Jan
04
2023

How to Mine Bitcoin: A Guide

By | Growing Wealth, invest, Investing | No Comments

Bitcoin miners rely on high-powered computer systems to validate blocks of digital transactions on the blockchain network and earn Bitcoin (BTC). Learning how to mine Bitcoin isn’t hard, but it can be expensive and time consuming.

Once a miner has completed a certain number of calculations (1 MB) to verify a block of transactions, they may be rewarded with new Bitcoins — if they are the first to verify the block.

This competitive process in turn helps to secure the system and prevent fraud. And it enables a network-wide consensus that essentially backs the validity of each Bitcoin, even without a central authority.

What Is Bitcoin Mining?

Mining Bitcoin is more than just the creation of Bitcoin tokens; it’s also the decentralized global system by which miners validate and secure all Bitcoin transactions — and earn Bitcoin themselves.

How does Bitcoin mining work exactly? It goes back to the blockchain technology that Bitcoin and other types of cryptocurrencies are built on. For many blockchain-based crypto networks to run, miners rely on super-charged computer systems — or in some cases cloud-based technology — to validate blocks of digital transactions that are then appended to the blockchain ledger.

How Bitcoin Mining Works

When a Bitcoin transaction is executed, it gets sent to miners for verification. Bitcoin miners use special computer hardware to do the complex mathematical calculations or hashing, required to confirm each item on the blockchain — an immense undertaking called proof-of-work (PoW) that involves literally trillions of calculations.

Many different types of crypto use a PoW algorithm, including Dogecoin, Litecoin, Bitcoin Cash, Monero, and others. It can be useful to understand the differences between certain types of crypto, like Bitcoin vs. Dogecoin, in order to learn more about mining crypto.

Understanding Bitcoin Hashing and Hash Rate

To solve these problems, each machine or node has to make millions of guesses per second — called hashing. This requires a lot of electricity. Estimates vary, but Bitcoin miners consume around 129 Terawatt-hours of energy, which is around 0.6% of the world’s total.

To successfully mine a block and receive bitcoin rewards, a miner has to hash the block’s header, which is a summary of the information contained within a given block. In order to keep the timing of each block consistent, the difficulty of solving each block has to increase over time. This keeps the number of Bitcoins entering the market steady. (If it got easier to validate each block, miners would get more rewards faster, which would quickly deplete the existing supply of Bitcoins).

The Bitcoin hash rate is a measurement of how many times the Bitcoin network attempts to complete those calculations each and every second. It’s the approximate average of all the hash rates of each individual miner in the network.

When a miner has a higher hash rate it increases the miner’s chances of finding the next block and receiving a Bitcoin reward. More hashing power also is an indication of a network’s overall security.

It takes about 10 minutes for miners to successfully confirm a block of transactions (1 MB) and get rewarded with new Bitcoin. But mining is intensely competitive, especially because the reward is halved every 210,000 blocks and now stands at 6.25 BTC.

What Is Bitcoin Halving, Why Does It Matter?

Every type of cryptocurrency follows its own protocol. Bitcoin is a deflationary crypto, which means the number of coins being minted is steadily decreasing.

How many Bitcoins are left? The number of Bitcoins that can be produced is capped at 21 million. That’s where the halving of Bitcoin rewards comes in.

Since mining rewards create Bitcoin, the number of Bitcoin you can earn from mining is decreased over time through the process called halving. In June of 2024, the Bitcoin block reward for mining is slated to drop to 3.125 BTC from 6.25 BTC.

Understanding Proof of Work

The process of mining Bitcoin actually helps secure the network, and the transactions that fly across it every day. For a hacker to take control of the blockchain, to commit fraudulent charges, and to steal Bitcoin, they’d have to control over 51% of the network.

It’s an important insight into the decentralized world of mining cryptocurrency: Rewarding miners creates a competitive environment that encourages more miners to join the network. This increases the size of the network, making it harder to get more than 51% control of it, which in turn makes transactions more secure for users who are sending Bitcoins back and forth.

Can Bitcoin Work Without Miners?

The short answer is no. Bitcoin relies on a proof-of-work consensus mechanism that requires miners and mining for transaction verification and block creation, for minting new coins, and for helping to secure the network. That’s how the system is built.

If Bitcoin were to switch to a proof-of-stake system, the way Ethereum did with the Merge in 2022, then miners would no longer be needed.

There is an ongoing debate about the value of crypto staking vs. mining. While mining uses special hardware to solve complex computational problems, staking locks up crypto for a fixed period. PoW is energy intensive, whereas PoS requires less energy. PoW relies on a high hash rate to secure a network, whereas PoS relies on a large amount of tokens (money) — a high level of market capitalization.

In a proof-of-stake network, transactions aren’t validated by miners running vast computer rigs, but validators who stake a certain amount of their crypto in order to help monitor and run the network — and earn crypto rewards.

Recommended: Is Crypto Mining Still Profitable in 2022?

Mining Bitcoin: What You Need

With the right equipment, nearly anyone can mine Bitcoin — in theory. The catch? As just discussed, Bitcoin mining has become highly competitive because of the potential rewards — and the complexity of the calculations and technology involved.

When Bitcoin was first launched in 2009, all miners needed was a sturdy PC and they could potentially get in the Bitcoin-mining game. Things progressed quickly, though. In 2010, software was released that let miners mine with graphics processing units (GPUs), the technical name for a video card.

The Evolution of Bitcoin Mining Hardware

This was a major shift in Bitcoin mining because a single GPU was 100 times faster than a central processing unit (CPU), which was how most people were initially mining.

Next, miners built computers specifically for mining Bitcoin, as well as other cryptocurrencies. These “crypto mining rigs” typically featured motherboards, the main hub of a computer, which supported four to eight graphics cards.

If a single card was 100 times faster than a CPU, it’s easy to see how the average user looking to mine Bitcoin might be left in the dust by a high-powered crypto rig that featured anywhere from four to eight GPUs churning away at blockchain calculations.

From there, as is the case with many things tech, the hardware got better, faster, and more specialized. In 2013 the first Bitcoin ASIC miners hit the scene. ASIC stands for application-specific integrated circuit. These mining tools are built to do one thing — mine cryptocurrencies (including Bitcoin), and they are far more powerful than GPUs.

Mining-Specific Hardware

How do you mine Bitcoin with your own rig? A mining rig is basically a super custom PC. The fundamental components are what you’d expect: You need a motherboard, RAM, a CPU, and storage.

The key enhancements are either the added GPUs, as noted above, or using an ASIC. Generally, using an ASIC is the preferred mining tool. GPUs are no longer considered fast enough to solve Bitcoin calculations and earn rewards; you’re up against far more powerful machines.

While ASICs are more effective at processing Bitcoin transactions than their GPU and CPU predecessors, and they’re generally more energy efficient, they can come with some upfront costs. And this doesn’t include the potentially high utility costs needed to maintain them (read: keep them cool enough to function).

The cost of electricity is a significant one for most miners, and something to include in your calculations, as it can impact your profits.

Miners also need to take into account the cost of mining fees.

Mining Software and a Bitcoin-Compatible Wallet

Selecting the best software to mine Bitcoin doesn’t have to be complicated or expensive. While mining Bitcoin can be costly in terms of hardware and electricity, the software to mine Bitcoin usually isn’t. Most Bitcoin mining software is free and open-source.

Once you have the hardware and software in place to mine Bitcoin, next you’ll need to set up a type of crypto wallet that’s compatible with Bitcoin.

Another option to consider may be a mining pool.

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How Bitcoin Mining Pools Work

A bitcoin mining pool is a group of users who have decided to join forces to validate Bitcoin transactions (create a new block). Users who join mining pools contribute their own CPUs, GPUs, or ASICs to a network and when rewards are paid out, they all get a share.

If you’re going solo, mining software will try to verify transactions with just the processing power of whatever hardware (CPU, GPU, or ASIC) that you’ve got. That said, many people agree that the computations have gotten so complex, it’s less likely that a solo miner will create a new block on their own. If you’re joining a pool, the mining software will help you connect to your pool.

Many mining pools these days are located in China because of the cheaper electricity. Some of these pools are actually companies, including F2Pool, AntPool, BTCC, and BW. While these are some of the biggest pools, there are pools based in the U.S. and Europe as well.

While pools might seem appealing to miners with less computing horsepower, there may be some things to consider before joining. Pools may charge users a fee. And miners might be paid out their shares based on the level of their contribution, which could mean that miners with fancy ASICs take home more of the rewards.

Since this is Bitcoin, there’s probably another innovation around the corner.

Cloud mining is an example — an option if you don’t want to own your own mining hardware and would rather mine with someone else’s. However, cloud mining may also come with its own costs and risks that have left some members of the Bitcoin community less than impressed with this approach to mining coins.

What’s Cloud Mining?

Much like storing data or running applications in the cloud, cloud mining is the process of paying someone else to use their crypto mining hardware. This could save a miner the upfront cost of setting up an ASIC system.

To get started, a miner would likely open an account with a cloud mining company, decide how much they want to spend, and how much they want to mine.

While cloud mining may seem like an easier way to get started with Bitcoin mining, it’s worth mentioning that there have been reports of cloud mining companies that might not be on the up and up. Miners looking to get started might consider doing a fair bit of research before deciding if cloud mining is right for them — as well as what company to go with.

Recommended: A Closer Look at Bitcoin Cloud Mining

The question of whether Bitcoin mining is legal is still fairly complex and can vary from region to region. The short answer is that Bitcoin itself, as well as Bitcoin mining, are both legal in many developed countries, including the U.S., U.K., and Japan. In general though, it’s wise to consider the use of any cryptocurrency within the context of the laws and regulations in a specific jurisdiction, as many are still in flux.

In some countries, the use of cryptocurrencies is forbidden and mining Bitcoin is illegal. In others, like China and India, the use of crypto is restricted. In Canada it’s not illegal to use cryptocurrencies, but they are not considered legal tender — which is a key distinction in how crypto is treated in the U.S. as well.

The question of Bitcoin’s legality is increasingly complex and depends on a wave of cryptocurrency regulations around the world that seem to fluctuate week to week, region to region. These may include how Bitcoin is defined (e.g. as a commodity or a currency); how it can be used (e.g. for some purchases or payments but not others); how it’s taxed.

According to IRS guidelines issued in 2014, cryptocurrencies like Bitcoin are considered property, and are taxed as such. Also, if an employer compensates an employee using a cryptocurrency, the employee will get a W2 or 1099 tax form and may owe income taxes on their crypto trading.

The status of cryptocurrency mining as well as crypto’s legal standing can shift as new regulations come into play.

Is Bitcoin Mining Right for You?

Despite some hurdles, learning how to mine Bitcoin is still an intriguing and potentially lucrative opportunity for some. With the right equipment, it’s possible to validate enough transactions to earn actual Bitcoin tokens. That said, mining Bitcoin is not the gold rush it once was. Even if you invest in some serious Bitcoin mining ASICs, mining itself keeps getting more complex and competitive.

That doesn’t mean you can’t do crypto mining, though. There are thousands of cryptocurrencies that could use help from eager miners willing to donate some processing cycles from their CPUs or GPUs, and even if you don’t hit the mother lode, you could mine for a better understanding of how cryptocurrency works. Whether or not you want to grab a metaphorical hat and mining pick is up to you.

The Takeaway

Bitcoin mining requires a substantial investment of time and energy on the part of any would-be miner. The equipment alone can set you back thousands. And while the payoff — assuming you earn actual BTC — could make the overhead cost worth it, there are no guarantees. Bitcoin mining has become highly competitive.

FAQ

How do you start mining for Bitcoin?

The most important step if you want to mine Bitcoin is to look into the cost of setting up your own mining rig (or computer hardware and software) and comparing that to the cost of joining a mining pool or cloud mining. Next, it would be a good idea to compare potential rewards and risks of different mining options, since Bitcoin mining is expensive and competitive, and there are no guarantees of “striking it rich.”

How hard is it to mine one Bitcoin?

It’s very difficult. Miners are rewarded when they are the first to confirm a 1 MB block of Bitcoin transactions. Currently the reward is 6.25 BTC. Being able to get that reward takes considerable time and energy — and there are no guarantees.

What are the steps to mining Bitcoin?

The first step is to decide which type of mining you want to set up (PC, mining pool, or cloud mining). Next, you have to obtain the necessary hardware and software to run your node, as well as setting up a Bitcoin-compatible crypto wallet to pay mining fees and (perhaps) rewards.

Photo credit: iStock/Stanislav Gvozd

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Jan
02
2023
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Understanding Stock Market Corrections

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A stock market correction occurs when the market hits a new high, and then falls by at least 10%. A correction is similar to a dip or crash, but not as severe as a “bear market,” which is when the market sees a decline of 20%.

Stock market corrections are normal and it’s important to be aware of why they happen and what you might consider doing the next time the market sees a correction.

What Is a Market Correction?

A stock market correction happens when the market reaches a new interim high and then falls by 10%. Some other stock market terms for market downturns include dips or crashes, which may be temporary or quick drops in the market that don’t see the market fall past 10%.

Corrections vs Bear Markets

A bear market is a longer decline in the stock market, and refers to the market after it declines 20% from a previous high. These terms can also apply to individual stocks (“Stock X is in correction territory,” for example), but individual stocks can see much more volatility than the overall market.

The most severe stock market correction in history, in terms of points, happened in 2018, when the Dow declined 1,175 points in a single day. Previously the record had been a 777-point decline. However, the 2018 4.6% drop wasn’t the biggest decline in terms of percentage. In 1987, on a day called Black Monday, the Dow dropped by 22%. That would be equivalent to 5,300 points in today’s market.


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

The Nature and Frequency of Market Corrections

Stock market corrections happen every once in a while. They are, in fact, a normal part of the market cycle — that’s important for investors to keep in mind, as it’s not unusual at all for the market to experience a correction.

How Common Are Market Corrections?

Dating back to the mid-1900s, stock market corrections have typically happened three to four times every year. Although it’s nerve-wracking every time, these corrections are a normal part of the market cycle, as mentioned.

Duration and Impact of Corrections

When a correction occurs, you will likely see the media speculate whether it’s a crash or a correction, how long the correction will last, and perhaps, if the economy is going into a recession. This speculation is just that — here is no way of knowing exactly how big a correction will be or how long it will last.

A stock market correction is not typically the cause of a recession, nor is it a predictor of a coming recession. Stock market corrections can be stressful for investors and companies, but they are not necessarily signs of a poor economy.

Although there is no way of predicting how long a market correction will last, you can look to past data as some indicator of possible trends. For example, since the 2008–09 financial crisis, the past four corrections have had an average decline of 15.3% over a time period of three and a half months.

Navigating Through Market Corrections

Given that market corrections are common, investors would do well to know how to handle them. That may or may not involve making any changes to your portfolio.

Preparing Your Investments for a Correction

Unless you exclusively own stocks in an S&P 500 index fund, your portfolio will perform differently from the overall market. When a stock market correction occurs, the percentage drop is generally referring to the performance of the S&P 500 index. This is an index of the largest U.S. companies in the stock market.

The stocks in your portfolio may fall in value more or less than the overall market. Some of your stocks may even go up in value. It’s important to remember that if your portfolio drops by a certain percentage, it will need to go up more than that percentage to recoup your losses.

Strategies for Investing During Corrections

Generally, a good rule of thumb is to stay invested through a market correction — or, stick to a buy-and-hold strategy. If, for example, someone sells off their stocks during a panic, they could see them go back up in value again in a few days or weeks. If anything, depending on your strategy and goals, you may want to consider buying stocks during a market correction, because prices will have lowered.

You could consider whether you have available funds you’d like to invest during a downturn, and decide if you want to purchase more shares of stocks you already own or if you want to find new stocks to buy. Diversifying the stocks in your portfolio may help you weather the storm of a market correction.

If you do choose to purchase stocks during a market correction, be aware that their value may continue to decline before it recovers again. There’s also no guarantee that it will.

Also remember that the market has bounced back from some severe corrections and crashes over the years. Corrections happen every year and can be healthy for the market.


💡 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.

Identifying Causes and Signs of Market Corrections

There can be numerous reasons that the market experiences a correction. And they typically can’t be predicted with any real sense of accuracy.

Key Factors Leading to Corrections

Since so many things could potentially lead to a market correction, it’s hard to say with any certainty what, exactly, is or was the catalyst. But generally, things like rising prices (inflation), slow economic growth, bad or disappointing corporate earnings reports, or even surprising news — say, a war breaks out, or some sort of political upheaval takes place — can cause the market to see a steep decline into correction territory.

Can Market Corrections Be Predicted?

As mentioned, market corrections can’t really be predicted. While it’s almost certain that there will be corrections in the future, discerning when, exactly, they’ll happen is nearly impossible — nobody has a crystal ball.

Coping With Market Corrections as an Investor

Market corrections are going to happen — it’s a near certainty. But that doesn’t mean investors need to panic every time the market has a hiccup.

What to Do During a Market Correction

The first step in knowing what to do during a stock market correction is to find out why it’s happening — if possible. Next, look into your individual portfolio and see how it’s being affected by the correction. This will help you decide whether to buy, sell, or hold on to the stocks in your portfolio.

Remember that stock market corrections are normal. If you have a long-term investing strategy, you will likely see market corrections, bear markets, and recessions during your years of investing. Try to stay calm and reconsider decisions that might be made based on fear or panic. It may not help to obsess over the value of your portfolio on any particular day.

Long-term Strategies for Handling Market Volatility

In terms of handling market volatility over the long term, here are some things and overarching principles investors can try to incorporate into their investment strategy.

•   Have a plan: Blindly buying stocks and then getting upset when they fall in value isn’t ideal. Know what your goals are and plan for them. Even when the market corrects, you can still reach your goals for the year if you plan properly. If you’re investing money to use in just a few months versus for your retirement, your strategy may look very different.

•   Diversify: One way to protect yourself from significant market crashes is to spread out investments over different types of assets. This is called diversifying your portfolio, and this tactic may help lower your risk of losses while still exposing yourself to potential gains. You can diversify into many different types of investments, including bonds, real estate, commodities, and simply by holding cash.

•   Consider cashing out: Investors can be afraid to cash out of a particular stock because it may continue to rise in value. If you own a stock which has gone up significantly, you may want to cash out some of the investment and diversify it into other investments.

•   Keep risk tolerance in mind: If you are growing your portfolio for long-term use, you can likely handle a few ups and downs in the market cycle. However, if it causes you too much stress to see your portfolio go down in value a lot in one day, perhaps it’s better not having so much invested in stocks.

•   Don’t try to time the market: On the same note, selling off your investments because you think the market is going south may not be a great strategy. The stocks you’re holding may continue to go up in value, and even if they do crash, trying to time your reentry can be just as challenging as timing your exit.

•   Think long term: Day trading and short-term investing are risky. If you build a diversified portfolio which you plan to keep invested for a long time before using it, it may be able to withstand cycles in the market and still continue to grow.

Real-World Examples of Market Corrections

As noted, corrections are common. In fact, the S&P 500 entered correction territory three times during 2022. It also happened more than once in 2023, and as of writing, the most recent market correction occurred during October 2023, as the market slid for a few months after topping out at a previous high in July 2023.

In December 2023, the market rebounded, and was near all-time highs.

The Takeaway

Stock market corrections are when the market falls 10% from a previous high, and they’re common parts of the market cycle. As you build your portfolio and mentally prepare for the next stock market correction, remember that you are not alone. Market crashes, dips, and corrections are stressful for everyone, and there are tools and specialists to help you navigate them.

Working with an investment advisor may help you stay calm throughout economic cycles. Planning your portfolio for diversification and long-term growth may also help you ride the waves of the market.

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.

FAQ

What happens in a stock market correction?

During a stock market correction, the market slides at least 10% from a previous high due to any number of factors.

Are corrections good for the stock market?

Corrections can be good for the stock market in a similar way that a wildfire can be good for a forest — they can serve as a reset to valuations that may have gotten too high, and lower security prices for investors looking to deploy capital.

How long do stock market corrections last?

There’s no telling how long a correction could last, but it’s important to keep in mind that historically, the market has always bounced back given enough time.

What is the biggest stock market correction of all time?

The biggest drop in the S&P 500 in a single day was in October 1987, when the index fell more than 20% into a bear market.

How often should you expect a stock market correction?

Since the 1950s, the S&P 500 has experienced dozens of market corrections, and that means that one occurs less than every two years, on average.

How many corrections have there been throughout history?

In the modern era, since World War II, the stock market has experienced 24 market corrections, with an average market drop of more than 14%.

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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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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.

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Jan
02
2023
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Do I Need a Financial Advisor? Essential Considerations

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Financial advisors can help their clients to define their financial goals, prioritize them, and develop a plan to achieve them. But depending on the specific individual, a relationship or level of engagement with a financial advisor can vary, as different investors have different needs.

Generally, deciding whether you need a financial advisor will come down to whether you feel you need some advice or a guiding hand in handling your finances. There are important considerations to make, too, as financial advisors don’t typically work for free — but they can help with a variety of finance-related issues.

Understanding the Role of Financial Advisors

Financial advisors can offer many services, but broadly, they’ll dissect a client’s financial picture, discuss their goals with them, and create a plan as to how to move forward.

What Financial Advisors Do

Financial advisors can help clients zero-in on specific financial goals, put together plans for investing or getting out of debt, and more.

An advisor can provide financially based education, which can help their clients identify whether they’re on track for achieving their goals. They can also help clients determine whether their habits are causing problems for their overall financial wellness.

Further, financial advisors can guide their clients through paying off debt, saving for the future, investing in a diversified portfolio, and aligning an investment approach with specific goals, timelines, and risk-tolerance levels.


💡 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.

Assessing Your Need and Readiness for a Financial Advisor

There are numerous things to consider when trying to determine if you’re ready or in need of a financial advisor and their services.

When to Consider Hiring a Financial Advisor

As clients make their decision about whether to use a financial advisor or not — and, if so, which one will offer what they want and need — here are some items they could consider:

•   What type of help is needed from an advisor? Education? Coaching? Management?

•   What services can the financial advisors provide?

•   How well does this match up with your specific needs?

•   How does the advisor charge? In other words, how does your advisor get paid?

•   What context can be provided about fees? How does a percentage translate into real dollars, both today and in the future?

Evaluating Net Worth, Earnings, Spending, and Financial Goals

It’s important to note that not everyone’s financial situation will warrant professional financial advice. As such, you’ll want to take some time to try and evaluate your net worth, earnings, and goals — do you feel that you can keep a grasp on those aspects of your financial picture? Or do you feel like you’re in over your head?

If you feel like you could use some advice, then it may be a good idea to reach out to a financial professional and see how they may be able to help.

Life Events and SituationsThat Warrant Professional Advice

Also keep in mind that your situation will change over time. You may get a new job, a big promotion, or a big raise — all of which can drastically change your financial situation. In such cases, if the change is significant enough, it could be a good idea to reach out for guidance.

Types of Financial Advisors and Their Services

“Financial advisor” is a broad term that describes several different specialties. Accordingly, it can be helpful to understand the different types of financial advisors out there.

Different Financial Advisor Specializations

Here are some (but not all) of the different types of advisors:

•   Certified professional planners (CFP®): CFPs are advisors who’ve earned a specific designation, and that can help people with a large range of financial services.

•   Wealth managers: Wealth managers take a broad approach to helping individuals with their finances, and typically offer a range of services.

•   Investment advisors: Investment advisors focus on providing advice and management related to investment portfolios.

•   Retirement planners: Like investment advisors, retirement planners tend to focus on a specific area of a person’s financial picture: Retirement.

Choosing the Right Type of Advisor for Your Needs

The specific type of financial advisor that is a good particular fit for any individual will vary depending on the person’s specific situation. As such, there’s no “one-size-fits-all” for financial advisors, and you’ll likely be best off giving some serious thought as to your needs, and how an advisor can help you.

It may be worth speaking with several different advisors to get a better sense of how they could help, and then making a decision as to which, if any, to work with.

Understanding Advisor Fees and Payment Structures

There are many types of fees and payment structures that may apply to financial advisors.

Commissions

When advisors are compensated on a commission basis, they receive pay based on the products they sell. The amount of commission paid can vary widely depending upon the product and the company.

Multiple arrangements can exist for advisors paid on commission, including receiving a percentage of a client’s assets before money is invested or being paid by the financial institution involved after a transaction takes place. Or, the client might be charged each time that stocks are bought or sold.

Advisory Fees

When an advisory fee is charged by the advisor, the general charge for the client is a percentage of the assets they manage. It’s reasonable to expect that an advisor can explain the reasoning behind the fee being charged, given a client’s specific circumstances — and if it’s higher than expected, it’s also reasonable to ask what added value the client is receiving.

Perhaps, for example, the advisor also helps with tax planning, or estate planning. They may be investigating a client’s financial vulnerabilities or otherwise going beyond standard money management services.

Actively managed portfolios may come with a higher fee because the advisor may charge more for putting more effort into getting the best value for their client.

Planning Fees

With this type of fee, the advisor would charge an upfront fee, or a subscription-based one, to provide either a financial plan or ongoing advice. As a potential client considers financial advisors, they may find themselves talking to someone who charges a fixed planning fee to create an initial plan and then uses a different fee structure to actually manage the portfolio. What’s most important is to be clear about what will be charged, and how.

Hourly Fees

In this case, the financial advisor charges a straight hourly fee for their services. On the one hand, having an advisor charge an annual fee means that a client may not need to worry as much that their advisor is recommending products because of the income the advisor would earn off of that recommendation.

Choosing a financial advisor that charges per hour can be costly, though, especially if more investigation needs to be done to find a product that fits a client’s needs. This may or may not be a huge concern, but if resources are limited these fees can potentially be hefty.

How to Choose the Right Financial Advisor

There’s no “right” financial advisor for everyone, but there can be some who may be better fits for your specific situation than others.

Tips for Finding and Selecting an Advisor

Starting broadly, it can be helpful to try and discern what types of services you need, or what type of advice you think would be most beneficial. From there, you’ll want to winnow down the types of advisors you’re looking for — you can review the short list above, or dig even deeper — and think about how those types of advisors can address your needs.

Then, consider the fees and costs, also as discussed. Some may not necessarily be worth the cost of retaining their services — but again, it’ll depend on the individual.

You can also look at, or search for advisors through various trade groups — there are many for financial professionals. It can be helpful to narrow down your search to a few selections, meet or interview them, and then make a decision.

Red Flags and Key Factors to Consider

A few things to look out for when you’re shopping around for financial advisors or planning services: Conflicts of interest, a lack of credentials or qualifications, and high-pressure sales tactics. While these aren’t necessarily deal-killers, they can be things to look out for. And remember, if you feel uncomfortable, you can always move on and talk to other advisors – there are hundreds of thousands of them in the U.S.!


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

Working with a Financial Advisor

Working with a financial advisor should be a rewarding experience. Here’s what to expect.

What to Expect in the Relationship

You should anticipate that your relationship with your advisor will be close — but not too close. They’ll take a hard look at your finances, consider your goals, and (hopefully) do their best to give you actionable advice and guidance. They may not want to get too personable, though, as emotion can enter the picture and make the process a bit murkier.

You should be ready to share fairly detailed aspects of your financial life, your career, family and personal goals, and more. That may be uncomfortable for some, but it’s important for an advisor to get the whole picture and map out a way to help you reach your goals.

The Takeaway

Financial advisors help individuals reach their financial goals by offering advice and guidance. There are many different types of financial advisors, and many different ways in which they are paid or charge for their services. As such, there’s no catch-all “financial advisor,” and not every type of advisor will be right for each individual.

For that reason, it’s important that you take the time to figure out your needs, and determine what type of advisor, if any, is the best fit for your situation. It may take some time to figure it out, but if you want the most bang for your buck, it could be worth it down the road.

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.

FAQ

Is it really worth having a financial advisor?

It can be worth having a financial advisor, but it’ll ultimately depend on each individual. Some people may not feel that an advisor is worth it, while others will say the opposite – there’s no clear, one-size-fits-all answer.

Does the average person need a financial advisor?

Whether someone needs a financial advisor depends on several factors, and while many “average” people feel they can handle their finances perfectly fine without a professional, others might not.

Do I need a financial advisor for my 401(k)?

You don’t necessarily need a financial advisor for a 401(k), but they may be helpful if you want to add an element of active management into the mix. That said, not everyone will feel that they need an advisor to oversee or help manage one retirement account.

Why don’t people use financial advisors?

Some people may not want to use financial advisors because they don’t feel that they have enough money or wealth to warrant it, and because they want to avoid the fees and costs associated with professional advice.

SoFi Invest®

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

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

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

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

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Jan
02
2023
What Is the Chicago Board Options Exchange (CBOE)?

What Is the CBOE?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is the CBOE?

The CBOE is CBOE Global Markets, the world’s largest options trading exchange. While you may already be familiar with the New York Stock Exchange and Nasdaq, those are only two of the exchanges investors use to trade securities.

In addition to the option trading exchange, CBOE has also created one of the most popular volatility indices in the world.

Learn more about CBOE and what it does.

What Is the CBOE Options Exchange?

CBOE, or CBOE Global Markets, Inc., is a global exchange operator founded in 1973 and headquartered in Chicago. Investors often turn to CBOE to buy and sell both derivatives and equities. In addition, the holding company facilitates trading over a diverse array of products in various asset classes, many of which it introduced to the market.

The organization also includes several subsidiaries, such as The Options Institute (an educational resource), Hanweck Associates LLC (a real-time analytics company), and The Options Clearing Corporation or OCC (a central clearinghouse for listed options).

The group has global branches in Canada, England, the Netherlands, Hong Kong, Singapore, Australia, Japan, and the Philippines.

CBOE is also a public company with a stock traded on the cboe exchange.

What Does CBOE Stand For?

Originally known as the Chicago Board Options Exchange, the company changed its name to CBOE in 2017.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

History of the Chicago Board of Options Exchange

Founded in 1973, CBOE represented the first U.S. market for traders who want to buy and sell exchange-listed options. This was a significant step for the options market, helping it become what it is today.

In 1975, the CBOE introduced automated price reporting and trading along with The Options Clearing Corporation (OCC).

Other developments followed in the market as well. For example, CBOE added “put” options in 1977. And by 1983, the market began creating options on broad-based indices using the S&P 100 (OEX) and the S&P 500 (SPX).

In 1993, the CBOE created its own market volatility index called the CBOE Volatility Index (VIX). In 2015, it formed The Options Institute. With this, CBOE had an educational branch that could bring investors information about options.

CBOE continues its educational initiatives. The Options Institute even schedules monthly classes and events to help with outreach, and it offers online tools such as an options calculator and a trade maximizer.

From 1990 on, Cboe began creating unique trading products. Notable introductions include LEAPS (Long-Term Equity Anticipation Securities) launched in 1990; Flexible Exchange (FLEX) options in 1993; short-term options known as Weeklys in 2005; and an electronic S&P options contract called SPXpm in 2011.

Understanding What the CBOE Options Exchange Does

The CBOE Options Exchange serves as a trading platform, similar to the New York Stock Exchange or Nasdaq. It has a history of creating its own tradable products, including options contracts, futures, and more. Cboe also has acquired market models or created new markets in the past, such as the first pan-European multilateral trading facility (MTF) and the institutional foreign exchange (FX) market.

The CBOE’s specialization in options is essential, but it’s also complicated. Options contracts don’t work the same as stocks or exchange-traded funds (ETFs). They’re financial derivatives tied to an underlying asset, like a stock or future, but they have a set expiration date dictating when investors must settle or exercise the contract.That’s where the OCC comes in.

The OCC settles these financial trades by taking the place of a guarantor. Essentially, as a clearinghouse, the OCC acts as an intermediary for buyers and sellers. It functions based on foundational risk management and clears transactions. Under the Security and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), it provides clearing and settlement services for various trading options. It also acts in a central counterparty capacity for securities lending transactions.

Recommended: How to Trade Options

CBOE Products

Cboe offers a variety of tradable products across multiple markets, including many that it created.

For example, CBOE offers a range of put and call options on thousands of publicly traded stocks, (ETFs), and exchange-traded notes (ETNs). Investors use these tradable products for specific strategies, like hedging.

Or, they use them to gain income by selling cash-secured puts or covered calls. These options strategies give investors flexibility in terms of how much added yield they want and gives them the ability to adjust their stock exposures.

Investors have the CBOE options marketplace and other alternative venues, including the electronic communication network (ECN), the FX market, and the MTF.


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

CBOE and Volatility

The CBOE’s Volatility Index (VIX) gauges market volatility of U.S. equities. It also tracks the metric on a global scale and for the S&P 500. That opens up an opportunity for many traders. Traders, both international and global, use the VIX Index to get a foothold in the large U.S. market or global equities, whether it’s trading or simply exposing themselves to it.

In late 2021, CBOE Global Markets extended global trading hours (GTH) on CBOE Options Exchange for its VIX options and S&P 500 Index options (SPX) to almost 24 hours per business day, five days a week. They did this with the intention to give further access to global participants to trade U.S. index options products exclusive to CBOE. These products are based on both the SPX and VIX indices.

This move allowed CBOE to meet growth in investor demand. These investors want to manage their risk more efficiently, and the extended GTH could help them to do so. With it, they can react in real-time to global macroeconomics events and adjust their positions accordingly.

Essentially, they can track popular market sentiment and choose the best stocks according to the VIX’s movements.

Recommended: How to Use the Fear and Greed Index to Your Advantage

The Takeaway

While CBOE makes efforts to educate and open the market to a broader range of investors, options trading is a risky strategy.

Investors should recognize that while there’s potentially upside in options investing there’s usually also a risk when it comes to the options’ liquidity, and premium costs can devour an investor’s profits. That means it’s not the best choice for those looking for a safer investment.

While some investors may want further guidance and less risk, for other investors, options trading may be appealing. Investors should fully understand options trading before implementing it.

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

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

Photo credit: iStock/USGirl

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

SoFi Invest®

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

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

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Dec
28
2022
What Is Cash Settlement in Options?

What Is Cash Settlement in Options?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Cash Settlement in Options?

Cash settlement in options is a method where the buyer of an option contract can exercise their right to receive the underlying asset, such as a stock or commodity, in the form of cash rather than the physical delivery of the asset. This means that instead of receiving the stock or commodity, the option holder will receive an amount of cash equal to the value of the underlying asset when the option is exercised.

Cash settlement may be used in options trading because it allows traders to speculate on the price movement of securities without actually having to own or hold the underlying assets. This can be particularly useful for traders looking to hedge their positions or who want to avoid the risks associated with holding the underlying assets.

What Is Cash settlement?

As noted above, cash settlement refers to a settlement method where the buyer of an option contract receives the cash difference between the strike price and the current market price of the underlying security. This is in contrast to the more traditional method of physical settlement, where the buyer of the option contract would receive the underlying security upon exercise.

When trading options, there are two primary methods for settling the contract: physical delivery and cash settlement. In physical delivery, the buyer of the option receives the underlying asset, such as a stock or commodity, when the option is exercised. Most listed equity options contracts are settled with the actual delivery of shares.

On the other hand, cash settlement allows the buyer of an option to receive the value of the underlying asset in the form of cash when the option is exercised. This means that the buyer does not receive the stock or commodity but receives an amount of cash equal to the value of the underlying asset when the option is exercised. Often, equity index and binary options are cash-settled.

💡 Recommended: Options Trading 101: An Introduction to Stock Options

How Does Cash Settlement Work?

The cash settlement process in options works like this:

When an options contract is exercised, the buyer has the right — but not always the obligation — to buy or sell the underlying security at the agreed-upon price (called the strike price). In a cash settlement, the buyer of the option is not required to purchase or sell the underlying security. Instead, they receive a cash payout based on the difference between the strike price and the current market price of the underlying security.

💡 Recommended: 10 Options Trading Strategies for Beginners

Example of Cash Settlement

Suppose an investor buys a call option on stock ABC with a strike price of $50. This means that the investor has the right to buy the stock at $50 per share at any time before the option expires if the stock’s price is above the strike price. If the stock’s market price rises above $50, the option becomes “in the money,” and the investor can exercise their right to buy the stock at $50, even if the market price is higher.

Suppose that, when the option expires, the stock’s market price is $55 per share. If the option is cash-settled, the investor can exercise their right to buy the stock at $50 per share and receive a cash payment of $5 per share (the difference between the strike price and the market price) multiplied by the number of options contracts that are exercised. This means the investor would receive a total cash payment of $500 (assuming they exercised a standard options contract of 100 shares).

Alternatively, if the stock’s market price is below $50 when the option expires, the option becomes “out of the money,” and the investor will not exercise their right to buy the stock. In this case, the option would expire worthless, and the investor would not receive any cash payment.

💡 Recommended: In the Money vs Out of the Money Options

Pros and Cons of Cash Settlement

Pros

 Cons
Improves liquidity across derivatives markets Prices have a risk of manipulation
Does not require cumbersome delivery coordination and costs in commodities markets or delivery of shares in options trading Only available on European-style options
Allows parties to hedge and speculate financially on products that cannot be physically delivered Commodities producers and consumers might prefer physical delivery when the product is needed for use

Advantages of Cash Settlement

There are several advantages to using cash settlement in options trading. First, it can be more convenient for the buyer, as they do not have to worry about physically receiving and storing the underlying asset. Cash settlement can be beneficial for traders who cannot hold the underlying asset, such as those who are trading options on futures contracts of commodities.

Another advantage of cash settlement is that it can be more cost-effective. Since the buyer does not have to take possession of the underlying asset, they do not have to pay any additional fees or expenses associated with holding an asset like gold, oil, wheat, or other commodities. This can help to reduce the overall cost of trading options and make them more accessible to a broader range of investors.

In addition to these advantages, cash settlement can provide greater flexibility for options traders. With physical delivery, the buyer must take possession of the underlying asset when the option is exercised, which can limit their ability to trade the asset in the future. With cash settlement, the buyer can use the funds received from the option to buy or sell the underlying asset in the market, allowing them to take advantage of changing market conditions.

Furthermore, cash settlement allows for a more efficient transaction in the overall derivatives markets — which includes options — adding to its liquidity.

Drawbacks of Cash Settlement

However, there are some drawbacks to cash settlement compared to physical settlement. For example, some investors may prefer the security and control that comes with physically owning and holding the underlying asset rather than receiving a cash payment. This is because cash can be more easily lost, stolen, or subject to inflation, whereas physical assets may provide a more tangible form of wealth. Also, physical settlement is not usually subject to manipulation by either party involved in the options contract because the activity is monitored by the broker and clearing exchange.

Other cash settlement drawbacks include that it is usually only available to European-style options, where the option holder can only exercise the contract at expiration rather than early like American-style options. Also, physical settlement may be preferred by traders who need the underlying asset for use.

Cash Settlement vs Physical Settlement

There are several important differences between cash settlement and physical settlement.

Definitional Differences

Cash settlement of options is a financial reconciliation. Physical settlement reconciles a contract with the underlying asset. A common physical delivery example is a commodity, but it can also be shares of an underlying financial asset such as stock.

Mode of Payment

Option cash settlement payments are made instantly by parties. It is a straightforward financial account transfer of the difference between the underlying asset’s spot price and the options contract or strike price.

Physical settlement’s mode of payment is a full payment of the underlying asset — the option contract’s underlying asset is physically delivered to the buyer.

Level of Liquidity

Liquidity is better in markets with a cash settlement option versus those with physical settlement only. More market traders — hedgers and speculators — can participate in cash-settled derivative markets since there can be lower capital requirements. Options traders also can engage in rolling options instead of exercising them.

Time Taken

Option cash settlement can be done with instantaneous financial transactions. Physical delivery involves potentially lengthy delivery times of an underlying commodity.

Level of Risk

Another upshot in markets with a cash settlement option is market risks are lower. Physical settlement often involves transfer certificates and other documents that could be susceptible to manipulation, loss, and theft.

Convenience

It is hard to argue with the convenience of cash settlement. Two parties square up using straightforward price differences rather than figuring out the logistics of the physical delivery of an asset. With equity index options, taking delivery of all the shares of a stock index can also be unwanted by the buyer. There can also be fewer fees with cash settlement, resulting in fewer trades.

Practicality, costs, and simplicity make cash settlement easier than physical settlement.

Practicality

Due to lower costs and quick payments, option cash settlement is more practical than physical settlement.

Costs Involved

Trades with cash settlements have low or even zero cost until settlement when the buyer and seller reconcile with a payment. With physical delivery, there are several costs, such as transportation costs, delivery expenses, and broker fees.

Simplicity

A final aspect that makes cash settlement advantageous versus physical settlement is the pure simplicity of cash settlement. Cash settlement is a netted payment from one party to the other.

Popularity

Cash Settlement

 Physical Settlement
Popular with retail traders who might not want to take large physical deliveries Popular with commodities firms that use the underlying asset
Popular with exchanges since more traders can transact, leading to more commissions and better liquidity Popular with large exchanges since a single exchange can become the primary exchange for a certain asset
Popular with large traders since they can quickly settle contracts with low cost Popular with listed stock options traders if they want to take delivery of shares

The Takeaway

Cash settlement in options trading may provide a convenient and cost-effective way for buyers of options contracts to exercise their rights to the underlying asset. By receiving the asset’s value in cash, traders can avoid the costs and complications associated with physical delivery while still maintaining the flexibility to trade the underlying asset in the market. However, investors should be aware that most equity options are not cash-settled but are settled with the delivery of underlying shares of stock.

If you’re ready to try your hand at options trading, SoFi can help. You can trade options from the SoFi mobile app or through the web platform. And if you have any questions come up along the way, SoFi offers educational resources about options to learn more.

Trade options with low fees through SoFi.

FAQ

What is the difference between a physical and cash settlement?

Cash settlement is a financial payment for the value of a stock or commodity underlying an options or futures contract when the holder exercises. Physical settlement entails the actual delivery of the underlying asset. In commodities markets, that means the commodity is delivered to the buyer. With equity options, physical delivery happens when the buyer receives shares of the underlying asset specified in the options contract.

Can you trade with unsettled cash?

Yes. You can use the proceeds from a sale to make another purchase in a cash account while your funds remain unsettled. Unsettled cash from a day trade cannot be used for another purchase until the settlement date

Which futures are cash settled?

According to the CME Group, equity indexes and interest rate futures are the most common cash-settled markets. Some precious metals and foreign exchange markets also settle in cash, along with agricultural products. In the options market, cash-settled options include digital options, binary options, and plain-vanilla index options.

Photo credit: iStock/FreshSplash

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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