Dec
06
2024
Why you need to invest when the market is down

What You Need to Know When the Market Is Down

By | Growing Wealth, invest, Investing | No Comments

What do you do with your stocks when the market drops? If you’re like most people, your first instinct is to sell. It’s human nature. But when they decline, selling everything can seem like the best way out of a bad situation. However, instinctively selling when stocks drop is often counterproductive, and it may make more sense to invest while the market is down.

Key Points

•   Selling stocks during a market downturn can be counterproductive; investing for the long term is often more beneficial.

•   Dollar-cost averaging allows investors to buy more shares when prices are low, potentially increasing returns.

•   Tax-loss harvesting can offset gains by selling investments at a loss and reinvesting in similar assets.

•   Avoid high-risk investments and rash decisions during downturns; maintain a diversified portfolio to manage risk.

•   Market downturns offer opportunities to buy stocks at lower prices, but decisions should align with long-term goals.

Should You Invest When the Market Is Down?

It’s generally a good idea to invest when the stock market is down as long as you’re planning to invest for the long term. Seasoned investors know that investing in the market is a long-term prospect. Stock market dips, corrections, or even bear markets are usually temporary, and, given enough time, your portfolio may recover.

When the market is down, it provides an opportunity to buy shares of stock through your online investing account at a lower price, which means you can potentially earn a higher return on your investment when the market recovers.

For example, in late 2007, stocks began one of the most dramatic plunges in their history. From October 2007 to March 2009, the S&P 500 Index fell 57%. During that time, many investors panicked and sold their holdings for fear of further losses.

However, the market bottomed out on March 9, 2009, and started a recovery that would turn into the longest bull market in history. Four years later, in 2013, the S&P 500 surpassed the high it reached in 2007. While that historic plunge of over 50% was terrifying, if you panicked and sold, rather than employ bear market investing strategies, you would have locked in your losses — and missed the subsequent recovery.

If, on the other hand, you had kept your investments, you would have seen stock values fall at first, but as the market reversed course, you may have seen portfolio gains again.

Consider the recent example of how the markets performed during the early stages of the Covid-19 pandemic in 2020. The S&P 500 fell about 34% from February 19, 2020, to March 23, 2020, as the pandemic ravaged the globe. However, stocks rebounded and made up the losses by August. As of the end of 2024, markets are hovering around record highs.

These examples illustrate why timing the market is rarely successful, but holding stock over the long term tends to be a smart strategy. It’s still important to keep in mind that the stock market can be volatile and can fluctuate significantly in the short term. Therefore, you must be prepared for short-term losses and have a long-term investment horizon.

Recommended: Bull vs. Bear Market: What’s the Difference?

4 Things to Consider Doing During a Market Downturn

When the stock market is down, it can be a worrying time for investors. But it’s important to remember that market downturns are a normal part of the investing process and that the market may eventually recover. Here are a few things to consider doing during a market downturn.

1. Stay Calm and Avoid Making Impulsive Decisions

It’s natural to feel worried or concerned when the stock market is down, but it’s essential to maintain a long-term perspective and not make rash decisions based on short-term market movements.

Buying and selling stocks based on gut reactions to temporary volatility can derail your investment plan, potentially setting you back.

You likely built your investment plan with specific goals in mind, and your diversified portfolio was probably based on your time horizon and risk tolerance preferences. Impulsive selling (or buying) can throw off this balance.

Instead of letting emotions rule the day, consider having a plan that includes investing more when the market is down (aka buying the dip). These strategies involve buying stocks on sale, and the hope is that the downturn is temporary and you’ll be able to ride any upturn to potential earnings.

So, when markets take a tumble, your best move is often to stay calm and stick to your predetermined strategy.

That said, any investment decisions you make should be based on your own needs. Just because the market is down doesn’t mean you have to buy anything. buying stocks on impulse just because they’re cheaper might throw a wrench in your plan, just like rushing to sell. Taking time to consider your long-term needs and doing research typically pays off.

2. Evaluate Your Portfolio

Review your portfolio and make sure it’s properly diversified. Portfolio diversification may reduce the overall risk of your portfolio by spreading your investments across different asset classes, like stocks, bonds, real estate, and cash. Investing in various assets and industries can protect your portfolio during a market downturn.

However, even if you have a well-diversified portfolio, you may also need to pay attention to your portfolio’s asset allocation during volatile markets. For example, during a down stock market, your stock holdings may become a lower percentage of your portfolio than desired, while bonds or cash become a more significant part of your overall holdings. If your portfolio has become heavily weighted in a particular asset class or sector, it could be strategic to sell some of those holdings and use the proceeds to buy securities to rebalance your portfolio at your desired asset allocation.

Recommended: How Often Should You Rebalance Your Portfolio?

3. Take Advantage of Low Prices With Dollar-Cost Averaging

To help curb your impulse to pull out of the market when it is low — and continue investing instead — you may want to consider dollar cost averaging.

Here’s how it works: On a regular schedule — say every month — you invest a set amount of money in the stock market. While the amount you invest each month will remain the same, the number of shares you’ll be able to purchase will vary based on the current cost of each share.

For example, let’s say you invest $100 a month. In January, that $100 might buy ten shares of a mutual fund at $10 a share. Suppose the market dips in April, and the fund’s shares are now worth $5. Instead of panicking and selling, you continue to invest your $100. That month, your $100 buys 20 shares.

In June, when the market rises again, the fund costs $25 a share, and your $100 buys four shares. In this way, dollar cost averaging helps you buy more shares when the markets are down, essentially allowing you to buy low and limiting the number of shares you can buy when markets are up. This helps protect from “buying high.”

After ten years of investing $100 a month, the value of each share is $50. Even if some shares you bought cost more than that, your average cost per share is likely lower than the fund’s current price.

Steady investments over time are more likely to give you a favorable return than dumping a large amount of money into the market and hoping you timed it right.

4. Consider Tax-Loss Harvesting

If you’ve already experienced losses, you may want to consider tax-loss harvesting — the practice of selling investments that experienced a loss to offset your gains from other investments.

Imagine that you invest $10,000 in a stock in January. Over the year, the stock decreases in value, and at the end of the year, it is only worth $7,500. Instead of wishing you’d had better luck, you can sell that position and reinvest the money in a similar (but not identical) stock or mutual fund.

You get the benefit of maintaining a similar investment profile that will hopefully increase in value over time, and you can write off the $2,500 loss for tax purposes. You can write off the total amount against any capital gains you may have in this year or any future year, helping to lower your tax bill. This is tax-loss harvesting.

You can also deduct up to $3,000 of capital losses each year from your ordinary income. However, you must deduct your losses against capital gains first before using the excess to offset income. Losses beyond $3,000 can be rolled over into subsequent years, known as tax loss carryforward.

During major market downturns, this technique can ease the pain of capital losses — but it’s important to consider reinvesting the money you raise when you sell, or you’ll risk missing the recovery. But remember that with investing comes risk, so there’s no assurance that a recovery will occur.

4 Things to Avoid When the Market Is Down

Feeling anxious when the stock market is down is natural, but it’s important to remain calm and not let fear drive your investment decisions. Here are a few things to avoid when the stock market is down.

1. Trying to Time the Market

Timing the market is the idea that you will somehow beat the market by attempting to predict future market movements and buying and selling accordingly. However, it’s difficult to predict with certainty when the stock market will go up or down, so trying to time the market is generally a futile endeavor.

However, it’s difficult to predict with certainty when the stock market will go up or down, so trying to time the market is generally a futile endeavor. As they say: No one has a crystal ball in this business.

As a result, timing the market is not a strategy that works for most investors. Even during a down market, you should not wait until the market hits bottom to start investing in stocks again.

2. Selling All Your Stocks

You should resist the temptation to sell all of your stocks or make other rash decisions when the market is down. While it may be tempting to sell all of your stocks during a down market, it’s important to remember that the stock market usually recovers. If you sell all of your stocks when the market is down, you may miss out on the opportunity to participate in the market’s recovery.

3. Chasing After High-Risk Investments

When stocks are down, you may be inclined to try to earn quick profits by investing in high-risk assets — like commodities or cryptocurrencies — but these investments can be particularly volatile and are not suitable for everyone.

Moreover, riskier investment strategies like options and margin trading may be an appealing way to amplify returns in down markets. But if you are not comfortable using these strategies, you could end up with even bigger losses.

Recommended: Options Trading 101: An Introduction to Stock Options

4. Abandoning Your Long-Term Financial Plan

It’s important to remember that the stock market is just one part of your overall financial plan. Keep your long-term financial goals in mind, and don’t let short-term market movements distract you from your larger financial objectives.

Risks to Investing During Down Markets

While the stock market generally recovers after a decline, there are exceptions to the idea that the market tends to snap back quickly or always trends upward.

Take the stock market crash of 1929. Share prices continued to slide until 1932, as the Great Depression ravaged the economy. The Dow Jones Industrial Average didn’t reach its pre-crash high until November 1954.

In addition, as of early 2023, the Nikkei 225 — the benchmark stock index in Japan — has yet to reach the peak of over 38,000 it hit at the end of 1989. Back then, the index went on to lose half its value in three years as an economic bubble in the country burst. However, the Nikkei did touch the 30,000 level at various points in 2021 for the first time since 1990.

So, investors need to remember that just because stock markets have recovered in the past doesn’t mean that it will always be that way. As the saying goes, past performance is not indicative of future results.

The Takeaway

Almost everyone feels a sense of worry (or fear) when the market is down. It’s only natural to find yourself swamped with doubts: What if the market keeps sliding? What if I lose everything? What if it’s one of those rare occurrences when the recovery takes ten years?

Rather than succumb to panic, perhaps the best course of action is to stay the course, and not to give in to your impulses to sell or scrap your entire investment strategy, but to stay the course. Using strategies like dollar-cost averaging, which allow you to invest in a down market sensibly, can be a part of a balanced investment strategy that helps build wealth over 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).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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06
2024
Businessman outside with laptop

What Is a Pattern Day Trader?

By | Financial Independence, invest, Investing | Comments Off on What Is a Pattern Day Trader?

September 2025: In a significant move this month, the Board of Governors of the Financial Industry Regulatory Authority (FINRA) passed amendments to replace its current day trading and pattern day trading rules, one of which requires pattern day traders to keep a minimum of $25,000 in net equity in their margin accounts. If approved by the SEC, this long-standing limit could be replaced with the current maintenance margin rule. Changing the pattern day trading margin requirement would allow many more retail investors to day trade, a high-stakes, high-risk endeavor.

A pattern day trader is actually a designation created by the Financial Industry Regulatory Authority (FINRA), and it refers to traders who day trade a security four or more times within a five-day period.

Because of their status, there are certain rules and stipulations that apply only to pattern day traders, which brokerages and investing firms must adhere to. Read on to learn more about pattern day traders, what rules apply to them, and how they’re different from regular day traders.

Key Points

•   A pattern day trader is classified as someone who executes four or more day trades within a five-day period, exceeding 6% of their total trading activity.

•   Investors identified as pattern day traders must maintain a minimum balance of $25,000 in their margin accounts to meet regulatory requirements set by FINRA.

•   Engaging in pattern day trading can yield profits, but it also carries significant risks, especially when utilizing margin accounts, which can amplify both gains and losses.

•   The Pattern Day Trader Rule was established to limit excessive risk-taking among individual traders, requiring firms to impose stricter trading restrictions on active day traders.

•   Being designated as a pattern day trader may lead to account restrictions, including a 90-day trading freeze if the minimum balance requirement is not met.

Pattern Day Trader, Definition

The FINRA definition of a pattern day trader is clear: A brokerage or investing platform must classify investors as pattern day traders if they day trade a security four or more times in five business days, and the number of day trades accounts for more than 6% of their total trading activity for that same five-day period in a margin account.

When investors are identified as pattern day traders, they must have at least $25,000 in their trading account. Otherwise, the account could get restricted per FINRA’s day-trading margin requirement rules.

How Does Pattern Day Trading Work?

Pattern day trading works as the rules stipulate: An investor or trader trades a single security at least four times within a five business day window, and those moves amount to more than 6% of their overall trading activity.

Effectively, this may not look like much more than engaging in typical day trading strategies for the investor. The important elements at play are that the investor is engaging in a flurry of activity, often trading a single security, and using a margin account to do so.

Remember: A margin account allows the trader to borrow money to buy investments, so the brokerage that’s lending the trader money has an interest in making sure they can repay what they owe.

Example of Pattern Day Trading

Here is how pattern day trading might look in practice:

On Monday, you purchase 10 shares of Stock A using a margin account. Later that day, you sell the 10 shares of Stock A. This is a day trade.

On Tuesday, you purchase 15 shares of stock A in the morning and then sell the 15 shares soon after lunch. Subsequently, you purchase 5 shares of stock A, which you hold only briefly before selling prior to the market close. You have completed two day trades during the day, bringing your running total — including Monday’s trades — to three.

On Thursday, you purchase 10 shares of stock A and 5 shares of stock B in the morning. That same afternoon, you sell the 10 shares of stock A and the 5 shares of stock B. This also constitutes two day trades, bringing your total day trades to five during the running four-day period. Because you have executed four or more day trades in a rolling five business day period, you may now be flagged as a pattern day trader.

Note: Depending on whether your firm uses an alternative method of calculating day trades, multiple trades where there is no change in direction might only count as one day trade. For example:

•   Buy 20 shares of stock A

•   Sell 15 shares of stock A

•   Sell 5 shares of stock A

If done within a single day, this could still only count as one day trade.

Do Pattern Day Traders Make Money?

Yes, pattern day traders can and do make money — if they didn’t, nobody would engage in it, after all. But pattern day trading incurs much of the same risks of day trading. Day traders run the risk of getting in over their heads when using margin accounts, and finding themselves in debt.

This is why it’s important for aspiring day traders to make sure they have a clear and deep understanding of both margin and the use of leverage before they give serious thought to trading at a high level.

It’s the risks associated with it, too, that led to the development and implementation of the Pattern Day Trader Rule, which can have implications for investors.

What Is the Pattern Day Trader Rule?

The Pattern Day Trader Rule established by FINRA requires that an investor have at least $25,000 cash and other eligible securities in their margin account in order to conduct four or more day trades within five days. If the account dips below $25,000, the investor will need to bring the balance back up in order to day trade again.

Essentially, this is to help make sure that the trader actually has the funds to cover their trading activity if they were to experience losses.

Note that, according to FINRA, a day trade occurs when a security is bought and then sold within a single day. However, simply purchasing shares of a security would not be considered a day trade, as long as that security is not sold later on that same day, per FINRA rules. This also applies to shorting a stock and options trading.

The PDT Rule established by FINRA requires that an investor have at least $25,000 in their margin account in order to conduct four or more day trades within five days. But merely day trading isn’t enough to trigger the PDT Rule.

All brokerage and investing platforms are required by FINRA, a nongovernmental regulatory organization, to follow this rule. Most firms provide warnings to their clients if they are close to breaking the PDT rule or have already violated it. Breaking the rule may result in a trading platform placing a 90-day trading freeze on the client’s account. Brokers can allow for the $25,000 to be made up with cash, as well as eligible securities.

Some brokerages may have a broader definition for who is considered a “pattern day trader.” This means they could be stricter about which investors are classified as such, and they could place trading restrictions on those investors.

A broker can designate an investor a pattern day trader as long as the firm has a “reasonable basis” to do so, according to FINRA guidelines.

Why Did FINRA Create the Pattern Day Trader Rule?

FINRA and the Securities and Exchange Commission (SEC) created the PDT margin rule during the height of the dot-com bubble in the late 1990s and early 2000s in order to curb excessive risk-taking among individual traders.

FINRA and the Securities and Exchange Commission (SEC) created the PDT margin rule amidst the heyday of the dot-com bubble in order to curb excessive risk taking among individual traders.

FINRA set the minimum account requirement for pattern day traders at $25,000 after gathering input from a number of brokerage firms. The majority of these firms felt that a $25,000 “cushion” would alleviate the extra risks from day trading. Many firms felt that the $2,000 for regular margin accounts was insufficient as this minimum was set in 1974, before technology allowed for the electronic day trading that is popular today.

Investing platforms offering brokerage accounts are actually free to impose a higher minimum account requirement. Some investing platforms impose the $25,000 minimum balance requirement even on accounts that aren’t margin accounts.

Pattern Day Trader vs Day Trader

As discussed, there is a difference between a pattern day trader and a plain old day trader. The difference has to do with the details of their trading: Pattern day traders are more active and assume more risk than typical day traders, which is what catches the attention of their brokerages.

Essentially, a pattern day trader is someone who makes a habit of day trading. Any investor can engage in day trading — but it’s the repeated engagement of day trading that presents an identifiable pattern. That’s what presents more of a risk to a brokerage, especially if the trader is trading on margin, and which may earn the trader the PDT label, and subject them to stricter rules.

Does the Pattern Day Trader Rule Apply to Margin Accounts?

As a refresher: Margin trading is when investors are allowed to make trades with some of their own money and some money that is borrowed from their broker. It’s a way for investors to boost their purchasing power. However, the big risk is that investors end up losing more money than their initial investment.

Investors trading on margin are required to keep a certain cash minimum. That balance is used as collateral by the brokerage firm for the loan that was provided. The initial minimum for a regular margin account is $2,000 (or 50% of the initial margin purchase, whichever is greater). Again, that minimum moves up to $25,000 if the investor is classified as a “pattern day trader.”

FINRA rules allow pattern day traders to get a boost in their buying power to four times the maintenance margin excess — any extra money besides the minimum required in a margin account. However, most brokerages don’t provide 4:1 leverage for positions held overnight, meaning investors may have to close positions before the trading day ends or face borrowing costs.

If an investor exceeds their buying power limitation, they can receive a margin call from their broker. The investor would have five days to meet this margin call, during which their buying power will be restricted to two times their maintenance margin. If the investor doesn’t meet the margin call in five days, their trading account can be restricted for 90 days.

Does the Pattern Day Trader Rule Apply to Cash Accounts?

Whether the Pattern Day Trader Rule applies to other types of investing accounts, like cash accounts, is up to the specific brokerage or investing firm. The primary difference between a cash account vs. a margin account is that with cash accounts, all trades are done with money investors have on hand. Some trading platforms only apply the PDT rule to margin accounts and don’t apply it to cash accounts.

However, some platforms may adhere to FINRA rules that govern margin accounts even if they don’t offer margin trading. This means that a $25,000 minimum balance of cash and other securities must be kept in order for an investor to do more than four day trades in a five-business-day window.

Investors with cash accounts also need to be careful of free riding violations. This is when an investor buys securities and then pays for the purchase by using proceeds from a sale of the same securities. Such a practice would be in violation of the Federal Reserve Board’s Regulation T and result in a 90-day trading freeze.

Pros of Being a Pattern Day Trader

The pros to being a pattern day trader are somewhat obvious: High-risk trading goes along with the potential for bigger rewards and higher profits. Traders also have a short-term time horizon, and aren’t necessarily locking up their resources in longer-term investments, either, which can be a positive for some investors.

Also, the use of leverage and margin allows them to potentially earn bigger returns while using a smaller amount of capital.

Cons of Being a Pattern Day Trader

The biggest and most obvious downside to being a pattern day trader is that you’re contending with a significant amount of risk. Using leverage and margin to trade compounds that risk, too, so day trading does require thick skin and the ability to handle a lot of risk. (Make sure to consider your risk tolerance and investment objectives before engaging in day trading.) Given the intricacies of day trading, it can also be more time and research intensive.

Tips to Avoid Becoming a Pattern Day Trader

Here are some steps investors can take to avoid getting a PDT designation:

1.    Investors can call their brokerage or trading platform or carefully read the official rules on what kind of trading leads to a “Pattern Day Trader” designation, what restrictions can potentially be placed, and what types of accounts are affected.

2.    Investors can keep a close count of how many day trades they do in a rolling five-day period. It’s important to note that buying and selling during premarket and after-market trading hours can cause a trade to be considered a day trade. In addition, a large order that a broker could only execute by breaking up into many smaller orders may constitute multiple day trades.

3.    Investors can consider holding onto securities overnight. This will help them avoid making a trade count as a day trade, although with margin accounts, they may not have the 4:1 leverage afforded to them overnight.

4.    If an investor wants to make their fourth day trade in a five-day window, they can make sure they have $25,000 in cash and other securities in their brokerage account the night before to prevent the account from being frozen.

5.    Investors can open a brokerage account with another firm if they’ve already hit three day trades over five days with one trading platform. However, it’s good to keep in mind that the PDT rule is meant to protect investors from excessive risk taking.

It’s also important to know that taking time to make wise or careful investment decisions could be in the investor’s favor.

The Takeaway

Pattern day traders, as spelled out by FINRA guidelines, are traders who trade a security four or more times within five business days, and their day trades amount to more than 6% of their total trading activity using a margin account.

Being labeled a pattern day trader by a brokerage can trigger the PDT Rule, which means that the trader needs to keep at least $25,000 in their margin account. While day trading can reap big rewards, it also has big risks — and that’s something that brokerages are keenly aware of, and why they may choose to have stricter requirements for pattern day traders.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 10.50%*

FAQ

What happens if you get flagged as a pattern day trader?

If you’re labeled as a pattern day trader, your brokerage may require you to keep at least $25,000 in cash or other assets in your margin account as a sort of collateral.

Do pattern day traders make money?

Yes, some pattern day traders make money, which is why some people choose to do it professionally. But many, perhaps most, lose money, as there is a significant amount of risk that goes along with day trading.

What is the pattern day trader rule?

The Pattern Day Trader Rule was established by FINRA, and requires traders to have at least $25,000 in their margin account in order to conduct four or more day trades within five days. If the account dips below $25,000 the trader needs to deposit additional funds.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Dec
06
2024
What Does FUD Mean in Investing in Crypto?

What Does FUD Mean?

By | Growing Wealth, invest, Investing | Comments Off on What Does FUD Mean?

FUD stands for “fear, uncertainty, and doubt” and refers to a general mindset of pessimism about a particular asset or market, as well as the manipulation of investor or consumer emotions so that they succumb to FUD.

While the term “fear, uncertainty, and doubt” has been in circulation for a century or so, it became popular as the abbreviation FUD in the 1970s — and widely known more recently, thanks to the highly volatile crypto markets. FUD is also used throughout finance and can apply to any asset class.

Here’s what you need to know about FUD now.

Key Points

•   FUD, which stands for “fear, uncertainty, and doubt,” describes negative investor sentiment that can lead to impulsive decision-making in financial markets.

•   Distinguishing between FUD and FOMO (fear of missing out) is crucial, as FUD represents collective fear while FOMO reflects collective greed during market fluctuations.

•   The history of FUD dates back to the 1920s and gained traction in the 1970s as a tactic to influence consumer behavior through misinformation.

•   In the cryptocurrency arena, FUD can refer to both deliberate attempts to manipulate prices and general skepticism about the asset class stemming from negative news.

•   The impact of FUD can lead to significant market reactions, as exaggerated or misleading information spreads rapidly, influencing investor behavior during volatile periods.

What Does FUD Mean in Investing?

Investment strategies based on fear, uncertainty, and doubt are not usually recommended. Sometimes FUD might be justified, but in general, the term is used to describe irrational, overwhelming negative sentiment in the market.

Many investors have concrete or pragmatic fears and doubts. Some investors worry that they’ve invested too little or too late (or both). Others might fear a total market meltdown. Some investors worry that an unforeseen factor could impact their investments. These are ordinary, common concerns.

FUD is different, and it’s important to understand what FUD is. When investors talk about FUD, they’re referring to rumors and hype that spread through media (and social media) that drive impulsive and often irrational investor decisions. Think about the meme stock craze.

Thus the term FUD can often have a demeaning edge, in the sense that it refers to these unpredictable waves of investor behavior.

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FUD vs FOMO: What Is the Difference?

What is FUD in stocks or the stock market? FUD can be thought of as the opposite of FOMO (fear of missing out). While FOMO tends to inspire people to do what others are doing — often in that they don’t want to miss out on a hot stock and potential gains — FUD can be described as a collective negative effect that spreads like wildfire, typically through social media.

When markets are going up, many people fall victim to FOMO trading, but when markets are going down, FUD can also spread swiftly. In the most basic sense, you could think of it like this: FUD equals fear and FOMO equals greed.

The two can sometimes be contrary indicators. In other words, when FUD seems to be everywhere, astute investors might actually be buying assets at reduced prices (aka buying the dip), and when many people are experiencing FOMO, seasoned traders might actually be selling at a premium.

Crypto traders offer a counter to FUD by using the term “hodl.” The hodl meaning is interpreted as “hold on for dear life.” Hodl comes from an old Reddit post where an investor posted a rant about having trouble timing the market, while misspelling the word “hold” several times.

The phrase was initially used in reference to Bitcoin but can apply to different types of cryptocurrency.

What Does FUD Mean in Crypto?

While FUD is often associated with investor sentiment in the crypto markets, the phrase “fear, uncertainty, and doubt” actually has a much longer history than many people realize.

The History of FUD

The general term “fear, uncertainty, and doubt” has been around for decades, and the use of FUD gained traction in marketing, sales, and public relations, through the 1980s and 1990s.

More recently, FUD has taken on a broader connotation in investing circles — particularly in the crypto markets — referring to the potential many investors have to succumb to sudden anxiety or pessimism that changes their behavior.

FUD and Crypto

In crypto, FUD has become a well-known crypto term, and it means one of two things:

1.    To spread doubt about a particular token or project in an attempt to manipulate prices downward.

2.    The general skepticism and cynicism about crypto as an asset class, and any related news/events. Even the rumor of a negative event possibly happening can generate FUD.

Again, FUD is not strictly relegated to the crypto space, but in recent years, it’s perhaps most commonly used when discussing crypto.

FUD Crypto and Memes

Crypto FUD also tends to involve the spreading of memes that can either amplify or lessen the FUD’s effect. Sometimes FUD being spread by the media is widely seen as trivial, in which case memes making fun of the idea might pop up. Or, if the FUD is perceived as more legitimate, memes making fun of those not taking the threat seriously might start circulating.

When Can FUD Occur?

FUD can occur whenever prices are falling or a big event happens that’s widely thought to be bearish. A company could miss earnings expectations or it could be revealed that an influential investor has taken a short position against a stock. Or the FUD could come from a larger source, like a pandemic, natural disaster, or the threat of a government defaulting on its debt.

The more catastrophic something could theoretically be, and the greater uncertainty surrounding its outcome, the more it becomes a suitable subject for people to spread FUD.
Sometimes markets react swiftly across the board to such news. Other times people take things out of context or exaggerate them, creating a sort of fake news buzz to scare others into selling.

In stocks and other regulated securities, it’s against the law to spread FUD with the intention of lowering prices. Doing so is considered to be a form of market manipulation and could subject individuals to legal action from regulatory agencies like the SEC, FINRA, or FINCEN.

As not all cryptocurrencies have been definitively classified as securities by all regulatory agencies, there is still some gray area. The idea that many altcoins could one day be deemed securities has itself become a big topic of FUD, because it would have a big impact on the regulatory landscape surrounding crypto

FUD Crypto Examples

Here are a few well-known examples of FUD in crypto. These examples show FUD at its finest. There are elements of truth to them, but the idea is that their detrimental impacts to asset prices are exaggerated to the point of hysteria.

China Banning Bitcoin

This might be one of the best examples of FUD in crypto, and perhaps the one that has been the subject of more memes and Twitter rants than any other.

At many points in recent years, officials in China have claimed to ban Bitcoin in one way or another. Of course, a real, comprehensive “ban” on Bitcoin would be a one-time event. What really happens is the Chinese government introduces some kind of restrictions for individuals or organizations involved in crypto markets, and media outlets report the event as a “ban on Bitcoin.”

In 2021, China really did make Bitcoin mining illegal in the country. Even so, markets shrugged off the event over time.

Government Regulation

Regulatory concerns coming from any national government can be a big source of fear, uncertainty, and doubt. Because crypto markets are still somewhat new, many countries have yet to adopt regulatory frameworks around crypto that provide specific rules around the use and taxation of cryptocurrencies.

Several countries have tried to make any use of crypto illegal, while others make public statements about harsh restrictions coming down the line. Whether the threat is real or perceived, the mere suggestion of governments cracking down on crypto transactions tends to spook investors.

The Fear of Lost Crypto

Nothing stokes investors’ fears like the idea of investment losses, but with crypto there’s the even greater dread of actually losing your coins. Unfortunately, there is some truth to that anxiety, in that there are notable cases of crypto being lost and never recovered, usually because someone loses the private keys that gave them access to their crypto.

Unfortunately, because crypto is decentralized, investors’ assets aren’t protected the same way they would be in traditional, centralized banking systems. (While it’s theoretically possible that all your cash money could vanish from your bank overnight, it’s highly improbable. And even if it did, you’d have the benefit of FDIC insurance.)

Influential Crypto Tweets

Another example of FUD includes some social media posts by famous people that had an immediate impact on a given type of crypto.

It’s important to remember that FUD moments don’t last, and the impact of a single power person on the price of a certain coin — even if it roiled markets for a period of time — was temporary.

Corporate Crypto Assets

In the last couple of years, several big corporations have launched, or announced plans to launch, a proprietary form of crypto. Unfortunately, it’s not that easy to get a new crypto off the ground — despite the many comparisons between the crypto markets and the frontiers of the Wild West — and the failure of at least one high-profile coin helped to sow FUD for some investors.

Solar Storms

Because crypto is digital, a great deal of FUD stems from technology-based fears that random events could take down electrical grids and effectively wipe out crypto holdings. One such FUD-inducing rumor is about the possibility of Earth being zapped by solar storms, but the scientific validity of this has yet to be confirmed.

The Takeaway

Crypto FUD is one of many crypto terms that have become popular, but the underlying concept — that fear, uncertainty, and doubt can influence investor behavior — is not new. In fact, FUD as an actual strategy exists in many spheres, including marketing, sales, public relations, politics (and of course crypto).

FUD can come from anywhere and be focused on just about anything, but crypto can be particularly vulnerable to FUD because this market is already quite volatile. It’s also a very new sector, and some investors don’t fully understand the technology involved, and they can be manipulated by alarmist rumors or even celebrity opinions.

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).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

Who uses FUD?

Some FUD arises naturally from market movements or economic conditions. Some FUD is deliberately cooked up to instill enough fear in the markets that investors make impulsive decisions, e.g. selling one type of crypto for another.

Why does FUD matter?

It’s important for investors to understand the concept of FUD so that they don’t get caught in the inevitable waves of negativity that can lead some people to panic and make poor choices.

What Counts as FUD?

Ordinary fears and concerns about market performance, or an investor’s personal long-term goals, don’t count as FUD. FUD refers to a broader market or crypto phenomenon, where highly negative information goes viral and causes investors to panic.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE


Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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What Is Earnings Season?

What Is Earnings Season?

By | Growing Wealth, invest, Investing | Comments Off on What Is Earnings Season?

Earnings season is the period of time when publicly-traded companies release their quarterly earnings reports, as required by the Securities and Exchange Commission (SEC). Earnings season is important for investors because it provides insight into a company’s financial health and performance.

The financial results reported during an earnings season can help investors and analysts understand a company’s prospects, how a specific industry is performing, or the state of the overall economy. Knowing when earnings season is can help investors stay up to date on this information and make better investment decisions.

When Is Earnings Season?

Earnings season, again, is a period during which public companies release quarterly earnings reports, and it occurs four times a year – generally starting within a few weeks after the close of each quarter and lasting for about six weeks. For example, the earnings season for the first quarter, which ends on March 31, would typically begin in the second week of April and wrap up at the end of May.

Earnings season normally follows this timeline:

•   First quarter: Mid-April through the end of May

•   Second quarter: Mid-July through the end of August

•   Third quarter: Mid-October through the end of November

•   Fourth quarter: Mid-January through the end of February

Note, however, that not all companies report earnings on this schedule. Companies with a fiscal year that doesn’t follow the traditional calendar year may release their earnings on a different schedule.

Many retail companies, for instance, have fiscal years that end on January 31 rather than December 31, so they can capture the results from the holiday shopping season into their annual reports. Thus, these firms may report their earnings toward the end of earnings season, or even after the typical earnings reporting period.

Investors interested in knowing when companies will report earnings can check each companies’ investor relations page, or other websites to see the earnings calendars.

💡 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).

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.

Why Is Earnings Season Important for Investors?

Earnings season is an important time for investors to track a company’s or industry’s performance and better understand its financial health.

During earnings season, companies release their quarterly earnings reports, which are financial statements that lay out the revenue, expenses, and profits. This information gives investors a better understanding of how a company is operating.

Moreover, earnings season is also when companies provide guidance for the upcoming quarters, sometimes during the company’s quarterly earnings call. This guidance can give investors an idea of what to expect from a company in the future and help them make more informed investment decisions, especially if investors use fundamental analysis to choose stocks.

💡 Recommended: The Ultimate List of Financial Ratios

The following are some additional effects of earnings season:

Volatility

You may notice fluctuations in your portfolio during earnings seasons because of stock volatility. The release of earnings reports can significantly impact a company’s stock price. If a company reports better or worse than expected earnings, for example, it may result in a spike or dip in share price.

And even if a company surpasses expectations for a given quarter, its forward-looking outlook may disappoint investors, causing them to sell and drive down its price. For this reason, earnings season is often a period of high volatility for the stock market as a whole.

Investment Opportunities

Many investors closely watch earnings reports to make investment decisions, especially traders with a short-term focus who hope to take advantage of price fluctuations before or after a company’s earnings report.

And investors with a long-term focus may pay attention to earnings season because it can give clues about a company’s future prospects. For example, if a company’s earnings are consistently increasing, it may be a suitable medium- to long-term investment. On the other hand, if a company’s earnings are decreasing quarter after quarter, it may mean that it is a stock investors want to avoid.

State of the Economy

Earnings season can help investors and analysts get a better picture of the overall economy. If most earnings reports are coming in below expectations or companies are revising their financial outlooks because they see trouble in the economy, it could be a predictor of an economic downturn or a recession.

And even if the overall economy is not at risk of a downturn, earnings season can help investors see trouble in a specific sector or industry if companies in a given industry report weaker than expected earnings.

Earnings season may give investors a holistic view of the state of the stock market and economy and help them make better investment decisions than focusing on specific stocks alone.

The Takeaway

Earnings season provides investors with valuable insights into the performance and outlook of specific companies, the stock market, and the economy as a whole. However, for most investors with a long-term focus, each earnings season shouldn’t be something that causes you too much stress.

Even if some of your holdings spike or plummet because of an earnings report during earnings season, it doesn’t mean you want to make a rash investment decision based on a single quarter’s results. You still want to keep long-term performance in mind.

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).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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What Is Portfolio Margin?

What Is Portfolio Margin?

By | Growing Wealth, invest, Investing | Comments Off on What Is Portfolio Margin?

Portfolio margin is a way of calculating the margin requirements for derivatives traders using a composite view of their portfolio. Portfolio margin accounts offset investors’ positive and losing positions to calculate their real-time margin requirements. Portfolio margining may provide investors with lower margin requirements, allowing them to use more of their capital in trades.

Key Points

•   Portfolio margin calculates margin requirements using a risk-based approach, potentially lowering requirements and freeing up capital.

•   It assesses a portfolio’s risk, considering market volatility and theoretical price changes.

•   Traders must maintain a $100,000 net liquidating value and get approval for margin trading.

•   The Chicago Board of Options Exchange sets rules, and brokers use the TIMS model for daily risk assessment.

•   Margin trading is risky and not recommended for beginners, but it can increase buying power for experienced investors.

Portfolio Margin, Defined

Portfolio margin is a type of risk-based margin used with qualified derivative accounts. It calculates a trader’s real-time portfolio margin requirements based on a risk assessment of their portfolio or marginable securities.

If a trader has a well-hedged portfolio they will have a lower margin trading requirement, allowing them to utilize more of their cash for trades and take advantage of more leverage. Of course the more margin a trader uses, the higher their risk of loss.

How Does Portfolio Margin Work?

Investors with qualified accounts where they trade derivatives including options, swaps, and futures contracts must maintain a certain composite-margin. Portfolio margin is a policy with a set of requirements that aim to reduce risk for the lender.

To determine portfolio margin, the lender consolidates the long and short positions held in different derivatives against one another. This works by calculating the overall risk of an investor’s portfolio and adjusting margin requirements accordingly.

The portfolio margin policy requirement must equal the amount of liability that remains once all the investor’s offsetting (long and short) positions have been netted against one another. Usually portfolio margin requirements are lower for hedged positions than they are with other policy requirements.

For example, the liability of a losing position in an investor’s portfolio could be offset if they hold a large enough net positive position in another derivative.

Margin vs Portfolio Margin

Here’s a closer look at how margin vs. portfolio margin compare when online investing, or investing with a broker.

Margin

Margin is the amount of cash, or collateral, that investors must deposit when they enter into a margin trade. Margin accounts work by allowing a trader to borrow money from their broker or exchange. By borrowing cash to cover part of the trade, an investor can enter into much larger positions than they could if they only used cash on hand.

Borrowing money, however, poses a risk to the lender. For this reason, the lender requires that traders hold a certain amount of liquid cash in their account to remain in margin trades. If a trader loses money on a position, the broker can then claim cash from the trader’s account to cover the loss.

Traditional margin loans under Regulation T require investors to put up a certain percentage of cash for margin trades based on the amount of the trade.

Portfolio Margin

Portfolio margin, on the other hand, calculates the required deposit amount based on the risk level of the investor’s overall portfolio. It looks at the net exposure of all the investor’s positive and losing positions. If a derivative investor has a well-hedged portfolio, their margin requirement can be much lower than it would be with traditional margin policies.

This chart spells out the differences:

Regulation T Margin

 Portfolio Margin
Maintenance margin = 50% of initial margin Initial and maintenance margin is the same
Traders can’t use margin on long options, and long options have a 100% requirement Traders can use margin on long options, and they can use long options as collateral for other marginable trades
Margin requirements are fixed percentages Trader’s overall portfolio is evaluated by offsetting positions against one another
Margin equity = stock + (+/- cash balance) Buying power (maintenance excess) = net liquidation value – margin requirements
Less flexibility on margin requirements Broad-based indices allow for more leverage
Margin requirement is a fixed percentage of trade amounts Stock volatility and hypothetical future scenarios are part of portfolio margin calculation

Portfolio Margin and Volatility

Portfolio margin calculations take into account investing in volatile markets by factoring in the outcome of various scenarios.

Portfolio Margin Calculation

Calculating portfolio margin is a multi-step process. The calculation includes hypothetical market volatility and theoretical price changes.

The steps are:

1.    Create a set of theoretical price changes across the trader’s margin account. These ranges may be different when trading options, stocks, and indices.

2.    Divide the range and calculate the gain or loss on the overall position for each theoretical scenario.

3.    Incorporate implied volatility into the calculated risk array.

4.    Calculate the largest possible loss that could occur with each theoretical scenario. That amount is the margin requirement.

Recommended: Calculating Margin for Trading

Key Considerations

Portfolio margin can be a great tool for experienced investors who want to invest more of their available cash. However, there are some important things to keep in mind:

•   Margin trading tends to be risky and is not recommended for beginning traders

•   Traders must keep $100,000 net liquidating value in their portfolio margin account (this is not the same as a client’s margin account). If the account goes below this, they may lose their active trading positions and the ability to trade on margin.

•   Traders must get approval to enable margin trading on a brokerage account before they can utilize the portfolio margin rules.

If an investor’s margin balance falls below the margin requirement, they could face a margin call, which would require them to either deposit more cash or sell securities in order to increase their balance to the required amount.

Portfolio Margin Requirements

The Chicago Board of Options Exchange (CBOE) sets the rules for portfolio margin. In 2006 it expanded margin requirements, with the goal of better connecting requirements to portfolio risk exposure. Reducing the amount of portfolio margin required for lower risk investment accounts frees up more capital for leveraged trades, benefitting both the trader and the broker.

Brokers must use the approved portfolio margin calculation model provided by The Options Clearing Corporation (OCC), which is the Theoretical Intermarket Margining System (TIMS). TIMS calculates the margin requirements based on the risk of the portfolio on a daily basis.

To remain qualified for portfolio margin, investors must maintain a minimum of $100,000 net liquid value in their account.

There are additional requirements derivatives traders should keep in mind if they use leverage to trade. Regulation T is a set of regulations for margin trading accounts overseen by the Federal Reserve Bank.

Brokers must evaluate potential margin traders before allowing them to start margin trading, and they must maintain a minimum equity requirement for their trading customers. In addition, brokers must inform traders of changes to margin requirements and of the risks involved with margin trading.

The Takeaway

Margin trading may be very profitable and is a tool for investors, but it comes with a lot of risk and isn’t recommended for most traders. If you use margin trading for derivatives, however, portfolio margin may free up more capital for trading.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 10.50%*

Photo credit: iStock/filadendron

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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