Investing Archives | Page 166 of 194

Jul

2023

How to Open a Brokerage Account

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

When you open a brokerage account with a brokerage firm, you transfer money into the account that you can use to start investing. While some brokerage accounts may set an account minimum, there is typically no limit to how much you can deposit or when you can withdraw your money.

With a brokerage account, investors can invest in a variety of securities, including stocks, bonds, ETFs, and more. There are many brokerages, but the steps to open a brokerage account are similar among most of them.

How Do I Open a Brokerage Account?

There are a few simple steps to opening a brokerage account. We’ll dive deep into each one below.

1. Choose a brokerage provider.

2. Sign up for an account.

3. Transfer money.

4. Start trading.

Step 1: Choose a Brokerage Provider

There are several types of brokerage accounts, and the type you choose will depend on what you’re trying to accomplish.

• Full-service brokerage firms not only allow clients to trade securities, they may also offer financial consulting and other services—though the price may be steep, compared to the other options here.

• Discount brokerage firms typically charge lower fees than full-service, but as a result clients don’t have access to additional financial consulting or planning services.

• Online brokerage firms are typically online-only, allowing clients to sign up, transfer money, and make trades through their website. These firms typically offer the lowest fees.

The accounts above are known as cash accounts: You must buy securities with funds you put in your account ahead of time. You may also encounter other more complicated types of brokerage accounts known as margin accounts, which allow you to borrow money from your brokerage to make investments, using your case account as collateral. These accounts tend to be for sophisticated investors willing to shoulder the risk that investments bought with borrowed funds will lose value.

Before working with an individual investment advisor or a firm and opening a cash or margin account, it can be a good idea to run a check on their background. The Financial Industry Regulatory Authority (FINRA) offers online broker checks where you can enter a broker’s name, or the name of a firm, to learn whether a broker is registered to sell securities, offer investment advice, or both. And you can learn about a broker’s employment history, regulatory actions, and whether there are past or current arbitrations and complaints.

Step 2: Sign Up for a Brokerage Account

Most brokers of all kinds allow you to open and access your brokerage account online. When you open the account, you will likely be asked to provide your Social Security number or taxpayer identification number, your address, date of birth, driver’s license or passport information, employment status, annual income and net worth. You may also be asked about your investment goals and risk tolerance.

For the most part, they should not charge you a fee for opening an account. While some may require account minimums, others allow you to open an account with no minimum deposit.

There is no limit on the number of brokerage accounts you can open, and you may be able to hold multiple accounts with multiple brokerage firms.

Step 3: Transfer Money

You will need to fund your new brokerage account before you can purchase any types of securities. You can deposit money in a brokerage account like you would in a traditional bank account.

Step 4: Start Trading

Many brokerage firms will offer a way for you to earn interest on uninvested funds so that your money continues to work for you even when not invested in the market.

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

How Do Brokerage Accounts Work?

The brokerage firm with which you hold your account maintains the account and acts as the custodian for the assets you hold. In other words, the custodian provides a space for investors to use their account in the way that it was intended.

However, you own the investments in the account and can buy and sell them as you wish. The brokerage firm acts as a middleman between you and the markets, matching you with buyers and sellers, and executing trades based on your instructions.

For example, if you place an order with your brokerage to buy a certain number of shares of stock, the brokerage will match you with a seller looking to sell those shares and make the trade for you.

What’s the Difference Between Brokerage Accounts and Retirement Accounts?

Brokerage accounts are also known as taxable accounts, because profits on sales of securities inside the account are potentially subject to capital gains taxes. Generally speaking, these accounts offer no tax advantages for investors.

Retirement accounts, on the other hand, offer a number of tax advantages that may make them preferable to taxable accounts if you’re planning to save for retirement. Retirement accounts place limits on how much money you can contribute and when you can withdraw funds.

If retirement planning is your main concern, you may consider saving as much as you can in both a 401(k) if your employer offers one, and a traditional or Roth IRA. If you have funds left over, you may choose to invest those in your taxable brokerage account.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Is My Money Safe in a Brokerage Account?

The money and securities held in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC) . The SIPC protects against the loss of cash and securities held at failing brokerage firms. If your brokerage firm goes bankrupt, the SIPC covers $500,000 worth of losses, including $250,000 in cash losses.

The SIPC only provides protection for the custody function of a brokerage firm. In other words, they work to restore the cash and securities that were in a customer’s account when the brokerage started its liquidation proceedings. The organization does not protect against declines in value of the securities you hold, nor does it protect against receiving and acting upon bad investment advice.

It is important that any investor realizes and accepts that investment comes with a certain amount of risk. While security prices may gain in value, it is also possible that you could lose some or all of your investment.

The Takeaway

Opening a brokerage account is a simple process that allows you to invest in securities. Effectively, you’re depositing money at a brokerage, which will allow you to buy investments such as stocks, bonds, or ETFs. There are numerous brokerages out there, and different types of brokerage accounts.

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

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

SoFi Invest®

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

SOIN523124

Jul

2023

A Guide to Delta Neutral Trading Strategies

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

The typical options investor is trying to leverage options trading to speculate on directional moves in the prices of underlying assets. However, there are more sophisticated traders who would like to profit from other characteristics of options.

To pursue these trading strategies, investors need to minimize the effect of price changes and create portfolios that profit from and are more sensitive to these other factors. Delta neutral approaches allow investors to create these portfolios.

What Is Delta?

Delta is one of the Option Greeks and measures how much an option will change in price, given a $1 change in the price of the underlying asset. By definition, the delta of the underlying asset is always 1.

What Does Delta Neutral Mean?

Delta neutral means that a position’s value will not change when there are small market price changes. By holding a combination of assets and options, or combinations of various call and put options, a trader can create a portfolio with an overall delta of zero (in actual practice, very close to zero).

Traders use delta neutral strategies to minimize the effect of price changes while aiming to profit from shifts in implied volatility, the time decay of options, or simply to hedge against price movements.

How Does Delta Neutral Function?

A portfolio’s overall delta is determined by the sum of the deltas of its individual positions. Let’s take a closer look at the delta in options and securities.

Basic Mechanics

A trader holding shares (“going long”) benefits one-for-one from increases in the stock price. The delta for long shares is 1.

Investors short a stock will experience losses one-for-one as the share price rises, but they will benefit in the same amount when it falls. The delta for short shares is -1.

In the options trading world, a long call option has a delta of 0 to 1, while a long put option has a delta of –1 to 0.

Deep in the money long call options are most likely to feature a delta near 1. Deep out of the money long call options will have a delta near 0. At the money long call options typically have a delta near 0.5.

Deep in the money long put options typically have deltas near -1. Deep out of the money long puts have deltas near 0 and at the money long puts have deltas near -0.5.

Deltas values are for each individual security held and need to be adjusted based on your actual holdings. If you own 200 shares of stock, the delta for this position is 200. If you own an at the money call options contract, the delta for this position would be 100 x 0.5 or 50 due to options representing 100 shares of the underlying asset.

If you are writing (“going short”) options, the deltas values are reversed. If you write a call option with a delta of 0.75, then the delta for the position would be -75. Similarly, the delta for shares sold short is -1 per share.

The investor must also be aware that any delta neutral portfolio will only be neutral over a range of asset prices. An option’s delta is always in flux as it moves in and out of the money. A portfolio must be constantly adjusted to maintain delta neutrality – many delta neutral trades must be executed.

An Example of Delta-Neutral in Use

A trader might employ a delta neutral trading strategy when they are long shares of stock but are concerned about a near-term pullback in its price. Assume the trader owns 100 shares of XYZ stock at $100 per share. A long stock position has a delta of 1. Multiplied by 100 shares, the position has a total delta of 100.

The goal of a delta neutral strategy is to use a combination of calls and puts to bring the portfolio’s net delta to 0. One possibility is to purchase at the money put options that have a delta of -0.5. Two of these put option contracts have a total delta of -100 (-0.5 multiplied by 200 options). Recall that an options contract represents 100 shares of stock.

Here, the $100 strike is the delta neutral strike. As the underlying price moves away from $100, the delta of the portfolio will move.

Combining the deltas of 100 shares together with 2 long put option contracts with a -0.5 delta yields a delta neutral portfolio.

Stock position delta = 100 shares x delta of 1 = 100

Long put position delta = 2 contracts x 100 shares/option x delta of -0.5 = -100

Portfolio delta = stock position delta + long put position delta

Portfolio delta = 100 + -100 = 0 or delta neutral

The net position is protected from losses by being long put options while still having exposure to upside from the long stock position. Of course, there is a cost to purchasing put options.

A diagram might help illustrate what is delta neutral.

Profit & Loss Diagram Using the Above Example (Not Including the Put Option Cost)

Profiting From Delta-Neutral Trading

It is possible to profit from changes other than price movements in the underlying stock. For example, an options trader can use delta neutral strategies to benefit from declining or rising volatility. Vega is the Options Greek that tells a trader how much the price of an option will move in response to changes in volatility.

Delta neutral strategies can also be used to profit from time decay or – as in the earlier example – to hedge an existing long stock position. Writing options allows you to benefit from the effect of time decay, but there is a risk of assignment. If the underlying stock price moves significantly, the contracts could be assigned to you.

Shorting Vega

Shorting vega is a more advanced options trading strategy. A delta neutral approach can be used to benefit from collapsing volatility.

You might look to short volatility after a period of extreme movements in the market or a single stock. The key is to short vega when implied volatility is still high and you expect it to come back down.

When implied volatility is high, you pay a significant premium to be long options. You can take advantage of expensive options when implied volatility is high by selling options while still being delta neutral. The risk is that implied volatility levels continue to jump, which can lead to losses on a short vega play.

Waiting for Collapse in Volatility

A short vega position relies on the implied volatility on the underlying security to drop in order to turn a profit. It might take patience for implied volatility to drop to historical norms. To remain delta neutral, other positions might have to be put on to mitigate the risk of a change in the underlying stock price.

Pros and Cons of Delta Neutral Positions

Some of the pros of crafting a delta neutral portfolio have been highlighted, but there are downsides as well. Having to closely monitor your portfolio can be a burden, while trading costs mount as you constantly layer on or reduce hedges to keep near delta neutral.

Pros	Cons
Profit from variables other than the price movement of the underlying asset	Requires frequent trades, which could be costly, to maintain a delta near 0
Traders hold stock for the long run while protecting against near-term declines	Deltas are constantly changing resulting in being over- or under-hedged

Delta Neutral Straddle

A delta neutral straddle uses a combination of puts and calls to keep the position’s delta near zero while having exposure to volatility changes.

For example, if XYZ stock trades at $100, and it’s at the money call has a delta of 0.5 and it’s at the money put has a delta of -0.5, you can buy the put and call with the goal of selling them after implied volatility jumps. With this delta neutral long straddle strategy, your delta is effectively 0 but you are long volatility.

A delta neutral short straddle is an options trade that seeks to profit from minimal changes in the underlying stock price and a large drop in implied volatility. So, the reverse of a long straddle can be used when you believe implied volatility will drop.

Other options trading strategies used to profit from changes in volatility and time decay are calendar spreads, diagonal spreads, iron butterflies, iron condors, among others.

The Takeaway

Building and maintaining a delta neutral portfolio can be a challenging task, but profiting from time decay and changes in volatility can make it worthwhile and profitable.

Delta neutral trading can also hedge your portfolio from short-term declines while continuing to hold stock for the long-term.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

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

FAQ

How do you make money with a delta neutral strategy?

You profit from a delta neutral option strategy when there are changes in a stock’s variables other than its share price. Changes in implied volatility create opportunities to go long or short volatility while being agnostic to the stock price’s change. You can also benefit from time decay by selling options while being delta neutral.

What is a delta neutral strike?

A delta neutral strike marks the price at which a portfolio is precisely delta neutral. In practice, it is more of a theoretical price rather than an exact level. When the underlying asset price moves up or down from the delta neutral strike, its delta will stray from zero; it will take additional hedging trades to get back to delta neutral.

How can you calculate the value of your delta neutral position?

To calculate your position’s delta, simply multiply each security’s delta by your position size. For example, one call option contract with a delta of 0.75 has a delta of 75 (0.75 x 100 options per contract). While being long 100 shares of stock with a delta of 1 has a delta of 100 (1 x 100 shares).

You combine the deltas of all positions in your portfolio to determine your overall delta. At that point, you can trade options to make your portfolio delta neutral.

Photo credit: iStock/Delmaine Donson

SoFi Invest®

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

Jul

2023

What Diagonal Spreads Are & How They Work

What Is a Diagonal Spread and How Does It Work?

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

A diagonal spread is an options trading strategy that involves taking a long and short position on the same stock with different strike prices and different expiration dates. It’s a combination of a vertical spread and calendar spread.

Using this strategy can allow the trader to get an early payday if the stock moves in a direction that’s in their favor. The way it works is the trader makes two options trades — either call options or put options simultaneously, with different strike prices and expiration takes.

Diagonal Spreads Defined

Diagonal spreads combine a two-step options trading strategy and are considered an advanced trading tactic. It’s a combination of a calendar spread and a short call or put spread. These positions have different expirations and different strikes which spread off diagonally, hence the name of the strategy.

A calendar spread is when a trader buys a contract with a longer expiration date while going short on an option with a near-term expiration date with the same strike price. But if two different strike prices are used, this is a diagonal spread.

A diagonal spread includes a calendar spread, also referred to as a horizontal spread or a time spread, combined with a vertical spread, because different strike prices are involved.

How Diagonal Spreads Work

A long put diagonal spread involves purchasing a put for some time in the future while selling a put in the short-term. Purchasing an option in the later term tends to be more expensive due to the embedded value of time. On the other hand, the trader sells the nearer term option to lower the cost of the other option. Traders usually use diagonal spreads when they have conviction on a stock’s movement while minimizing the effects of time.

A diagonal bull spread becomes a valuable trade when the price of the stock increases, while a diagonal bear spread increases in value when the stock price decreases.

Diagonal spreads require experience because traders have to account for volatility and have a good sense of timing.

Setting Up a Diagonal Spread

When traders are bullish on a stock, they generally use call options vs. using put options when they’re bearish on a stock.

The most common way to set up a diagonal spread is to buy a back month option that is in the money, which is a futures contract whose delivery dates are further into the future. Then, you sell a front month option with a strike price that is out of the money, which is a contract that has a near-term expiration date.

Setting up a diagonal spread in this manner would constitute a debit spread, though credit spread structures can also be used.

Maximum Loss

When a stock’s price rises, the maximum loss is equal to the premium paid when buying a call. If the stock falls, the maximum loss is the difference between the strike prices plus or minus the option premium paid or received.

Maximum Profit

It can be difficult to anticipate what the maximum gain may be since traders can’t know what the back-month option will be trading at when the front-month option expires as a result of shifting volatility expectations. In a long diagonal spread, the stock price must be near the short strike for a trade to go in the market participant’s favor.

The max profit potential for a short diagonal call spread is the net credit received minus commissions. If the strike price plummets below the short call, the value of the spread will be close to zero and the credit received is profit.

On the other hand, the max profit scenario of a short diagonal put spread is when the stock price soars above the strike price of the sold higher strike put option, as the value of the spread nears zero and the credit received is profit.

Breakeven Point

The breakeven point cannot be calculated, rather it can be estimated. The breakeven price at expiration for a long call is below the strike price of the short call. During expiration of a long call, the breakeven point is the stock price at which the price of the short call is the net credit received for the spread.

Traders are not able to predict what the breakeven stock price will be because it depends on market volatility, which can impact the price of the short call.

Diagonal Spread Examples

In one example, a trader is bullish on ABC stock, currently priced at $300. If the front month is January and the back month is February, the trader may want to purchase a $298 strike call with February expiry, which is in the money. Then the trader sells a $302 strike call with January expiry, which would be out of the money. This would give the trader a four-dollar wide diagonal spread.

In another scenario, a trader is bearish on XYZ stock at a current market price of $129. To set up a diagonal spread, the trader could buy a $132 February put, which would be several dollars in the money. Next, the trader could sell a $126 January put, which would be a few dollars out of the money. This trade would be a six-dollar wide diagonal spread.

Types of Diagonal Spreads

There are different types of diagonal spread strategies traders can use to get their desired outcome. Here are several diagonal spreads traders can try:

1. Long Call Diagonal Spreads

To execute on a long call diagonal spread, traders must buy an in the money call option with a longer term expiration date and then sell an out of the money call option with a nearer term expiration date. Traders can use this advanced options strategy if they are mildly bullish on a stock in the near term and very bullish in the longer term. An ideal set up for a long call diagonal spread is during times of low volatility as you do not want your trade to be disrupted by sharp price swings.

2. Long Put Diagonal Spreads

To execute on a long put diagonal spread, traders must buy an in the money put option with a longer term expiration date and then sell an out of the money put option with a nearer term expiration date that has an out the money strike. Traders typically use long put diagonal spreads to mimic a covered put position.

3. Short Call Diagonal Spreads

A short call diagonal spread is when traders sell a long-term call with a lower strike price and buy a shorter-term call with a higher strike price. A trader benefits from a short call option when the price of the underlying asset falls, thus making this a bearish strategy.

4. Short Put Diagonal Spreads

A short put diagonal spread involves selling a longer-term put with a higher strike price and buying a shorter-term put with a lower strike price. This is a bullish strategy, as the trader benefits if the underlying asset goes up in price, making both options expire worthless and netting the investor the net credit earned at the beginning of the trade.

5. Double Diagonal Spread

A double diagonal spread is when a trader buys a longer-term straddle and sells a shorter-term strangle, a trade that benefits from time decay and an increase in volatility. Traders setting up a double diagonal are long the middle strike calls and puts, which expire further in the future, and short out of the money call and put options with sooner expiries. The ideal outcome for double diagonals is to stay between the two OTM strike prices as they approach expiration.

Risks of Diagonal Spreads

The biggest risk traders have in diagonal spreads is overpaying for the diagonal spread. That said, the maximum risk is the debt a trader incurred to enter the position. If traders pay too much for their diagonal spreads they can remain unprofitable.

Market volatility can be used to the trader’s advantage when using diagonal spreads, although it can also pose a risk to such trades. Depending on the level of volatility, it can substantially change the price of the option and impact the trader’s profit potential. Diagonal spreads are an advanced trading strategy so traders who are experienced in dealing with volatility are best suited to incorporating diagonal spreads in their investment strategy.

The Takeaway

Setting up a diagonal spread correctly is an important part of the profit potential of the strategy, otherwise traders are at risk of losing money. This advanced options trading strategy requires traders to make both long and short trades, either with calls or puts, that have different expiration dates and strike prices. Traders should know these option trades are lined up diagonally from one another.

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

Photo credit: iStock/percds

SoFi Invest®

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

Jul

2023

Angel Investors: What They Are and How to Find Them

By Kate Ashford | Growing Wealth, invest, Investing | Comments Off

An angel investor is typically a high-net-worth individual or a group of wealthy individuals who invest their money in a venture at an early stage in return for an equity share.

There are several ways a new small business might try to secure money for expansion or growth, from friends to bank lenders to joining a startup accelerator program. Angel investors are another option that can provide a capital infusion, but there are trade offs when accepting funds in exchange for a stake in a new company.

What Is an Angel Investor?

If you’ve ever watched the show Shark Tank, you’ve seen one type of angel investor in action. On the show, a group of wealthy investors listen to pitches from entrepreneurs who are looking for funding for their small business or startup. In exchange for funding, these investors generally ask for an ownership share in the business.

Angel investors can also be personal friends or colleagues of the entrepreneur. Typically they’re wealthy enough to provide a significant amount of money, despite the risks the startup could fail.

Recommended: What Is Active Investing?

That said, angel investors typically invest in startups that have the potential to grow and have minimal downside risk in the long term. An angel investor may provide a one-time investment in a company, or they may provide ongoing support. They may also be called private investors, seed investors, or just “angels,” for short.

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

Who Can Be an Angel Investor?

Angel investors were once required to be accredited investors, which demanded, among other things, that they have a net worth of $1 million in assets, not including personal residences — or yearly income greater than $200,000 alone, or $300,000 for a household for the previous two years. (Anyone who holds a Series 7, Series 65, or Series 82 in good standing also qualifies).

This was meant to limit angel investing — which is a risky practice — to those who ostensibly had enough assets to safely dabble in it. In recent years, however, anyone can be an angel investor.

Ways to Become an Angel Investor With Less Cash

Angel investing is undoubtedly risky — businesses fail all the time. However, lately it is possible to get involved in angel investing without putting tens of thousands of dollars on the line. (A smaller investment won’t reduce the risk, but it may potentially reduce an investor’s total loss.) These crowdfunding platforms enable smaller investors to dip their toes in the water:

• WeFunder is an equity crowdfunding site that allows you to invest as little as $100 in startups and small businesses. The site encourages investors to invest in companies and products they love and believe in. Although the investment is smaller than might be typical, the site still describes these investments as risky and advises that people don’t invest money they can’t afford to lose.

• SeedInvest is an equity crowdfunding site that allows users to get started with $1,000. The company vets all startups on the platform and offers a variety of investment opportunities. The site notes that early-stage investors should expect to hold their investments for at least five years, and that there is no guarantee on returns.

Recommended: Tips for Investing in Tech Stocks

What Are the Pros of Using Angel Investors?

There are a number of benefits to using angel investors to help finance a venture.

Less risk

If you take out a loan to finance your business, you’ll still be expected to pay it back, whether or not your venture is a success. Angel investors generally understand the risk of investing in a startup business, and may not expect any return on capital if the business goes south.

Expertise

If angel investors also happen to be experts in your business, they can offer advice and guidance based on their years of experience.

Credibility

Angel investors are often well-known in their field, and if they invest in your idea, it can boost your reputation and status to have them on board.

They’re Willing to Take a Leap

Unlike a bank, which may need more concrete proof that you’re onto something big, an angel investor might be more willing to gamble on your great idea.

Better Chance of Success

Companies with angel investor interest stand a greater chance of survival than those with less angel investor interest, according to findings from the National Bureau of Economic Research. Having angel investment doesn’t mitigate the risk of starting a business, but it’s possible that having angel investors on board can provide some oversight or accountability that might be beneficial.

What Are the Cons of Angel Investors?

There are also some potential disadvantages to having angel investors.

Loss of Full Ownership

Angel investors often provide funding in return for a share of the business, so involving angel investors means giving up some of your control. It also means that if the business succeeds, they’ll share in the proceeds.

They May Add Pressure

Angel investors aren’t giving you money out of kindness and good will. They may be aggressive investors who expect to see a high return on their investment. If they’re sinking money into your venture, it may feel there’s more riding on your success or failure.

Funding May Be Slow

Finding angel investors can take time, and the process of securing backers — and for the cash to find its way to your venture — can take even longer.

It’s a Competitive Market

Even if you have a brilliant idea, there’s no guarantee that you’ll be able to find backers for it. Although there were 334,680 active angel investors in 2021, only 64,480 entrepreneurial ventures received angel funding, according to an analysis by the University of New Hampshire Center for Venture Research.

💡 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).

Where to Find Angel Investors

Startups looking for early-stage investors can look in several places.

Friends and family

Most commonly, startups get much of their initial investment from friends and family who believe in their idea and want to support the venture.

High-Net-Worth Individuals

Networking within your business community may allow you to make connections with people who’d be interested in helping to back your idea. It can be helpful to join local business, trade, and community organizations. Attend meetings and trade fairs, and have your elevator pitch well-honed.

Angel Funding Groups

There are a number of sites that seek to match entrepreneurs with angel investors, including:

Angel Capital Association : A collective of accredited angel investors

Golden Seeds : A group whose members focus on women-led ventures

Angel Investment Network : A network that seeks to connect entrepreneurs with business angels

Crowdfunding sites

While traditional angel groups seek to match entrepreneurs with accredited investors, crowdfunding sites allow lots of smaller investors to pitch in to move your venture along. (Picture a GoFundMe for your business idea.) These include SeedInvest, LocalStake, WeFunder, and Fundable.

You’ll likely have to apply to have your idea or business vetted by the site before they’ll present your project to their members.

The Takeaway

Angel investors are typically high-net-worth individual or group backers that support startup and early-stage business ventures. But lately, opportunities have opened up for individuals of all types to invest in companies that have recently launched.

For entrepreneurs, an angel investor can be an enormous help, both in terms of financing their dream as well as providing guidance if they have relevant business experience. On the flip side, some entrepreneurs may find there is added pressure to deliver when an angel investor is backing their startup.

Whether you’re interested in finding an angel investor for your own startup idea, or thinking of becoming one, there are a number of risks associated with this type of business. Consider the pros and cons in light of your own financial goals, as there are many different paths forward.

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

Jul

2023

What Is an Expense Ratio?

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

The expense ratio is the annual fee that mutual funds and exchange-traded funds (ETFs) charge investors, to cover operating costs. The fee is deducted from your investment, reducing your returns each year — which is one reason why expense ratios have been shrinking.

Typically, investors may look for funds that offer lower expense ratios, as high expense ratios can take a substantial bite out of long-term returns, affecting investors’ financial plans.

Here’s a look at how expense ratios are calculated, what they encompass, and other factors worth considering when choosing a mutual fund or ETF to invest in.

How Expense Ratios Are Calculated

Though individual investors typically won’t find themselves in a situation where they need to calculate an expense ratio, it’s helpful to know how it’s done. To calculate expense ratios, funds use the following equation:

Expense Ratio = Total Fund Costs/Total Fund Assets Under Management

For example, if a fund holds $500 million in assets under management, and it costs $5 million to maintain the fund each year, the expense ratio would be:

$5 million/$500 million = 0.01

Expressed as a percentage, this translates into an expense ratio of 1%, meaning you would pay $10 for every $1,000 you have invested in this fund.

As you research funds you may come across two terms: gross expense ratio and net expense ratio. Both have to do with the waivers and reimbursements funds may use to attract new investors.

• The gross expense ratio is the figure investors are charged without accounting for fee waivers or reimbursements.

• The net expense ratio takes waivers and reimbursements into account, so it should be a lower amount.

How Expense Ratios Are Charged

A fund’s expense ratio is expressed as a percentage of an individual’s investment in a fund. For example, if a fund has an expense ratio of 0.60%, an investor will pay $6.00 for every $1,000 they have invested in the fund.

The cost of an expense ratio is automatically deducted from an investor’s returns. In fact, when an investor looks at the daily net asset value of an ETF or a mutual fund, the expense ratio is already baked into the number that they see.

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

The Components of an Expense Ratio

The fees that make up the operating costs of a mutual fund or ETF can vary. Generally speaking, the investment fees included in an expense ratio will include the following:

Management Fees

The management fee is the amount paid to the person/s managing the money in the investment fund — they make decisions about which investments to buy and sell and when to execute trades. Management fees can vary depending on how much activity is required of these managers to maintain the fund.

Custodial Fees

Custodial fees cover the cost of safekeeping services, the process by which a fund or other service holds securities on an investor’s behalf, guarding the securities from being lost or stolen.

Marketing Fees

Also known as 12b-1 fees, marketing fees are used to pay for the advertising of the fund, some shareholder services, and even employee bonuses on occasion. FINRA caps these fees at 1% of your assets in the fund.

Other Investment Fees

Investors may be forced to pay other investment fees when they buy and sell mutual funds and ETFs, including commissions on trades to a broker. The cost of buying and selling securities inside the fund is not included as part of the expense ratio. Additional costs that are not considered operating expenses include loads, a fee mutual funds charge when investors purchase shares. Contingent deferred sales charges and redemption fees, which investors pay when they sell some mutual fund shares, are also paid separately from the expense ratio.

How to Research Expense Ratios

Luckily, you do not have to spend your time calculating expense ratios on your own. The Securities and Exchange Commission (SEC) requires that funds publish their expense ratios in a public document known as a prospectus. The prospectus reports information important to mutual fund and ETF investors, including investment objectives and who the fund managers are.

Online brokers often allow you to look up expense ratios for individual investment funds, and they may even offer tools that allow you to compare ratios across funds.

Average Expense Ratios

Expense ratios vary by fund depending on what investment strategy it’s using. Passively managed funds that frequently track an index, such as the S&P 500 index, and require little intervention from managers, tend to have lower expense ratios. ETFs are usually passively managed, as are some mutual funds. Other mutual funds may be actively managed, requiring a heavier touch from managers, which can jack up the expense ratio.

Expense ratios have been falling for decades, according to the most recent Morningstar Annual U.S. Fund Fee study, released in June 2022. “In 2021, the asset-weighted average expense ratio of U.S. open-end mutual funds and ETFs was 0.40%, compared with 0.87% in 2001,” the report states.” While that difference may seem slight, investors saved an estimated $6.9 billion in fund expenses in just one year.

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

What’s a Good Expense Ratio?

When considering expense ratios across mutual funds and ETFs, it’s helpful to use average expense ratios as a benchmark to get an idea of whether a specific expense ratio is “good.”

Investors may want to target funds with expense ratios that are below average. The lower the expense ratio, the less expensive it is to invest in the fund, meaning more profits would go to the investor vs. the fund.

That said, some investors may prefer to invest in actively managed funds, which typically charge higher fees than passive or index funds.

Looking Beyond Expense Ratios

When comparing mutual funds and ETFs, an investor might choose to consider other factors in addition to expense ratios.

It can be a good idea to consider how a particular fund will fit in their overall financial plan. For example, individuals looking to build a diversified portfolio may want to target a fund that tracks a broad index like the Nasdaq or S&P 500. Or, investors with portfolios heavily weighted in domestic stocks may be on the hunt for funds that include more international stocks.

And it’s also a good idea to know the key differences between mutual funds and ETFs. ETFs, for example, are generally designed to be more tax efficient than mutual funds, which can also have a big impact on an investor’s ultimate return. ETFs are generally lower in cost than mutual funds as well.

The Takeaway

Expense ratios seem small, but they can have a big impact on investor returns. For example, if an individual invested $1,000 in an ETF with a 6% annual return and a 0.20% expense ratio, and continued making a $1,000 investment each year for the next 30 years, they would earn $81,756.91, and spend $3,044.76 on the fund’s expenses.

But expense ratios are only one of many factors to consider when choosing a mutual fund or ETF. Fundamentally your investment choices have to fit into your larger financial plan. But cost should always be a concern.

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

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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.
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For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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 $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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How to Open a Brokerage Account

How Do I Open a Brokerage Account?

Step 1: Choose a Brokerage Provider

Step 2: Sign Up for a Brokerage Account

Step 3: Transfer Money

Step 4: Start Trading

How Do Brokerage Accounts Work?

What’s the Difference Between Brokerage Accounts and Retirement Accounts?

Is My Money Safe in a Brokerage Account?

The Takeaway

A Guide to Delta Neutral Trading Strategies

What Is Delta?

What Does Delta Neutral Mean?

How Does Delta Neutral Function?

Basic Mechanics

An Example of Delta-Neutral in Use

Profit & Loss Diagram Using the Above Example (Not Including the Put Option Cost)

Profiting From Delta-Neutral Trading

Shorting Vega

Waiting for Collapse in Volatility

Pros and Cons of Delta Neutral Positions

Delta Neutral Straddle

The Takeaway

FAQ

How do you make money with a delta neutral strategy?

What is a delta neutral strike?

How can you calculate the value of your delta neutral position?

What Is a Diagonal Spread and How Does It Work?

Diagonal Spreads Defined

How Diagonal Spreads Work

Setting Up a Diagonal Spread

Maximum Loss

Maximum Profit

Breakeven Point

Diagonal Spread Examples

Types of Diagonal Spreads

1. Long Call Diagonal Spreads

2. Long Put Diagonal Spreads

3. Short Call Diagonal Spreads

4. Short Put Diagonal Spreads

5. Double Diagonal Spread

Risks of Diagonal Spreads

The Takeaway

Angel Investors: What They Are and How to Find Them

What Is an Angel Investor?

Who Can Be an Angel Investor?

Ways to Become an Angel Investor With Less Cash

What Are the Pros of Using Angel Investors?

Less risk

Expertise

Credibility

They’re Willing to Take a Leap

Better Chance of Success

What Are the Cons of Angel Investors?

Loss of Full Ownership

They May Add Pressure

Funding May Be Slow

It’s a Competitive Market

Where to Find Angel Investors

Friends and family

High-Net-Worth Individuals

Angel Funding Groups

Crowdfunding sites

The Takeaway

What Is an Expense Ratio?

How Expense Ratios Are Calculated

How Expense Ratios Are Charged

The Components of an Expense Ratio

Management Fees

Custodial Fees

Marketing Fees

Other Investment Fees

How to Research Expense Ratios

Average Expense Ratios

What’s a Good Expense Ratio?

Looking Beyond Expense Ratios

The Takeaway

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