Jul
28
2023
Investing in Gold and Silver: a Guide
Precious metals can be an important part of a diversified portfolio. Here’s what to know before you invest.
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Student Loan Consolidation and Refinancing
Jul
28
2023
What Is MACD?
The moving average convergence divergence (MACD) is an indicator that shows the momentum in equity markets. It’s especially popular with traders, who use it to help them rapidly identify short-term momentum swings in a stock.
A moving average can help investors see past the noise of daily market movements to find securities trending up or down. The MACD offers another way to focus on such stocks, by showing the relationship between two moving averages.
Understanding the Moving Average
The moving average convergence divergence may sound complex, so it makes sense to start with the first part – the moving average (MA), also called the exponential moving average, or EMA. This is a very common metric with stocks, used to make sense of ever-fluctuating price data by replacing it with a regularly updated average price. This moving average can give investors a clearer idea of where a stock is trading than one that’s updated second by second.
Because the moving average reflects past prices, it is a lagging indicator. But how much the past prices factor in depends on the person setting the average. Most commonly, investors look at moving averages of 15, 20, 30, 50, 100, and 200 days, with the 50- and 200-day averages being the most widely used.
A moving average with a shorter time span will be more sensitive to price changes, while moving averages with longer time spans will fluctuate less dramatically. Generally, active traders with strategy focused on market timing favor shorter-duration moving averages.
To perform the MACD calculation, traders take the 26-day moving average of a stock and subtract it from that stock’s 12-day moving average. This calculation offers a quick temperature-check of a stock’s momentum.
While the 12-day and 26-day time spans are standard for the MACD, investors can also create their own custom MACD measurements with time spans that better fit their own particular trading tactics and investment strategies.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
How to Read MACD
If a stock’s MACD is positive, that means its short-term average is higher than its long-term average, which could be a bullish indicator that stock is on an upswing. A higher MACD indicates more pronounced momentum in that upswing. On the other hand, a negative MACD indicates that a stock is trending downward.
If the positive or negative difference between the shorter-term and longer-term moving averages expands, that’s considered the MACD divergence, or the D in MACD. If they get closer, that’s considered a convergence, the C in MACD.
When the two moving averages converge, they meet at a place between the positive and negative MACD, called the zero line, or the centerline. For many traders, this MACD crossover is the sign they wait for to jump into a stock, which after losing value, is suddenly gaining value. Conversely, a stock crossing the zero line of the MACD is often taken to mean that the good times are over, leading many traders to sell at that point.
The MACD is a vital concept in technical analysis, a popular approach investors use to try to forecast the ways a stock might perform based on its current data and past movements. It involves a wide range of data and trend indicators, such as a stock’s price and trading volume, to locate opportunities and risks.
Technical analysis does not look at underlying companies, their industries, or any macroeconomic trends that might drive their success or failure. Rather, it solely analyzes the stock’s performance to find patterns and trends.
Recommended: The Pros and Cons of Momentum Trading
The MACD as a Trading Indicator
For traders, a rising MACD is a sign that a stock is being bid up. The MACD shows how quickly that’s happening.
As the short-term average rises above the longer-term average, and the two figures diverge more widely, the MACD expresses this in a simple number. When a stock is sinking, investors also want to know how fast it’s falling, as well as whether its decline is speeding up or slowing down, which they can find quickly by looking at the divergence.
A convergence is also a key indicator for many traders. As the long-term and short-term moving averages get closer to one another, it can be a sign that a given stock is either overbought or oversold for the moment. If they hold the stock, it may be time to sell the stock. But if they like the stock, and are waiting for a bargain-basement price at which to buy it, then the convergence of the two averages on the zero line may mean it’s time to start buying.
By using the MACD, traders can also compare a stock to competitors in its sector, and to the broader market, to decide whether its current price reflects its value and whether they should buy, sell, or short a stock. Because the MACD is priced out in dollars, many traders will use the percentage price oscillator, or PPO. It uses the same calculation as the MACD, but delivers its results in the form of a percentage difference between the shorter- and longer-term moving averages. As such, it allows for quicker, cleaner comparisons.
💡 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.
The Pros and Cons of the MACD
The MACD indicator has benefits for traders. It’s a convenient gauge of a stock’s momentum for an active, short-term trader. But it can also help a long-term investor who’s looking for the right moment to buy or sell a stock. Once an investor understands the MACD, it’s an easily interpreted data point to incorporate into their trading strategy.
But the MACD does have its drawbacks and does not account for certain types of investment risk. Because the MACD is a lagging indicator, it can lead to a trader staying too long in a position that’s since begun to swoon. Or, alternately, it can indicate a turnaround that’s already run the bulk of its course.
This is especially dangerous in volatile markets, when stocks can “whipsaw.” This term – named for the push-and-pull of the saw when it’s used to chop down a tree – describes the phenomenon of a stock whose price is moving in one direction, and suddenly goes sharply in the opposite direction. Whether that whipsaw movement is up or down, it can prove highly disruptive for a trader who relies too heavily on the MACD.
The Takeaway
The MACD can be a helpful metric for traders to understand and to use, in conjunction with other tools to help formulate their investing strategy.
The MACD indicator has benefits for traders. It’s a convenient gauge of a stock’s momentum for active traders. But it can also help long-term investors, too, determine when to buy and sell. It’s also a lagging indicator, which can make it tricky to use for inexperienced traders. As always, it’s best to consult with a financial professional if you’re feeling like you’re in over your head.
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).
Photo credit: iStock/visualspace
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.
SOIN623006
Read moreJul
28
2023
What Is Crowdfunding? Definition & Examples
Crowdfunding allows businesses to raise capital by pooling together small amounts of money from many investors. This can include private investors, institutional investors, friends, and family. There are different types of crowdfunding, but they tend to share a common goal: helping entrepreneurs raise money for their business.
Entrepreneurs may raise money from the public through social media platforms or crowdfunding websites. This is an alternate take on the traditional methods of financing a business through equity or debt. Crowdfunding offers some advantages to business owners who may not qualify for traditional loans or would prefer to avoid them. There are, however, some potential downsides to know if you’re interested in exploring crowdfunding for business.
What Is Crowdfunding?
Crowdfunding is more or less exactly what it sounds like: funding that comes from the crowd. Note, though, that regulators like the Securities and Exchange Commission (SEC) have their own definition of crowdfunding — but for our purposes, a broad definition will do the trick. Generally, crowdfunding for business is subject to federal securities laws. That means any efforts to raise capital through the crowd require SEC registration.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
History of Crowdfunding
The concept of raising capital as a collective effort is not a new one.
For example, Ireland launched several loan funds in the 1700s and 1800s to help less-advantaged people gain access to credit. A group of wealthier citizens pooled their money together to provide the funding for those loans.
More recently, online crowdfunding began at the start of this century. In 2003, ArtistShare became the first crowdfunding website, allowing people to collectively fund the efforts of artists. At the time, the platform used the term “fan-funding” rather than crowdfunding to describe its mission.
In 2006, entrepreneur Michael Sullivan coined the term “crowdfunding,” using it to describe an ultimately failed video-blog project for which he was seeking backers.
Crowdfunding began to move into the mainstream in 2008 and 2009, with the launch of companies such as Indiegogo and Kickstarter, respectively. Those websites allow supporters to help people build projects or businesses, but they do not receive equity in return.
In 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which included a provision allowing equity crowdfunding. This permitted early-stage businesses to sell securities to raise funds via online platforms. The SEC followed up with the adoption of Regulation Crowdfunding to oversee the crowdfunding provisions included in the JOBS Act.
How Does Crowdfunding Work?
In general, crowdfunding works by allowing multiple people to contribute money to a common cause. To launch a campaign, an entrepreneur will set up an account on an online crowdfunding platform.
Instead of presenting their product or service and their business plan to professional investors like venture capital firms, they’ll share it with the public and appeal for funds from them. The entrepreneurs will typically select a time period during which the investors can put money into the campaign to help it achieve its crowdfunding goal.
Crowdfunding is not a loan, in the traditional sense. The entrepreneur does not get the money they need to launch or scale your business from a lender. Instead, they tap into capital markets sourced from a group of people, which can include people they know as well as strangers.
With crowdfunding, anyone can invest but there are limits on the amount that can be invested in Regulation Crowdfunding during a 12-month period. These limits reflect their net worth and income.
Here’s a brief look at how crowdfunding works:
• If either your annual income or net worth is less than $107,000 you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth during any 12-month period.
• If both your annual income and net worth are equal to or more than $107,000 you can invest up to 10% of your income or net worth, whichever is less but not more than $107,000 during any 12-month period.
If you’re an accredited investor, there are no limits on how much you can invest. An accredited investor has earned income of at least $200,000 ($300,000 for married couples) in each of the two prior years and a net worth of over $1 million. Individuals who hold certain financial professional certifications can also get accredited investor status.
Crowdfunding vs IPO
It’s important to note that crowdfunding is not the same as launching an Initial Public Offering (IPO). IPOs involve taking a company public and offering shares to investors through a new stock issuance. This is another way businesses can raise capital.
The IPO process begins with getting an accurate business valuation. Once a company goes public, an IPO lock-up period prevents insiders who already own shares from selling them for a certain time period. This period may last anywhere from 90 to 180 days. When it’s over, investors can buy and sell shares of the company on public exchanges.
For businesses, an IPO could be an effective way to raise capital if there’s sufficient demand among investors who are interested in buying stock at IPO price. Meanwhile, IPO investing may be attractive to investors who are interested in getting on the ground floor of start-ups and early-stage companies.
How Many Types of Crowdfunding Are There?
There are different types of crowdfunding you can use to raise capital for your business. Each one works differently, though entrepreneurs may choose to use one or all of them for business fundraising. Here’s a closer look at how the various types of crowdfunding work.
Rewards-Based Crowdfunding
Rewards-based crowdfunding allows you to raise capital from the crowd in exchange for some type of reward. For example, say you’re launching a start-up that produces eco-friendly water bottles. In exchange for funding your campaign, you may choose to offer your backers samples of your product.
This type of crowdfunding can be helpful for testing the waters, so to speak, to gauge interest in your product. If your campaign succeeds, that could be a sign that there’s sufficient consumer interest in your offerings. But if your efforts to raise capital fizzle, it could mean your idea needs some tweaking.
Donation-Based Crowdfunding
Donation-based crowdfunding allows you to raise funds on a donation basis, with no rewards offered. With this type of crowdfunding, you’re asking people to give money to your cause. Succeeding with this type of crowdfunding campaign may depend less on the product or service you’re trying to launch than on the story behind your business.
Equity Crowdfunding
Equity crowdfunding allows you to raise capital for your business by offering unlisted shares or equity in your business to investors. This is the type of crowdfunding that falls under the Regulation Crowdfunding heading.
Equity crowdfunding can be better than rewards-based or donation-based crowdfunding if you need to raise large amounts of money for your business. The tradeoff, however, is that you have to be sure that you’re observing SEC regulations for launching this type of campaign and you’ll need to spend time carefully determining the value of your business.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending is another type of crowdfunding that allows businesses to raise capital through pooled loans. With this kind of crowdfunding, you borrow money from a group of investors. You then pay that money back over time with interest.
Getting a peer-to-peer loan may be preferable if you’d rather not give up equity shares in the business or deal with regulatory issues. And a P2P loan may be easier to qualify for compared to traditional business loans.
There is, however, the cost to consider. If you have a lower credit score, you could end up with a higher interest rate which would make this type of loan more expensive.
Pros and Cons of Crowdfunding
Relying on different crowdfunding methods can benefit businesses in a number of ways. Companies may lean toward crowdfunding in lieu of other financing methods, including debt financing with loans or equity financing through angel investors or venture capitalists. There are, however, some potential drawbacks associated with crowdfunding for business. Here’s a quick rundown of how both sides compare.
Crowdfunding Pros
• Raise capital without trading equity. Venture capital and angel investments require businesses to trade equity or ownership shares for capital. Depending on the types of crowdfunding you’re using, you may not have to give up any ownership to get the capital you need.
• Increased visibility. Launching a crowdfunding campaign online through a funding platform and/or social media could help attract attention from investors and potential clients or customers alike, increasing brand awareness.
• Get funding when you can’t qualify for loans. If you’re having trouble getting approved for a business loan or start-up loan, crowdfunding could help you access the capital you need without having to meet a lender’s strict standards.
Crowdfunding Cons
• Requires time and effort. Launching a successful crowdfunding campaign means doing your research to understand who your campaign is likely to reach and what kind of response it’s likely to get. In that sense, it can seem more complicated than filling out a loan application.
• No guarantees. Using crowdfunding to raise capital for your business is risky because there’s no guarantee that your campaign will attract the type or number of investors you need. It’s possible that you may put in a lot of work to promote a campaign only to come up short with funding.
• Fees. Crowdfunding platforms typically charge fees to launch and run a campaign. The fees can vary from platform to platform but it’s important to factor the costs in if you’re considering this fundraising method.
💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good investment choices shouldn’t stem from strong emotions, but a solid strategy.
How to Decide If Crowdfunding Is Right for Your Business
If you look at some of the most successful crowdfunding examples, you’ll see that it’s possible for companies to raise large amounts of capital this way. Some of the most successful crowdfunding campaigns, in terms of outpacing their original funding goals, include:
• The Micro, a 3D printer that raised $3.4 million in 11 minutes, easily surpassing its original $50,000 fundraising goal
• Reading Rainbow, which raised over $5 million and broke the Kickstarter record for having the most backers of any project
• Pono, which met its $800,000 goal within a day of campaign launch and went on to raise more than $6 million
• Pebble smartwatch, which with more than $10 million raised is the most funded Kickstarter campaign of all time
Whether crowdfunding, an IPO, or some other source of capital is right for your business depends on how much capital you need to raise, whether you’re interested in or able to qualify for loans, and what types of crowdfunding you’re interested in. Weighing the pros and cons and comparing crowdfunding to other types of equity and debt financing can help you decide what may work best for your business.
The Takeaway
Crowdfunding involves raising capital for a business venture by soliciting a large number of small investors. Crowdfunding can also have appeal for investors as well, though it’s important to understand how SEC regulations work. It has pros and cons for both entrepreneurs and investors.
If you’re interested in funding up-and-coming companies without having to observe net worth and income requirements, IPO investing could make more sense. But that also comes with its pros and cons, and some significant risks.
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).
Photo credit: iStock/oatawa
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.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
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.
SOIN0723021
Jul
28
2023
What Is A Currency Carry Trade in Forex Markets?
Carry trade is a strategy used by some traders who invest in currency markets to take advantage of differences in interest rates. In a carry trade, an investor buys or borrows a security or asset at a low interest rate, and then uses it to invest in another security or asset that provides a higher rate of return.
Carry trades have some clear uses in the foreign exchange market, or “forex” market. Given that they can be used to drive returns, they can be important for investors of all stripes to understand.
What Is a Carry Trade?
In a carry trade, forex traders borrow money at a low interest rate in order to invest it in an asset with a higher rate of return. In the forex markets, the currency carry trade is a bet that one foreign currency will hold or increase its value relative to another currency.
Of course, this investing strategy hinges on whether or not interest rates and exchange rates are in the traders’ favor. The wider the exchange rate between two currencies, the better the potential returns for the investor.
Recommended: What Is Forex Trading?
Even so, a carry trade strategy can be a relatively simple way to increase an investor’s returns, assuming they understand the difference in interest rates. In that way, it’s similar to understanding “spread trading” as they relate to stocks.
💡 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.
How Do You Execute a Carry Trade?
Executing a carry trade can seem nebulous without an example. Here’s a runthrough.
Carry Trade Example
Imagine that the U.S. dollar has a 1% interest rate, but the British pound has a 2% interest rate. A trader could take 100 U.S. dollars, and then invest that 100 dollars into the equivalent number of pounds (according to the exchange rate), and earn a higher return in interest. The discrepancy in interest rates allows traders to take advantage and earn higher returns.
This is a rather simplistic carry trade example, professional traders and investors can engage in complex carry trade strategies, and even employ the use of a carry trade formula to help them figure out expected returns, and whether the strategy is worth pursuing in a given situation.
Rather than simply buying one currency with another, traders often execute a carry trade that involves borrowing money in one currency and using it to purchase assets in another currency. In this scenario, traders want to borrow the money at the lowest possible interest rate, and do so using a weak or declining currency.
That can create higher profits when they close the deal and pay back the borrowed money. In general, carry trade is a short-term strategy, rather than one focused on the long-term.
Recommended: Short-Term vs Long-Term Investments
Is a Carry Trade Risky?
The concept of a carry trade is simple, but in practice, it can involve investment risk.
Most notably, there’s the risk that the currency or asset a trader is investing in (the British pounds in our previous example) could lose value. That could put a damper on a trader’s expected returns, as it would eat away at the gains the difference in interest rates could provide. Currency prices tend to be very volatile, and something as mundane as a monthly jobs report released by a government can cause big price changes.
The greater the degree of leverage an investor uses to execute a carry trade, the higher the potential returns — and the larger the risk. In addition to currency risk, the carry trade is subject to interest rate risk. Given the risks, carry trades in the currency markets may not be the most appropriate strategy for investors with a low tolerance for risk.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
The Takeaway
Carry trades are one way for investors or traders to generate returns, although the approach involves some risks that aren’t present in other types of investment strategies. While the carry trade concept is straightforward, it can quickly get complex when institutional investors put it in place.
Carry trades can be advanced trading tools or strategies. For that reason, they may not be appropriate for all investors or traders. If you feel like you’re in over your head, it may be a good idea to speak with a financial professional for guidance, or to do some more homework to further your understanding.
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).
Photo credit: iStock/akinbostanci
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.
SOIN0723020
Jul
28
2023
What’s the Reflation Trade?
The reflation trade is a bet that certain sectors of the market perform well immediately after a recession or economic crisis. Essentially, it’s a bet on cyclical stocks at the beginning of a market recovery.
Reflation is the inflation that typically comes immediately after a low-point in the economic cycle — often after economic stimulus, and the reflation trade is the purchase of specific stocks or sectors believed to outperform in that type of environment.
Reflation vs Inflation
While both reflation and inflation are characterized by rising prices, they are not the same thing.
Reflation is a recovery of prices lost during an economic downturn along with employment growth, and many economists see reflation as a healthy sign of an improving economy. It often accompanies economic stimulus, and may reflect monetary policy designed to stimulate spending and halt deflation.
Inflation, on the other hand, does not look at employment or any other economic factors. It is the rise in prices beyond their “normal” range, and poses a threat to economic recovery, since it can reduce the purchasing power of consumers and make it more expensive to borrow money.
Reflation is also different from what happens during stagflation, in which prices go up but wages don’t follow.
💡 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.
Understanding Reflation Trade Opportunities
Reflation doesn’t just mean that the market as a whole will rise as economic activity returns to normal or even higher levels. Instead there’s a focus on certain sectors as they reflate after a decline.
For example, some investors might see reflationary dynamics in sectors like hospitality or dining during a pandemic, along with travel and tourism. It may also be noticeable, under those circumstances, in more indirectly affected sectors like energy and materials.
Again, assuming an economy suffers a pandemic, part of the reflation trade could be a switch from purchases of goods to services, as people go out more, whether it’s movie theaters, restaurant meals, theme parks and hotels. These are the sectors that would perform well if the reflation thesis turned out to be true.
Investors interested in the reflation trade can invest in individual stocks, or get more diversified exposure by investing in sector-specific exchange-traded funds (ETFs) or index funds.
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Reflation Trade Sectors
While hospitality stocks might make sense for investors considering a reflation trade, there are other sectors that typically perform well in most deflationary environments. Here’s a look at a few of them:
Financial Stocks
Banks and other financial institutions tend to do well after an economic recession, since they can benefit from both higher interest rates and ramped up consumer spending.
Value Investing
Companies that deliver steady, long-term growth often get undervalued during economic downtimes, meaning that they’re poised for better performance as the market begins to improve. That’s the logic behind value investing.
Bonds
When interest rates are rising–in either the short- or the long-term — investing in bonds may benefit from a reflationary market.
Commodities
Since commodities tend to perform well during both periods of inflation and periods of economic growth, they’re a favored investment among those looking for a reflationary trade. As such, commodities trading could be an attractive area in a reflationary market.
Small Cap Stocks
Investments in small cap stocks tend to increase in value after recessions or during periods of growth, making them another asset that investors might consider in a reflationary market.
💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.
The Takeaway
The reflationary trade is a bet on specific sectors of the economy or certain types of asset classes in the aftermath of an economic downturn. If you’re interested in incorporating the reflation trade into your portfolio, you could do so either via individual stocks or by buying sector-specific exchange-traded funds (ETFs) or mutual funds.
But note that the economy is a complicated thing, and that there are cycles it naturally takes, but it’s also susceptible to all sorts of other events. That includes natural disasters, political changes, or even pandemics and other global crises. With that in mind, it can be difficult to be sure of what sort of environment the economy is in, exactly, at any given time.
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).
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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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