InvestHL Archives | Page 18 of 67

Sep

2023

What Is a Direct Stock Purchase Plan (DSPP)?

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

A direct stock purchase plan (DSPP) is a plan that allows investors to purchase stock in a company without a broker and get it directly from the company instead.

With DSSPs, there are often no brokerage fees. Meanwhile, discounts to the share prices may be available for larger purchases. With shares purchased through a DSPP, investors have the same profit and loss opportunities, access to dividends, as well as stockholder voting rights.

However, direct stock purchase plans may not be right for every investor. Learn more about buying stock direct from companies through a DSPP, including the pros and cons.

Direct Stock Purchase Plan, Explained

What is a direct stock purchase plan? Typically, many investors use a broker to buy shares of stock. But you can sometimes purchase stocks directly from companies, no broker required. This is what it means to participate in a direct stock purchase plan.

Many blue-chip stocks tend to offer DSPPs. For example, let’s say Company X offers a plan that allows investors to buy $500 or more worth of company stock directly from it, up to $250,000 a year, with some service and transaction fees.

With a DSPP, investors directly purchase shares, sometimes at a small discount. Discounts can range from 1% to 10% to encourage investors to buy more shares.

However, because many brokerage accounts now waive fees and commissions entirely for many investors, the savings difference is smaller than it used to be.

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

Pros and Cons of a DSPP

Direct stock purchase plans have benefits and drawbacks. These include:

Pros:

• No broker needed. Investors can purchase shares of stock directly from the company.

• Very little money is required to get started, and the process is typically simple to do.
Good for long-term investing.

• Some DSPP programs offer dividend reinvestment plans.

Cons:

• An investor may not achieve portfolio diversification because not all stocks offer DSPPs.

• Companies may put maximum limits on how much an individual investor can purchase.

• When selling DSPP stocks, multiple types of fees can sometimes be charged.

How To Invest in a DSPP

Armed with information about how to buy directly from companies, investors may want to explore what specific opportunities exist. Perhaps they already have a publicly traded company in mind. In that case, they can go to that company’s investor relations website to see if the company offers this type of investment opportunity.

They can also search on the Internet to see which direct stock purchase plans are available.

More specifically, if someone wants to buy stocks in this way, they typically open an account and make deposits into it. Usually, these deposits are automatically made monthly through an ACH funds transfer from the investor’s bank account. In some cases you can write checks as well.

Then, that dollar amount is applied toward purchasing shares in that company’s stock, which can include fractional shares. For example, let’s say that one share of a company’s stock currently costs $20. If an investor sets up an ACH withdrawal of $50 monthly, then, each month they have purchased 2.5 shares of that company’s stock.

One of the benefits of investing through a direct stock purchase plan is the ability to incrementally invest in an inexpensive way. This might make it a good choice for some first-time investors with smaller amounts of money to invest, with initial deposits ranging from $100 to $500. In some cases, initial deposit minimums can be waived if you purchase a certain dollar value of stock every month. But again, it may be difficult to achieve portfolio diversification with DSPP.

Companies With DSPPs

A number of large, well-established companies offer DSPPs. Companies with direct stock purchase plans include Walmart, The Coca-Cola Company, Starbucks, and Home Depot, and Best Buy, among others.

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

What to Consider Before Buying DSPPs

When online investing was new, people typically needed to pay significant fees to brokers to buy stock. In that era, direct stock purchase plans could be money-savers for investors. Over time, though, fees for online investing have lessened, making this less distinctive of a benefit.

In addition, many DSPPs charge initial setup fees, and may have other investment fees, including ones for each purchase transaction or sale. Although they may be small, these fees can build up over time. And it may be challenging to re-sell shares without the use of a broker, which makes this investment strategy more of a long-term one.

Plus, any time a share is purchased, some degree of stock volatility comes along with it — how much depends upon what is happening with that specific company and the overall levels of turbulence in the market.

Here’s something else to consider: When owning stock in just one company, or only a couple of them, portfolios aren’t diversified. When you diversify your investment assets, it helps to spread out the degree of risk. That’s because, if one stock’s value decreases, others may rise to balance out that portfolio.

The Takeaway

Direct stock purchase plans are when individual investors can directly purchase shares of that company’s stock without the need for broker involvement. The benefits of DSPPs potentially include purchasing company shares at a discount, and not needing a broker to make the transaction.

The downside of DSPPs is that a limited number of companies offer them, which means that an investor who invests solely through DSPPs may not have the best portfolio diversification. Plus, with brokerage commissions and fees rapidly shrinking, in many cases to zero, DSPPs have become a less essential way of cutting down trading costs for investors.

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

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

FAQ

What is the difference between a brokerage and a direct stock purchase?

The main difference between a brokerage and a direct stock purchase is this: With a direct stock purchase, an investor buys shares of one company. A brokerage, on the other hand, offers multitudes of different stock options an investor may choose from.

What is direct stock vs portfolio stock?

With direct stock, an investor purchases shares of stock directly from a company. A portfolio refers to a collection of different types of investments an investor may have, including stocks, bonds, or stock funds, to name a few.

What is the difference between DSPP and DRIP?

By using a DRIP (dividend reinvestment plan), investors can buy more stock in companies whose shares they own by reinvesting what they earn from dividends. With a DSPP, an investor can purchase stock directly from a company. Unlike a DRIP, they don’t have to use dividends to purchase shares.

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

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

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

SOIN0723125

Sep

2023

Advance/Decline Line: Definition, Formula, Examples

By Paulina Likos | Growing Wealth, invest, Investing, Terminology | Comments Off

The Advance/Decline line, or A/D line, is a technical stock market indicator used by traders to measure the overall health of the stock market. This measurement tells market participants whether there are more stocks rising or falling on a trading day, and whether a majority of stocks are pushing the market in either direction.

For traders who are looking for greater insight into market trend analysis, the A/D line may be a suitable indicator to help determine where the market is trending, how strong that trend is, and the direction the market could be going in the short-term.

What Is the Advance/Decline Line (A/D)?

The advance/decline line (A/D) is a market indicator that traders use during stock technical analysis to estimate the breadth, or the overall strength or weakness of the stock market. The A/D line monitors how many stocks are currently trading above or below the previous day’s close. Traders may follow these changes over time to try to forecast the direction of the market.

In a particular index, like the S&P 500, Nasdaq, or Dow Jones Industrial Average, stocks go up and down. But just because some stocks move in one direction, it doesn’t mean that all stocks move in that same direction. Sometimes it can be difficult for investors to discern whether the direction of the market is being influenced by larger stocks that hold more weight in an index, or by a majority of stocks that are pushing the markets in a particular direction.

The purpose of the A/D line is to see how it correlates with the price movement of the index it’s being compared to. Traders and investors can use the A/D line to see how many stocks are rising or declining to form an estimate on market direction.

Where Is the Advance/Decline Line on a Chart?

Market participants can find the advance/decline line above or below a stock index chart. Investors can reference the A/D line and compare it to the chart stock market indexes to better understand the strength of the market and to help gauge the direction of where the market might be headed.

Advance/Decline Line vs the Arms Index

The Arms Index — also known as the story-term trading index (TRIN) — is another technical analysis indicator used to estimate market sentiment and measure volatility. It’s a ratio between advancing and declining stocks versus the volume of stocks whose price increases or decreases. In other words, the TRIN compares advancing and declining stocks to their volume and shows whether the volume is flowing toward advancing or declining stocks.

If more volume is trending toward declining stocks, the TRIN for that day will be greater than one. If more A/D volume correlates with advancing stocks, then the TRIN will be below one for that day. A high TRIN reading could signal to traders that stock selling may be on the horizon. A TRIN reading below one could indicate a buying opportunity.

Traders may use the TRIN ratio as a short-term market gauge to measure overbought or oversold market levels, while the A/D line can be used to gauge longer term market sentiment by measuring the rise and fall of stock over a period of time.

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

Advance/Decline Line Formula

The A/D Line is calculated by taking the difference between the number of stocks that advance and the number of stocks that decline, compared to the prior close. This value is added to the previous day’s A/D Line value. If there are more declining stocks versus advancing stocks on a particular day, then traders will see the A/D line start to move downward. If there are more stocks that are advancing, the A/D number is going to be increasing. Here is the formula:

Advance/Decline Line = Number of advancing stocks – Number of declining stocks + Previous A/D Line value

Calculating the Advance/Decline Line (A/D)

The A/D line is a cumulative, daily calculation that is plotted each day so market participants can see the direction of where stocks are moving. When reading the A/D line, it’s important for traders to look at the direction of the line and not its value.

Traders may use the A/D line to help decide which trades to place next. For example, if the market shows more declining stocks than advancing stocks, this means a majority of stocks closed at a lesser value than their previous day close. As a result, traders may anticipate that the market will fall in the near term, and may choose to sell because the market trend is moving in a bearish direction.

Some indexes, like the S&P 500, are market-cap weighted, which means the larger companies hosted in the index influence the direction of the index. The A/D line allows investors to look at stocks on a level playing field. When a market rises, for example, the A/D line shows investors whether this rise was driven by a majority of stocks increasing or if the rise was caused by a select few of stocks that hold a larger weight in the index.

What Does the Advance/Decline Line Show?

The advance/decline line shows traders the degree of participation of stocks in a market that is either rising or falling and whether the majority of stocks are moving in a similar direction of the market.

The line is a representation of stocks that are ticking up or down cumulatively, adding stock movements each day to see the trend of advancing stocks vs. declining stocks. If there were more declining stocks than advancing stocks on a particular day, the A/D line would start to slope downward. If there were more advancing stocks than declining stocks on the day, then the A/D line would slope upwards.

Sometimes there might be a difference in direction between the index and the A/D line. This is called a divergence, and it can happen in one of two ways.

Bearish Divergence: Declining Line

If the index is on an upward trend but the A/D line has a negative slope, this is known as a bearish divergence. The increase in the index may be driven by some stocks, but this scenario signals to traders the market may reverse and trend downward in the short term.

Bullish Divergence: Rising Line

If the index is on a downward trend but the A/D line has a positive slope, this is called a bullish divergence. The index seems to be bearish, but the A/D line tells market participants there are more advancing than declining stocks during the period that the index is declining. This may signal a trend reversal in market prices and indicate the market has more strength than meets the eye.

Example of Using the A/D Line

Traders use the A/D line to compare it to the price movement of the index.

For example, when an index you’re monitoring is moving to new highs, you want to see the A/D line moving new highs to confirm the index’s direction.

If the index and the A/D line are both hitting new highs, the market is hitting a bullish trend. If the stock market reaches a new peak but the A/D line reaches a lower peak than the previous rally, that means fewer stocks are participating in a higher move and the rally could be coming to an end. This could suggest that the strength of the market is driven by a few names with larger market caps.

Is the A/D Line a Good Indicator?

The A/D line is considered a reputable and popular measurement for traders to gather reliable insight into the strength of a market trend. Note that there are many market indicators out there, and each will have good and bad use cases. But generally, the A/D line may be a good choice for many investors to utilize.

When the price of an asset changes, traders will want to know whether it’s best to buy or sell. With the A/D line, traders can estimate price trends of assets and potential reversals by reviewing the direction of the A/D line, which is considered to be a reasonably reliable indicator in predicting trends since it shows market participants how the market is behaving.

Pros of the A/D Line

Traders can find the A/D Line indicator either above or below a stock chart on a trading platform and may use it as a tool to try to time the market and potentially catch a particular stock price.

By gauging the direction of where markets are headed, the A/D Line can help traders forecast stock price movements on the upside or downside. This may help market participants position their trades favorably.

Cons of the A/D Line

It’s important for market participants to be careful to not rely on the A/D Line as their only market indicator. While the A/D Line offers insight into overall market direction, it may not be able to capture minor market changes.

The A/D Line does not capture price changes between trading gaps, or when a stock’s price moves higher or lower throughout the trading day even though there’s not much trading going on.

Another limitation is that even though the line shows the general direction of where the market is trending, either a positive or negative slope, the A/D line doesn’t show the precise percentage the stock moved.

How Investors Can Use the Advance/Decline Line

The A/D line is positioned against an index to help spot market trends and reversals. Traders who trade on the major indexes can use the A/D line to gauge overall market sentiment. Market participants can look at a historical A/D line to see how the market performed in different periods of time.

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

The Takeaway

The Advance/Decline Line is a tool used by traders and investors to forecast the direction of where the overall stock market is headed. The A/D Line is a well-known market indicator used to predict and confirm trends and forecast market reversals.

The A/D Line offers a great visual guide that may help traders make decisions on market strategies and positions in the short term. But while there are benefits of using this metric, it’s important for market participants to know the A/D line’s drawbacks as well.

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

FAQ

What is considered a good Advance/Decline ratio?

An advance/decline ratio of one or more is generally considered to be good, as it’s a signal that a stock is in a stable or on an upward trend. Conversely, a ratio of less than one is a sign that it could be declining.

What is the 10-day Advance/Decline line?

The 10-day advance/decline line is a technical indicator that allows investors to get a measure of the average number of daily advancers minus decliners within an index or specific sector over the previous ten trading days.

What does a period of decline in investment mean?

A period of decline in investment is a broad description of a period of deflation in the investment market. It could take the form of an overall drop in the value of investments.

Photo credit: iStock/utah778

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

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

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

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Sep

2023

Pros & Cons of the F.I.R.E Movement

By Krystal Etienne | Budgeting & Goals, invest, Preparing for Retirement | Comments Off

Most people dream of the day that they clock into work for the very last time. In most cases, we imagine that’ll be when we’re in our 60s. But what if you could take the freedom and independence of retirement and experience it 20 or 30 years earlier?

That’s the basic principle of the Financial Independence Retire Early (F.I.R.E) movement, a community of young people who aim to live a lifestyle that allows them to retire in their 30s or 40s rather than their 60s and 70s.

While it may sound like the perfect life hack, attempting to live out this dream comes with some serious challenges. Read on to learn more about the F.I.R.E. movement and the techniques followers use achieve their goal of early retirement. That can help you determine whether any of their savings strategies might be right for you.

What Is the FIRE Movement?

F.I.R.E stands for “financial independence, retire early,” and it’s a movement where followers attempt to gain enough wealth to retire far earlier than the traditional timeline would allow.

The movement traces its roots to a 1992 book called “Your Money or Your Life” by Vicki Robin and Joe Dominguez. F.I.R.E. started to gain a lot of traction, particularly among millennials, in the 2010s.

In order to achieve retirement at such a young age, F.I.R.E proponents devote 50% to 75% of their income to savings. They also use dividend-paying investments in order to create passive income sources they can use to support themselves throughout their retired lives.

Of course, accumulating the amount of wealth needed to live for six decades or more without working is a considerable feat, and not everyone who attempts F.I.R.E. succeeds.

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

F.I.R.E. vs. Traditional Retirement

F.I.R.E. and traditional retirement both aim to help people figure out when they can retire, but there are major differences between the two.

Retiring Early

Given the challenge many people have of saving enough for retirement even by age 60 or 70, what kinds of lengths do the advocates of the F.I.R.E. movement go to?

Some early retirees blog about their experiences and offer tips to help others follow in their footsteps. For instance, Mr. Money Mustache is a prominent figure in the F.I.R.E. community, and advocates achieving financial freedom through, in his words, “badassity.”

His specific advice includes reshaping simple but expensive habits—like eliminating smoking cigarettes or drinking alcohol, and limiting dining out.

Of course, the basic premise of making financial freedom a reality is simple in theory: spend (much) less money than you make in order to accumulate a substantial balance of savings.

Investing those savings can potentially make the process more attainable by providing, in the best-case scenario, an ongoing passive income stream. However, many people who achieve F.I.R.E. are able to do so in part because of generational wealth or special circumstances that aren’t guaranteed.

For instance, Mr. Money Mustache and his wife both studied engineering and computer science and had “standard tech-industry cubicle jobs,” which tend to pay pretty well—and require educational and professional opportunities not all people can access.

In almost all cases, pursuing retirement with the F.I.R.E. movement requires a lifestyle that could best be described as basic, foregoing common social and leisure enjoyments like restaurant dining and travel.

Traditional Retirement

Most working people expect to retire sometime around the age of 65 or so. For those born after 1960, Social Security benefits can begin at age 62, but those benefits will be significantly less than they would be if an individual waited until 67, their full retirement age, to collect them.

People saving for traditional retirement typically save much of their retirement funds in tax-incentivized retirement accounts, like 401(k)s and traditional IRAs, which carry age-related restrictions. For example, 401(k)s generally can’t be accessed before age 59½ without incurring a penalty.

Even a traditional retirement timeline can be difficult for many savers. Recent data from the Federal Reserve shows that approximately 25% of Americans have no retirement savings whatsoever. Still, Americans between the ages of 25 to 40 plan to retire at age 59, according to a 2022 survey.

Online calculators and budgeting tools can help you determine when you can retire—and are customizable to your exact retirement goals and specifications.

💡 Haven’t started an IRA yet? Check out: How to Open an IRA

Financial Independence Retire Early: Pros and Cons

Although financial independence and early retirement are undoubtedly appealing, getting there isn’t all sunshine and rainbows. There are both strong benefits and drawbacks to this financial approach that individuals should weigh before undertaking the F.I.R.E. strategy.

Pros of the F.I.R.E. Approach

Benefits of the F.I.R.E. lifestyle include:

• Having more flexibility with your time. Those who retire at 35 or 40, as opposed to 65 or 70, have more of their lifetime to spend pursuing and enjoying the activities they choose.

• Building a meaningful, passion-filled life. Retiring early can be immensely freeing, allowing someone to shirk the so-called golden handcuffs of a job or career. When earning money isn’t the primary energy expenditure, more opportunities to follow one’s true calling can be taken.

• Learning to live below one’s means. “Lifestyle inflation” can be a problem among many working-age people who find themselves spending more money as they earn more income. The savings strategies necessary to achieve early retirement and financial independence require its advocates to learn to live frugally, or follow a minimalist lifestyle, which can help them save more money in the long run—even if they don’t end up actually retiring early.

• Less stress. Money is one of the leading stressors for many Americans. Gaining enough wealth to live comfortably without working could wipe out a major cause of stress, which could lead to a more enjoyable, and healthier, life.

Cons of the F.I.R.E. Approach

Drawbacks of the F.I.R.E. lifestyle include:

• Unpredictability of the future. Although many people seeking early retirement thoroughly map out their financial plans, the future is unpredictable. Social programs and tax structures, which may figure into future budgeting, can change unexpectedly, and life can also throw wrenches into the plan. For instance, a major illness or an unexpected child could wreak havoc on even the best-laid plans for financial independence.

• Some find retirement boring. While never having to go to work again might sound heavenly to those on the job, some people who do achieve financial security and independence and early retirement struggle with filling their free time. Without a career or specific non-career goals, the years without work can feel unsatisfying.

• Fewer professional opportunities. If someone achieves F.I.R.E. and then discovers it’s not right for them—or must re-enter the workforce due to an extenuating circumstance—they may find reintegration challenging. Without a history of continuous job experience, one’s skill set may not match the needs of the economy, and job searching, even in the best of circumstances, may be difficult.

• F.I.R.E. is hard! Even the most dedicated advocates of the financial independence and early retirement approach acknowledge that the lifestyle can be difficult—both in the extreme savings strategies necessary to achieve it and in the ways it changes day-to-day life. For instance, extroverts might find it difficult to forgo social activities like eating out or traveling with friends. Others may find it challenging to create a sense of personal identity that doesn’t revolve around a career.

Investing for F.I.R.E.

Investing allows F.I.R.E. advocates—and others—to earn income in two important ways: dividends and market appreciation.

Dividends

Shareholders earn dividend income when companies have excess profits. Dividends are generally offered on a quarterly basis, and if you hold shares of a stock you could earn them.

However, because dividend payments depend on company performance, they’re not guaranteed, those relying on them to live should have other income sources (including substantial savings accounts) as a back up income stream.

Market Appreciation

Investors can also earn profits through market appreciation when they sell stocks and other assets for a higher price than what they initially paid for them.

Even for those who seek retirement at a traditional pace, stock investing is a common strategy to create the kind of compound growth over time that can build a substantial nest egg. There are many accounts built specifically for retirement investing, such as 401(k)s, IRAs, and 403(b) plans.

However, these accounts carry age-related restrictions and contribution limits which means that those interested in pursuing retirement on a F.I.R.E. timeline will need to explore additional types of accounts and saving and investing options.

For example, brokerage accounts allow investors to access their funds at any point—and to customize the way they allocate their assets to maximize growth.

The Takeaway

Whether you’re hoping to retire in a traditional fashion, shorten your retirement timeline, or are just looking to increase your wealth to achieve shorter-term financial goals, like buying a new car—investing can be one of the most effective ways to reach your objectives.

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

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

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

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.

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.

SOIN0723004

Sep

2023

What Are Over-the-Counter (OTC) Stocks?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Over-the-counter (OTC) stocks are not traded on a public exchange like the New York Stock Exchange (NYSE) or Nasdaq. Instead, these stocks are traded through a broker-dealer network. Additionally, the over-the-counter market can also include other types of securities. The Financial Industry Regulatory Authority regulates broker-dealers that engage in OTC trading.

For investors, it can be important to understand the meaning of OTC stocks, and where these securities might fit into your portfolio before trading them.

What Are OTC Stocks?

As mentioned, an OTC stock is one that trades outside of a traditional public stock exchange. As such, in order to grasp OTC stock trading and how it works, it helps to have a clear understanding of public stock exchanges.

A stock exchange — like NYSE or Nasdaq — is a regulated environment in which buyers and sellers can trade shares of publicly listed companies. Before a stock can be listed on an exchange for public trading, it first has to meet the guidelines established by that exchange (for example, a company that wants to be listed on the Nasdaq must meet the Nasdaq listing requirements).

Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer) if they’re unable to meet the listing requirements of a public exchange. OTC trading may also appeal to companies that were previously traded on an exchange but have since been delisted.

Also, stocks that are traded on an exchange are called “listed stocks,” while those that trade OTC are often called “unlisted stocks.”

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

How to Buy OTC Stocks

Investors interested in purchasing OTC stocks may not need to change their investing strategy much, because depending on the exchange or platform they use to buy listed investments, they may be able to buy OTC stocks in much the same way.

Again, this will largely depend on the platform being used, but many — but not all — exchanges or platforms allow investors to trade OTC stocks. This can be done by searching for the OTC stock on the platform and placing an order. Investors may need to know the specific stock ticker they’re looking for, however, so there may be a bit of initial homework involved.

Types of OTC Securities

OTC trading tends to focus on equities, i.e. stocks. In fact, it’s even common to see penny stocks being traded over the counter, or used as a common example of an OTC security. But stocks don’t make up the entirety of OTC trading activity. Other types of investments that can be traded OTC include:

• Derivatives

• Corporate bonds

• Government securities

• Foreign currency (forex)

• Commodities

Altogether, there are thousands of securities that trade over the market. These can include small and micro-cap companies, large-cap American Depositary Receipts (ADRs), and foreign ordinaries (international stocks that are not available on U.S. exchanges). Companies that trade over the counter may report to the SEC, though not all of them do.

Types of OTC Markets

In the U.S., the majority of over-the-counter trading takes place on networks operated by OTC Markets Group. This company runs the largest OTC trading marketplace and quote system in the country (the other main one is the OTC Bulletin Board, or OTCBB). While companies that trade their stocks on major exchanges must formally apply and meet listing standards, companies quoted on the OTCBB or OTC Markets do not have to apply for listing or meet any minimum financial standards.

OTC Markets Group organizes OTC stocks and securities into three distinct markets:

• OTCQX

• OTCQB

• Pink Sheets

OTCQX

OTCQX is the first and highest tier, and is reserved for companies that provide the most detail to OTC Markets Group for listing. Companies listed here must be up-to-date with regard to regulatory disclosure requirements and maintain accurate financial records.

Penny stocks, shell corporations, and companies that are engaged in a bankruptcy filing are excluded from this grouping. It’s common to find stocks from foreign companies (e.g. foreign ordinaries) listed here.

OTCQB

The middle tier is designed for companies that are still in the early to middle stages of growth and development. These companies must have audited financials and meet a minimum bid price of $0.01. They must also be up-to-date on current regulatory reporting requirements, and not be in bankruptcy.

Pink Sheets

The Pink Sheets or Pink Open Market has no minimum financial standard that companies are required to meet, nor do they have reporting or SEC registration requirements. These are only required if the company is listed on a Qualified Foreign Exchange.

Be forewarned: OTC Markets Group specifies that the Pink Market is designed for professional and sophisticated investors who have a high risk tolerance for trading companies about which little information is available.

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

Pros and Cons of OTC Trading

Investing can be risky in general, but the risks may be heightened with trading OTC stocks. But trading higher risk stocks could result in bigger rewards if they’re able to produce above-average returns.

When considering OTC stocks, it’s important to understand how the positives and potential negatives may balance out — if at all. It’s also helpful to consider your personal risk tolerance and investment goals to determine whether it makes sense to join the over-the-counter market.

Trading OTC Stocks: Pros and Cons
OTC Stock Trading Pros	OTC Stock Trading Cons
Over-the-counter trading may be suitable for investors who are interested in early stage companies that have yet to go public via an IPO.	Micro-cap stocks and nano-cap stocks that trade over the counter may lack a demonstrated track record of positive performance.
Investing in penny stocks can allow you to take larger positions in companies.	Taking a larger position in a penny stock could amplify losses if its price declines.
May appeal to active traders who are more interested in current pricing trends than fundamentals.	Limited information can make it difficult to assess a company’s financials and accurately estimate its value.
Trading cryptocurrency on an OTC exchange could help minimize hacking or security risks.	OTC securities are subject to less regulation than stocks listed on a public exchange, which may increase the possibility of fraudulent activity.
OTC trading makes it possible to invest in foreign companies or companies that may be excluded from being listed on a public exchange.	OTC stocks may be more illiquid than stocks traded on a public exchange, making it more difficult to change your position.

The Takeaway

OTC stocks are those that trade outside of traditional exchanges. Since OTC stocks trade outside of traditional exchanges like the NYSE or Nasdaq, the OTC market gives you access to different types of securities, including penny stocks, international stocks, derivatives, corporate bonds, and even cryptocurrency.

If you’re interested in OTC trading, the first step is to consider how much risk you’re willing to take on and how much money you’re willing to invest. Having a baseline for both can help you to manage risk and minimize your potential for losses.

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FAQ

How do OTC stocks differ from stocks listed on major exchanges?

The primary difference between OTC stocks and stocks listed on major exchanges is exactly that: OTC stocks aren’t not listed on major U.S. stock exchanges. They can still be traded, however, but how they’re listed (or not listed) is the primary differentiator.

How can I buy or sell OTC stocks?

Many investors can use their preferred brokerage or platform to buy and sell OTC stocks. Not all brokerages or investment platforms allow investors to do so, but many do, and trading them often involves searching for the appropriate ticker and executing a trade.

Are there any specific regulations or reporting requirements for OTC stocks?

There are reporting standards for OTC stocks, but those standards are not as stringent as listed stocks. Depending on the OTC market on which an OTC stock trades, more or less reporting may be required.

What are the main factors to consider when researching OTC stocks?

Investors should consider many factors in the OTC market, but among them are volatility, liquidity and trading volume, and applicable regulations. These three factors may have the biggest impact on how an OTC stock performs going forward, though that’s not guaranteed.

Are there any restrictions or limitations on trading OTC stocks?

Not really, other than an exchange, brokerage, or platform perhaps not allowing users or investors to trade OTC stocks or securities. In that case, investors can look for another platform on which to execute trades that does allow OTC trading.

Photo credit: iStock/JohnnyGreig

Sep

2023

Complete Guide to the Volume-Weighted Average Price Indicator (VWAP)

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

The volume-weighted average price indicator (VWAP) is a short-term trend indicator used on intraday charts. It measures the average price of a stock weighted by trading volume and price, and shows up as a single line.

Professionals and retail traders alike can use the VWAP as a benchmark to aid their trading strategies by using this indicator to identify liquidity points, or as part of a broader trend confirmation strategy.

VWAP also helps determine the target price for a particular asset, helping traders determine when to enter or exit a position. VWAP restarts at the opening of each new trading session, and is thus considered a single-day indicator.

What Is Volume-Weighted Average Price (VWAP)?

The volume-weighted average price (VWAP) is a technical indicator that shows a security’s average price during a specific trading period, adjusted for trading volume. In effect, it’s a measure of demand for that security.

It’s similar to the moving average indicator (MA), but because VWAP factors in trading volume, it’s a clearer indicator of the security’s value.

VWAP is calculated as the total amount traded for every transaction (price x volume) and divided by the total number of shares traded.

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Why Is VWAP Important?

VWAP is important to traders and financial institutions for a few reasons. They can use the VWAP in combination with different trading strategies because it helps determine whether an asset is over- or underpriced based on the current market.

VWAP also helps identify a target price for the security so traders can aim for the best exit or entry points, depending on the strategy they’re using.

This benefits day traders, but also comes into play during corporate acquisitions, or big institutional trades.

Accuracy

One reason traders use VWAP is because it removes some of the static around a security’s price movement, and thus this indicator can provide a more realistic view of a security’s price throughout the day.

Trend Confirmation

Traders can also use the volume-weighted average price to gauge the strength and momentum of a price trend or reversal. When a price is over the VWAP, it might be considered overvalued. When it’s below the VWAP it may be undervalued. Thus it’s possible to determine support and resistance levels using the VWAP.

Simplicity

In many ways VWAP is a quick and easy way to interpret a security’s price and trend, and decide whether to make a trade.

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How Is VWAP Used in Trading?

As a trend indicator, VWAP adds more context to a moving average (MA). Since a moving average does not take volume into account, it could potentially be misleading when relatively big price changes happen on low volume, or if relatively small price changes happen despite large volume.

In addition, moving averages aren’t always helpful for short-term traders, because MA’s require longer time frames to provide good information. The VWAP is made to be a short-term indicator, as it involves one data point for each “tick,” or time period of a selected chart (each minute on a 1-minute chart, for example).
There are several ways that investors use the VWAP when trading.

Institutional Investors

Large institutional investors and algorithm-based traders use the VWAP to make sure they don’t move the market too much when entering into large positions. Buying too many shares too quickly could create price jumps, making it more expensive to buy a security.

Instead, some institutions try to buy when prices fall below the VWAP, and either sell or pause purchases when prices rise above the VWAP, in an attempt to keep prices near their average.

Retail Traders

Retail investors use the VWAP as a tool to confirm trends. As noted above, the VWAP indicator is similar to a simple moving average with one key difference — VWAP includes trading volume, as the name implies. Why does this matter?

Moving averages (MA) simply calculate average closing prices for a given security over a particular period (e.g., 9-day MA, 50-day MA, 200-day MA, etc.). Adding volume to an indicator helps confirm the potential strength of a trend.

How to Calculate VWAP

VWAP is a ratio that indicates the relationship between an asset’s price and its volume. When used as a technical indicator on a chart, the computer automatically calculates VWAP and displays it as a single line.
Investors can also calculate VWAP manually. The two main pieces of the equation include:

• Typical price + volume

• Cumulative volume

The formula for calculating VWAP equals the typical price (the average of the low price, the high price, and the closing price of the stock for a given day) multiplied by the number of shares traded in a given day, divided by the total number of shares traded (cumulative volume).

Calculated daily, VWAP begins when the markets open and ends each day when the markets close.

Calculating a 30-Day VWAP

The 30-day VWAP is equivalent to the average of the daily VWAP over a 30-day period. So, to calculate the 30-day VWAP, you would have to add up the daily closing VWAP for each day, then divide the total by 30.

How Do You Read a VWAP Chart?

As with most technical indicators, there are many different ways to interpret the VWAP. Some of the most common ways to use this indicator for price signals include establishing support and resistance, indicating a trend being overextended, or using VWAP in combination with a different indicator.

Support and Resistance

This might be one of the simplest and most objective ways to read a chart using VWAP. One method for reading a VWAP chart is to use the line as an indicator for short-term support and resistance levels. If prices break beneath support, this could indicate further weakness ahead. If prices break above resistance, this could indicate more bullish momentum is yet to come.

Support and resistance are commonly measured using historic points of price strength or weakness, but this becomes more difficult when time frames are very short. Traders may use a volume-weighted indicator like the VWAP to predict short-term moves.

Trend Overextended

When looking at the VWAP indicator on a short-term chart, there could be times when price action goes very far beyond the VWAP line.

If price quickly goes too far above the line on heavy volume, this could indicate that the security has become overbought, and traders might go short. If price quickly falls far below the line, this could indicate that the security has become oversold, and traders might go long.

Of course, there is a subjective component involved in determining the exact definition of “overextended.” Typically, however, investors assume that price tends to return to the VWAP line or close to it, so when prices go too far beyond this line one way or the other, they could eventually snap back.

Recommended: Understanding Stock Volatility

VWAP Plus MACD

As they do with many technical indicators, investors often use the VWAP indicator in conjunction with other data points.

Technical analysis can become more effective when using multiple indicators together. By confirming a trend in multiple ways, investors can feel more confident in their projections.

As an example, some traders like to look at the VWAP while also looking at the Moving Average Convergence Divergence (MACD).

If the MACD lines see a bullish crossover around the same time that prices become overextended to the downside beneath the VWAP line, this could indicate a buying opportunity. If the MACD shows a bearish crossover as prices stretch far above the VWAP line, this could indicate a good time to close out a trade or establish a short position.

Limitations of VWAP

The VWAP is useful for day traders because it’s based on that day’s trading data; it’s more difficult to use the VWAP over the course of many days, as that can distort the data.

VWAP is also a lagging indicator, so while it captures recent price changes, it’s less useful as a predictive measure.

Is VWAP Good for Swing Trading?

It’s impossible to explore the role of VWAP in trading without addressing swing trading with this indicator.

The VWAP tends to work well for short-term trading like day trading and short- to medium-term trading like swing trading, in which investors hold a position for anywhere from a few days to a few weeks.

Using the VWAP on a daily basis could potentially help swing traders determine whether to continue to hold their position. If a short-term chart consistently shows prices beneath the VWAP, this fact could combine with other information to help the trader decide when to sell.

A Cumulative Indicator

It’s important to note that VWAP is what’s known as a cumulative indicator, meaning the number of data points grows higher as the day goes on. There will be one data point for each measurement of time on a given chart, and as the day passes, these points accumulate.

A 5-minute chart would have 12 data points one hour after the market opens, 36 after 3 hours, and 84 by the time the market closes. For this reason, VWAP lags the price and the lag increases as time goes on.

The Takeaway

The volume-weighted average price (VWAP) is essentially a trading benchmark that captures the average intraday price of a given security, factoring in volume. It’s considered a technical indicator, and it’s important because it gives traders pricing insight into a security’s trend and value, making it most helpful for intraday analysis. It’s one data point among many that traders might use when devising their investment strategy.

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FAQ

What is the difference between the volume-weighted average price and a simple moving average (SMA)?

The simple moving average or SMA just shows the average price of a security over a period of time. The volume-weighted average price, or VWAP, factors in the asset’s trading volume over the course of the day as well, thus giving investors more information about demand and price trends.

How do you use VWAP in day trading?

Day traders often use VWAP to determine the target price of an asset, the better to determine the entry and exit points for trades, based on their current strategy, whether long or short.

What is the difference between Anchored VWAP vs VWAP?

Traditional VWAP always starts with the opening price of the day (VWAP is primarily used as an intraday metric), whereas anchored VWAP allows the trader to specify a certain price bar where they want their calculation to start.

Photo credit: iStock/Pheelings Media