment vehicle.

💡 Recommended: ETFs vs. Mutual Funds: Learning the Difference

4. Real Estate

Many initially invest in real estate by purchasing a home or a rental property.

If owning a home is out of reach for you, you can also invest in a real estate investment trust (REIT), a company that operates in the real estate business. You can trade a REIT on a stock exchange like you would a stock. With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. There’s less responsibility and pressure on the shareholder when compared to purchasing an investment property.

Investment Strategies for Beginners

An investment strategy is a plan that outlines how you will invest your money. An ideal strategy should consider your financial goals, risk tolerance, and time horizon. Here are two recommended strategies for beginner investors.

Buy and Hold

Investors practicing buy and hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so can help curb the tendency to panic sell, and it can also help minimize fees associated with trading, which can boost overall portfolio returns.

A buy and hold strategy can be difficult as you witness the market’s volatility, where the value of your portfolio declines during certain periods. However, market fluctuations are a natural part of the market cycle. Rather than get nervous and be tempted to sell when prices drop, a buy and hold strategy will keep you in the markets if you can afford it. If you sell when prices are low, you may lock in losses and miss out on a likely market rebound.

Dollar-Cost Averaging

Dollar-cost averaging is a strategy that helps individuals regularly invest by making fixed investments on a regular schedule regardless of price.

For example, say you want to invest $1,000 every quarter in stock ABC. Each quarter, the price of that stock will vary — sometimes it will be up, sometimes it will be down. The amount of money you invest remains the same, so you buy fewer shares when prices are high and more shares when prices are low.

A dollar-cost average strategy can help individuals access a lower average share price and help them avoid emotional investing.

When Should You Start Investing?

It’s ideal to start investing as soon as possible, as long as you have established an emergency fund and paid off high interest debts. The earlier you start, the more time your money has to grow. It’s better to start investing when you’re young, setting aside a little bit of money each month toward your portfolio, rather than wait until you’re older and have to invest a more significant portion of your income to meet your goals.

Additionally, when you start investing when you’re young, you can more easily benefit from compounding returns. Compound returns mean any gains you earn are reinvested to earn additional returns.

How Much Money Do You Need to Start Investing as a Beginner?

You can start investing with as much money that fits your budget and financial goals. The amount of money you need to start investing as a beginner can vary depending on the type of investment you want to make. For example, if you want to buy shares of a company, you will need to have enough money to cover the cost of the shares. If you want to invest in a mutual fund, you will need to have enough money to cover the minimum investment amount.

Fortunately, you can invest with only a few bucks at a time these days because many brokerage firms offer fractional share investing, allowing investors to buy smaller amounts of a stock they like. Instead of purchasing one stock at the value for which the stock is currently trading — which could be $1,000 or more — fractional share investing makes it possible to buy a portion of one stock. Investors can utilize this to use whatever dollar amount they have available to purchase stocks.

The Takeaway

Learning how to invest doesn’t have to be complicated. Like many things in life, it takes time and experience to gain the knowledge to do it successfully. As long as you begin sooner rather than later, you can start building wealth to meet your financial goals.

If you want to learn everything you can about the markets and have control over your portfolio, SoFi’s all-in-one online investing platform might be the choice for you. With SoFi Invest®, you can trade stocks and ETFs with no commissions for as little as $5.

Want to learn more about how SoFi may be able to help you reach your long-term financial goals? Get started with SoFi Invest today.

FAQ

What are the most popular investment options for beginners?

Some popular beginner investments include stocks, mutual funds, and exchange-traded funds (ETFs).

What are some simple investment strategies for beginners?

Some common investment strategies for beginners include buy and hold and dollar-cost averaging. Many beginners may also employ an index investing strategy, buying ETFs and mutual funds that track a benchmark index, like the S&P 500.

SoFi Invest®

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

Jul

2022

How to Invest in the Metaverse: A Beginner’s Guide

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

The metaverse refers to an amalgamation of digital and virtual worlds where people will be able to collaborate, socialize, shop, and even work and learn in 3D spaces. It’s billed as a more embodied or immersive way of experiencing life on the internet, and it’s tied to Web 3.0 — the next iteration of the world wide web.

The metaverse includes cryptocurrencies, video games, Web3 platforms, and much more. And with established tech companies creating countless new products and possibilities, you can even invest in the metaverse. True, the metaverse is an evolving state of technology + reality. It’s really just getting started. But for those who want to seize the moment and invest in the metaverse in its early stages, here’s what you need to know.

Birth of the Metaverse

The concept of the metaverse can be difficult to wrap your head around, and yet in many ways it’s already here. There are numerous aspects of modern life that can be considered a part of the metaverse, including virtual infrastructure, multi-player video games, non-fungible tokens (NFTs), cryptocurrencies, and more.

In fact, it’s easier to think of the metaverse in more established terms like cyberspace or Web 3.0, which describe how existing technologies are evolving in new directions. Cyberspace helped define the emergence of interconnected digital spaces and devices. And Web 3.0 is now emerging as the term of art for where the internet is headed: more experiential, decentralized, and open.

Recommended: Web 3.0 Guide for Beginners

History of the Metaverse

You could argue that the origins of the metaverse date back to the creation of the first three-dimensional image in the 1830s — a primitive system that helped pave the way for stereoscopes and even today’s VR headsets.

The idea of 3D images combined with sensory experiences led to the first virtual reality products in the 1950s. Decades later, many remember when Google unveiled “Google Glass,” which never took off, but could also be thought of as an attempt to bring the metaverse to the masses.

As a result of nearly a century of digital innovation — including science fiction stories and movies that inspired real life technologies — augmented and virtual reality technologies are now fairly common. And many companies are hard at work intertwining virtual worlds with the physical world. That’s helping to fuel new opportunities in the metaverse, and potentially a trillion-dollar market by the end of the decade.

As such, it’s easy to see why investors may be interested in exploring new opportunities in order to get in on the ground floor and invest in the metaverse now.

3 Ways to Invest in the Metaverse

If you’re ready to put your money to work and wondering, How can I invest in the metaverse?, there are a few avenues to consider — and they are similar to investing in any other industry:

1. Invest in companies or industries where business growth is related to the metaverse.

2. Invest in metaverse cryptocurrencies.

3. Invest in stocks and funds doing business in the metaverse.

For now, investors may want to consider investing in companies or industries that are focused on expanding or innovating products, technologies, and services that relate to the metaverse. In addition, there may be digital assets and currencies that will also grow as the metaverse expands.

Investors can also explore stocks of companies that are doing business in the metaverse as well as mutual funds and exchange-traded funds (ETFs) related to the metaverse,

Of course, the same caveats apply when you invest in the metaverse as when you invest in any other sector. It pays to do your research, to decide where metaverse investments fit into the rest of your financial portfolio, and to get expert guidance when needed.

Indeed, when you invest in the metaverse, even more caution may be required, given that these technologies and industries don’t have long track records.

Are There Metaverse ETFs?

Yes, there are a number of metaverse ETFs that are already available to investors.

Generally speaking, and as with many investments in the metaverse space, these ETFs offer exposure to companies working directly on technologies related to the metaverse, or in adjacent industries. Think: fintech, gaming, social media, tech giants, and similar companies.

Many of these ETFs are also being launched by established financial institutions, which can be a sign of a broader trend that investors may want to keep an eye on.

5 Metaverse Stocks to Watch For

If metaverse ETFs aren’t your preferred investment vehicle, you can buy some specific, individual metaverse stocks. Or, at least stocks that are metaverse related. Below are five of the biggest companies in the metaverse space. That doesn’t mean you should add them to your investment portfolio, but if you’re interested in the metaverse and the tech that powers it, you may want to keep an eye on these stocks:

1. Meta

With its new moniker “Meta,” the parent company of Facebook, Instagram, and Oculus is considered a leading metaverse-focused corporation. Meta (META) is dedicating a lot of resources to the metaverse, incorporating virtual reality, augmented reality, and more into its Oculus headsets and smart glasses. It even rolled out digital workrooms that allow users to participate in digital meetings using VR headsets. Meta is going all-in on the metaverse.

2. Microsoft

Microsoft (MSFT), the global software manufacturer, also has a large gaming division with its Xbox console and has become a leader in the metaverse. A big part of Microsoft’s activity in the metaverse space has to do with gaming and building virtual worlds, as it has been acquiring numerous video game studios (including Activision Blizzard and Bethesda, makers of popular IPs like “Call of Duty” and “Fallout,” among others) in recent years.

3. NVIDIA

NVIDIA (NVDA), a semiconductor producer known for inventing the GPU, is creating what may be considered the backbone of the metaverse with its powerful processors and chips. Plus, NVIDIA also launched the NVIDIA Omniverse, which is a simulation and collaborative platform in the existing metaverse.

4. Autodesk

Autodesk (ADSK) makes software that’s used by engineers and architects to design buildings and real estate projects. Now, it’s being used to create similar digital projects in the metaverse.

5. Roblox

Roblox (RBLX) is a video game ecosystem, where users can design their own characters, content, and games. In a sense, Roblox is a more established player in that it has already created a metaverse, with millions of people engaging in virtual experiences and creating their own virtual content. Thus may be appealing to investors in this space.

4 Metaverse Cryptocurrencies to Watch For

Similarly, here are some metaverse cryptocurrencies that may catch the eye of an enterprising metaverse investor. These are the largest metaverse cryptocurrencies by market cap, as of June 10, 2022:

1. The Sandbox (SAND)

SAND is the native token of The Sandbox platform, which is something of play-to-earn virtual game that is backed by gaming brands such as Atari. Participants can use SAND tokens to create NFTs on the platform, which is built on the Ethereum blockchain.

2. Theta Network (THETA)

The Theta Network aims to decentralize streaming services — it’s a unique blockchain that allows users to build apps for streaming, broadcasts, and more. For metaverse crypto investment outside of the Ethereum blockchain, Theta may be of interest to some investors.

3. Axie Infinity (AXS)

Axie Infinity is another play-to-earn metaverse game on the Ethereum blockchain which allows players to create little virtual creatures called Axies. They can also buy and exchange land plots, NFTs, and more in the game. AXS is the network’s native coin, which players can earn by playing.

4. Enjin Coin (ENJ)

Enjin Coin (ENJ) is a crypto that was created by Enjin, a software company that allows users to create and trade virtual goods like NFTs on the Ethereum blockchain. The coin, in effect, makes it easier to conduct in-game or in-virtual-world transactions, making it easy to see why it would be appealing to metaverse participants and investors.

The Takeaway

The metaverse, with its rapidly expanding virtual worlds and digital assets and NBDB technologies, is just beginning to take off. Yet so many established tech companies are already in this space, there are numerous opportunities for investors to consider, including mutual funds, exchange traded funds (ETFs), stocks, cryptocurrencies, and more.

Still, investing in the metaverse has some very clear and obvious risks because this sector is so new. It’s difficult to predict which products, services, and virtual currencies might succeed, and where the inevitable hurdles for this nascent industry will arise.

If you’re keen to get started, consider opening an investment account with SoFi Invest. From SoFi’s secure app, you can trade stocks, ETFs, IPOs, and more right from your phone or computer. And SoFi members are entitled to complimentary access to financial professionals who can help answer your investing questions.

Check out SoFi Invest today.

Photo credit: iStock/Prostock-Studio

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Jul

2022

ETFs vs Index Funds: Differences and Similarities, Explained

By AJ Smith | invest, Investing, Terminology | No Comments

While most exchange-traded funds, or ETFs, are passively managed just like index funds (meaning they track a certain market index), these funds have different structures, which can have a significant impact on investors.

Index funds are a type of mutual fund, which means they are less transparent, liquid, and tax efficient compared with ETFs. Exchange-traded funds shares, for example, trade on exchanges throughout the day, similar to stocks — while index funds do not. Owing to disclosure regulations, index ETFs are also more transparent than index mutual funds.

Here’s what else you need to know before you decide whether to invest in an index fund vs. an ETF.

An Overview of Index Funds

In order to understand some of the similarities between index funds and ETFs, both of which adhere to passive investing strategies (though a small fraction of ETFs are actively managed), let’s start with what a market index is and how it works.

What Is an Index?

A market index tracks a representative sample of securities in a particular sector or asset class. For example, the S&P 500 index tracks the performance of the 500 largest companies in the U.S., while the Russell 2000 index tracks small-cap domestic companies. Typically, the index is weighted according to the size of the companies.

Most indices are used as benchmarks to measure the performance of assets in a particular sector. Meaning: large-cap U.S. mutual funds might measure their performance against the S&P 500 index as a benchmark.

You can’t invest in an index, but you can invest in funds that track the index.

So index funds or index ETFs that track the S&P 500 seek to mimic the performance of that benchmark by investing in the same large-cap U.S. companies that are in the index, and giving them a similar weight in the fund.

The same goes for funds that track any other benchmark, whether that’s the Nasdaq 100 Index (which includes 100 of the largest domestic and international non-financial companies), or the MSCI World Index (mid- and large-cap global companies), or one of the many bond indices. Index funds and ETFs simply track the performance of the index, thus they are passively managed.

What Is Passive Investing?

As noted above, an index fund mirrors the performance of its index, which is known as passive investing. An actively managed fund, however, follows the strategy of an active management team. So active investing is a strategy where human portfolio managers pick investments they believe will outperform the market — whereas passive investing relies on a formula to mirror the performance of certain market sectors.

There are thousands of mutual funds available to investors, and the vast majority of them rely on active strategies. In 2021, there were over 6,600 actively managed funds, and about 500 passively managed (index) funds in the U.S., according to Statista.

Even though the number of index funds is much smaller, these funds track a wide range of benchmarks, which naturally has an impact on index fund returns. A fund that tracks a corporate bond index versus a fund that tracks an index of biotech stocks will typically have different returns.

What’s the Differences Between an ETF and Index Fund?

When picking ETFs, however, bear in mind that the world of ETFs is the opposite of mutual funds: the majority of ETFs are passively managed; i.e. they are index ETFs.

Only about 2% of ETFs are actively managed, owing to rules about transparency for these products.

That’s why many actively managed ETFs rely on a certain fund structure that allows for less transparency. These are called active non-transparent or ANT ETFs.

So: ETF vs. index fund, what are the primary differences?

How an Index Fund Works

Index funds are mutual funds. They are a collection of stocks, bonds, or other securities that are bundled together into a single unit (the mutual fund). Some may invest in large-cap stocks; some in ESG companies; some in tech; some in international companies, and so on. Most investors own more than one type of mutual fund in their portfolio, and you can also own more than one type of index fund.

Like any other type of mutual fund, index fund shares can be traded only once per day. You can put in the order in the morning, but it won’t go through until the market closes. This means the price you anticipated when you entered the order to buy or sell isn’t necessarily what you’ll get.

💡 Recommended: Learn what actively managed ETFs are and how they work.

How an ETF Works

An ETF is an exchange-traded fund, so its wrapper — or structure — is not the same as a traditional mutual fund. While an exchange-traded fund is also a basket of securities, shares of these funds can be traded on exchanges throughout the day, just like stocks. As a result, ETF shares are not only more liquid from a cash standpoint, they are also more fluid.

Mutual fund shares vs. ETF shares are relatively fixed. ETFs can generate more shares, depending on investor demand. But because an ETF is listed on a stock exchange, a sale can go through any time the market is open. An investor can get real-time pricing information with relative ease by checking financial websites or calling a broker. That’s a plus for investors and financial professionals who like the idea of making moves based on market conditions.

When trading ETFs, bear in mind that the expense ratio of ETFs is generally lower than most mutual funds. And owing to the way shares are created and redeemed, ETFs can be more tax efficient.

ETFs can offer that flexibility and more transparency: Investors can review holdings daily and monitor portfolio risk exposures more frequently than with indexed mutual funds.

Similarities Between ETFs and Index Funds

As noted above, ETFs and index funds are both pooled investments, like baskets that include dozens, sometimes hundreds of securities in a single package. This helps provide investors with diversification within the fund that can help mitigate risk and may improve performance. In addition, these two fund types share some other similarities.

Cost

ETF vs. index fund — which is cheaper? The cost per share varies widely, of course, but when it comes to expense ratios of these funds the two are increasingly competitive. Time was when ETFs fees were far lower, but now many index funds have ultra-low expense ratios.

Still, many ETFs no longer charge brokerage fees or commissions, which cuts out a cost that many mutual funds still charge. Mutual funds also tend to have higher administrative costs.

Diversification

Both ETFs and index funds can offer investors the potential to add diversification to their portfolios.

ETF vs Index Fund: Pros and Cons of Each

There’s no cut-and-dried answer to whether ETFs are better than index funds, but there are a number of pros and cons to consider for each type of fund.

Transparency

By law, mutual funds are required to disclose their holdings every quarter. This is a stark contrast with ETFs, which disclose their holdings each day.

Transparency may matter less when it comes to index funds, however, because index funds track an index, so the holdings are not in dispute. That said, many investors prefer the transparency of ETFs, whose holdings can be verified day to day.

Pricing

Because a mutual fund’s net asset value (NAV) isn’t determined until markets close, it can be hard to know exactly how much an index fund costs until end of day. That’s partly why mutual funds, including index funds, allow straight dollar amounts to be invested, as well as purchasing shares. If you buy an index fund at noon, you can buy $100 worth, for example, regardless of the share price.

ETF shares, which trade throughout the day like stocks, are priced by the share, so you always know how much you’re paying for an ETF.

This pricing structure also allows investors to use stop order or limit orders to set the price they’re willing to buy or sell.

Taxes

ETFs are generally considered more tax efficient than mutual funds, including index funds.

The way mutual funds are structured, there can be more tax implications as investors buy in and out of an index fund, and the cost of taxes is shared among different investors. ETF shares are redeemed directly for cash, so if there are capital gains, you would only owe them based on your ETF shares.

How Do Investors Find the Right ETF?

Choosing between ETFs vs. index funds typically comes down to cost and flexibility, as well as understanding the tax implications of the two fund types. While both ETFs and index funds are low-cost, passively managed funds — two factors which can provide an upside when it comes to long-term performance — ETFs generally have the upper hand when it comes to taxes.

If taxable gains are a concern for you, ETFs may be a more tax-efficient option vs. index funds, which are structured such that gains are dispersed among shareholders. Also consider the tax structure of the container: i.e. are you holding the fund in a taxable portfolio, or a tax-deferred retirement account?

Once your goals are clear, selecting an ETF is easy when you set up a brokerage account with SoFi Invest. You can explore ETFs from the secure SoFi app at your convenience, and invest in ETFs in a taxable account or an IRA. SoFi also enables you to trade stocks, IPO shares, and more. Whatever your aims are, SoFi can get you started on your investing future.

Download the SoFi app to get started.

FAQ

Is it better to choose an ETF or an index fund?

ETFs and index funds each have their pros and cons. ETFs tend to cost less and be more tax efficient, and you can trade ETFs like stocks throughout the day. If you’re interested in more of a buy-and-hold strategy, an index fund may make more sense.

What are the similarities between an ETF and an index fund?

All index funds, and about 98% of ETFs, are passively managed — meaning, they track a certain market index. In addition, both ETFs and index funds tend to be much cheaper to own, versus their actively managed counterparts.

What are the differences between an ETF and an index fund?

ETFs generally cost less, are more transparent, and more tax efficient compared with index funds.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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.

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Jul

2022

Stablecoins vs Altcoins: A Comparison

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

Getting started with cryptocurrency investing can be overwhelming because there are a lot of technical terms to learn. One important distinction to understand is the difference between Bitcoin, altcoins, and stablecoins. Each of these types of crypto have their benefits and downsides.

In this article, we look at stablecoins and altcoins to see how they compare as crypto investments.

What Is An Altcoin?

An altcoin is simply any cryptocurrency that is not Bitcoin (BTC). Some people refer to altcoins as any cryptocurrency that is not Bitcoin or Ethereum (ETH). Bitcoin was the very first cryptocurrency, and is still the most dominant crypto. Usually, BTC is worth between 45% and 70% of the entire value of the multi-trillion dollar crypto market. In addition to its value and adoption, Bitcoin is the most widely known cryptocurrency around the world.

💡 For more details, check out: What Are Altcoins? A Guide to Bitcoin Alternatives

Although Ethereum is not as widely adopted as Bitcoin, it is also well-known and holds a large percentage of the market. Because the Ethereum network can be used to create smart contracts and other tokens, many blockchain and crypto transactions use the Ethereum network.

Because Bitcoin is such a dominant part of the crypto sector, all other crypto tokens have become known as altcoins. Thousands of altcoins are available for trade on various exchanges. It’s impossible to know exactly how many altcoins there are, as the industry is so decentralized and global, and anybody can create an altcoin. Industry watchers have observed patterns in the relationship between Bitcoin and altcoins. If Bitcoin increases a lot in value, often that is followed by altcoin season, in which altcoins also increase in value.

Bitcoin and altcoins have the same basic characteristics. They are digital currencies that use blockchain-based ledgers to keep track of transactions in a secure and transparent manner. However, each altcoin has different features that can make it a potentially attractive alternative to Bitcoin. For instance, some altcoins use different types of staking or proof systems; they can claim more anonymity than Bitcoin, or they have faster transaction times.

What Is a Stablecoin?

A stablecoin is a cryptocurrency whose value (of each coin) is pegged to an external asset — such as the U.S. dollar, the Euro, and even a commodity or another cryptocurrency. All stablecoins are also altcoins. They were originally brought to the crypto market in 2015.

💡 For more details, check out: What Are Stablecoins?

How Stablecoins Work

As the price of each coin is pegged to a particular asset, the price of the coin is always the same as the current market price of the asset. For instance, if a stablecoin is pegged to the U.S. dollar, the price of each coin will always remain as close as possible to $1. In order to maintain a stable price, the coin’s developers — or in some cases a government agency — can intervene, which generally takes the form of launching inflation production along with a guaranteed buyback.

For example, if a stablecoin XYZ is created and pegged to the U.S. dollar, the coin creators could hold the amount of USD that they have released in the token form in an account. This way, they can always guarantee that they could buy back XYZ coins for $1, even if they need to buy 100% of them back. Although backing guarantees a minimum value for XYZ, the market price of the coin could still go up. In order to keep it at $1, the creators can release more XYZ coins to reduce the price. Unbacked stablecoins are also known as non-collateralized stablecoins or “seigniorage-style” stablecoins.

Although this system works in theory, it takes a lot of capital to back 100% of a stablecoin. There is a risk that stablecoin developers claim to hold more than they really do. If enough people try to sell their stablecoin and there isn’t sufficient cash to back it up, the stablecoin price could collapse.

About “Seigniorage”

Another way that stablecoin developers can maintain a stable pegged token price is to use a system of algorithms that guides the expansion and contraction of a stablecoin’s money supply. In other words, algorithms can tell governments and economists when it might be beneficial either to inject money into or withdraw money from the economy.

Under certain conditions, creating new money within a particular country is cheaper than the money’s current face value. When this occurs, a government can claim as revenue the difference in price between printing new money and the current face value of the money.

In financial services, the revenue a government receives by creating new money is called seigniorage. The seigniorage strategy only uses supply as a regulating tool. If the price of XYZ drops below $1, the developers buy back coins from the market to increase the price, and vice versa. Although this requires less capital than the backing method, it tends to be slower, so the stablecoin may not hold quite as stable a price.

Stablecoins vs Altcoins

Although all stablecoins are altcoins, not all altcoins are stablecoins. Let’s look at some similarities and differences between the two.

Similarities

Both stablecoins and altcoins are cryptocurrencies that use the blockchain to record and keep track of transactions. They are digital currencies that can be traded on exchanges and stored in different types of hot or cold storage crypto wallets.

Differences

The main difference between stablecoins and altcoins is that stablecoins always remain at the same value, whereas altcoins can spike or dip in value.

Stablecoins provide a stable investment that will always remain the same value. Altcoins, on the other hand, offer different types of functionality, which makes them an attractive alternative to Bitcoin.

Similarities	Differences
Both are cryptocurrencies	Stablecoins’ value usually remains the same
Built on blockchain	Altcoins’ value can rise or fall
Digital currencies
Can trade on crypto exchanges
Stored in different types of crypto wallets

Examples of Altcoins and Stablecoins

Below are examples of altcoins and stablecoins an individual can buy.

Altcoins: Examples

There are thousands of altcoins on the market; some popular altcoins are: Dogecoin (DOGE), Litecoin (LTC), and Monero (XMR).

Some types of altcoins include mining-based altcoins, security tokens, utility tokens, and stablecoins.

• Mining-based altcoins: This type of altcoin can be earned by users through a computer-based process known as mining. Bitcoin also uses a mining system for the minting of new coins and to keep the network running. Examples of mining-based altcoins are Ethereum and Litecoin.

• Security tokens: These altcoins are similar to buying stock in a company. They are issued by businesses and released to buyers through an initial coin offering (ICO). Buyers who own security tokens can earn dividends or partial ownership in the issuing company. Examples of security tokens include Sia Funds, Blockchain Capital, and Science Blockchain.

• Utility tokens: These tokens serve a use case within a specific ecosystem, such as a video game or an ecommerce store. They enable the owner to take certain actions in the network, such as buying a digital good within a video game world. The token is created just for use in that ecosystem and can be traded in the broader crypto market; but it only has real use within that ecosystem. Some examples of utility tokens are Basic Attention Token and Binance Coin.

Stablecoins: Examples

Some popular stablecoins are: Binance USD (BUSD), Dai (DAI), Digix Gold (DGX), Paxos Standard (PAX), and TrueUSD (TUSD).

Potential Advantages/ Disadvantages of Altcoins

Altcoins can be a great way to diversify away from Bitcoin, and they offer features that can be attractive to investors. It’s impossible to know which altcoins will ultimately survive and be mass adopted, so altcoins do come with some risk, but there are several altcoins that have already become widely used.

Potential Advantages	Potential Disadvantages
Room to grow	Can be volatile
May offer unique functions	Limited usage
Can have lower fees	No guarantee that they’ll survive
Can have quicker transactions	Hard to compete with Bitcoin for market share
Can offer more anonymity	Can have low liquidity
Can offer lower energy usage	Second choice for many investors

Potential Advantages/ Disadvantages of Stablecoins

Stablecoins make it easier to trade cryptocurrencies on an exchange. Instead of buying bitcoin (or another crypto) with fiat currency directly, traders often exchange fiat for a stablecoin — and then using the stablecoin, they execute a trade for another cryptocurrency. During times of market volatility, some investors might choose to park their money in stablecoins. However, stablecoins don’t offer the same potential upward price movement as altcoins.

Potential Advantages	Potential Disadvantages
Fast processing time	Require a third party
Lower fees	Require external auditing
Transparency	Low return on investment
Borderless transactions	Locked to the value of an external asset
Easily programmable changes
Safer asset in which to store funds during volatile markets
Many are securely backed by external assets
Convenient to trade on an exchange

FAQ

Is XRP considered a stablecoin?

No. XRP is an altcoin, but it is not a stablecoin.

Can stablecoins be mined?

Yes, some stablecoins can be mined.

Are altcoins and stablecoins mutually exclusive?

All stablecoins are altcoins, but not all altcoins are stablecoins.

Photo credit: iStock/akinbostanci

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

SoFi Invest®

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

Jul

2022

Exercising in Options? What Does It Mean & When to Exercise

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

Investors in stock option contracts have the right to buy or sell underlying stocks (or other assets) at a predetermined price within a certain time period. When an investor decides they want to take action on their right to buy or sell, it’s called exercising. There are a number of ways investors can choose to exercise their options contract, depending on their individual goals and financial situation.

Option contracts are complex investment vehicles. They’re a multi-faceted tool that involves precise timing and are backed by lots of strategizing. While options are not for all investors, if handled by experienced traders, options could add diversity to a well-diversified portfolio.

In this article, we focus on the concept of exercising in options. What does it really mean to “exercise an option?” And how do you do it?

What Does Exercising Mean?

Exercising a stock option means that a trader purchases or sells the underlying stock associated with the options contract at the price set by the contract, which is called the strike price. This price may differ from the current market price of the stock.

Options contracts are valid for a certain amount of time. So if the owner doesn’t exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.

There is also an upfront fee, called a premium, that gets paid when a trader enters into an options contract. If the trader doesn’t exercise the contract, they forfeit that fee along with any other brokerage fees. Most options contracts never get exercised. Some contracts are sold instead of exercised, because the contract itself has value if it has the potential to be exercised later.

There are two main choices of types of options contracts, call options and put options. Purchasing a call option gives traders the right, but not the obligation, to purchase the underlying security at the strike price. Selling put options gives traders the right to sell the underlying security at the strike price.

Each contract is different, and there are also different types of options. American-style options let traders exercise them prior to the contract’s expiration date, while European-style options can only be exercised after the expiration date.

How Do You Exercise an Option?

Generally, traders have several choices when it comes to exercising their stock options. When a trader is ready to exercise an option, they can let their brokerage firm know. The broker will create an exercise notice to the Options Clearing Corporation (OCC) to let the individual or entity buying or selling the underlying stock know that the trader wants to execute a trade on a particular date. The option seller is required to fulfill the obligations of the contract.

The OCC assigns the exercise notice to one of their clearing members, which tends to be the trader’s brokerage firm. The broker then assigns the option to one of their customers who has written an option contract that they have not yet covered. Depending on the broker, the customer they choose may either be chosen randomly or picked on a first-in-first-out (FIFO) principle .

Holding

If a trader thinks a stock will go up in value, they can purchase options at a lower market price, then wait until the market price goes up to exercise the option. Then they purchase at their original lower price and can decide to sell at the new, higher market price. This is one of the benefits of trading stock options. However, traders can’t wait forever, because options contracts do have expiration dates.

Exercise-and-Hold

It is common for company employees to receive stock options, which give them the right to purchase company stock. They can purchase the stock and then hold onto it if they think it will rise in value. However, it’s important for employees to understand the rights they have with their options. Often, stock shares are vested for a certain amount of time, so an employee has to wait for that time to end before they are allowed to exercise the option.

Exercise-and-Sell-to-Cover

Sometimes there are fees, commissions, and taxes involved in exercising company stock options. To cover those fees, traders can exercise options, purchase shares of company stock and simultaneously sell some of those shares to cover the expenses.

Exercise-and-Sell

If a company employee wants to immediately sell their stock options after exercising their right to buy the stock, they can choose to exercise and sell. They will receive the cash amount of the current market value of the stock minus any fees and taxes.

Early Exercise

In addition to profiting off of a stock’s price increase, options traders may want to exercise early so that they can earn dividends off of the underlying security. Traders who write call options should be prepared to close out a trade at any time prior to the contract’s expiration date, especially if the contract is in-the-money. If a put option is in the money, most likely the owner will exercise it before it expires.

Advantages and Disadvantages of Exercising an Option

Exercising options presents opportunities to earn a profit, but there also are potential downsides to exercising options.

Exercising Options

Advantages	Disadvantages
Earn dividends from owning the underlying stock.	Fees, taxes, transaction costs potentially could cancel out any profit.
Sell the underlying stock for a profit.	Increases chance of risk: margin call, stock’s value could decrease.
In general, traders can make a greater profit via closing positions — by buying or selling options rather than exercising them. One of the few instances where it could be advantageous to exercise a contract is if you’d like to own the stock outright instead of basing a contract on it.	The one way that exercising a contract could actually make you lose out on money has to do with the complicated price structure of options, which consists of two components: extrinsic (time value) and intrinsic value. If you own options contracts that are in the money, then the price of those contacts will comprise both extrinsic and intrinsic value. If you sell these options, you’d benefit from both the intrinsic and the extrinsic price components. But if you exercised them instead, you would only benefit from the intrinsic value. Why? Extrinsic value serves to compensate the writer (seller) of options contracts for the risk they are taking. Once you exercise an options contract, the contract itself effectively ceases to exist, so that all extrinsic value is lost.

Advantages

Disadvantages

Earn dividends from owning the underlying stock.

Fees, taxes, transaction costs potentially could cancel out any profit.

Sell the underlying stock for a profit.

Increases chance of risk: margin call, stock’s value could decrease.

In general, traders can make a greater profit via closing positions — by buying or selling options rather than exercising them.

One of the few instances where it could be advantageous to exercise a contract is if you’d like to own the stock outright instead of basing a contract on it.

The one way that exercising a contract could actually make you lose out on money has to do with the complicated price structure of options, which consists of two components: extrinsic (time value) and intrinsic value.

If you own options contracts that are in the money, then the price of those contacts will comprise both extrinsic and intrinsic value. If you sell these options, you’d benefit from both the intrinsic and the extrinsic price components.

But if you exercised them instead, you would only benefit from the intrinsic value. Why?

Extrinsic value serves to compensate the writer (seller) of options contracts for the risk they are taking. Once you exercise an options contract, the contract itself effectively ceases to exist, so that all extrinsic value is lost.

How Do You Know Whether to Hold or Exercise an Option?

It can be difficult to know when and whether to exercise an option. There are different options trading strategies that can prove beneficial to exercising early, or to waiting or even selling the option contract itself. Many factors come into play when making the decision to exercise an option, such as

• the amount of time left in the contract,

• whether it is in-the-money and if so by how much, and

• whether the trader wants to buy, sell, or hold shares of the underlying security.

Time Value

One key thing to know about options trading is how options pricing works. Options lose value over time until they are finally worth nothing at their expiration date. If a trader owns an option that still has time left on it, they may consider selling the option or waiting to exercise it. Often it is more profitable to sell the option than to exercise it if it still has time value. If an option is in the money and close to expiring, it may be a good idea to exercise it. Options that are out-of-the-money don’t have any intrinsic value, they only have time value.

Transaction Costs

In addition to the premium a trader pays when buying an option, they must also pay transaction and commission fees to their broker. There can be fees both when exercising an option and when buying or selling the underlying shares.

Increased Chance of Risk

Buying a call option is fairly low risk because the most a trader can lose is the premium amount they paid when they bought into the contract. Exercising an option increases risk, because even if the trader profits in the short term by exercising and buying the stock at a good price, the stock could decrease in value any time. Because the trader already lost the premium amount, they would need to earn at least that amount back to break even on the trade.

Exposure to Margin Risk

To purchase the shares of the underlying security, a trader needs to use cash from their account or take out a margin loan from their broker. If they take out a loan, they increase their chances for risk and greater expenses.

Options Obligations

The owner of a long option contract has the right to buy shares of the underlying stock if they choose to exercise it. The selling trader on the other side of the contract is obligated to fulfill the contract if the owner decides to buy. If the buyer exercises their right, the seller must deliver the number of shares — generally 100 shares per contract — for the strike price set by the contract. If the buyer does exercise the contract, they are then obligated to pay the seller for those shares.

The brokerage firm gives notice to a random seller when a buyer exercises an option that fits the transaction parameters. This could happen at any time prior to the expiration date. A seller can close out their option contract early if it hasn’t been exercised yet. The process of assigning and exercising options is all automated. So if a trader sells an option, when it gets exercised the stock will automatically be removed from their account, and they receive cash in their account in return. The buyer will receive the shares in exchange for cash from their brokerage account.

The Takeaway

Stock options are a popular investing tool to gain exposure to securities with a smaller upfront cost and level of risk. If you’re interested in starting to build a portfolio, a great tool to use is SoFi Invest. The online trading platform lets you research, track, buy and sell stocks, ETFs, and other assets right from your phone — all with 24/7 convenience.

More ways to invest — all in one place. You can connect your banking and any other investment accounts to the SoFi Invest app to see all your financial information easily in one simple dashboard.

Get started trading on SoFi Invest today.

FAQ

How can you tell when to exercise an option?

It could be beneficial to exercise an option if the underlying security’s price is more than the strike price of a call option; or the underlying security’s price is less than the strike price of a put option.

How are early-exercise options different from exercise options?

Early-exercise options differ from exercise options in one way: Early exercise is possible with American-style option contracts only. You cannot do this with European-style option contracts, as they rule that you may exercise on the expiration date only.

What is a cashless exercise in options?

Also called the “same-day sale,” a cashless exercise is when an employee exercises their stock options via a short-term loan provided by a brokerage firm.

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

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.
*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®

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

Photo credit: iStock/whyframestudio
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