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Q: How is an Option Price Determined?

A few primary factors that drive the investment value of an options contract are: the market price of the stock that underlies the option, the current intrinsic value of the option, the time until the option expires, and volatility.

Q: What Are the Different Option Pricing Models?

A few of the most common include: The Black-Scholes Merton (BSM) Model, The Binomial Option Pricing Model, and The Trinomial Option Pricing Model.

Sep

2021

Guide to Options Prices: How are Options Priced?

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

Options are derivative financial instruments that give the buyer the right (but not the obligation) to buy or sell an underlying security, such as a stock, within a predetermined time period for a predetermined price, known as the strike price.

Investors like options because they allow the investor to bet on the price increase or decrease of a stock, without owning the stock itself. There are two main types of options: call options and put options. An investor who buys a call option buys the right to buy the option’s underlying asset. An investor who purchases a put option is buying the ability to sell the option’s underlying asset.

Recommended: A Guide to Options Trading

How is an Option Price Determined?

The sellers of an option take many different factors into account to determine the price, or premium, of an option. The most widely known method for determining the value of an option is the Black-Scholes model. But other models – such as the binomial and trinomial options pricing models – are more commonly used to determine stock option prices.

All of those options pricing models are complex, but they all draw on a few primary factors that drive the investment value of an options contract:

• the market price of the stock that underlies the option

• the current intrinsic value of the option

• the time until the option expires

• volatility

Market Price and Intrinsic Value

The first is easy to understand – it’s the price at which the underlying stock is trading. The second – the intrinsic value of the option – is the value of the option would be worth if sold at that moment. This only applies if the price of the underlying stock has moved to where the option is “in the money,” meaning the owner of the option would make a profit by exercising it.

Time Value

The time until expiration is more complex. It represents the possibility that an out-of-the-money option could eventually become profitable. This so-called time value reflects the amount of time an option has until it expires. It’s one part of an option’s value that only goes down – and which goes at an increasingly rapid rate as the options contract approaches expiration. As the expiration date gets closer, the underlying stock must make bigger moves for those price changes to make significant changes in stock options pricing.

Volatility

That time value reflects the volatility of the underlying security, as well as the market’s expectation of that security’s future volatility. As a general rule, stocks with a history of high volatility underlie options that with a higher likelihood to be in-the-money at the time of their expiration.

Volatility, in many pricing models, is represented by beta, which is the volatility of a given stock versus the volatility of the overall market. And options on stocks with higher historic or expected volatility typically cost more than options contracts on stocks that have little reputation for dramatic price swings.

What Are the Different Option Pricing Models?

There are several models that investors and day traders consider when figuring out how to price an option. Here’s a look at a few of the most common:

The Black-Scholes Merton (BSM) Model

The best-known options pricing method is the Black-Scholes model. The model consists of a mathematical formula that can be daunting for people without a math background. That’s why both institutional and retail investors employ online options calculators and analysis tools.

The economists who created the formula published their findings in 1973, and won the 1997 Nobel Prize in economics for this new method for arriving at the value of financial derivatives.

Also known as the Black-Scholes Merton (BSM) model, the Black-Scholes equation takes the following into account:

• the underlying stock’s price

• the option’s strike price

• current interest rates

• the option’s time to expiration

• the underlying stock’s volatility

In its pure form, the Black-Scholes model only works for European options, which investors can not exercise until their expiration date. The model doesn’t work for U.S. options, because U.S. options can be exercised before their expiration date.

The Binomial Option Pricing Model

The Binomial Option Pricing Model is less well-known outside of financial circles, but it’s more widely used. One reason it’s more popular than the Black-Scholes Model is that it can work for U.S. options. Invented in 1979, the binomial model reflects on a very simple assumption – that in any pricing scenario the premium will go one of two ways: up or down.

As a method for calculating an option’s value, the binomial pricing model uses the same basic data inputs as other models, with the ability to update the equation as new information emerges. In comparison with other models, the binomial option pricing model is very simple at first, but it becomes more complex as investors take multiple time periods into account. For a U.S. option, which the owner can exercise at any point before it expires, traders often use the binomial model to decide when to exercise the option.

By using the binomial option pricing model with multiple periods of time, the trader has the advantage of being able to better visualize the change in the price of the underlying asset over time, and then evaluate the option at each point in time. It also allows the trader to update those multi-period equations based on each day’s price movements, and emerging market news.

Recommended: What Is a Straddle in Options Trading?

The Trinomial Option Pricing Model

The trinomial option pricing model is similar to the binomial model but it allows for three possible outcomes for an option’s underlying asset within a given period. Its value can go up, go down, or stay the same. As they do with the binomial model, traders recalculate the trinomial pricing model over the course of an option’s life, as the factors that drive the option’s price change, and as new information comes to light.

Its simplicity and acknowledgement of a static price possibility makes it more widely used than the binomial option pricing model. When pricing exotic options, or any complex option with features that make it harder to calculate than the common calls and puts on an exchange, many investors favor the trinomial model as a more stable and accurate way of understanding what the price of the option should be.

The Takeaway

Understanding how options pricing works is important, whether you’re interested in trading options or not. However, you can also build a more straightforward portfolio that does not use options at all.

A great way to get started is with SoFi’s options trading platform. The platform has an intuitive design where you can trade options on the mobile app or through the web platform. You’ll also have access to educational resources to continue to help guiding you along the way.

Pay low fees when you start options trading with SoFi.

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

Sep

2021

What Is Dogecoin?

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

What is Dogecoin?

Dogecoin (DOGE) is a an altcoin launched in December 2013, possibly as a joke. But cryptocurrency investors consider Dogecoin’s blockchain, derived from Litecoin, as reliable, which is one of the many reasons for the cryptocurrency’s rise to prominence.

The “Doge” in Dogecoin comes from the Flash cartoon “Homestar Runner,” in which Homestar calls another character his “D-O-G-E,” deliberately misspelling the word “dog.” In the early 2010s, a blogger posted a picture of her dog smiling excitedly, which struck a chord on Tumblr and Reddit. Then, a Redittor called the image “Doge, “creating a meme.

» Looking for more guides? Check out our crypto glossary.

How Does Dogecoin Work?

That code for Dogecoin is based on Litecoin, and early versions of the coin incentivized block miners through a randomized reward system. But the coin would soon change to a static-reward system for miners in March 2014. Being based on Litecoin, Dogecoin uses scrypt technology. It’s a proof-of-work coin, which is the reason for its low price and virtually unlimited supply.

That scrypt technology set it apart from other kinds of cryptocurrency, including Bitcoin, which uses a different proof-of-work algorithm called SHA-256. While the differences between the two are complicated, the upshot is that Dogecoin’s scrypt allows for an unlimited supply of coins. This makes Dogecoin a so-called “inflationary coin,” whereas Bitcoin and similar cryptocurrencies are considered deflationary, because there’s a fixed limit to the number of coins miners can create.

Who Created Dogecoin?

Jackson Palmer, an Australian project manager, created Dogecoin, which he originally thought of as a way to make fun of the media frenzy around cryptocurrencies. But he did purchase the dogecoin.com domain. At the same time, Portland, Oregon-based software developer Billy Markus looked up from his desk at IBM, and noticed the social-media attention that Dogecoin was gathering. Together, Palmer and Markus began to write the code that would underlie the first actual Dogecoin.

Two weeks after Palmer and Markus launched Dogecoin in 2013, its value rose by a staggering 300%. In those days, Dogecoin marketed itself as a “fun” version of Bitcoin. Its smiling-dog logo fit the playful atmosphere mood of the crypto community at the time, while its underlying code kept it relatively cheap to buy.

That playfulness showed up in the Dogecoin community’s 2014 donation of 27 million Dogecoins (roughly $30,000 at the time) to bankroll the Jamaican bobsled team’s expenses at the Sochi Winter Olympic games.

What Can Dogecoin Be Used for?

Once you have some Dogecoin, you can put it in a BitPay wallet, and via their partnership with Mastercard, you could put it on a prepaid crypto card, which you can spend anywhere Mastercard is accepted. That means you can use your Dogecoin to buy just about anything.

BitPay has also added Dogecoin support for Apple Wallet, which allows you to store their BitPay Card – and the Dogecoins within it – in your iPhone to make Apple Pay purchases.

How Did Dogecoin Become So Popular?

Born from a Reddit meme, Dogecoin had a ready audience of supporters ready to buy into the cryptocurrency, especially on the WallStreetBets subreddit. But it reached a far wider audience through its celebrity endorsements.

How Many Dogecoins Are There?

There were more than 129 billion Dogecoins in circulation on May 21, 2021, according to CoinMetrics. That made it the highest-circulation cryptocurrency in existence. The closest contender is Stellar (XLM), with 105 billion coins in circulation. By comparison, Bitcoin has just over 18.5 million in circulation.

Dogecoin has no limit as to how many coins miners can create. This is a stark contrast to Bitcoin, which is designed to never exceed 21 million coins in circulation, a level it should reach in the year 2140.

Why Is Dogecoin So Cheap?

Dogecoin is so cheap because there are so many of them, and because so many more are coming into existence, without limit, for the foreseeable future. The founders have decided not to cap the amount of Dogecoins in existence. And the law of supply and demand means that, without scarcity, the coins will remain inexpensive.

But that same low price is also why Dogecoin is so liquid, and can trade so quickly. While the price remains low, it has gone up substantially, increasing 12,000% from January to July, 2021. That’s an incredible return for those who managed to HODL their cryptocurrency through the volatility.

Dogecoin Price Prediction: Will It Reach $1?

Of course, it’s impossible to predict the future, but at present, it is very easy and inexpensive to mint new Dogecoins. As a result, one could reason that it is unlikely to reach $1 per coin until it becomes harder and more expensive to mint new Dogecoins.

Is Dogecoin a Good Investment?

While Dogecoin has gone up in recent years, it’s very hard to predict the future of any form of crypto. But if crypto is a big part of your investment strategy, then Dogecoin could make sense as part of a diversified crypto portfolio. It is a popular currency, and has a unique set of investors behind it.

That said, Dogecoin comes with risks. Critics say that Dogecoin, as a cryptocurrency, doesn’t have many advantages built into its code or its applications. They also point out that beyond the popularity of Dogecoin, there’s not much that differentiates it from a new crypto competitor that could emerge tomorrow next year. But boosters point to Dogecoin’s popularity and growth as the kind of first-mover advantage that new competitors may have trouble matching.

How Can I Buy and Sell Dogecoin?

You can invest in Dogecoin through a crypto exchange, like Coinbase, Binance, Kraken, or another platform. After opening an account and funding it, you can use those funds to trade Dogecoin or other cryptocurrencies.

The Takeaway

Dogecoin is an altcoin that has gained a significant following, despite its origins as a joke currency. It is just one of many types of cryptocurrencies that crypto investors might consider adding to their portfolio.

If you want to invest in Dogecoin without opening an account on a crypto exchange, you can open an account on the SoFi Invest® brokerage platform. You can use the app to purchase stocks and exchange-traded funds as well as to build a crypto portfolio.

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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.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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Aug

2021

How to Start a Cryptocurrency: Can Anyone Create a New Coin?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Despite ongoing crypto volatility, there’s nothing to stop people from launching new crypto projects. In fact, anyone could start a cryptocurrency, but not everyone has the knowledge or resources necessary to take on the task.

Even after someone manages to create a new type of crypto, one that offers new features or aims to solve existing problems, there is still work to do in terms of promotion, listing on exchanges, never mind ongoing maintenance and upgrades.

Table of Contents

Understanding Coins vs Tokens
Ways to Create a Cryptocurrency
How to Make a Cryptocurrency in 7 Steps

Understanding Coins vs Tokens

Before getting started, however, it’s important to know the difference between a token and a coin. Both fall under the blanket term of “cryptocurrency,” but while a coin like Bitcoin or Litecoin exists on its own blockchain, a token like Basic Attention Token, functions within an established blockchain technology infrastructure like Ethereum. Tokens also do not have uses or value outside of a specific community or organization.

Cryptocurrencies function like fiat currencies, without the centralized bank. Users typically hope to use their coins to store, build, or transfer wealth.

Meanwhile, tokens usually represent some kind of contract or have specific utility value for a blockchain application. Basic Attention Token for example, rewards content creators through the Brave browser. Tokens can also serve as a contract for or digital version of something, such as event tickets or loyalty points.

Non-fungible tokens (NFTs) represent a unique piece of digital property, like artwork. And DeFi tokens serve many different purposes in that space.

Ways to Create a Cryptocurrency

There are three primary ways to create a cryptocurrency, none of which is fast or easy. Here’s how each of them works:

Create a New Blockchain

Creating a new blockchain from scratch takes substantial coding skills and is, by far, the most difficult way to create a cryptocurrency. There are online courses that help walk you through the process, but they assume a certain level of knowledge. Even with the necessary skills, you might not walk away from these tutorials with everything you need to create a new blockchain.

Fork an Existing Blockchain

Forking an existing blockchain might be a lot quicker and less complicated than creating one from scratch. This would involve taking the open source code found on GitHub, altering it, then launching a new chain with a different name and a new type of crypto. The developers of Litecoin, for example, created it by forking from Bitcoin.

Developers have since forked several coins from Litecoin, including Garlicoin and Litecoin Cash. This process still requires the creator to understand how to modify the existing code.

Use an Existing Platform

The third and easiest option for those unfamiliar with coding is making a new cryptocurrency or token on an existing platform like Ethereum. Many new projects create tokens on the Ethereum network using the ERC-20 standard, for example.

If you’re not familiar with writing code, you might consider a creation service that does the technical work and then hands you a finished product.

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How to Make a Cryptocurrency: 7 Steps

After considering everything above, you can start taking the steps to build the cryptocurrency. Some of these steps will be less relevant when paying a third-party to create the new coin. Even then, anyone undertaking the task should be familiar with these aspects of how to create a cryptocurrency.

1. Decide on a Consensus Mechanism

A consensus mechanism is the protocol that determines whether or not the network will consider a particular transaction. All the nodes have to confirm a transaction for it to go through. This is also known as “achieving consensus.” You will need a mechanism to determine how the nodes will go about doing this.

The first consensus mechanism was Bitcoin’s proof-of-work. Proof-of-Stake is another popular consensus mechanism. There are many others as well.

2. Choose a Blockchain

This goes back to the three methods mentioned earlier. A coin or token needs a place to live, and deciding in which blockchain environment the coin will exist is a crucial step. The choice will depend on your level of technical skill, your comfort level, and your project goals.

3. Create the Nodes

Nodes are the backbone of any distributed ledger technology (DLT), including blockchains. As a cryptocurrency creator, you must determine how your nodes will function. Do they want the blockchain to be permissioned or permission less? What would the hardware details look like? How will hosting work?

4. Build the Blockchain Architecture

Before launching the coin, developers should be 100% certain about all the functionality of the blockchain and the design of its nodes. Once the mainnet has launched, there’s no going back, and many things cannot be changed. That’s why it’s common practice to test things out on a testnet beforehand. This could include simple things like the cryptocurrency’s address format as well as more complex things like integrating the inter-blockchain communication (IBC) protocol to allow the blockchain to communicate with other blockchains.

5. Integrate APIs

Not all platforms provide application programming interfaces (APIs). Making sure that a newly created cryptocurrency has APIs could help make it stand out and increase adoption. There are also some third-party blockchain API providers who can help with this step.

6. Design the Interface

There’s little point in creating a cryptocurrency if people find it too difficult to use. The web servers and file transfer protocol (FTP) servers should be up-to-date and the programming on both the front and backends should be done with future developer updates in mind.

7. Make the Cryptocurrency Legal

Failing to consider this last step led to trouble for many who initiated or promoted ICOs back in 2017 and 2018. At that time, cryptocurrency was in a kind of legal grey area, and they may not have realized that creating or promoting new coins could result in fines or criminal charges depending on the circumstances.

Before launching a new coin, it a good idea to research the laws and regulations surrounding securities offerings and related topics. Given the complexity of the issues and their regular updates, you might consider hiring a lawyer with expertise in the area to help guide you through this step.

The Takeaway

This is only the beginning of what someone needs to know about how to create a cryptocurrency. In addition to the technical aspects, creators of a new coin or token will have to figure out how their cryptocurrency can provide value to others, how to persuade them to buy in, and how the network will be maintained. Doing so often involves many costs like hiring a development team, a marketing team, and other people who will help keep things going and perform needed upgrades.

Creating a cryptocurrency can take a lot of time and money, and there’s a high risk that it will not succeed. There are more than 5,000 different types of cryptocurrencies listed on public exchanges according to data from Coinmarketcap, and thousands more that have failed over the years.

Simply participating in cryptocurrency trading might be a better route for those who don’t have the time, money, or interest in creating their own. A great way to do that is by opening an investment account on the SoFi Invest brokerage platform, which makes it easy to trade crypto, stocks, and exchange-traded funds.

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

Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

Aug

2021

How to Trade Stocks Online

By Kim Franke-Folstad | Growing Wealth, Investing | No Comments

If you’ve been investing for a while now—maybe through your employer’s 401(k) or an IRA—and you’re ready to take a more hands-on approach, you’re in luck. A growing number of financial firms are making online trading more convenient and affordable with easy-to-use websites and apps—often with no minimum balance required and commission-free trades.

Some online brokerages even allow investors to buy partial shares of company stocks they might not have had access to in the past because of the cost. Thanks to innovations in financial technology, or fintech, you can now buy and sell stocks and other securities from the comfort of your own couch—or while you wait in line for a latte.

But before you start buying and selling stocks from your phone, you’ll want to have at least a basic knowledge of how the market works; how online brokers execute trades; and how to develop an investing process that fits your personality, plans for the future, and bank account.

Here are some things to consider:

What Is Stock Trading?

All investors take a calculated risk with their money, with the aim of making a profit. But whether you are an investor or a trader depends on how long you typically hold on to investments. Investors are generally looking to grow their savings over the long-term for future goals, stock traders typically try to capitalize on short-term price fluctuations. That can take more time, attention, and exposure to risk than many investors would prefer to commit.

Are You an Investor?

Investors may track what’s happening with the major indexes and the securities in their portfolio, and they might do research or seek advice about the best companies in which to invest. But they’re more likely to use a buy-and-hold strategy—purchasing and keeping stocks or other securities with the idea that these investments will continue to increase in value over years or even decades.

Or Are You a Trader?

Traders keep a close eye on the market throughout the day. They pay attention to current news, tips, and research, and buy and sell stocks frequently. An active trader might buy and sell stocks several times a month, with the goal of beating the market (or getting a better return than the market average). A “day trader,” on the other hand, might buy and sell the same stock in one day, hoping to turn a quick profit and then move on to the next opportunity.

Or Are You Both?

There’s no rule that says you can’t engage in both passive and active investing. You might use your tax-deferred IRA to save for the long haul, for example, but set aside some money to try your hand at trading stocks as well.

It’s up to you how hands-on or hands-off you want to be. But knowing your investment style can help you decide if you’re really up for trading stocks yourself (instead of leaving most of the work to someone else). It also could help you choose a financial firm with the services you require.

Which Type of Broker Suits Your Style?

Investors and traders have a lot of options when it comes to choosing a broker—from long-established financial firms to newer names that offer intuitive online trading platforms and often lower costs.

If you want more help, you might be willing to pay extra for a full-service brokerage with a physical office and an actual person who takes and executes client orders. Or you might decide to limit human interaction (which can get expensive) and instead choose automated investing, leaving the heavy lifting to a robo-advisor that uses computer algorithms to build and manage an investment portfolio.

But if you truly want to get into researching and picking your own stocks, and executing trades on your own schedule, an active investing account with an online brokerage might be the right call.

Many financial websites offer up-to-date reviews of online brokerages, so that can be a good place to start researching. Some factors to consider might include:

• The broker’s commission fees (many sites now offer free trading)

• Account minimums (some online brokers don’t require a minimum deposit)

• Available products (in addition to stocks, you may want to look at exchange-traded funds (ETFs), mutual funds, and/or fractional shares of stock)

• Educational features

• Other perks

Of course, you’ll be looking for a company with a solid reputation and good customer service. You can use the BrokerCheck database offered by the Financial Industry Regulatory Authority (FINRA) to get information on the background and experience of financial brokers, advisors and firms.

Once you choose your brokerage, you can open an account whenever you’re ready. (You don’t have to start trading right away.) You’ll probably need to provide your Social Security number and your driver’s license number or other ID. If you’re funding your brokerage account with an electronic transfer from your bank account, you’ll also want to have that information on hand. The website may ask for other information as well, to assess your goals and risk tolerance.

Learning How to Trade Stocks

Once you’ve funded your brokerage account you can start buying stocks. But be prepared—those decisions can be daunting for a newbie. While opening an account is easy, actually getting started investing may be a bit harder.

If you’re not sure where to start, you may want to look at exchange-traded funds, which offer the diversification of mutual funds but trade continuously throughout the day like stocks. ETFs are typically less expensive than either mutual funds or stocks.

Another way to get into the market at a lower cost might be to invest in fractional shares, or pieces of single shares of stocks you might otherwise find too expensive. With SoFi Invest’s fractional shares program, for example, investors can build a portfolio with big-name companies. But instead of buying whole shares, buyers specify the dollar amount they want to spend on a company’s stock. Before you invest in whole or partial shares, you may want to use an online screener to narrow your choices to stocks that meet your specific requirements and do some technical and fundamental research on potential investments. For example, are you looking for companies within a certain size range, or market capitalization (micro, small, mid, or large)? Is there a range you want to stay within when it comes to the price-to-earnings ratio (P/E)?

Most screeners offer several filters to choose from, so you can find stocks at the price you want, or in a designated industry, or within a certain level of volatility. There are several well-reviewed free screeners available that may suit your needs as a beginner, including Zacks, FINVIZ, Yahoo Finance, TD Ameritrade, and TC2000. Or you might decide to pay for a subscription service that offers more in-depth analysis.

Even if you use a screening tool, it can be useful to do your own stock research as well. There are plenty of online sites that can help you learn more about how to trade stocks and calculate stock values. And many brokerages, including SoFi, provide users with educational resources and newsletters.

In addition, the Securities and Exchange Commission (SEC) requires all public companies to file financial documents with data that could help you further assess a stock’s value. You can use the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, EDGAR , to access that information.

How Do You Feel About Risk?

How much risk are you willing to take when trading stocks online?

If you’re OK with a white-knuckled, stomach-churning roller-coaster ride—and you’re willing to lose everything on an investment—you can throw caution to the wind. But if you’re hoping to make money without chronic anxiety, you’ll probably want to put some strategies in place to better manage your risk. That might include:

Knowing How Much You Can Afford to Lose

Do you have your financial bases covered (with an emergency fund, for example, and good insurance that will cover you if an unexpected health, home, or automobile expense pops up)? Are you current on your bills, and are you socking away some money for retirement? Even if you’re feeling pretty financially secure, you may want to set a clear limit on how much you’ll spend on any stocks that might expose you to more volatility and, therefore, a greater potential for loss.

Keeping Your Emotions in Check

Thanks to 24/7 access to market news, and instant reactions on social media, it can be tough to tune out distractions that can lead to knee-jerk trading moves. Greed is a tough emotion to ignore when a friend or co-worker shares a hot stock tip. And fear can easily get the better of you when you watch your favorite stock suddenly drop.

As you begin trading, you may consider a journal to document what you did and why you did it, and measure your performance against a benchmark index like the S&P 500. Reviewing those notes could help you analyze and improve how you react to changes in the market. (You’ll also want to keep good records so you can manage the tax consequences of any gains and losses in your brokerage account.)

Diversifying Your Portfolio

It’s one thing to occasionally take a small gamble on a trendy stock. It’s another to put all your money into just one stock (even a Blue Chip), or one sector, or one asset class. Keeping a balanced mix of investment types could help lower your risk—and make following your gut once in a while a little less gut-wrenching.

Again, this is where ETFs or fractional shares can come in handy. It also may be useful to work with an advisor to establish an appropriate asset allocation strategy and set up a plan that helps keep you on track as you make moves on your own.

What Type of Trade is Right for You?

When you’re ready to start using your broker’s website or app to buy and sell stocks, you’ll see there are a few different options for order types, which dictate how your trade goes through.

The type of order you use will likely vary from one situation to the next, depending on how many stocks you’re hoping to buy or sell, how liquid the stocks in question might be, or if the stock is currently under- or over-valued. And once you get more comfortable, you may want to add more strategies (such as options and futures) to your trading repertoire. So it’s a good idea to be well-versed in all the possibilities, their pros and cons, and how they might work in various scenarios.

The two most common orders are:

Market Orders

If you place a market order to buy, you’re saying you’ll purchase the stock “at market,” or at the current lowest asking price. If you place a market order to sell, you’re saying you’ll sell for whatever the highest bidding price is at that time. Because you aren’t holding out for a better price, brokers can generally fill market orders pretty quickly.

Limit Orders

If you place a limit order, you’re telling your broker in advance the price you want to get on the trade. If your broker can get the price you want (or better), they will execute the trade. But if no one is buying or selling at the price you’ve set, the trade won’t happen.

Ready to Get Started?

If you’re feeling overwhelmed, you may want to practice a bit using a free stock-trading simulator that could help you become more fluent in market terms and actions. But with your online brokerage account funded, you also could begin making small trades to get your feet wet and see how it feels.

The Takeaway

Once you begin trading stocks online, you’ll probably be able to gauge pretty quickly what works for you and what doesn’t, both financially and psychologically. Learning the basics of online trading can up your comfort level even before you get started, but executing some money-making trades will likely build your confidence. (Making some not-so-great trades could also help you finetune your process.)

With innovative trading tools like SoFi Invest® brokerage platform, you can start slowly. With SoFi Invest, you’ll have a variety of investment alternatives to choose from. And you can count on SoFi’s educational resources, real-time investing news, and advisors for help when you need it.

Learning how to trade stocks is exciting. Get started with a SoFI Invest account

SoFi Invest®

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN19041

Jun

2021

What Are Currency Hedged ETFs?

By Matthew Zeitlin | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Currency-hedged ETFs are exchange-traded funds created to minimize the risks of fluctuating exchange rates in ETFs that have foreign holdings.

Many investment companies offer two versions of the same ETF with one version including a currency hedge. The latter ETF has the same holdings as the former, but it also includes derivatives purchased to protect–or hedge–against currency risk. The protections come at a cost, however, and hedged ETFs may have higher fees than non-hedged ETFs.

Why Do Investors Use Currency-Hedged ETFs?

Since currency values fluctuate, exchange rates can affect the total return on an asset. While ETFs provide investors with a significant diversification, they don’t offer any protection against the investment risk created by foreign exchange rates. So purchasing an ETF focused on overseas markets creates an additional layer of volatility within the investment.

Currency shifts can boost or diminish returns on international investments — but they almost always make them more uncertain. If the local currency loses value against the ETF’s currency (in this case the dollar), that can offset returns for the dollar-based investor, even if the assets that make up the security’s returns go up in their own currency.

Since many ETF investors are not interested in forex trading, they can minimize their currency risk by purchasing a currency-hedged ETF, which can smooth out volatility related to foreign exchange rates.

Currency-hedged ETFs may have a slightly higher expense ratio than non-hedged ETFs, due to the cost of the futures contracts as well as potential expenses associated with the tools and people who develop the hedged currency strategy.

Recommended: How to Invest in International Stocks

How Do Exchange Rates Impact Investment Returns?

While a strong dollar may be good when you’re buying assets in a foreign currency, it can hurt returns on assets denominated in a foreign currency. Over the past decade, the strong dollar has meant that hedged portfolios tend to outperform those that weren’t hedged.

Here’s an example: If the dollar-to-foreign-currency conversion rate is 1 to 2, as in one dollar buys you two units of the foreign currency, and you buy 100 shares of a stock at 5 foreign currency units per share, it will cost you $250, or 500 foreign currency units. Now, let’s say those shares double, so that 100 shares are worth 1,000 foreign currency units instead of 500 and your investment is now worth $500, compared to the $250 you spent initially.

But if the dollar strengthened so that the conversion rate went from 2 foreign currency units per dollar to 4 foreign currency units per dollar, those 100 shares are still worth 1,000 foreign currency units but for a US investor, their $250 investment would have shown no gain. While this is an extreme currency fluctuation, it illustrates the reason that some investors might purchase currency-hedged ETFs.

How Does Currency Hedging Work?

Investors use two methods to hedge against currency risk: static hedging and dynamic hedging.

Static Hedging

Static hedging is the most basic kind of hedging. An ETF that uses static hedging has one strategy that it executes, regardless of market conditions. An ETF using this strategy would buy contracts in the future market that lock in a currency’s value relative to the dollar or set parameters around it.

The contract is an agreement to buy a currency at a future price, which has the same effect of cancelling out currency gains or losses if they move from the currency’s current value against the dollar.

Dynamic Hedging

Dynamic hedging may incorporate multiple strategies or change strategies as market conditions change. Dynamic hedging is not always in effect, instead the hedge is “put on” based on the judgment of the ETF manager. Sometimes this judgment reflects an algorithm or series of rules that looks at market conditions for determining when to buy and sell financial instruments that hedge currency exposure.

For example, an ETF might have a rules-based system that looks at the trend of a currency’s value against the dollar, the interest rates in both countries, and the overall value of that currency (namely if it’s more expensive than the dollar). Those data points and, specifically, how they change over time, would determine whether and how much to hedge the ETF at any given time

The Takeaway

Currency-hedged ETFs are one way to get exposure to foreign markets and protection against the currency risks that come with that type of investment, but they may cost more than non-hedged ETFs. It’s important for investors to understand how they work, as they start to build their own investment strategy and learn how to pick ETFs to include (if any) in their portfolio.

If you’re ready to start putting that strategy into action, a great place to start is the SoFi Invest investing platform, which offers personalized investment advice, a range of ETFs, and automated investing.

Start investing today.

Photo credit: iStock/Delmaine Donson

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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

SOIN21069

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Volatility

What Are the Different Option Pricing Models?

The Black-Scholes Merton (BSM) Model

The Binomial Option Pricing Model

The Trinomial Option Pricing Model

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Dogecoin Price Prediction: Will It Reach $1?

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The Takeaway

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Understanding Coins vs Tokens

Ways to Create a Cryptocurrency

Create a New Blockchain

Fork an Existing Blockchain

Use an Existing Platform

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How to Make a Cryptocurrency: 7 Steps

1. Decide on a Consensus Mechanism

2. Choose a Blockchain

3. Create the Nodes

4. Build the Blockchain Architecture

5. Integrate APIs

6. Design the Interface

7. Make the Cryptocurrency Legal

The Takeaway

How to Trade Stocks Online

What Is Stock Trading?

Are You an Investor?

Or Are You a Trader?

Or Are You Both?

Which Type of Broker Suits Your Style?

Learning How to Trade Stocks

How Do You Feel About Risk?

Knowing How Much You Can Afford to Lose

Keeping Your Emotions in Check

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What Type of Trade is Right for You?

Market Orders

Limit Orders

Ready to Get Started?

The Takeaway

What Are Currency Hedged ETFs?

Why Do Investors Use Currency-Hedged ETFs?

How Do Exchange Rates Impact Investment Returns?

How Does Currency Hedging Work?

Static Hedging

Dynamic Hedging

The Takeaway

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