Investing Archives

Sep

2023

How Time-Weighted Rate of Return Measures Your Investment Gains

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

One of the most important and most common methods investors use to measure their returns is the time weighted rate of return formula. That’s because the time-weighted rate of return measures a compound rate of growth.

The time-weighted rate of return incorporates the impact of transactions such as portfolios rebalancing, contributions, and withdrawals. That leaves investors with a clearer picture of their portfolio’s overall performance.

What Is the Time-Weighted Rate of Return?

Starting with the basics, a return on investment (ROI) is a measure of how much money investments earn, or how much they’ve grown in value. Returns can be positive or negative (if a stock loses value following its purchase, for example). But obviously, investors make decisions with the goal of earning positive returns.

A rate of return, then, is a measure of the pace at which investments are accruing value, expressed as a percentage. The higher the rate of return, the better. Essentially, it’s a measure of a portfolio’s or investment’s performance over time. Rates of return can be calculated for certain time periods, such as a month or a year, and can be helpful when comparing different types of investments.

But investment portfolios are rarely static. Many investors make contributions or withdrawals to their portfolios on a regular basis. Many people contribute to their 401(k) with each paycheck, for example, or rebalance when market moves throw their asset allocation out of whack.

During these transactions, investors are buying and selling investments at different prices and times based on their investing strategy. That can make it more difficult and complicated to calculate a portfolio’s overall rate of return.

That’s where the time-weighted rate of return formula becomes useful. In short, the time-weighted rate of return formula takes into account a portfolio’s cash flows, and bakes in their effect on the portfolio’s overall returns. That gives investors a better, more accurate assessment of their portfolio’s performance.

That’s why the time-weighted rate of return calculation is, for many in the financial industry, the standard formula for gauging performance, over both the short- and the long-term.

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The Time-Weighted Rate of Return Formula

The time-weighted rate of return formula can look intimidating for even seasoned investors, but it’s an important step in building and maintaining an investment portfolio. But like many other financial formulas, once the variables are identified, it’s a matter of plug-and-play to run through the calculation.

First, let’s take a look at the basic portfolio return calculation:

Basic portfolio return = (Current value of portfolio – initial value of portfolio) ÷ initial value

While this formula provides a value, it assumes that an investor made one investment and simply left their money in-place to grow. But again, investors tend to make numerous investments over several time periods, limiting this calculation’s ability to tell an investor much about their strategy’s effectiveness.

That’s where the time-weighted rate of return comes in. In essence, the time-weighted formula calculates returns for a number of different time periods — usually additional purchases, withdrawals, or sales of the investment.

It then “weights” each time period (assigns them all roughly equal importance, regardless of how much was invested or withdrawn during a given period). Then, the performance of each period is included in the formula to get an overall rate of return for a specified period.

Calculating the time-weighted rate of return over the course of a year, for instance, would include the performance from each individual month. And, yes, that’s a lot of math. Computers and software programs can help, but it’s also doable the old-fashioned way.

This is what the time-weighted rate of return formula looks like:

Time-weighted return = [(1 + RTP1)(1 + RTP2)(1 + RTPn)] – 1

There are variables needed to calculate the equation:

n = Number of time periods, or months
RTP = Return for time period (month) = (End value – initial value + cash flow) ÷ (initial value + cash flow)
RTPn = Return for the time period “n”, depending on how many time periods there are

Let’s break it down again, and assume we’re trying to calculate the time-weighted return over three months. That would involve calculating the return for each individual month, three in all. Then, multiplying those returns together — “weighting” them — to arrive at an overall, time-weighted return.

💡 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 to Calculate Time-Weighted Rate of Return

To run through an example, assume we want to calculate a three-month, time-weighted return. An investor invests $100 in their portfolio on January 31. On February 15, the portfolio has a value of $102, and the investor makes an additional deposit of $5. At the end of the three-month period on April 30, the portfolio contains $115.

For this calculation, we wouldn’t think of our time periods as merely months. Instead, the time periods would be split in two — one for when a new deposit was made. So, there was the initial $100 deposit that would constitute a time period that ends on February 15. Then a second time period, when the $5 deposit was made, which constitutes a second time period.

With this information, we can make the calculation. That includes calculating the return for each time period during our three-month stretch. So, for time period one, the basic formula looks like this:

Return for time period = (End value – initial value + cash flow) ÷ (initial value + cash flow)

Now, we plug in our variables and calculate. Remember, there was no additional cash flow during this first period, so that won’t be included in this first calculation.

Time period 1:
($102 – $100) ÷ $100 = 0.02, or 2%

Then, do the same to calculate time period two’s return:

Time period 2:
[$115 – ($102 + $5)] ÷ ($102 + $5) = 0.074, or 7.4%

Now, take the returns from these two time periods and use them in the time-weighted rate of return formula:

Time-weighted return = [(1 + RTP1)(1 + RTP2)(1 + RTPn) – 1

With the variables — remember to properly use percentages!

TWR = [(1 + 0.02) x (1 + 0.074)] – 1 = 0.95, or 9.5%

So, the time-weighted return over this three-month stretch (which included two time periods for our calculation), is 9.5%. If we had simply done a basic return calculation, we’d reach a different number:

Basic portfolio return = (Current value of portfolio – initial value of portfolio) ÷ initial value
$115 – $100 ÷ $100 = 0.15, or 15%

That 15% figure is too high, because it doesn’t account for cash flow. In this case, that was a $5 deposit made in mid-February. The basic return formula folds that into the overall return figure. The time-weighted calculation gives us a more accurate return percentage, and one that accounts for that mid-February deposit.

Other calculations

While the time-weighted rate of return is an important measurement, it’s not the only way to look at a portfolio’s returns. Some investors may also choose to evaluate a portfolio or investment based on its money-weighted rate of return. That calculation is similar to the time-weighted rate of return because it incorporates inflows and outflows, but it does not break the overall investment period into smaller intervals.

Another common measure is the compound annual growth rate, (CAGR), which measures an investment’s annual growth rate over time and does not include the impact of inflows and outflows.

The Takeaway

Having an accurate, timely view of a portfolio’s performance is critical for understanding current investments, planning future investments, and considering changes to your asset allocation. While other rate of return calculations can be useful, it’s important to understand their limitations.

The time-weighted rate of return formula is helpful because it takes into account the numerous inflows and outflows of money over various time periods. Armed with that insight, investors can adjust their strategy to try to increase their rate of return. That may mean reallocating or rebalancing their portfolio to include more aggressive investments or less risky securities.

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

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

SOIN0623024

Sep

2023

What Is an IPO Pop?

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

An IPO pop occurs after a company goes public, when its stock price jumps higher on the first day of trading.

No matter how much preparation they’ve done, company executives and shareholders never really know how a stock will perform once it hits the market through its initial public offering (IPO).

While they of course hope to see some increase in price, a big spike — or IPO pop — could indicate that the underwriters underpriced the IPO.

Key Points

• An IPO pop occurs when a company’s stock spikes on its first day of trading and may indicate that underwriters didn’t properly price retail investor demand into the IPO price.

• In 2021, IPOs saw increases of 40% on average on the first trading day, but in the second quarter, companies were pricing below their expected ranges.

• Direct listings are an alternative to IPOs that may help avoid an IPO pop, but they aren’t as efficient at raising capital.

• Buying IPO stocks can be profitable, but it’s important to research the company before investing and to consider broad market trends.

• IPO pops are relatively common, and larger companies tend to have larger pops since they are in high demand.

IPO Pop Defined

An IPO pop occurs when a company’s stock spikes on its first day of trading. An IPO pop may be a sign that underwriters did not properly price retail investor demand into the IPO price.

For instance, if a company prices its shares at $47 in its IPO and the price goes to $48 or $50, that would be considered a normal and positive IPO increase. But if the stock jumped to $60, both the company and its early investors might believe an error occurred in the IPO pricing.

This is one of the reasons that IPO shares are considered highly risky. In many cases, historically, that initial price jump hasn’t lasted, and investors who bought on the way up have taken a hit on the way down.

Recommended: What Is an IPO?

Problems Indicated by an IPO Pop

Many different factors go into pricing an IPO, including revenue, private investment amounts, public and institutional interest in investing. IPO underwriters try to find a share price that institutional investors will buy.

If the public thinks a company’s shares are more valuable than what early investors, underwriters, and executives thought, that means the company could have raised more money, increasing their own profit. Or they could have raised the same amount of money but with less dilution.

Also, when bankers price an IPO too low, that means their customers benefit — while company founders and VCs miss out on more profits.

If the share price soars on the first day, some investors will be happy, but it means the company could have raised more money if they had priced the stock higher from the start. It also means that existing investors could have given up a smaller percentage of their ownership for the same price.

IPO Trends

In the past, some companies have seen significant IPO pops occur on their first trading day. But in many cases the market cooled down after the first quarter, with some high-profile companies seeing declines on their first day.

Take 2021 as an example; in that year there were a record number of IPOs in the market.

In the first quarter of 2021 many companies were pricing their IPOs at the top of their expected range, due to increased demand, an improving economy, and a strong stock market. Even after that, IPOs still saw increases of 40% on average on the first trading day.

But in the second quarter, companies were pricing below their expected ranges and some weren’t even reaching those prices on the first trading day. This made the public less eager to buy into IPOs. This type of volatility is common to IPOs, and another reason why investors should be cautious when investing in them.

There was also a boom in special-purpose acquisition corporations (SPACs), IPOs of shell companies that go public with the sole purpose of acquiring other companies.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

Direct Listings

Some companies have turned to direct listings as a way to try to avoid an IPO pop. In a direct listing, the company doesn’t have an IPO, they just list their stock and it starts trading in the market. There is a reference price set by a market maker for the stock in a direct listing, but it isn’t nearly as important as the price of a stock in an IPO. Although this can help avoid an IPO pop, it is not as efficient as an IPO as a means of raising capital.

Setting a price for an IPO is a key part of that fundraising strategy. A newer strategy companies are trying is raising a large amount of private capital just before going public, and then doing a direct listing instead of an IPO. The process gives a valuation to the stock price but in a different way from pricing shares for an IPO.

A third strategy is to direct list, and then do a fundraising round some time after the listing, giving the public a chance to establish the market price for the stock.

Do IPOs Usually Go Up or Down?

Although stocks increase an average of 18.4% on their first day of trading, 31% of IPOs decrease when they start to trade. Calculations of IPO profits show that almost 50% of IPOs decrease from their day-one trading price on their second day of trading. While IPO investing may seem like a great investment opportunity, IPOs remain a risky and unpredictable asset class.

Average IPO First Day Return

IPO pops are relatively common. Sometimes average first day returns increase significantly, such as during the dot-com bubble when the average pop was 60%. Larger companies generally have larger pops, since they are in high demand.

Determining the Right IPOs to Invest In

Buying IPO stocks can be profitable, but it also has risks. Just because a company is well known or there is a lot of publicity around its IPO doesn’t mean the IPO will be profitable. As with any investment, it’s important to research the market and each company before deciding to invest.

It’s also important to be patient and flexible, as individual investors don’t always have the ability to trade IPO shares. Or investors may have access at some point after the actual IPO. In addition, IPO shares can be limited.

If you’re interested in upcoming IPOs, it’s important to keep in mind that IPOs increase in price on the first day but quickly decrease again, and almost a third of IPOs decrease on their first listing day. Popular IPOs are more likely to increase, but they are also crowded with investors, so investors might not see their orders fulfilled.

When investing in IPOs through your brokerage account, it’s important to look at broad market trends in addition to individual company fundamentals. When the market is strong, IPOs tend to perform better. Also, when high-profile companies have unsuccessful IPOs, investors may become more wary about investing in upcoming IPOs.

Each sector has different trends and averages. Generally tech companies have higher first day returns than other types of companies, even though they’re also often unprofitable. Investors still want in on these IPOs because they may have strong future earnings potential.

Historically, some of the most successful tech stocks started out with negative earnings, so low earnings are not a strong indicator of future success or failure.

The Takeaway

As exciting as an IPO pop can be, it’s another example of how hard it is for individual investors to time the market. First, there’s no way to predict if a newly minted stock will have a spike after the IPO. Sometimes there is a pop and then the price plunges. This is one reason why IPOs are considered high-risk events.

Investors who find IPOs compelling may want to assess company fundamentals and other market conditions before investing in IPO stock.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

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

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

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

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

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.

SOIN0623070

Sep

2023

What Is Yield to Call? Formula & Examples

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

An investor calculating yield to call is getting an idea of how much their overall bond returns will be. Specifically, yield to call refers to the total returns garnered by holding onto a bond until its call date. That doesn’t apply to all bonds, naturally, but can be very important for many investors to understand.

For investors who utilize bonds — callable bonds, in particular — as a part of their investment strategy, having a deep understanding of yield to call can be critical.

What Is Yield to Call?

As mentioned, yield to call (often abbreviated as “YTC”) refers to the overall return earned by an investor who buys an investment bond and holds it until its call date. Yield to call only concerns what are called callable bonds, which are a type of bond option.

With callable bonds, issuers have the option of repaying investors the value of the bond before it matures, potentially allowing them to save on interest payments. Callable bonds come with a call date and a call price, and the call date always comes before the bond itself matures.

A little more background: in a YTC scenario, ”yield” refers to the total amount of income earned over a period of time. In this case, the yield is the total interest a bond purchaser has accrued since purchasing the bond.

How Yield to Call Works

If an investor buys a callable bond, they’ll see interest payments from the bond issuer up until the bond reaches maturity. The callable bond also has a call date, and the investor can choose to hold onto the bond until that date. If the investor does so, then YTC amounts to the total return the investor has received up until that date.

Yield to call is similar to yield to maturity, which is the overall interest accrued by an investor who holds a bond until it matures. But there are some differences, especially when it comes to how YTC is calculated.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Yield to Call Formula

The raw yield to call calculation formula looks like this:

Yield to Call Formula:

Yield to call = (coupon interest payment + ( The call price – current market value ) ÷ time in years until call date ) ÷ (( call price + market value ) ÷ 2)

An investor should have all of the variables on-hand to do the calculation. Before we run through an example, though, here’s a breakdown of those variables:

• Yield to call: The variable we are trying to solve for!

• Coupon interest payment: How much the bondholder receives in interest payments annually.

• Call price: The predetermined call price of the callable bond in question.

• Current market value: The bond’s current value.

• Time until call date: The number of years until the bond’s first call date arrives

The yield-to-call calculation will tell an investor the returns they’ll receive up until their bond’s call date. A bond’s value is roughly equal to the present value of its future earnings or cash flows — or, the return, at the present moment, that the bond should provide in the future.

How to Calculate Yield to Call

It can be helpful to see how yield to call looks in a hypothetical example to further understand it.

Yield to Call Example

For this example, we’ll say that the current face value of the bond is $950, it has an annual coupon interest payment of $50, and it can be called at $1,000 in four years.

Here’s how the raw formula transforms when we input those variables:

Yield to call = ($50 + ( $1,000 – $950 ) ÷ 4 ) ÷ (( $1,000 + $950 ) ÷ 2)

YTC = $25 ÷ $975

YTC = 0.0256 = 2.56%

Interpreting Yield to Call Results

Once we know that our hypothetical, callable bond has a yield to call of 2.56%, what does that mean, exactly? Well, if you remember back to the beginning, yield to call measures the yield of a bond if the investor holds it until its call date.

The percentage, 2.56%, is the effective return an investor can expect on their bond, assuming it is called before it matures. It’s important to remember, too, that callable bonds can be called by the issuer at any time after the call date. So, just because there is an expected return, that doesn’t necessarily mean that’s what they’ll see.

Yield to call calculations make a couple of big assumptions. First, it’s assumed that the investor will not sell the bond before the call date. And second, the calculation assumes that the bond will actually be called on the call date. Because of these assumptions, calculations can produce a number that may not always be 100% accurate.

Yield to Call Comparisons

Two calculations that are similar to YTC are “yield to maturity,” and “yield to worst.” All three calculations are related and offer different methods for measuring the value that a bond will deliver to an investor.

A different type of yield calculation would be needed if you wanted to try and measure the overall interest you’d earn if you held a bond to maturity. That’s different from measuring the overall interest you’d earn by simply holding the bond until its call date.

Yield to Call vs Yield to Maturity

YTC calculates expected returns to a bond’s call date; yield to maturity calculates expected returns to the bond’s maturity date. Yield to maturity gives investors a look at the total rate of return a bond will earn over its entire life, not merely until its call date (if it has one).

Yield to Call vs Yield to Worst

Yield to worst, or “YTW,” measures the absolute lowest possible yield that a bond can deliver to an investor. Assuming that a bond has multiple call dates, the yield to worst is the lowest expected return for each of those call dates versus the yield to maturity. Essentially, it gives a “worst case” return expectation for bondholders who hold a bond to either its call date or for its entire life.

If a bond has no call date, then the YTW is equal to the yield to maturity — because there are no other possible alternatives.

💡 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.

The Takeaway

Learning what yield to call is and how to calculate it, can be yet another valuable addition to your investing tool chest. For bond investors, YTC can be helpful in trying to figure out what types of returns you can expect, especially if you’re investing or trading callable bonds.

It may be that you never actually do these calculations, but having a cursory background in what the term yield to call means, and what it tells you, is still helpful information to keep in your back pocket.

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

FAQ

What is the advantage of yield to call?

Yield to call helps investors get a better idea of what they can expect in terms of returns from their bond holdings. That can help inform their overall investment strategy.

How do you calculate yield to call in Excel?

Calculating yield to call can be done the old fashioned way, with a pen and paper, or in a spreadsheet software, of which there are several. An internet search should yield results as to how to calculate YTC within any one of those programs.

Is yield to call always lower than yield to maturity?

Generally, an investor would see higher returns if they hold a bond to its full maturity, rather than sell it earlier. For that reason, yield to call is generally lower than yield to maturity.

Photo credit: iStock/MicroStockHub

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

Sep

2023

What Is a Candlestick Chart?

By MP Dunleavey | Growing Wealth, Investing | Comments Off

What Are Candlestick Charts?

Candlesticks are price chart units that show the high, low, opening, and closing prices of a stock or security within a specified time period. Overtime, the candles create patterns that traders can use to predict price movements, trends, and reversals.

Most candlesticks consist of a body and upper and lower wicks, which are also known as shadows or tails.

Candlestick charts are commonly used, along with line charts, bar charts, and point-and-figure charts.

Understanding Candlestick Charts

Candlesticks originated in Japan, perhaps in the 19th century, as a means of tracking the prices of certain assets and commodities. When candlestick charts were introduced in the West, they originally were called Japanese candlestick charts.

The candlestick itself consists of an open area called the “real body,” which shows the range between the open and close prices, with the price movements in the specified time period shown as vertical lines or wicks (also called shadows) on either end of the body. The wicks indicate the high and the low for that period.

When the real body is filled in with black or red it means the close was lower than the open. When it’s white (blank) or green, the close was higher than the open. On most platforms, traders can alter the colors to whatever is easiest for them to read. Some candlestick charts are black and white.

Traders can set the desired time period they want to analyze; often a candlestick represents the price movements during a trading day. Candlestick patterns are formed by a series of candles within a designated interval (e.g. days or weeks).

Candlestick Charts vs Bar Charts

Like candlestick charts, bar charts show security price changes over time. Many traders think candlestick charts are easier to read; the thicker candle bodies make it easy to see the distinction between the opening and closing price and the high and low.

Bar charts are also often not color coded, making it more difficult to see price trends. However, some traders prefer the cleaner aesthetic of a bar chart.

What Do Candlestick Charts Tell Investors?

Candlestick charts are composed of candles lined up next to one another, each of which shows price movement between the specified time period. Because candles show price changes in certain time periods, traders can use charts to see trends and try to predict price changes.

Candlestick patterns can show that a negative or positive price continuation is likely, or that a price trend may reverse. Even a single candlestick can help traders decide whether to buy or sell.

Some investors use fundamental analysis of an investment to make trading decisions. But that in-depth analysis is typically not of interest to a day trader.

Day traders often use what is called technical analysis in an attempt to detect patterns in a security’s performance. Although this method is common in the financial industry, many debate the validity of these patterns and whether they can be predictive, or help investors anticipate a security’s future performance in any way.

Recommended: Understanding the Risks of Day-Trading

How to Read Candlestick Charts

Owing to the four main components of a single candlestick — the opening price, closing price, the high and the low — candlestick charts convey a lot of information. Essentially you have five data points in each candlestick:

• The opening price (indicated by the top of the real body)

• The closing price (the bottom of the real body)

• The high (the upper wick)

• The low (the lower wick)

• Whether the day’s closing price was higher or lower than the previous close.

Components of a Candlestick

Real Body

As described above, the part of the candle between the top and bottom borders is called the candle body, or real body. This represents the opening and closing prices of the time period that the candle depicts.

The candle body is more important than the wicks or shadows, because the wicks show high and low trades, which may be significantly different from the majority of the day’s trades. A longer candle body shows a stronger price trend in either direction.

Upper Wick

The vertical line above the candle body is the upper wick or shadow. The top of the shadow the highest price the security was traded at during the set time period. A long upper shadow indicates a bearish price direction: It means traders are unsuccessfully attempting to increase prices.

Lower Wick

The line below the candle body is the lower wick. The bottom of the wick marks the lowest price of the security during the set time period. If a wick is short, it means the opening or closing price was near the high and low trades.

Range

The range is the difference between the top and bottom of the real body. If the close was lower than the open, the real body is filled in (usually black or red. If the close was higher than the open, the real body is hollow or green (or another color of the trader’s choice).

While these are the components of a traditional or standard candlestick chart, some candlestick charts have candles without a top or bottom or wicks.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Candlestick Chart Time Frames

Traders can select the time frame that each candle represents. One commonly used time frame shows the opening price, closing price, and high and low for a single day. Each candle in the chart would show the price movement in one day.

A trader could see that a stock price declined significantly over the course of the day, which could result in a continuing decline in the coming days.

The most commonly used time frames are:

• 1-minute (M1)

• 5-minute (M5)

• 15-minute (M15)

• 30-minute (M30)

• 1-hour (H1)

• 4-hour (H4)

• Daily (D1)

• Weekly (W1)

• Monthly (M1)

Shorter time frames essentially allow traders to zoom in on the price action of the chart. For example, an H1 chart would have four times the candles of an H4 chart, so traders can look more closely at price changes.

Types of Candlesticks

Candlesticks are created by price movements throughout the specified time period. Taken as a cluster, candlesticks form patterns traders use for analysis and trend prediction.

Bearish and Bullish Candles

There are two main patterns: bearish (the security’s price is likely to decline) and bullish (the security’s price is likely to rise). These reflect the common terms for bullish and bearish market conditions.

No pattern is a guarantee of a price change or of a security’s performance. Candlestick charts are therefore used more as indicators of potential price trends.

Doji Candles

If the price closes exactly where it opened, there is no candle body. This is called a doji and is marked with a cross. A doji candlestick is rare, but when it shows up it can be a predictor of a price reversal.

Marubozu

The marubozu is essentially the opposite of the doji. It has a long candle body and no wicks or shadows. This type of candle indicates that the price didn’t trade beyond the range of the open and closing prices.

Types of Candlestick Patterns

Certain candlestick patterns can help traders make short-term predictions about price movements. Although a single candle indicates whether buying or selling action is strong, it doesn’t necessarily mean that the long-term price will continue in that direction. This is why traders look at different time periods to get a sense for longer-term trends, and to understand support and resistance levels.

There are many ways to read candlestick charts, depending on trading strategy and time frame.

At first glance, candlestick charts can appear pretty random. But there are many bullish and bearish patterns traders can identify in order to try to predict price movements. It’s important to remember that patterns are not guarantees of future price movement.

Bearish Engulfing Pattern

If there are more sellers than buyers when a chart has been trending upward, traders will see a long red candlestick after a small green one. This can indicate that prices may decline.

Bullish Engulfing Pattern

The opposite pattern will occur if the price is trending downward but then a long green candlestick appears in the chart. This may indicate that prices will continue to increase.

Bearish Evening Star

The evening star pattern is uncommon, but considered a strong indicator of future price declines when it does show up. It’s generally a three-day candlestick pattern.

• The first day is a large white or green candle, indicating a clear rise in price.

• The second day shows a smaller candle, indicating a more modest price increase.

• The third day is a long red candle that opens at a lower price than the previous day, and closes near the middle of the first candle’s range.

Morning Star

The reverse of the evening star is the morning star, a bullish indicator. The first candlestick in this pattern is long and red, the second is short and lower than the first, and the third is a long green candlestick that closes above the center of the first, indicating an upward price trend.

Bearish Harami

This is a two-candle pattern. If traders see a small red or black candle body that fits completely within the previous day’s candle body, it could indicate a price reversal. Price action continuing downward after the small candle could indicate a longer-term downward trend.

Bullish Harami

A bullish harami is a three-day pattern that may indicate a reversal of a bearish trend. If there are two black or red candles, indicating the downward trend, followed by a small white or green candle that fits completely within the body of the previous candle, that may signal a bullish turn.

Harami Cross

The harami cross can be bearish or bullish. With a bearish harami cross, there is a long candle that’s part of a downtrend and it’s followed by a doji.

With a bullish harami cross, there is a long candle that’s part of an upward trend, also followed by a doji.
In either case, the doji could signal a reversal of the trend.

Falling Three Methods

This is a bearish pattern that includes five candlesticks. Typically there is one day with a strong downward trend, followed by three small green candle bodies that stay within the boundaries of the first candle, followed by another long red candle. The falling three methods may signal an interruption of the trend, but not a full-on reversal.

Hammer

If the price significantly decreases but then makes a comeback and ultimately closes near the high, this is called a hammer. The hammer pattern has a small body and a long lower wick. It’s a bullish signal because it shows that the price was declining but then traders pushed it back up.

Hanging Man

The hanging man pattern is the opposite of the hammer. It is also referred to as an inverted hammer. This pattern looks like a square lollipop. If traders are attempting to spot the top or bottom of a market, they often use hammer and hanging man patterns as indicators.

Shooting Star

A shooting star takes shape when a security opens, the price rises significantly over the trading period, but then closes near the opening price, signaling a reversal.

To really be considered a shooting star pattern, this particular candlestick — with the short real body, long top wick, and hardly any bottom wick — must occur within an upward price trend.

Gaps

A gap is a window of time in which there are no trade transactions. Gaps in a chart can indicate support and resistance levels, which can be followed by a further bullish or bearish trend.

The Takeaway

Candlestick charts are a way of condensing price information about a security into a fairly simple diagram that looks like a candle with two wicks. The candle’s “real body” shows the range between the open and close prices. The wicks are the vertical lines at the top and bottom of the real body, indicating the high and the low for that period.

Candlesticks can be grouped together into patterns that traders can interpret as signals of price trends that are either bearish or bullish. Often it’s best to use tools like this with other types of technical indicators.

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Sep

2023

What Are Real Estate Options? Advantages for Buyers

Understanding the Basics of Real Estate Options

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

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

Another way to invest in real estate is through buying or selling real estate options. With an options contract, a buyer is granted the right to purchase a property for a specific price by a specific date, but they are not obligated to buy it.

In order to purchase this option, the buyer of the contract pays the seller a premium.

This is a flexible and typically less expensive way to enter the real estate market that may also help reduce risks involved in single property investment.

What Are Real Estate Options?

Real estate options are contracts between a potential buyer and seller. They grant the buyer the exclusive right to purchase a particular property within terms set in the contract. But the buyer doesn’t have to purchase the property.

However, if the buyer decides to exercise the option and purchase the property, the seller is obligated to sell the property at the agreed-upon price. Once the agreement is entered into, the property owner can’t sell to anyone else within the time period set in the option.

An options contract for a purchase is also known as a call option, whereas an option to sell would be called a put option.

Recommended: Call vs Put Options: Main Differences

How Do Options in Real Estate Work?

Generally, real estate options set a particular purchase price and are valid for anywhere from six months to one year. The buyer doesn’t have to purchase the property, but if they want to, the seller is obligated to sell to them even if the market price has gone up.

The buyer pays what is known as a “premium” in options terminology to enter into the contract. If they decide not to buy the property, the property owner (the seller) keeps that premium.

Real estate options are most often used in commercial real estate, but they can be used by retail investors as well. They aren’t sold on exchanges, and each contract is specific for the property it represents. Usually a contract is only for a single property, not multiple properties.

Real estate options are similar to stock options in that they set a specific price, premium, and period of time for a contract related to an underlying asset. Options can be exercised early or at the expiration date. They can also be sold to another investor.

• Most of the benefits involved in real estate options tilt in the buyer’s favor.

• If the property value goes up a few months into the contract, the buyer can exercise the contract and purchase the property, and sell it for a profit.

• If the property value drops, the buyer can simply let the option expire — thus losing only the premium they paid, which is typically a small percentage of the value of the underlying asset or property in this case.

If the buyer decides not to exercise the contract, they can sell it to another buyer at a potentially higher premium (and pocket the difference).

For a seller, there is the potential for them to make a profit if the buyer exercises their option to purchase the property. They may also profit if the buyer doesn’t exercise the option — at which point they can keep the premium amount, and then sell the contract (or the property) to someone else.

💡 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.

Lease Options

In addition to real estate options for purchases, there are also lease options. These are rent-to-own agreements between a buyer and seller. They let someone lease a property with the option to buy it after a certain amount of time, but not the obligation.

Generally with a lease option, some or all of the rental payment goes towards the purchase. Some lease options lock in a particular price, but others just give the buyer the exclusive right to buy at whatever the market price is.

Although lease options can be great for buyers, they are also more expensive than simply renting a property since they involve a premium. For this reason, it’s important for a buyer to carefully consider the contract and their future plans before entering into a lease option agreement.

2 Advantages of Real Estate Options for Buyers

Options are a common investing strategy for commercial real estate investors. There are several reasons a buyer might enter into a real estate option contract with a seller.

It Can Allow Time for the Buyer to Amass Funds

One might choose a real estate option if they want to secure a piece of land or property at a certain price but they need some time to get funds in order for the purchase.

A Real Estate Option Locks in a Price

If a buyer thinks the price of a property might go up, they can purchase an option to lock in the current market price. However, some real estate options are not completely set in their sale prices. There may be clauses in the contract to determine what the final sale price will actually be.

2 Advantages of Real Estate Options for Investors

Real estate investors can also use options to their advantage.

It’s a Lower-Risk Way to Develop Property

For example, let’s say an investor finds a property they’re interested in developing into housing. The investor needs to create a plan for the property and get other investors involved before they can buy it, so they purchase a real estate option to give them the exclusive right to buy the land.

The investor can make a profit by bringing in investors at a higher rate than the option. They can then buy the land and sell it to the developers they brought in to make a profit.

If they aren’t able to get developers and investors involved before the contract expires then they simply don’t buy the land.

An Investor Can Buy and Sell Real Estate Options

Investors can also make a profit just on buying and selling real estate options contracts rather than the properties themselves. This is a much less capital-intensive way to get involved in real estate investing.

For instance, an investor might find a property they expect will increase in value in the coming months. They purchase a real estate option to buy the land at the current market rate within the next year, pay a premium, and wait.

At any point during the period of the agreement the investor can either act on the contract and buy the property, or they can sell the contract to someone else. Let’s say the value of the property increases three months into the contract. The investor can find another investor who wants to purchase the contract for them for a higher price than the premium the original investor paid.

Whether any investor buys the property or not, the seller of the property keeps the premium.

The Takeaway

Real estate options are a way for investors to get involved in real estate investing without directly buying properties. As with any other kind of options, the investor buys the right to buy or sell at a certain price, but is not obligated to do so.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not offer real estate options trading at this time.

Photo credit: iStock/Melpomenem

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

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Yield to Call Formula

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Yield to Call Example

Interpreting Yield to Call Results

Yield to Call Comparisons

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FAQ

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What Is a Candlestick Chart?

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Understanding Candlestick Charts

Candlestick Charts vs Bar Charts

What Do Candlestick Charts Tell Investors?

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How to Read Candlestick Charts

Components of a Candlestick

Real Body

Upper Wick

Lower Wick

Range

Candlestick Chart Time Frames

Types of Candlesticks

Bearish and Bullish Candles

Doji Candles

Marubozu

Types of Candlestick Patterns

Bearish Engulfing Pattern

Bullish Engulfing Pattern

Bearish Evening Star

Morning Star

Bearish Harami

Bullish Harami

Harami Cross

Falling Three Methods

Hammer

Hanging Man

Shooting Star

Gaps

The Takeaway

Understanding the Basics of Real Estate Options

What Are Real Estate Options?

How Do Options in Real Estate Work?

Lease Options

2 Advantages of Real Estate Options for Buyers

It Can Allow Time for the Buyer to Amass Funds

A Real Estate Option Locks in a Price

2 Advantages of Real Estate Options for Investors

It’s a Lower-Risk Way to Develop Property

An Investor Can Buy and Sell Real Estate Options

The Takeaway

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