Investing Archives | Page 145 of 194

May

2023

Diamond Hands? Tendies? A Guide to Day Trading Terminology

A User’s Guide to New Day Trading Lingo

By Colin Dodds | Growing Wealth, invest, Investing, Terminology | Comments Off

A new interest in trading and investing in recent years has sparked new nicknames, jargon, and day trading lingo. For most, the jargon used on Wall Street and in other facets of the financial industry was largely unknown outside of the markets. But with more and more people trading and investing, it can be helpful to know what certain terms and phrases actually mean.

Note, of course, that language is always evolving, and that there may be even newer phrases out there that we’ve yet to include!

Popular Day Trading Lingo in 2023

Tendies

This term is short for chicken tenders, which is a way of saying gains or profits or money. The phrase originated with self-deprecating jokes by 4Chan users making fun of themselves as living with their mothers, who rewarded them with chicken tenders, or tendies.

STONKS

This is a playful way of saying stocks, or of referring more broadly to the world of finance. The obvious misspelling is a way of making fun of the market, and to mock people who lose money in the market. It became a popular meme — of a character called Meme Man in front of a blue board full of numbers — used as a quick reaction to someone who made poor investing or financial decisions.

Diamond Hands

This is an investor who holds onto their investments despite short-term losses and potential risks. The diamond refers to both the strength of their hands in holding on to an investment, as well as the perceived value of staying with their investments.

Paper Hands

This is the opposite of diamond hands. It refers to an investor who sells out of an investment too soon in response to the pressure of high financial risks. In another age, they would have been called panic sellers.

YOLO

When used in the context of day trading or investing, the popular acronym for the phrase “you only live once” is usually used in reference to a stock a user has taken a substantial and possibly risky position in.

Bagholder or Bag Holder

This is a term for someone who has been left “holding the bag.” They’re someone who buys a stock at the top of a speculative runup, and is stuck with it when the stock peaks and rolls back.

To the Moon

This term is often accompanied by a rocket emoji. Especially on certain online stock market forums, it’s a way of expressing the belief that a given stock will rise significantly.

GUH

This is similar to the term “ugh,” and people use it as an exclamation when they’ve experienced a major loss. It came from a popular video of one investor on Reddit who made the sound when they lost $45,000 in two minutes of trading.

JPOW

This is shorthand for Jerome Hayden “Jay” Powell, the current Federal Reserve Chair, also popular on online forums as the character on the meme “Money Printer Go Brrr.” Both refer to Federal Reserve injections of capital in response to the COVID-19 pandemic, as well as “quantitative easing” policies.

Position or Ban

This is a demand made by users on the WallStreetBets (WSB) subreddit to check the veracity of another user’s investment suggestions. It means that a user has to deliver a screenshot of their brokerage account to prove the gain or loss that the user is referencing. It’s a way of eliminating posters who are trying to manipulate the board. Users who can’t or won’t show the investments, and the gain or loss, can face a ban from the community.

Roaring Kitty

This is the social media handle of Keith Gill, the Massachusetts-based financial adviser who’s widely credited with driving the 2021 GameStop and meme stock rally with his Reddit posts and YouTube video streams.

Apes Together Strong

This refers to the idea that retail investors, working together, can shape the markets. It is sometimes represented, in extreme shorthand, by a gorilla emoji. And the phrase comes from an earlier meme, which references the movie Rise of Planet of the Apes, in which downtrodden apes take over the world. In the analogy, the apes are retail investors. And the idea is that when they band together to invest in heavily-shorted stocks like GameStop, they can outlast the investors shorting those stocks, and make a lot of money at the expense of professional traders, such as hedge funds.

Hold the Line

This is an exhortation to fellow investors on WSB. It is based on an old infantry battle cry. But in the context of day traders, it’s used to inspire fellow board members not to sell out of stocks that the forum believes in, but which have started to drop in value.

DD

This refers to the term “Due Diligence,” and is used to indicate a deeply researched or highly technical post.

HODL

“HODL” is an abbreviation of the phrase “Hold On For Dear Life.” It’s used in two ways. Some investors use it to show that they don’t plan to sell their holdings. And it’s also used as a recommendation for investors not to sell out of their position — to maintain their investment, even if the value is dropping dramatically. HODL (which is also used in crypto circles) is often used by investors who are facing short-term losses, but not selling.

KYS

This is short for “Keep Yourself Safe,” and it is a rare bearish statement on WSB and other boards. It’s a way of advising investors to sell out of a given stock.

The Takeaway

Many retail traders have found a new home on message boards — and created a new language in the process. Some of the phrases are based on pop culture and memes, others are appropriated from terms used for decades. No matter the origins, it’s clear that the investors using these phrases are evolving the way retail investors talk about investing online and maybe IRL as well.

Learning to speak the language of the markets can be helpful, too, so that you don’t miss anything important when researching investment opportunities. That doesn’t mean it’s absolutely necessary, but it may help decipher some of the messages on online forums.

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

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

Photo credit: iStock/FG Trade

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

May

2023

Short Calls vs Long Calls: Complete Comparison

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Table of Contents

Short Calls vs Long Calls
What Are Short Calls?
What Are Long Calls?
Comparing Short Calls vs Long Calls
FAQ

What’s the Difference Between Short Calls and Long Calls?

Every time a call option contract transaction takes place there is a seller and a buyer. The seller is said to have gone short the calls and the buyer is long the calls. “Short calls” and “long calls” are simply shorthand for these two positions and strategies.

Short calls are a bearish options strategy used to profit from an expected sideways to downward price action on a security. On the other hand, a long call is a bullish options strategy that aims to capitalize on upward price movements on an asset such as a stock or exchange-traded fund (ETF).

Short calls are the opposite strategy to long calls and their potential payoffs reflect that. Long calls have the potential to be unlimited in gain, and short calls the maximum gain is the premium.

What Are Short Calls?

“Short calls” is shorthand for pursuing the strategy of selling a call option.

Short call sellers receive a premium when the call is sold. The seller hopes to see a decrease in the underlying asset’s price to achieve the maximum profit.

It is also possible for the seller to profit if the underlying asset price stays the same. Options prices are based on intrinsic value (the difference between the strike price and the asset price) and time value.

If the asset price remains stable, intrinsic value will also be stable. However, as the option nears expiration the time value will drop to zero due to theta decay.

Furthermore, there are two types of short calls, naked and covered calls. Short calls are “naked” when the seller does not own the underlying asset. Short calls are “covered” when the seller owns the underlying asset at the time of sale.

Short calls have a fixed maximum profit equal to the premium collected and losses are undefined. Theoretically, a stock could rise to infinity, so there is no cap on how high the value of a call option could be.

Therefore short calls can be highly risky. For this reason, traders should have a risk management plan in place when they engage in naked call selling.

Short Call Example

It’s helpful to see an example of a short call to understand the upside reward potential and downside risks involved with such a strategy.

Suppose your outlook on shares of XYZ stock is neutral to bearish. You think that the stock, currently trading at $50, will trade between $45 and $50 in the next three months.

A plausible trade to execute would be to sell the $50 strike calls expiring in three months. We’ll assume those options trade at $5. The breakeven price on a short call is the strike price plus the premium collected.

In this example, the breakeven price is thus $50 plus $5 which is $55. You profit so long as the stock is below $55 by the time the options expire but will experience losses if the stock is above $55 by expiry.

Two months pass, and the stock is at $48. The calls have dropped in value thanks to a minor share price decline and since there is less time until expiration. The drop in time value relates to decaying theta, one of the option Greeks, as they’re called. Your short calls are now valued at $2 in the market.

Fast-forward three weeks, and there are just a few days until expiration. The stock has rallied to $49, but the calls have actually fallen in value. They are now worth just $1. Time decay has eaten away at the value of the calls — more than offsetting the rise in the underlying shares. Time decay becomes quicker as expiration approaches.

You choose to buy-to-close your options in the market rather than risk a late surge in the stock price. Most options are closed out rather than left to expire (or be exercised) as closing options positions before expiration can save on transaction costs and added margin requirements. You cover your short calls at $1 and enjoy a net profit of $4 on the trade ($5 collected at the trade’s initiation and a $1 buy back to close the position).

Pros and Cons of Short Calls

Pros of Short Calls	Cons of Short Calls
Benefits from time decay	Unlimited risk if the underlying asset rises sharply
Can be used in combination with a long stock position to generate extra income (covered call)	You may be required to deliver shares if the options holder exercises the call option
The underlying stock can be sideways to even slightly higher and you can still profit	Reward is capped at the premium you received at the onset of the trade

Finally, user-friendly options trading is here.^*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

What Are Long Calls?

Long calls are the opposite strategy to a short call. With a long call, the trader is bullish on the underlying asset. Once again, a key piece of the options trade is the timing aspect.

A long call benefits when the security rises in value, but it must do so before the options expire.

Long calls have unlimited upside potential and limited downside risk. A long vs short call differs in that respect since a short call has limited profit potential and unlimited risk.

A long call is a basic options strategy that is often a speculative bullish bet on an underlying asset. It’s a good options strategy for those just starting out since there is a limited loss potential and the strategy itself is not complicated.

Long Call Example

Buying a long call option is straightforward. Long calls vs short calls involve different order types. With long calls, you input a buy-to-open order and then choose the calls you wish to purchase.

You must enter the underlying asset (often a stock or ETF, but it could be an option on a futures contract such as on a commodity or currency), along with the strike price, options expiration date, and whether the order is a market or limit order.

Suppose you go long calls on XYZ shares. The stock trades at $50 and you want to profit should the stock rise dramatically over the next month. You could buy the $60 strike calls expiring one month from now. The option premium — the cost to buy the option — might be $2. Because the call is out-of-the-money, that $2 is composed entirely of extrinsic value (also known as time value).

Since you are going long the calls, you want the underlying stock price to rise above the strike price by expiration. It’s important to know your breakeven price with a long call — that is the strike price plus the premium paid. In our example, that is $60 plus $2 which is $62. If the stock is above $62 at expiration, you profit.

After three weeks, the stock has risen to $70 per share. Your calls are now worth $13.

That $13 of premium is made up of $10 of intrinsic value (the stock price minus the strike) and $3 of time value since there is still a chance the stock could keep increasing before expiry.

A few days before expiration, the shares have steadied at $69. Your $60 strike calls are worth $10. You decide to take your money and run.

You enter a sell-to-close order to exit the position. Your proceeds from the sale are $10, making for a tidy $8 profit considering your $2 premium outlay.

Pros and Cons of Long Calls

Pros of Long Calls	Cons of Long Calls
Unlimited upside potential	The premium paid can be substantial
Risk is limited to the premium paid	You can be correct with the directional bet and still lose money if your timing is wrong
Is a leveraged play on an underlying asset	There’s a chance the calls will expire worthless

Comparing Short Calls vs Long Calls

There are important similarities and differences between a short call vs long call to consider before you embark on a trading strategy.

Similarities

Traders use options for three primary reasons:

• Speculation — Speculators often do not take positions in the underlying stock. Investors can buy a call and hope the underlying asset rises or they can sell a call and hope the asset price drops. Either way, the investor is taking a risk and could lose their investment, or more in the case of naked short calls.

• Hedging — Short sellers of stock may sometimes buy call options to hedge their stock positions against unexpected price movements.

• Generate Income — Covered short calls help to generate extra income in a portfolio. The seller sells a call that is out-of-the-money, collects the premium, and hopes the stock doesn’t rise to that strike price. However, the investor can also choose a strike that they would be happy to sell at such that, if the stock rises and the option is exercised, they are happy to sell their shares.

Differences

Long calls are a bullish strategy while short calls are a neutral to bearish play.

Potential profits and possible losses are the opposite in long calls vs. short calls. A long call has unlimited upside potential and losses are limited to the premium paid. A short call has an unlimited loss potential with a max profit that is simply the premium collected at the onset of the trade.

Time decay works to the benefit of an options seller, such as when you enter a short call trade. Time decay is the enemy of those who are long options.

When implied volatility rises, the holder of a call benefits (all else equal) since the option will have more value. When implied volatility drops, options generally become less valuable, which is to the option writer’s benefit.

It’s also important to understand the moneyness of a call option. A call option is considered in-the-money when the underlying asset’s price is above the strike price. When the underlying asset’s price is below the strike, then the call option is considered out-of-the-money.

A call writer prefers when the call is more out-of-the-money while a call holder wants the calls to turn more in-the-money.

Short Calls	Long Calls
Neutral-to-bearish view	Bullish view
A more advanced options play	A trade that is good for options beginners
Limited reward, unlimited risk	Unlimited reward, limited risk

The Takeaway

Long calls and short calls are two options trading strategies you can use to place a directional and timing wager on an underlying asset — often a stock or ETF. Buying calls is a bullish play while selling calls is a neutral to bearish strategy.

If you’re ready to try your hand at options trading online, You can set up an Active Invest account and trade options from the SoFi mobile app or through the web platform.

And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commissions, but some fees apply, and members have access to complimentary financial advice from a professional.

With SoFi, user-friendly options trading is finally here.

FAQ

Are long calls better than short calls?

Long calls are not necessarily better than short calls. Using one versus the other depends on your outlook on how a security will move between now and expiration.

Long calls appreciate when the underlying asset rises in value. Short calls, on the other hand, are useful if you have a neutral to bearish view on a security. Short calls drop in value as time value erodes and when the underlying asset’s price falls.

Like long calls, it is important that your directional bet and timeframe line up with the calls you look to sell short.

How do short calls and covered calls differ?

Short calls are often naked positions. That means they traded outright without having an existing long stock position. Naked short calls are risky since there is unlimited loss potential should the stock rise.

Covered calls work by owning shares of a stock, then selling calls against that long stock position. Covered calls are a common options trading strategy whereby a trader looks to enhance a portfolio’s income by collecting a premium while the underlying shares trade sideways or decline in value.

The downside of covered calls is that your shares can get called away from you if the stock price rises above the strike price. Covered calls have the benefit of protecting the trader from unlimited losses since the long stock position offsets the short calls’ unlimited loss potential.

Photo credit: iStock/Prostock-Studio

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

May

2023

What Is a Financial Crisis?

By Austin Kilham | invest, Investing, Terminology | Comments Off

A financial crisis is a situation in which the financial sector and economy of a country, or the world, is thrown into a state of temporary upheaval. A financial crisis can have several causes, whether stock market crashes, political instability, and even global pandemics.

Financial crises are also not a new phenomena, and the United States has experienced many in its history.

Financial Crisis Definition

During a financial crisis, asset prices drop rapidly, usually over the course of days or a few weeks. This drop is often accompanied by a stock market crash as investors panic and pull money from the market. It may also be associated with bank runs in which consumers withdraw assets for fear they will lose value if they remain in the bank. This type of downturn may signal the beginning of a recession.

Recessions are a general period of economic decline during which unemployment may rise, income and consumer spending may fall, and business failures may be up. (To stay up-to-date on the current financial crisis and possible recession visit SoFi’s Recession Help Center.)

Common Causes of Financial Crises

There are a number of situations that can cause a financial crisis, including the bursting of financial bubbles (such as the dotcom bubble), defaults on debt, and currency crises.

Stock market bubbles occur when stock prices rise precipitously, often driven by speculation and investors overvaluing stocks. As more people jump on the bandwagon and buy stocks, prices are driven higher, a cycle that is not based on the stock’s fundamental value. Eventually, the situation can become unsustainable, and the bubble bursts. Investors sell and prices drop quickly.

A failure to meet debt obligations can also lead to a financial crisis. For example, a country may be unable to pay off its debts. This may happen as a country starts to face higher interest rates from lenders worried that the country may not be able to pay back their bonds. As lenders require higher bond yields to offset the risk of taking on a country’s debt, it becomes more and more expensive for that country to refinance. Eventually, the country could default on its debt, which can cause the value of its currency to drop.

A currency crisis occurs when a country’s currency experiences sudden volatility as a result of factors such as central bank policies or speculation among investors. For example, a currency crisis may occur when a country’s central bank pegs its currency to another country’s floating currency (one whose value depends on supply and demand) and fails to maintain that peg.

Examples of Financial Crises

Financial crises date back hundreds of years, and perhaps the first was the South Sea Bubble of 1720. Here’s a look at a handful of other well-known financial crises that have happened in the United States and around the world:

America’s First Financial Crisis

The United States’ first financial crisis occurred in 1790. At that time, the U.S. had few banks, and Alexander Hamilton wanted to model the U.S. financial system after the systems that existed in Britain and Holland. He created the first central bank, known as The First Bank of the United States (BUS). To get the bank off its feet, the public could buy shares in the bank with a mixture of cash and government bonds.

Two problems arose: The demand for government bonds to buy shares led some investors to try and corner the bond market by borrowing widely to buy bonds, and the BUS quickly grew, becoming the nation’s largest lender. Investors, flush with credit, began to use their newfound cash to speculate in futures contracts and short sales markets.

In spring of 1792, the BUS ran low on hard currency and cut lending. The BUS’ leadership was forced to take on new debt to pay off old debt, and tightening credit, led U.S. markets on a downward spiral.

With the system on the verge of collapse, Hamilton was forced to use public funds to buy back U.S. bonds and prop up the price of those bonds. Additionally, he had to direct money to failing lenders, and allowed banks with collateral to borrow as much as they wanted with a penalty rate of 7%. Not only was this America’s first financial crisis, it was also the first instance of a government bailout, setting a precedent for future financial crises.

The Stock Market Crash of 1929

Perhaps the granddaddy of financial crises, the 1929 stock market crash came at a time when stock speculation led to booming markets. At the same time, however, consumer prices were falling and some established businesses were struggling, creating tension within the economy.

The Federal Reserve raised interest rates, in an effort to slow the overheated markets. Unfortunately, the hike wasn’t big enough to slow the economy. It ended up further hurting already weakening businesses, and industrial production continued to fall.

The market crashed on October 28 and October 29, 1929. The 29th came to be known as Black Tuesday. By mid-November, the market was down 45%. By the next year, banks began to fail. Customers began withdrawing cash as fast as they could, causing bank runs.

The crisis devastated the economy, forcing businesses to close and causing many people to lose their life savings. It also sparked the Great Depression, the worst recession in U.S. history, and the Dow wouldn’t climb to its previous heights for 25 years.

The crash led to a number of financial reforms. The Glass-Steagall legislation separated regular banking, such as lending, from stock market operations. It also gave the government power to regulate banks at which customers used credit to invest.

The government also set up the Federal Deposit Insurance Commission (FDIC) to help prevent bank runs by protecting customer deposits. The creation of the FDIC helped stabilize the financial system, because individuals no longer felt they needed to withdraw their money from the bank at the slightest sign of economic trouble.

The 1973 OPEC Oil Crisis

In October 1973, the 12 countries that make up the Organization of Petroleum Exporting Countries (OPEC) agreed to stop exporting oil to the United States in retaliation for the U.S. decision to offer military aid to Israel. As a result of the embargo, the U.S. experienced gas shortages, and oil prices in the U.S. quadrupled.

Though the embargo ended in March of 1974, its destabilizing effects are largely blamed for the economic recession of 1973–1975. High gas prices meant American consumers had less money in their pockets to spend on other things, lowering demand and consumer confidence.

Other factors beyond the embargo, including wage-price controls and the Federal Reserve’s monetary policy, exacerbated the financial crisis. Wage-price controls forced businesses to keep wages high, keeping them from hiring new employees. In a series of monetary moves, the Federal Reserve quickly raised and lowered interest rates. Businesses unable to keep up with the changes protected themselves by keeping prices high, which contributed to inflation.

The period’s high unemployment, stagnant economic growth, and inflation came to be known as “stagflation.”

The Asian Financial Crisis of 1997–1998

The Asian financial crisis began in Thailand in July 1997. It spilled over to other East Asian nations and eventually had ripple effects in Latin American and Eastern Europe.

Before the crisis began, Thailand had pegged its currency to the U.S. dollar. After months of speculative pressure that depleted the country’s foreign exchange reserves, Thailand devalued its currency, allowing it to float on the open market. Malaysian, Indonesian and Singapore currencies were devalued as well, causing high inflation that spread to East Asian countries, including South Korea and Japan.

Growth fell sharply across Asia, investment rates fell, and some countries entered into recession.

The International Monetary Fund (IMF) stepped in, providing billions of dollars of loans to help stabilize weak Asian economies in Thailand, Indonesia, and South Korea.

In exchange for its loans, the IMF required new rules that led to better financial regulation and oversight. Countries that received the loans had to raise taxes, reduce public spending, and raise interest rates.

The Global Financial Crisis of 2007–2008

The origins of the global financial crisis of 2007 and 2008 are complicated. They started with government deregulation that allowed banks to use derivatives in hedge fund trading. To fuel this trading, the banks needed mortgages and began lending to subprime borrowers who had questionable credit. When interest rates on these mortgages reset higher, borrowers could no longer afford their payments.

At the same time, housing prices dropped as demand for homes fell, and borrowers who could no longer afford their payments were now unable to sell their homes to cover what they owed on their mortgage. The value of the derivatives collapsed and banks stopped lending to each other, resulting in a financial crisis and eventually the Great Recession.

As a result of the financial crisis, the government took over mortgage giants Fannie Mae and Freddie Mac, and bailed out investment banks on the verge of collapse. Additionally, Congress passed the Dodd-Frank Wall Street Reform Bill to prevent banks from taking on too much risk again in the future.

The European Sovereign Debt Crisis

The European Sovereign Debt Crisis followed swiftly on the heels of the global financial crisis in 2007 and 2008. The crisis largely began in Greece in 2009 as investors and governments around the globe realized that Greece might default on its national debt.

At that point the nation’s debt had reached 113% of its GDP. Debt levels within the European Union were supposed to be capped at 60%, and if the Greek economy slowed down it might have trouble paying off its debt. By 2010, the E.U. discovered irregularities in the Greek accounting system which meant that its budget deficits were higher than previously suspected. Bond rating agencies subsequently downgraded the country’s debt.

Investors were concerned that similar events might spread to other members of the E.U., including Ireland, Spain, Portugal and Italy, which all had similar levels of debt. In response to these concerns, investors in sovereign bonds from these countries demanded higher yields to make up for the increased risk they were taking on. That meant the cost of borrowing rose in these countries. And because rising yields lowers the price of existing bonds, eurozone banks that held these bonds began to lose money.

Eurozone leaders agreed on a €750 billion rescue package that eventually reached €1 trillion by 2012.

Investing During a Financial Crisis

Investing during a recession or financial crisis may not sound like a good idea. Watching stock prices plummet can give even the most seasoned investor reason for pause. But keeping an investment plan on track during a crisis is critical to future success. In the face of a financial crisis, there are a few considerations to make.

First, watching a market fall may inspire panic, tempting investors to pull their money out of a stock. However, that may be exactly the wrong instinct. Bear markets are typically followed by a recovery, although not always immediately, and selling assets may mean that investors lock in losses and miss out on subsequent gains.

Second, some investors engage in a strategy that involves buying more stock when markets are down. Purchasing stock when prices are low during a bear market may provide the opportunity for increased profits as the market turns around, though there are no guarantees.

The Takeaway

A financial crisis can have many causes, but usually leads to falling stock market prices, and often, a recession. There have been many financial crises around the world over the years, and in all likelihood, there will be more in the future. Down markets can be a good opportunity for investors to stress-test their risk tolerance, or to embrace more conservative strategies.

If you have questions about building a portfolio, allocating your wealth or how market conditions will affect your financial situations, it can help to talk to a financial professional.

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

Photo credit: iStock/South_agency

SoFi Invest®

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

May

2023

What Is a Trust Fund?

By Ashley Kilroy | Growing Wealth, Investing | Comments Off

A trust fund can help shelter your assets and determine how they are managed now or in the future. Generally a part of estate planning, trust funds can help minimize estate taxes, provide financial support to your loved ones, or even donate money to your favorite charitable cause.

There are numerous types of trust funds out there, and there likely isn’t a one-size-fits-all option. The trust you select will depend on your goals and unique circumstances, so it’s important to know the ins and outs of trust funds before deciding which option is right for you.

🛈 SoFi currently does not offer trust funds.

Trust Fund Definition

A trust fund is a legal tool or arrangement in which individuals can choose to place assets of various types into a special account. They’re often used to hold those assets, like stocks or real estate, for a beneficiary, like a family member, or even a company.

The purpose of a trust is to hold assets for the beneficiary without giving them direct control over the funds or property — the control remains with a third party designated by the individual creating the trust.

As an example, say a high-net-worth philanthropist desires to leave a legacy to his favorite cause when he dies. He creates a charitable trust that will add the charity as a beneficiary when he passes away. At that time, the predetermined assets move into the trust. A third party, otherwise known as the trustee, will manage the money or assets in the trust and make distributions to the charity following the trust’s terms.

How Do Trust Funds Work?

There are a few key parties involved in a trust fund agreement. They include:

• Grantor. This person is the creator of the trust. The grantor outlines the trust guidelines, designating the funds or other assets that will go into a trust as well as the rules that govern it.

• Trustee. The grantor will name a third party the trustee. This person is responsible for managing trust assets, completing any trust obligations such as distributions, and upholding the fiduciary standard (employed by fiduciary advisors), or, always acting in the best interest of all beneficiaries. A trustee is anyone the grantor deems appropriate for handling the terms of the trust.

• Beneficiary. The beneficiary is the one who will reap the benefits of the assets or property in the trust.

The grantor determines the terms of the trust, choosing how and when the resources are given to the beneficiary.

Say, for example, a grantor wants to establish a trust fund for their grandchild with the stipulation that the funds can only go toward college expenses. In this case, the grantor can write the trust’s terms to reflect these wishes rather than let the beneficiary spend a financial windfall however they please.

Through use of the “spendthrift clause,” a grantor can also prevent a beneficiary from spending the trust’s assets in a particular manner, such as to pay off credit card debt.

Additionally, when the grantor passes away, trust assets are often guarded against creditors, and can bypass the extensive and sometimes costly probate process. Of course, whether that happens depends on the type of trust the grantor sets up.

Different Types of Trust Funds

The needs of the grantor will determine which trust is suitable for their situation. A financial professional or attorney can help outline the features of each trust and help find a suitable solution for the grantor’s trust needs. Some of the most common types of trust funds include:

• Irrevocable trust: Once established, this trust cannot be changed or revoked in any way — not even by the grantor.

• Revocable trusts: Also known as living trusts, revocable trusts permit the grantor to make modifications at will or cancel the trust altogether.

• Charitable trust: Grantors can establish a trust with a charitable organization as the beneficiary. Typically, charitable trusts can help minimize the grantor’s tax obligation, such as reducing estate taxes.

• Constructive trust: This type of trust is an indirect trust that the court creates, believing that there was intention on the part of a property owner to disperse it in a precise manner.

• Special needs trust: Those who have children with special needs may use this type of trust to create support for their child well after their passing. Any asset transferred to the trust will not prohibit the beneficiary from any government funding or benefits they would receive otherwise.

How to Establish a Trust Fund

When creating a trust, it’s important to seek knowledgeable and responsible people or professionals to help create and manage it. For starters, even though it’s not technically necessary to hire a trust attorney, it’s probably a good idea to do so to ensure all legal requirements are upheld and the terms of the trust are solidified.

A trust attorney should be able to identify different trusts that can meet the unique needs of the grantor. From lowering a tax bill to securing assets, trust attorneys understand the intricacies of each type of trust’s advantages, which can help the grantor meet their trust fund objectives.

Depending on the grantor’s circumstances and state of residence, attorney fees can amount to several thousand dollars. To find a trusted attorney, you can start by asking friends and family members for referrals. You can also browse the internet for reviews and cost estimates.

It’s also essential to select a responsible trustee to manage the funds. Since it’s the trustee’s responsibility to manage and distribute the assets, they must be trustworthy and understand the magnitude of the role. After all, the grantor is putting their hard-earned money into the hands of someone else. Using a third-party trustee may help the family avoid scuffles about how assets are divided up.

Why Set Up a Trust Fund?

With the benefits trust funds provide, there are many reasons why a trust fund may make sense for your estate-planning efforts. When asking “Is a trust fund right me?“, consider a few topics:

• Tax reduction. Depending on the size of an estate, some states may levy an estate or inheritance tax. For 2023, an estate tax return is required for estates that exceed $12,920,000. To avoid taxation, a trust may make sense.

• Control over asset distribution. A trust gives a grantor greater power over their wealth, since they can set the terms for how the trustee manages the assets.

• Bypassing probate. When someone passes away, by law, their will must complete the probate process. The creation of a trust can help the estate owner bypass this often costly and extensive process.

• Safeguarding assets. Depending on the trust, assets can be guarded against creditors and/or asset misuse by the beneficiaries. A trust can also protect a beneficiary with special needs so that they can continue to receive both the financial support from the trust and any other government benefits after their caretaker passes away.

• Philanthropic efforts. Trusts give individuals who are passionate about a cause a way to support the mission long after they are gone.

Trusts are worth considering for those concerned with how their assets, property, or life insurance benefits will be managed after their passing. Although everyone has a unique situation that may require an array of estate planning tools, a trust fund can be a valuable addition to the mix if the creator can capitalize on trust benefits.

The Takeaway

A trust fund is a special legal arrangement that allows for the protection of certain assets for beneficiaries. Creating a trust may be advantageous for people who have built some wealth and want to control what happens to it once they are gone. There are a number of different types of trusts, each tailored to the needs of the grantor, and sometimes the beneficiary as well.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

SOIN0523028

May

2023

Important Candlestick Patterns to Know

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

Candlestick charts are one of many popular tools used for technical stock analysis. They are also called Japanese candlestick charts or patterns, because they were first invented in Japan in the 1700s to track the prices of rice. Today, candlestick patterns reveal patterns in stock prices.

They are also one of multiple types of charts that traders use to analyze stock prices, and there are some general patterns that are helpful to know and understand if you’re participating in the markets.

What Is a Candlestick Pattern?

A candlestick pattern is a sequence of price changes that can be identified as a formation on a chart. Each candlestick in a chart represents stock price increases or decreases within a specified time frame. Watching out for particular candlestick patterns in charts is a popular day trading strategy, and one that involves trying to predict whether a stock will go up or down in value, and make trades based on those predictions.

Again, this is a form of technical analysis, as opposed to fundamental stock analysis, which is different.

Candlestick patterns are also useful for specifically timing entry and exit points for trades. Based on how stock price movements have repeatedly occurred in the past following a pattern, traders can decide whether to put faith in them moving in a similar way again. The reason these patterns form is that human perceptions, actions, and reactions to stock price movements repeat.

Past events are not predictions of the future — no candlestick pattern is perfect, and it’s important to remember that there are always risks when trading stocks. But they can be useful guidelines and one more piece of information for those looking to make informed trading decisions.

Reading Single Candlesticks

Even a single candlestick chart can provide valuable insight into where stock prices may head. Each candlestick is composed of four parts:

• The top “wick” or shadow of a candlestick marks the highest price the stock traded within the specified time period.

• The bottom wick marks the lowest price the stock traded. If a candlestick wick is long, this means the highest or lowest trading price is significantly different from the opening or closing price. A shorter wick means the high or low trade was close to the opening or closing price. The difference between the top and bottom of the candlestick wicks is called the range.

• In a red candlestick, the top of the thicker body of the candlestick, called the “real body,” marks the opening price of the stock within the specified time period, and the bottom marks the closing price. Red candlesticks mean the price has decreased.

• In a green candlestick, the bottom marks the opening price, and the top marks the closing price. Green candlesticks show that the price has increased.

Candlesticks can represent different time frames. One popular time frame is a single day, so each candlestick on a chart will show the price change of one day. A one-month chart would have approximately 30 candlesticks.

Trending Candles vs Non-Trending Candles

If a candle continues an ongoing price trend, this is called a trending candle. Candles that go against the trend are non-trending candles.

Candles that don’t have an upper or lower wick can also show that there is a strong trend, support, or resistance in either direction. This means the opening or closing price was close to the high or low trade. And vice versa — a long wick can be an indicator that high or low prices aren’t holding.

Doji Candles

When a candle’s opening and closing price are almost the same, this forms a doji candle, which looks like a black cross or plus sign. The wicks of doji candles can vary in length.

A doji can either be a sign of a reversal or a continuation. It shows equal forces from buyers and sellers, with no gain in either direction.

Long Shadow Candles

Candles with a long wick or shadow can be a strong indicator. A candle with a long upper shadow can indicate a continuation of a bullish trend or reversal towards one, while long lower shadows can indicate a bearish trend or reversal.

Types of Candlestick Patterns

Candlestick patterns are used to help predict stock price action. There are dozens of candlestick patterns that some traders use to help recognize trading opportunities and better time their entries and exits, but there are four distinct ways to define potential outcomes of candlestick patterns:

1. Bullish candlestick patterns show that a stock’s price is dominated by buyers and the price is likely to increase.

2. Bearish patterns show that the stock is dominated by sellers, and the price is likely to decrease.

3. Reversal candlestick patterns predict that the price trend of a stock is going to reverse.

4. Continuation patterns predict that the price will continue to head in the direction it’s currently going.

It’s important to remember that some patterns are a signal not to trade. Knowing when not to buy or sell is just as important as knowing when to take action.

Bullish Candlestick Patterns

A bullish candlestick pattern can either be an indication of a continued bullish trend, or it could be a reversal from a bearish trend. There are a number of popular bullish candlestick patterns, each of which can tell a trader something different.

Morning Star: The Morning Star is a three-candlestick pattern indicating a reversal towards a bullish trend, so named because it gives traders hope of a reversal during a bearish trend. The first candle is long-bodied and red. The second candle opens lower and has a short body, it can be either red or green but its body doesn’t overlap with the body of the first candle. The third candle is green and closes at or above the center of the first candle body.

Morning Star Doji: This three-candlestick pattern tends to be a reversal from a bearish trend. The first candle has a long body showing a downtrend. The second candle opens at a lower price and trades within a narrow price range, then the third candle reverses in a bullish direction, closing at or above the center of the first candle body.

Bullish Engulfing: In this two-candle pattern, the first candle is bearish and the second is bullish. The body of the first candle fits completely within the body of the second candle, “engulfing” it. Although both candles are important, the higher the high of the second candle’s body, the stronger the indication of a reversal.

Three Line Strike: A four-candlestick bullish pattern that consists of three red candles followed by a long green candle. The red candles all fit inside the body of the green candle.

Hammer: This single-candle pattern can occur during or at the end of a bearish trend. The hammer candle looks like a hammer, with a short red candle body and a long lower shadow. This indicates that the low of the day is significantly lower than the close of the day, which can be a sign that the bearish trend is ending. However, it’s important for traders to wait and see if the reversal happens, because sometimes the hammer occurs during a continuing downtrend.

Bullish Harami: This reversal pattern happens during a downtrend and can indicate a switch toward upward price movement. It looks like a short green candlestick that follows several red candlesticks. The green candlestick body fits within the body of the previous red candlestick.

Abandoned Baby: This reversal pattern is made up of three candles. The middle candle is a doji which gaps up from the bottom of the previous red candle. The third candle is green and gaps up from the doji. The first and third candles have relatively long bodies. It’s so named because the gaps have space between the doji candle’s wick and both wicks of the first and third candle.

Dragonfly Doji: This is a strong indicator of a reversal. In this pattern, a doji candle opens and closes at or near the highest trade of the day. The lower shadow tends to be long, but it can vary in length.

Hanging Man: This is a single candlestick pattern which can indicate a coming bullish trend. The candle has a long lower wick and a short candle body.

Piercing Line: In this two-candle pattern, the first candle is long and red, followed by a green candle that opens at a new low but closes higher than the midpoint of the first candle. This can indicate a reversal away from a bearish trend.

Candlestick Sandwich: This is a three-candle pattern which consists of a long green candle sandwiched between two long red candles. The closing prices of the two red candles are similar, creating support that indicates a coming bullish trend.

Three Green Soldiers: A three-candle pattern that looks like a staircase towards higher prices. It consists of three green candles, each of which opens at a higher price than the previous day.

Bearish Candlestick Patterns

Bearish candlestick patterns may indicate an ongoing bearish trend, or they may indicate a reversal from a bullish trend. These are some common bearish candlestick patterns.

Evening Star: This three-candle pattern is the opposite of the Morning Star, indicating that a bullish trend is reversing into a bearish one. The first candle is long and green. The second candle opens higher and has a short body. The body can be either red or green but doesn’t overlap with the body of the previous candle. This shows that buying interest is coming to an end. The third candle is red and closes at or below the center of the first candle body.

Evening Star Doji: This three-candle pattern is the opposite of the Morning Star Doji. It indicates a possible reversal towards a bearish trend. The first candle is a long green candle. The second candle is a doji or very narrow and opens at a higher price. The third candle is red and closes at or below the center point of the first candle body.

Inverted Hammer: The inverse of the hammer pattern, this is a single-candle pattern which can indicate the end of a downtrend and reversal towards a bullish price movement. This candle has a short green body and a long upper shadow, making it look like an upside down hammer.

Shooting Star: This is a single-candle pattern in which there is a green candle with a short body, very little or no lower shadow, and a long upper shadow. The shooting star can mark the top of an upcycle and signal a reversal.

Dark Cloud Cover: A three-candlestick pattern that occurs when a red candle has an opening price that’s higher than the closing price of the previous day’s candle, and a closing price below the middle of the previous one. The first candle is green. To complete the pattern, the third candle is bearish.

Bearish Harami Cross: A trend-reversal pattern consisting of a series of green candlesticks followed by a doji, this pattern indicates that the uptrend may be losing momentum and preparing for a reversal.

Falling Tree: This is a five-candlestick pattern which signals a possible interruption of a bearish trend, with a continuing downtrend. The first is a long red candle, followed by three small green candles, which all stay within the range of the first candle. The last candle is another long red one. This pattern shows that bulls are unable to reverse a downtrend.

Two Black Gapping: This pattern happens when there is a new high in an uptrend, followed by two red candles that gap down. This can be a good indicator of a coming bearish trend.

Gravestone Doji: This is an inverted dragonfly pattern, in which the opening and closing price are at or near the low of the day. The upper candle shadow tends to be long, but can vary in length. It can indicate either a reversal towards a bearish trend, or an ongoing bearish trend.

Three Black Crows: In this pattern, a new high is followed by three long red candlesticks that each close with lower lows.

Reversal Patterns

The Harami Cross can indicate a reversal in either a bullish or a bearish trend. It’s a two-candlestick pattern in which the first candle opens or closes at a new high or low. The second candle is a doji which is inside the range of the previous candle’s body.

Other Patterns

These two patterns don’t fit into the bullish, bearish, reversal, or continuation categories.

Spinning Top: A short-bodied candlestick with equal top and bottom wicks that looks like a spinning top. This is an indication of indecision in the market. After the spinning top the market will likely move quickly one way or another, so if there’s a pattern prior to the top that may be an indicator of which way the spinning top will fall.

Supernova: If there’s a high volume stock with low float that experiences a price explosion, followed by a significant price drop, this is a supernova. There can be trading opportunities on the way up, and then opportunities to short sell on the way down as well.

The Takeaway

Candlestick charts are a stock analysis tool, and traders who can identify patterns within them may gain trend insights and try to predict security price movements. It can help them make a decision of when or if to buy, sell, or stand pat. There are numerous types of candlestick patterns, though it’s important to remember that patterns do not always lead to the predicted outcome.

Reading stock charts is only one small part of the investing world, and a rather complicated part, too. There are simpler, less-intensive ways to participate in the markets, too.

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

SoFi Invest®

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

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

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

SOIN0523040

A User’s Guide to New Day Trading Lingo

Popular Day Trading Lingo in 2023

Tendies

STONKS

Diamond Hands

Paper Hands

YOLO

Bagholder or Bag Holder

To the Moon

GUH

JPOW

Position or Ban

Roaring Kitty

Apes Together Strong

Hold the Line

DD

HODL

KYS

The Takeaway

Short Calls vs Long Calls: Complete Comparison

What’s the Difference Between Short Calls and Long Calls?

What Are Short Calls?

Short Call Example

Pros and Cons of Short Calls

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

What Are Long Calls?

Long Call Example

Pros and Cons of Long Calls

Comparing Short Calls vs Long Calls

Similarities

Differences

The Takeaway

FAQ

Are long calls better than short calls?

How do short calls and covered calls differ?

What Is a Financial Crisis?

Financial Crisis Definition

Common Causes of Financial Crises

Examples of Financial Crises

America’s First Financial Crisis

The Stock Market Crash of 1929

The 1973 OPEC Oil Crisis

The Asian Financial Crisis of 1997–1998

The Global Financial Crisis of 2007–2008

The European Sovereign Debt Crisis

Investing During a Financial Crisis

The Takeaway

What Is a Trust Fund?

Trust Fund Definition

How Do Trust Funds Work?

Different Types of Trust Funds

How to Establish a Trust Fund

Why Set Up a Trust Fund?

The Takeaway

Important Candlestick Patterns to Know

What Is a Candlestick Pattern?

Reading Single Candlesticks

Trending Candles vs Non-Trending Candles

Doji Candles

Long Shadow Candles

Types of Candlestick Patterns

Bullish Candlestick Patterns

Bearish Candlestick Patterns

Reversal Patterns

Other Patterns

The Takeaway

CATEGORIES

JOIN THE COMMUNITY

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Personal Loans

Online Investments

Other

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