Aug
13
2023
What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401k?

What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

By | invest, Investing, Preparing for Retirement | Comments Off on What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

A money purchase pension plan or MPPP is an employer-sponsored retirement plan that requires employers to contribute money on behalf of employees each year. The plan itself defines the amount the employer must contribute. Employees may also have the option to make contributions from their pay.

Money purchase pension plans have some similarities to more commonly used retirement plans such as 401(k)s, pension plans, and corporate profit sharing plans. If you have access to a MPPP plan at work, it’s important to understand how it works and where it might fit into your overall retirement strategy.

What Is a Money Purchase Pension Plan?

Money purchase pension plans are a type of defined contribution plan. That means they don’t guarantee a set benefit amount at retirement. Instead, these retirement plans allow employers and/or employees to contribute money up to annual contribution limits.

Like other retirement accounts, participants can make withdrawals when they reach their retirement age. In the meantime, the account value can increase or decrease based on investment gains or losses.

Money purchase pension plans require the employer to make predetermined fixed contributions to the plan on behalf of all eligible employees. The company must make these contributions on an annual basis as long as the plan is maintained.

Contributions to a money purchase plan grow on a tax-deferred basis. Employees do not have to make contributions to the plan, but they may be allowed to do so, depending on the plan. The IRS does allow for loans from money purchase plans but it does not permit in-service withdrawals.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What Are the Money Purchase Pension Plan Contribution Limits?

Each money purchase plan determines what its own contribution limits are, though the amount can’t exceed maximum limits set by the IRS. For example, an employer’s plan may specify that they must contribute 5% or 10% of each employee’s pay into that employee’s MPPP plan account.

Annual money purchase plan contribution limits are similar to SEP IRA contribution limits. For 2023, the maximum contribution allowed is the lesser of:

•   25% of the employee’s compensation, OR

•   $66,000

The IRS routinely adjusts the contribution limits for money purchase pension plans and other qualified retirement accounts based on inflation. The amount of money an employee will have in their money purchase plan upon retirement depends on the amount that their employer contributed on their behalf, the amount the employee contributed, and how their investments performed during their working years. Your account balance may be one factor in determining when you can retire.

Rules for money purchase plan distributions are the same as other qualified plans, in that you can begin withdrawing money penalty-free starting at age 59 ½. If you take out money before that, you may owe an early withdrawal penalty.

Like a pension plan, money purchase pension plans must offer the option to receive distributions as a lifetime annuity. Money purchase plans can also offer other distribution options, including a lump sum. Participants do not pay taxes on their accounts until they begin making withdrawals.

The Pros and Cons of Money Purchase Pension Plans

Money purchase pension plans have some benefits, but there are also some drawbacks that participants should keep in mind.

Pros of Money Purchase Plans

Here are some of the advantages for employees and employers who have a money purchase plan.

•   Tax benefits. For employers, contributions made on behalf of their workers are tax deductible. Contributions grow tax-free for employees, allowing them to put off taxes on investment growth until they begin withdrawing the money.

•   Loan access. Employees may be able to take loans against their account balances if the plan permits it.

•   Potential for large balances. Given the relatively high contribution limits, employees may be able to accumulate account balances higher than they would with a 401(k) retirement plan, depending on their pay and the percentage their employer contributes on their behalf.

•   Reliable income in retirement. When employees retire and begin drawing down their account, the regular monthly payments through a lifetime annuity can help with budgeting and planning.

Disadvantages of Money Purchase Pension Plan

Most of the disadvantages associated with money purchase pension plans impact employers rather than employees.

•   Expensive to maintain. The administrative and overhead costs of maintaining a money purchase plan can be higher than those associated with other types of defined contribution plans.

•   Heavy financial burden. Since contributions in a money purchase plan are required (unlike the optional employer contributions to a 401(k)), a company could run into issues in years when cash flow is lower.

•   Employees may not be able to contribute. Depending on the terms of a plan, employees may not be able to make contributions to the plan. However, if the employer offers both a money purchase plan and a 401(k), employees could still defer part of their salary for retirement.



💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Money Purchase Pension Plan vs 401(k)

The main differences between a pension vs 401(k) have to do with their funding and the way the distributions work. In a money purchase plan, the employer provides the funding with optional employee contribution.

With a 401(k), employees fund accounts with elective salary deferrals and option employer contributions. For both types of plans, the employer may implement a vesting schedule that determines when the employee can keep all of the employer’s contributions if they leave the company. Employee contributions always vest immediately.

The total annual contribution limits (including both employer and employee contributions) for these defined contribution plans are the same, at $66,000 for 2023. But 401(k) plans allow for catch-up contributions made by employees aged 50 or older. For 2023, the total employee contribution limit is $22,500 with an extra catch-up contribution of $7,500.

Both plans may or may not allow for loans, and it’s possible to roll amounts held in a money purchase pension plan or a 401(k) over into a new qualified plan or an Individual Retirement Account (IRA) if you change jobs or retire.

Recommended: IRA vs 401(k)–What’s the Difference?

Employees may also be able to take hardship withdrawals from a 401(k) if they meet certain conditions, but the IRS does not allow hardship withdrawals from a money purchase pension plan.

Here’s a side-by-side comparison of a MPPP and a 401(k):

MPPP Plan

 401(k) Plan
Funded by Employer contributions, with employee contributions optional Employee salary deferrals, with employer matching contributions optional
Tax status Contributions are tax-deductible for employers, growth is tax-deferred for employees Contributions are tax-deductible for employers and employees, growth is tax-deferred for employees
Contribution limits (2023) Lesser of 25% of employee’s pay or $66,000 $22,500, with catch-up contributions of $7,500 for employees 50 or older
Catch-up contributions allowed No Yes, for employers 50 and older
Loans permitted Yes, if the plan allows Yes, if the plan allows
Hardship withdrawals No Yes, if the plan allows
Vesting Determined by the employer Determined by the employer

The Takeaway

Money purchase pension plans are a valuable tool for employees to reach their retirement goals. They’re similar to 401(k)s, but there are some important differences.

Whether you save for retirement in a money purchase pension plan, a 401(k), or another type of account the most important thing is to get started. The sooner you begin saving for retirement, the more time your money will have to grow through the power of compounding returns.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Easily manage your retirement savings with a SoFi IRA.

FAQ

Here are answers to some additional questions you may have about money pension purchase plans.

What is a pension money purchase scheme?

A money purchase pension plan or money purchase plan is a defined contribution plan that allows employers to save money on behalf of their employees. These plans are similar to profit-sharing plans ,and companies may offer them alongside a 401(k) plan as part of an employee’s retirement benefits package.

Can I cash in my money purchase pension?

You can cash in a money purchase pension at retirement in place of receiving lifetime annuity payments. Otherwise, early withdrawals from a money purchase pension plan are typically not permitted, and if you do take money early, taxes and penalties may apply.

Is final salary pension for life?

A final salary pension is a defined benefit plan. Unlike a defined contribution plan, defined benefit plans pay out a set amount of money at retirement, typically based on your earnings and number of years of service. Final salary pensions can be paid as a lump sum or as a lifetime annuity, meaning you get paid for the remainder of your life.

Photo credit: iStock/ferrantraite

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

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

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

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Aug
11
2023
What Are Exotic Options? 11 Types of Exotic Options

What Are Exotic Options? 11 Types of Exotic Options

By | Growing Wealth, invest, Investing | Comments Off on What Are Exotic Options? 11 Types of Exotic Options

An option is a financial instrument that gives the buyer the right to purchase or sell an underlying security, such as a stock, during a set time period for an agreed-upon price. They are popular with investors because they allow the investor to bet on the price increase or decrease of a stock, without owning the stock itself.

Exotic options are a class of options that allow investors to take advantage of some features of options contracts to pursue other strategies. Exotic options pricing tends to be higher than that of traditional options.

What Is an Exotic Option?

Exotic options are hybrid securities that offer unique and often customizable payment structures, expiration dates, and strike prices. For those features, they typically charge a higher price than traditional options. University of California Berkeley professor Mark Rubenstein coined the term “Exotic Options” in a 1990 paper about contracts.

The asset that underlies these options also includes non-traditional assets and securities. Exotic options can be either covered or naked call, meaning that the seller has not set aside shares or cash to meet the obligation when it expires.

To understand what makes an exotic option exotic, let’s review a traditional, plain-vanilla options contract and how it works. With a traditional option, the owner can buy or sell the underlying security for an agreed-upon price either before or at the option’s predetermined expiration date. The holder is not, however, obligated to exercise the option, hence the name.

An exotic option typically has all of those features, but with complex variations in the times when the option can be exercised, as well as in the ways investors calculate the payoff.

Investors typically buy and sell options in the over-the-counter (OTC) market, a smaller dealer-broker network. An exotic option may have underlying assets that differ from those offered by traditional options. Those underlying assets can include commodities like oil, corn and natural gas, in addition to stocks, bonds, and foreign currencies.

There are even exotic derivatives that allow traders to bet on things like the weather. Both institutional and sophisticated retail investors use customized exotic options to match their own unique risk-management needs.


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

11 Types of Exotic Options

There are many types of exotic options that investors can purchase for exotic options trading. Here’s a look at some of them:

1. Asian Options

One of the most common forms of exotic options contract, the Asian option is a contract whose payoff to the holder reflects on the security’s average price over one or several agreed-upon periods of time. This makes it different from a U.S. option, whose return reflects the price of the underlying asset when the holder chooses to exercise it, and different from a European option, whose payoff reflects the price of the security at the time of the option’s expiration.

2. Barrier Options

These options remain effectively dormant until activated, usually by the price of the underlying asset reaching a certain level.

3. Basket Options

Unlike traditional options, which typically have a single underlying asset, basket options contracts depend on the price movements of more than one underlying asset. For holders, the payout on a basket option reflects the weighted average of the assets underlying the contract.

4. Bermuda Options

The main differentiator of Bermuda options is when the holder can exercise them. An investor can exercise a Bermuda option at its expiration date, and at a handful of set dates before then. This makes them different from U.S. options, which holders can exercise at any point during the contract, and European options, which can only be exercised at expiration.

5. Binary Options

Sometimes called digital options, binary options are unique because they only guarantee a payout to the holder if a predetermined event occurs. This all-or-nothing investment typically delivers a predetermined payout or asset if the agreed-upon event occurs.

6. Chooser Options

With ordinary options contracts, the investor must decide upfront if they’re buying a call (right to buy the underlying security) or put (right to sell the underlying security) option. But with a chooser option, the holder can decide whether they want the option to be a put or call option at a predetermined date between when they buy the chooser option and when the contract expires.

7. Compound Options

These options, often called split-fee options, allow investors to buy an option on an option. Whether or not a compound option pays off depends on whether or not another option pays off. Investors in compound options have to make their decisions based on the expiration dates and strike prices of both the underlying option, as well as the compound option itself.

8. Extendible Options

The main advantage that extendible options offer is that they give an investor the ability to postpone the expiration date of the contract for an agreed-upon period of time. This can mean adding the extra time for an out-of-the-money option to get into the money, a feature that’s priced into the original option contract.

Extendible options can be holder-extendible, meaning the purchaser can choose to extend their options. They can also be writer-extendible, meaning that the issuer has the right to extend the expiration date of the options contracts, if they so choose.

9. Lookback Options

Lookback options differ from most options because they do not come with a specified exercise price. Instead, an owner of a lookback option can choose the most favorable strike price from the prices at which the underlying asset has traded at throughout the duration of the option contract.

10. Spread Options

Unlike a traditional option, where the payoff depends on the difference between the contract’s strike price and the spot price of the underlying asset when the investor exercises the contract, a spread option pays an investor based on the price difference between multiple assets. The butterfly spread, which involves four separate options, is one example of a spread option.

11. Range Options

For highly volatile assets, some investors choose to use range options, because their payout is based on the size of the difference between the highest and lowest prices at which the underlying asset trades during the life of the range options contract.

Pros and Cons of Exotic Options

There are benefits and drawbacks to using exotic options.

Pros

•   Some exotic options have lower premiums than more flexible American options contracts.

•   Investors can select and customize exotic options to fit very complex and precise strategies.

•   With exotic options, investors can fine-tune the risk exposure of their portfolio.

•   Investors can use exotic options to find opportunities in unique market conditions.

Cons

•   Many exotic options come with higher costs, and less flexibility than traditional contracts.

•   There are no exotic options that guarantee a profit.

•   Because of their unique structures, exotic options sometimes react to market moves in unexpected ways.

•   The complex rules mean that exotic options have a higher risk of ultimately becoming worthless.



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

The Takeaway

Exotic options are complex financial instruments that allow investors to make bets on the price of an asset without owning that asset itself. Unlike traditional options, exotic options include customizable features that investors can use to pursue a specific options trading strategy.

As many investors know, trading options — of all types — is relatively advanced, and requires a good amount of background knowledge and understanding of intricate financial assets. For that reason, it may be a good idea to speak with a financial professional before diving into options trading.

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

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

Photo credit: iStock/Pekic

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.

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

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Aug
11
2023
Contango Vs. Backwardation: What's the Difference?

Contango vs Backwardation: What’s the Difference?

By | Growing Wealth, invest, Investing | Comments Off on Contango vs Backwardation: What’s the Difference?

Contango and backwardation are two ways to characterize and understand the state of the commodities or cryptocurrency futures markets, based on the relationship between spot and future prices.

In short, contango is a market in which futures trade at spot prices that are higher than the expected future spot price. But a contango market is not the same thing as a normal futures curve, though it is often mistaken for one. Normal backwardation, on the other hand, is a market where futures trade at a price that’s lower than the expected future spot price.

Futures and Derivatives

It’s important to have an understanding of both futures and derivatives to fully understand the difference between contango and backwardation.

Futures, Explained

Futures contracts, or futures, consist of legal agreements to buy or sell a security, commodity or asset at a set time in the future, for a predetermined price. One feature for both buyers and sellers of futures is that they can execute the contract no matter what current market price of the underlying asset when the contract expires.

Companies use futures contracts to hedge their risk of massive shifts in commodities prices, and investors who believe that the underlying security will go up or go down by a certain amount of time over a fixed period of time. The buyer of a futures contract enters a legal agreement to buy the underlying asset at the contract’s expiration date. The seller, on the other hand, agrees to deliver the underlying security at the agreed-upon price, when the contract expires.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Derivatives, Explained

A derivative refers to any financial security whose value rises and falls based on the value of another underlying asset, such as a security or commodity. That includes securities such as futures, options, and swaps. The most common assets upon which derivatives are based include securities like stocks and bonds, commodities like oil or other raw materials, but they may also reflect currencies and interest rates.

Recommended: Derivatives Trading 101: What are Derivatives and How Do They Work?

The Futures Curve

When writing futures contracts for a given asset, the futures seller will place different prices on that commodity at different points in the future. While the base price of a futures contract is determined by adding the cost of carrying the underlying asset to its spot price, it also includes an element of prediction. People buy more oil in the winter to buy their homes, for example, so oil investors may predict that oil will be in higher demand — and thus cost more — in January than it will in May.

By comparing the prices within futures contracts for the same underlying asset at different points in the future, the dollar amounts form a curve.

Normal Futures Curve vs Inverted Futures Curve

In a normal futures curve, the prices assigned to the underlying asset of futures contracts goes up over time. In the example of oil, a normal futures curve will be one in which a barrel of oil is priced at $50 for a contract expiring in 30 days; $55 for a contract expiring in 60 days; $60 for a contract expiring in 90 days, and $65 for a contract expiring in 120 days.

A normal futures curve embodies an expectation that the price of the asset underlying the futures contracts — such as oil, soybeans, a stock, or a bond — will rise over time. An inverted futures curve assumes just the opposite.

To go back to the example of oil, in an inverted futures curve, a barrel of oil is priced at $50 for a contract expiring in 30 days; $45 for a contract expiring in 60 days; $40 for a contract expiring in 90 days, and $35 for a contract expiring in 120 days.

The futures curve is used by investors, policymakers and corporate treasurers as an indicator of popular sentiment toward the underlying asset. And the prices of those futures contracts can represent the market’s combined best guess about the prices of those assets.

The spot price of the asset, on the other hand, the price at which it’s currently trading. It’s the relationship between the spot price and the prices on the futures curve that determine if the futures market is in a state of backwardation or contango.

What Is Backwardation?

When an asset is trading at spot prices that are higher than the prices of that asset as reflected in the futures contracts maturing in the coming months, it’s called backwardation.

It can happen for a number of reasons, but most commonly occurs because of an unexpectedly higher demand for the underlying asset, especially in cases of a shortage in the spot market. Sometimes backwardation is caused by a manipulation of a commodity’s supply by a country or organization. Decisions by the Organization of Petroleum Exporting Countries (OPEC), for example, could create oil backwardation.

When backwardation occurs in futures markets, traders may try to make a profit by short-selling the underlying asset, while buying futures contracts that promise delivery at the lower prices. That trading drives the spot price down, until it matches the futures price.

What Is Contango?

Contango, on the other hand, is a situation where the spot price of an asset is lower than those offered in the futures contracts. In an oil contango market, for example, the spot price of the oil would rise to match that of the futures contracts at expiration. In contango, often associated with a normal futures curve, investors agree to pay more for a commodity in the future.

Backwardation vs Contango for Investors

Contango and backwardation can occur in any commodities market, including oil, precious metals, or agricultural products. Investors can find different opportunities and investment risks when investing in commodities in both backwardation and contango.

Recommended: Investing in Precious Metals

In backwardation, short-term traders who practice arbitrage can make money by short-selling the underlying assets, while buying futures contracts until the difference between the spot and futures prices disappears.

But investors can also lose money from backwardation in situations where the futures prices keep falling while the expected spot price remains the same. And investors hoping to benefit from backwardation caused by commodity shortage may wind up on the wrong side of their trades if new suppliers appear.

For investors, contango mostly poses a risk for investors who own commodity exchange-traded funds (ETFs) that invest in futures contracts. During periods of contango, investors can, however, avoid those losses by purchasing ETFs that hold the actual commodities themselves, rather than futures contracts.


💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

The Takeaway

Contango and backwardation are two terms that describe the direction futures markets are headed. Knowing the difference between these two terms can help institutional and retail investors make the strategic choices when investing in a wide range of derivatives markets.

These are fairly high-level terms, and may be used as a part of an advanced trading strategy. If investors don’t feel comfortable investing in derivatives or futures contracts – or similar securities — it may be best to consult with a financial professional to get a better sense of if they fit into your strategy.

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

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

Photo credit: iStock/LumiNola

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.

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

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Aug
11
2023
Lidar Stocks: What Are They & How Do You Pick the Best Ones?

Lidar Stocks: What Are They & How Do You Pick the Best Ones?

By | Growing Wealth, invest, Investing | Comments Off on Lidar Stocks: What Are They & How Do You Pick the Best Ones?

Many people associate “Lidar” with the sensors that enable self-driving cars — but there are a growing number of applications for this technology that can offer attractive new opportunities for investors. New developments in self-driving cars and other smart products are driving demand for Lidar technology, which is in turn helping to spur the growth of Lidar companies innovating in this space.

What Is Lidar? How Is it Used?

Lidar is short for “light detection and ranging,” and Lidar works by using short bursts of light from lasers to create a 3-D rendering of an object or environment.

Devices equipped with Lidar detect nearby objects, and process massive amounts of data to determine information such as their size, direction and speed of movement — which is why Lidar has become a core technology in the sensors that may one day allow self-driving cars to operate safely.

What many people don’t know is that Lidar is also at work in the newest smartphones and other automated devices like robot vacuum cleaners, which use Lidar to scan the environment and maneuver through a room.

Lidar is also widely used for measurement and imaging in an array of scientific disciplines, including oceanography, archaeology, forestry, seismology, robotics and atmospheric physics. For that reason, some lidar technology stocks attract investor interest.


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

The Advantages of Lidar

Lidar offers several advantages over similar technologies, such as radar, because light has a shorter wavelength than radio waves. By sending out repeated laser bursts, Lidar can offer a clearer picture of a given target.

For example, the Lidar sensors on some smartphones can give users almost instantaneous estimates of the size, shape and distance of an object, a capability that has enabled better experiences of augmented reality.

Also, as the Internet of Things (IoT), an element of Web 3.0, moves toward increasingly autonomous and interconnected machines, those devices will likely need sophisticated sensors to operate safely and effectively, which is another reason why Lidar companies and Lidar stocks are catching the eye of investors large and small.

Some Lidar Drawbacks

That said, investors considering Lidar technology stocks should be aware of some of the drawbacks as these may present some investment risks. Although Lidar technology can be highly sophisticated, critics note that some Lidar systems can lag in a more dynamic environment (e.g. driving in traffic), where a swift analysis of driving conditions is critical to safety.

Another drawback is that some Lidar sensors may weigh all data points equally in a given environment, and fail to take into account a more present danger like a certain obstacle or bad weather. For example: Lidar functionality has also been compromised by rainy or cloudy conditions, or very bright sun — as any of these can interfere with the light reflection and refraction that’s fundamental to the technology.

Lidar Stocks to Watch

Given the growth of the industry, and industries utilizing Lidar technology, there are numerous lidar stocks on the market. While investors will likely come up with a list by engaging in a quick internet search, it’s important to remember that Lidar is a developing technology, and that all stocks have associated risks. In short: Be sure to do your homework before investing in Lidar stocks.

Evaluating Potential Investment Risks With Lidar Stocks

Lidar has been finding its ways into the products people use on a daily basis, and it holds great promise as an enabler for many technologies in many different fields. As such, investors may find investment opportunities through one or several public Lidar companies.

But investing in Lidar stocks comes with some risks. One risk factor investors should consider: a single version of Lidar technology might emerge as a frontrunner, elevating one patent-holding company to prominence and relegating others to the status of also-rans. On the flip side, there is also the risk that one company’s technology might be adopted, but not widely.

And while Lidar is seen by many as an essential technology in self-driving cars, there is some debate on this point, with reports indicating that some automakers are exploring other types of sensors and networks to create safe, viable autonomous vehicles.


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

The Takeaway

Lidar technology and sensors are well-entrenched in the autonomous car market, and now a growing number of companies are finding innovative ways to use this laser-driven technology to make advancements in other industries — like oceanography, seismology, robotics and more.

While the expanding array of players in the Lidar space may be contributing to a sense of excitement about what the future of Lidar may hold, competing companies and technologies also indicate that this is a sector that’s still in flux, and there is much for investors to weigh when it comes to choosing the best Lidar stocks.

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

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

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

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

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

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Aug
10
2023
What is Volume in Stock Trading? How Investors Can Use It

What Is Volume in Stock Trading? How Investors Can Use It

By | Growing Wealth, invest, Investing | Comments Off on What Is Volume in Stock Trading? How Investors Can Use It

Stock trading volume is a measure of the amount of stocks traded over a given day or other specified time period. When more of a stock is traded actively, trading volume is high, while volume slumps as sales slow.

Some investors may analyze volume as a part of a technical analysis strategy to help them make decisions about when to buy and sell a particular stock. Here’s a closer look at volume and how investors may be able to use it.

What Is Volume in Stocks?

Trade volume for stock and other securities tells investors how frequently shares in a company are being bought and sold.

Every buy and sell transaction of a particular stock helps contribute to its trade volume. A transaction takes place when a buyer agrees to purchase the shares a seller has put up for sale. If this type of transaction takes place 100 times during a day for a particular stock, that stock has a trade volume of 100.

For stock futures and options trading, volume is based on how many contracts change hands during the set period.

Volume doesn’t tell the whole story of a stock. There are a couple of terms that can help give investors a better idea of the size of a company and how many shares are actually available, including “float” and market capitalization, or market cap.

Volume vs Float

While volume is the number of shares that are being actively traded during a given period, float is the number of shares that are actually available to trade. This total does not include restricted shares, which are not registered and are usually given to corporate leaders as part of a compensation package. Outstanding shares refers to all of the stock a company has issued, including restricted shares.

Stocks that have a small number of shares — usually between 10 million and 20 million — available to trade are what is known as “low-float” stocks. Large corporations, by contrast, could have floats of billions of shares.

In certain circumstances when trade volume is very high, volume can surpass float or even number of outstanding shares.

Volume vs Market Cap

Market cap is the total number of outstanding shares multiplied by the current public market price. In other words, it’s the dollar amount required to buy up all outstanding shares of a company, including restricted shares.

Market cap helps investors understand the size of one company relative to another. For example, large-cap stocks tend to be companies worth $10 billion to $200 billion, while small-cap stocks tend to be companies worth $250 million to $2 billion.

Investors can calculate free-float market cap by excluding restricted shares.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

What Does Stock Volume Tell You?

Stock volume tells investors how much interest there is in a stock. The greater the volume, the more interest there is, while smaller volume translates to less interest.

High trade volume can also indicate that stock orders are being executed quickly and that the market is highly liquid. In other words, high volume can mean that buying and selling the stock is relatively easy.

What It Means When Stock Volume Goes Up

When stock volume is on the rise, it typically means that prices are on the move, either in the upward or downward direction. As volume increases, it can mean that investors are committing to the price change; a trend may be gathering strength.

Generally speaking, higher volume means that there’s increased interest in buying a stock, and that the market for that stock is more liquid, making it easier to buy and sell shares.

What It Means When Stock Volume Goes Down

When stock volume starts to decrease, it can signal that investors are less enthusiastic about a company. Volumes can decrease even as stock prices increase.

Low volume can be a signal for investors to get cautious about a stock. It can signal market uncertainty, the possibility of stock volatility on the horizon, and lower liquidity.

Where Can You Find Stock Volume on a Chart?

Investors can usually find information about volume next to or below the stock chart provided by trading platforms or media sources, like Yahoo Finance or the Wall Street Journal.

Often volume is charted using a candlestick chart, in which investors look for patterns to help make investment decisions. Normally, candlestick charts measure a stock’s price, including highs, lows, and opening and closing prices over a given period. The resulting figure looks a bit like a candle with a line, or “wick”, that represents highs and lows and a rectangle that marks opening and closing prices. Volume candlestick charts use the width of the rectangle to indicate volume. The higher the volume, the wider the candle.

How Traders Can Use Volume

We’ve already seen that volume can help investors understand when a price trend is picking up steam. There are a few other basic guidelines investors may want to consider as they’re deciding when to buy and sell stocks.

Exhaustion Moves

Exhaustion moves occur when there is a sharp movement in the price of stock coupled with a sharp increase in trading volume. This potentially signals the end of a current price trend. These moments can be accompanied by a period of volatility.

Price Reversals

If the price of a stock has moved in one direction for a long time and volume begins to increase at the same time that prices start to move very little, it can signal a reversal. So if stock prices were on an upward trajectory, changes start to slow and volume increases, it might mean the trend is about to reverse.

Breakouts

A breakout is a point at which changes in market trends occur. Changes in volume can clue investors into the strength of the breakout. Little change in volume suggests investors are paying the breakout little heed, while big changes in volume indicate a strong new trend.

Bullish Signals

Volume can also help investors identify bullish signs that suggest prices are likely to rise. For example, say stock prices increase and then decline. At the same time there is an increase in volume which drives prices up again. The stock again declines, but if it doesn’t decline the second time as much as it did the first time, it may be a bullish signal that prices will continue to rise.


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

Types of Indicators to Measure Stock Volume

There are a number of volume indicators that could help traders make investment decisions based on their approach and goals. Here are a few examples.

On Balance Volume (OBV)

On balance volume is a cumulative technical indicator in which volume is added on days when overall volume is up and subtracted on days when overall volume is down. The direction of the indicator is what is most important to investors. When price and OBV are moving up or down together, it is likely the trend will increase in strength.

Volume Price Trend (VPT)

Similar to OBV, volume price trend measures cumulative volume. However, it differs in that it considers a percentage increase or decrease in price. VPT helps investors relate share price to trading volume. If the price of a stock increases, so does the value of the indicator. If prices fall, the indicator value falls, too.

Ease of Movement

This indicator helps traders see how easy it is for a stock price to move between levels based on trading volumes. Stocks that continue along a trend for a given period are considered “easy.” This indicator is used over longer time periods and in volatile markets in which it can be hard to spot trends.

The Takeaway

Stock trading volume measures the amount of stocks traded in a given day or time period. Examining volume and other tools in technical analysis can help investors make decisions about when to buy and sell stocks.

When buying any individual security, investors should be sure to consider how it fits into their overall financial plan, including their goals, risk tolerance, and time horizon.

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


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

Photo credit: iStock/shapecharge

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

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

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

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