Nov
18
2024
What Does Flood Insurance Cover?

What Does Flood Insurance Cover?

By | Family Finances, Insurance, servicing | Comments Off on What Does Flood Insurance Cover?

Flood insurance is designed to help homeowners, renters, and business owners cover losses caused by a flood. You can buy it to protect a building, the possessions in that building, or both.

Most standard homeowners policies don’t cover flood damage. So this separate insurance coverage is your best option for repairing or replacing property after rising water rises enters your home. In some areas, mortgage lenders can make buying flood insurance mandatory. Even if your lender doesn’t require flood insurance, you may want to consider it.

Read on for information that can help you decide if a flood policy should be part of your insurance coverage.

Key Points

•   Flood insurance covers direct physical losses due to floods, including damage to the building and its contents.

•   Coverage extends to foundation walls, electrical and plumbing systems, and major appliances.

•   Personal property such as clothing, furniture, and electronics are also covered under flood insurance.

•   The National Flood Insurance Program offers up to $250,000 for building and $100,000 for personal property damage.

•   Flood insurance does not cover items outside the building, cars, or business interruption losses.

What Is Flood Insurance?

According to the Federal Emergency Management Agency (FEMA), just one inch of floodwater can cause up to $25,000 in damage. And that damage probably won’t be covered by your homeowners or renters insurance. You can, however, purchase a standalone flood insurance policy to help cover your losses.

A flood insurance policy is meant to cover losses directly caused by flooding or, as FEMA describes it, “an excess of water on land that is normally dry, affecting two or more acres of land or two or more properties.”

If your sewer backed up after heavy rainfall, or rising inland or tidal waters flooded your property, the damage would likely be covered by flood insurance. But if the backup wasn’t caused by flooding, the damage wouldn’t be covered by flood insurance. (Whether it’s covered by your homeowners insurance depends on your individual policy.)

Most people get their flood policy through the National Flood Insurance Program (NFIP), which is managed by FEMA and works with a network of insurance companies across the country. But some private insurance companies also offer their own flood policies, which are not government-backed.

Recommended: Mortgage & Homeowners Insurance Definitions

What Is Included in Standard Flood Insurance?

The NFIP offers two types of flood insurance coverage: one that covers buildings and another that covers the owner’s or renter’s personal contents.

A policy purchased through the NFIP can reimburse up to $250,000 in building damage and typically covers:

•   Foundation walls, anchoring systems, and staircases

•   Detached garages

•   Electrical and plumbing systems

•   Furnaces and water heaters

•   Fuel tanks, well water tanks and pumps, and solar energy equipment

•   Appliances, including refrigerators, stoves, and built-in dishwashers

•   Permanently installed cabinets, paneling, and bookcases

•   Permanently installed carpeting and window blinds

An NFIP policy can provide up to $100,000 in personal property damage, and typically covers:

•   Personal belongings, such as clothing, furniture, and electronic equipment (TVs, computers, etc.)

•   Valuables (like original artwork and furs) up to $2,500

•   Portable and window air conditioners

•   Washers and dryers

•   Microwave ovens

•   Carpets that may not be included under building coverage

•   Curtains and other window coverings

What Doesn’t Flood Insurance Cover?

There are a few things NFIP flood insurance doesn’t cover, even if the damage is directly caused by flooding. Items that aren’t covered include:

•   Any property that’s outside the insured building (such as a well, septic system, deck or patio, fences, seawall, hot tub or pool, and landscaping)

•   Cars and most other self-propelled vehicles and their parts

•   Cash, coins, precious metals, stock certificates, and other valuable paperwork

•   Damage from mold or mildew that could have been prevented by the property owner

•   Financial losses caused by an interruption in business

Flood insurance also doesn’t cover costs incurred if you have to live in temporary housing because of damage to your property. Unfortunately, neither will the “loss of use coverage” you may have through your homeowners policy. (Loss of use coverage pays those expenses only when the reason you’ve been displaced is covered by your homeowners policy.)

What Does Flood Insurance Cover in the Basement?

The NFIP’s coverage for flood damage in the basement is limited to some specific (usually permanent or attached) items and cleanup. Some examples of what should be covered include:

•   Central air conditioners

•   Fuel tanks and the fuel in them

•   Furnaces and water heaters

•   Sump pumps, heat pumps, and well water tanks and pumps

•   Electrical outlets, switches, and junction and circuit breaker boxes

•   Elevators, dumbwaiters, and related equipment

•   Unfinished drywall for walls and ceilings

•   Attached stairways and staircases

•   Foundation elements and anchoring systems required for building support

Most personal property kept in the basement isn’t covered, including clothing, computers, TVs, and furniture.

Where Can You Get Flood Insurance?

Federal flood insurance isn’t sold directly by the federal government. Instead, you can buy NFIP policies through private insurance companies, under what’s known as a Write Your Own (WYO) program.

The NFIP partners with more than 50 insurance companies, so you may be able to work with the same insurance agent or broker who helped you purchase your home and auto policies to get flood coverage.

You can get help finding an NFIP provider online at floodsmart.gov/flood-insurance-provider or by calling the NFIP at 877-336-2627. You also can also check into any private, non-government-backed flood insurance policies that are offered in your area.

You may want to look at including flood insurance as part of your overall personal insurance planning. Don’t wait until you hear predictions of a storm heading your way to start inquiring about a policy, though. There is typically a 30-day waiting period for a flood insurance policy to go into effect.

How Much Does Flood Insurance Cost?

Like most insurance, the cost of a flood policy can depend on the coverage type (building and/or personal contents), the size and age of the building covered, the risk level in your location (based on your flood zone), and other factors, including whether you’re buying a private or NFIP policy.

According to the Federal Emergency Management Agency (FEMA), the average cost of one year of coverage with an NFIP policy is $786. And though that’s not nearly as much as the average cost of a homeowners policy, it can still be a hit to many household budgets.

You may be able to lower the cost of a flood policy by choosing a higher deductible. You can also elevate your home’s electrical panels, heating and cooling systems, and other utilities so they’re less vulnerable to water damage.

For renters, the NFIP offers contents-only policies for as low as $99 annually.

You can also look for a competitive quote on a private flood policy that isn’t backed by FEMA and the NFIP. Just make sure you’re getting a fair price from a stable company that is capable of paying out claims in the event of a major flood.

When Is Flood Insurance Required?

If you have a government-backed mortgage and your home or business is in a high-risk flood area, you are required to have flood insurance. If you don’t have a government-backed loan, your lender may still require that you purchase a flood policy. Even lenders in moderate- to low-risk locations may make it a loan requirement.

Recommended: Is Homeowners Insurance Required to Buy a Home?

Who Should Buy Flood Insurance?

Knowing your designated flood zone can help you decide whether you want to prioritize purchasing flood insurance. You can find your zone by entering your address at the FEMA Flood Map Service Center at MSC.FEMA.gov.

Structures in zones A and V are at the highest risk, while those in zones B, C, and X are considered at moderate to minimal risk. Keep in mind, though, that you can still experience flood damage even if you don’t live in a high-risk zone. According to NFIP data, more than 20% of all insurance claims come from moderate- to low-risk zones.

If you’re moving to a new area where flood insurance isn’t required, you may want to speak with your real estate agent or neighbors about the area’s history and potential for flooding.

How Much Flood Insurance Do You Need?

In many ways, shopping for flood insurance is similar to how you buy homeowners insurance: Calculating how much you’ll need will depend on what you plan to protect and what it might cost to replace if it’s destroyed.

In fact, whether you go with an online insurance company or a traditional insurer, your homeowners insurance company may give you an idea of what it might cost to rebuild or repair your home if it’s damaged. Then you can add on the value of your furnishings and other personal possessions to decide how much flood insurance you need. (If you’re a renter, you can purchase a policy that covers only your belongings.)

Remember, there are limits to how much coverage you can get through an NFIP policy ($250,000 for a building and $100,000 for the contents). If your needs go beyond those limits, you may want to consider buying excess flood insurance through a private flood policy.

The Takeaway

An average flood insurance policy for homeowners costs $786 a year. But most homeowners insurance policies don’t cover flood damage, which can leave a big gap when it comes to protecting your home and belongings. Purchasing a separate flood insurance policy can help fill that gap, and it can be an important part of your overall insurance planning.

Flood policies can cover the building itself, its contents, or both. Make sure you understand what isn’t covered by your policy, such as personal belongings stored in the basement or outside.

If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.

SoFi brings you real rates, with no bait and switch.

FAQ

What losses are covered by flood insurance?

A flood insurance policy covers direct physical losses caused by a flood. That could mean repairing or replacing your home, or the furnishings and other belongings in your home, or both.

How do I know if I’m in a flood zone?

Everyone is in a flood zone, but some areas are at a higher risk than others. You can find your zone by entering your address at the FEMA Flood Map Service Center at MSC.FEMA.gov.

Is flooding covered by homeowners insurance?

Some types of water damage are covered by a standard homeowners policy, but flooding usually is not.

Photo credit: iStock/onurdongel

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
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SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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Nov
15
2024
Similarities and Differences Between Initial and Maintenance Margin

Similarities and Differences Between Initial and Maintenance Margin

By | Growing Wealth, invest, Investing | Comments Off on Similarities and Differences Between Initial and Maintenance Margin

Initial and maintenance margin are separate margin requirements investors must adhere to when trading on margin. The two requirements are similar in that they are both sums of money that the broker requires the investor to have in their account to open or maintain a position with a margin loan. The main difference between the two is that the initial margin is the amount of money required to open a position, while the maintenance margin is the amount needed to keep a position open.

Investors interested in trading on margin need to understand the similarities and differences between initial and maintenance margin. Moreover, knowing how to calculate maintenance margin may help investors from being subject to a margin call or other adverse outcomes.

What Is Initial Margin?

Initial margin is the minimum amount of cash or collateral an investor must deposit in a margin account in order to buy securities on margin.

Initial Margin Requirements

The initial margin requirement is expressed as a percentage of the total purchase price of a security. The Federal Reserve Board’s Regulation T requires a minimum initial margin of 50% for stock purchases, meaning investors must have cash or collateral to cover at least half of the market value of stocks they buy on margin. However, Regulation T only sets the minimum for margin accounts. Stock exchanges and brokerage firms can set their initial margin requirement higher than 50% based on a stock’s volatility, the state of the markets, or other considerations.

How Initial Margin Works

If you meet the initial margin requirement, your broker will provide you with a margin loan to cover the rest of the trade’s purchase price. For example, if the initial margin requirement is 50% and an investor wants to purchase $6,000 of a stock, then the investor will have to cover an initial margin of $3,000 with cash or other equity and borrow $3,000 from the broker to make the trade.

Investors use margin trading as a way to increase their buying power. In the example above, if the investor bought the same amount of stock in a cash account, then they would need $6,000 in cash to make the trade. But by using a margin, the investor doubles their buying power by using only $3,000 to buy $6,000 worth of stock.

However, using margin involves risk, and may lead to more significant losses than buying stock directly in a cash account. If a trade declines below the threshold, investors will need to bring it back up to effectively pay back the margin loan.

Recommended: Cash Account vs Margin Account: Key Differences

What Is Maintenance Margin?

Maintenance margin is the minimum amount of equity an investor must have in their margin account to keep a position open after making a trade. The margin equity in the account is the value of securities minus the amount of the margin loan borrowed to make the trade. If the account’s equity falls below the maintenance margin, the broker may issue a margin call or close out the investor’s trade.

Maintenance Margin Requirements

Maintenance margin is usually expressed as a percentage of the position’s value. The Financial Industry Regulatory Authority (FINRA), which regulates maintenance requirements, says maintenance margin must be at least 25% of the total market value of the securities bought on margin. However, like initial margin, brokerage firms may have higher maintenance requirements, depending on various factors like market volatility and liquidity.

How Maintenance Margin Works

Suppose an investor purchased $6,000 worth of stock by paying $3,000 in cash and borrowing $3,000 from their broker, and the broker has a 25% maintenance margin requirement. If the market value of the stock drops from $6,000 to $5,000, the investor’s equity will now be $2,000 ($5,000 – $3,000 margin loan) and the maintenance margin will be $1,250 ($5,000 x 25%). In this case, the investor still has enough equity to cover the maintenance margin.

However, if the stock’s value drops to $3,500, the investor will no longer have enough equity to cover the maintenance margin requirement. The investor’s account has $500 in equity ($3,500 – $3,000), while the maintenance margin is $875 ($3,500 x 25%). The broker will likely issue a margin call, requiring the investor to deposit additional funds into the account or sell some assets to increase the equity in the account.

The broker may also sell some of the investor’s holdings without notifying them to bring the account back up to the maintenance margin level.

The purpose of the maintenance margin is to protect the broker in case the value of the securities in the account falls.

Increase your buying power with a margin loan from SoFi.

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Initial Margin vs Maintenance Margin

Here’s a quick look at how initial margin and maintenance margin stack up:

Initial Margin vs Maintenance Margin
Initial Margin

 Maintenance Margin
50% minimum initial margin requirement regulated by the Federal Reserve Board’s Regulation T 25% minimum maintenance margin requirement regulated by FINRA
Initial margin is deposited at the start of a trade Maintenance margin must be maintained throughout the life of a trade

Similarities

Initial margin and maintenance margin are similar in that they are both used as deposits to cover potential losses in a margin account. The two margin requirements are both calculated as a percentage of the value of the account’s assets.

Additionally, both initial margin and maintenance margin can be increased or decreased by an exchange or brokerage firm depending on a stock’s volatility, the financial situation of a client, and other factors.

Differences

The initial margin is the amount of cash or collateral an investor must deposit with a broker when buying or selling an asset on margin. In contrast, the maintenance margin is the minimum amount of equity an investor must maintain in their account to keep the account open and avoid a margin call.

Another difference between the two is that the initial margin is typically higher than the maintenance margin.

Calculating Initial and Maintenance Margin

There are formulas for calculating both initial margin and maintenance margin. Note that the examples below may not include margin figures that are indicative of a typical brokerage firm, or of SoFi.

Initial Margin Calculation

The formula for calculating initial margin is:

Initial margin = initial margin percentage x total purchase price of security

So, if a brokerage firm has an initial margin percentage of 65% and an investor wants to buy $10,000 worth of stock ABC, then the initial margin would equal $6,500:

$6,500 initial margin = 65% initial margin percentage x $10,000 total purchase price

In this scenario, the investor would need to have $6,500 in an account and borrow $3,500 with a margin loan.

Maintenance Margin Calculation

The formula to calculate maintenance margin is:

Maintenance margin = Total value of securities owned on margin x maintenance margin percentage

So, if a brokerage firm has a maintenance margin percentage of 30% and an investor holds $1,000 of stock XYZ (100 shares at $10 per share) in their margin account, then the maintenance margin would equal $300:

$300 = $1,000 x 30% maintenance margin percentage

In this scenario, the investor would need to have $300 in equity in their margin account to avoid being subject to a margin call.

Investing Tips From SoFi

Understanding the nuances of initial and maintenance margin is essential before investors start trading on margin. Utilizing margin can help investors increase their buying power, but it comes with more risk, like the chance for margin calls.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

Why is initial margin higher than maintenance margin?

The initial margin is higher because the Federal Reserve Board’s Regulation T sets a 50% minimum initial margin requirement, while FINRA sets a lower 25% minimum maintenance margin requirement.

How do you calculate maintenance margin?

Maintenance margin is the minimum equity an investor must have in the margin account after making a trade. Maintenance margin is expressed as a percentage of an investor’s total trade. Investors can calculate maintenance margin by multiplying the maintenance margin percentage by the total value of the margin account.

Photo credit: iStock/PeopleImages

SoFi Invest®

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

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

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

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q324-067

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Nov
15
2024
Performance Charts

5 Bullish Indicators for a Stock

By | Growing Wealth, invest, Investing | Comments Off on 5 Bullish Indicators for a Stock

When it comes to figuring out when to buy a stock, there are two main schools of thought: fundamental analysis and technical analysis. Fundamental analysis involves all the material aspects of a company: its sales, revenue, profits, and so on — the day-to-day details of operations. Technical analysis, on the other hand, involves only looking at charts. A stock chart is a visual representation of the price movement of a particular security over time.

Using different mathematical technical indicators, it’s thought that traders can sometimes anticipate future price movements based on previous patterns. And fundamentals need not be at odds with technical analysis — the most successful investors often use both methods.

Below, we’ll look at five common bullish indicators used in technical analysis and discuss how they can be used to determine a reasonable time to buy a stock or ETF.

Key Points

•   Understanding both fundamental and technical analysis is essential for making informed stock purchases, with each offering unique insights into market behavior.

•   The Relative Strength Index (RSI) serves as a momentum indicator to assess whether a stock is overvalued or undervalued, guiding potential buying opportunities.

•   The cup-and-handle pattern is a recognized bullish signal, characterized by a specific price movement that often precedes upward trends in stock prices.

•   A golden cross occurs when a short-term moving average crosses above a long-term moving average, indicating potential bullish momentum and future price increases.

•   Combining multiple technical indicators enhances accuracy in predicting stock movements, as relying on a single indicator can lead to misleading conclusions.

Technical Indicators of a Bull Trend

Before getting into the specifics of technical analysis, it’s important to understand the difference between bullish indicators and bullish patterns.

Indicators represent information generated by a computer based on a dataset. That dataset comes from the price action of a security over a set time period (one hour, one day, one month, six months, one year, etc.).

Patterns, on the other hand, are identified by human eyes when charts take on a certain shape (head and shoulders, cup and handle, etc.). Some traders even program their own computer scripts to try to identify patterns automatically, leading to a kind of hybrid of patterns and indicators.

All of these methods are broadly referred to as technical analysis — the process of using charts to try to predict which way a security will move next. A pattern or indicator that tends to appear when prices are getting ready to move higher is referred to as a bullish one.

Here are five examples of bullish indicators and bullish patterns.

RSI Weakness

The Relative Strength Index (RSI) is a technical indicator that gives investors an idea of how overvalued or undervalued a security might be. This momentum indicator gauges the significance of recent price changes. The higher the RSI, the more likely the stock is overvalued, and the lower the RSI, the more likely the stock is undervalued.

The RSI is represented by a simple line graph that goes up and down between two extremes (also known as an oscillator). When the line dips below a certain level, it can indicate potential undervaluation. Meanwhile, when it rises above a certain level, it can indicate — you guessed it — overvaluation.

RSI values range from 0 to 100 but rarely fall below 20 or go higher than 80. Between 30 and 60 is a shaded area sometimes referred to as the “paint” area. An RSI within this range can still provide some insight, but it is not as reliable an indicator as an RSI that has extended to more extreme levels.

An RSI of 50 is considered neutral, whereas an RSI of 30 and lower is considered undervalued (bullish). Meanwhile, an RSI of 70 and above is considered overvalued (bearish). In other words, the lower the RSI, the more of a bullish indicator it could be.

Cup-and-Handle Pattern

The cup-and-handle pattern is among the most bullish patterns known to stock traders. There are two main parts, as the name implies: a cup and a handle.

The cup is formed when a stock moves downward, then sideways, and then upward. Once the cup has been formed, the handle can be formed by a period of slow decline. This kind of price action leads to a chart with one part resembling the bottom half of a circle (cup) followed by a slanted line at the top edge (handle).

The pattern has a long list of nuances. Many lengthy articles have been dedicated to the cup-and-handle pattern alone. Here are quick notes about identifying the pattern:

•   Ideally, the cup should be about 30% deep (having declined about 30% from its start to its lowest point).

•   The handle should form over a period of at least five days to several weeks.

•   Trading volume should surge when the handle finishes forming, at which point traders will often seek to enter into a position.

•   Conversely, an inverted cup and handle can be a sell signal. This pattern has the same shape, only it appears upside down, with the handle slanting up and the top half of a circle forming the cup.

Moving Average Golden Cross

Moving averages (MA) are another common technical indicator. A moving average is the mean of a stock’s daily closing price for a certain number of trading days. Moving averages smooth out the trend of a stock’s price and highlight any moves above or below the trend.

A moving average is denoted by a line that overlays on a price chart. While these averages don’t contain a whole lot of information in and of themselves, sometimes key averages interacting with one another can serve as major buy or sell signals.

The 50-day MA and the 200-day MA are of particular importance when they cross paths. Most of the time, the 200-day MA will be higher than the 50-day MA. But when the 50-day crosses above the 200-day, the move can be seen as a bullish indicator signifying a trend toward upward price movement.

This indicator is known as the “golden cross,” and it is regarded as relatively rare and reliable. Prices often, but not always, move up after a golden cross happens.

Golden crosses can occur with moving averages of time frames shorter than 50 or 200 days as well, but longer time frames carry more weight.

Bollinger Bands Width

Bollinger Bands combine a simple moving average with an additional metric — a measure of price extending one standard deviation above or below the average.

When Bollinger Bands get very close together, it often indicates that a trend change lies on the immediate horizon. That means the price might be likely to break out either higher or lower in the near future in most cases.

While this indicator is a little vaguer than the others, combining it with a few other bits of information can sometimes make it a bullish indicator.

For example, an investor might choose to look at Bollinger Bands alongside one of the other indicators mentioned here. If the RSI for a particular stock were at 40 at the same time that Bollinger Bands were close together, that might give an investor further assurance that an upward move could be on the horizon.

Piercing Pattern

The piercing pattern is simpler than most others. It marks the possibility of a short-term reversal from downward price action to upward price action based on only two days of trading.

The pattern occurs when the first day opens near its high point, closes near the low, and has an average or larger-than-average price range. Then the second day begins trading with a gap down, opening near the low and closing near the high. The close ought to form a candlestick covering at least half of the length of the first day’s red candlestick.

A piercing pattern rarely appears in perfect form. As with other patterns, the closer to perfection the setup looks, the more likely it is to be accurate. When bullish patterns like this one coincide with other bullish indicators, like a low reading on the RSI, the potential for price gains becomes strengthened.

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Other Technical Analysis Factors to Consider

It’s important to remember that technical indicators should be used together when possible. Looking at only one indicator may not always give as accurate a picture of which direction price action will head next.

Another concern is time frame. These indicators and patterns need to be looked at over a sufficient amount of time to prove effective — the longer the better, in general. Looking at price movements on a daily chart might lead to one impression, but zooming out and looking at six months or a year might result in a different (and often more accurate) assessment for the simple reason that there is more data included.

Finally, when thinking about bullish patterns and indicators, realize that most investors have access to the same public knowledge. When a bullish development occurs, millions of stock traders use technical analysis to try to identify the pattern at more or less the same time. This can lead the charts to become self-fulfilling, as everyone can buy at the same bullish point or sell at the same bearish point, regardless of anything else happening.

The Takeaway

Technical analysis, which involves only looking at stock charts, is one of the two main schools of thought when it comes to figuring out when to buy a stock. Investors using this form of analysis may look at both bullish indicators and bullish patterns to determine when it appears that prices are preparing to move higher. There are a number of these patterns and indicators investors might look at — from RSI weakness to piercing pattern — though it’s generally best to use technical indicators together and also take time frame into consideration.

If you think you’ve found the next good pick, it might be time to try SoFi Invest. Trade stocks and ETFs with no commission fees. SoFi Invest offers both active and automated investing. Whether you’re an experienced investor trading big-time shares or have never owned stocks before, SoFi® has everything needed to help you start investing.

Take a step toward reaching your financial goals with SoFi Invest.

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

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

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

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Nov
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2024
How to Invest and Profit During Inflation

How to Invest During Inflation

By | Growing Wealth, invest, Investing | Comments Off on How to Invest During Inflation

Inflation occurs when there is a widespread rise in the prices of goods and services. The inflation rate, or the rate at which prices increase, rose, in recent years, at its fastest pace in 40 years before falling during 2024. That has an impact on both consumers and investors. High inflation makes common goods like groceries, gasoline, and rent more expensive for consumers, meaning paychecks might not go as far if wages don’t rise along with prices.

For investors, high inflation may also affect the financial markets. It’s possible that rising inflation could impact the markets, as consumers have less money to spend, and the Federal Reserve may step in to check rising inflation by making loans and credit more expensive with higher interest rates. What’s an investor do when inflation is on the upswing? Often, it means adjusting investment portfolios to protect assets against rising prices and an uncertain economy.

Key Points

•   Inflation affects purchasing power, which may affect financial markets, impacting consumers and investors.

•   High inflation can lead to increased interest rates, affecting stock and bond market performance.

•   During bouts of inflation, investors may want to consider stocks of companies that can raise prices, consumer goods stocks, commodities, TIPS, and I Bonds during inflation.

•   Inflation can reduce stock market growth and bond returns, making it crucial to adjust portfolios.

•   Long-term investment plans should not be drastically changed due to temporary inflation spikes.



Inflation Basics, Explained

Inflation is primarily defined as a continuing rise in prices. Some inflation is okay and natural — historically, economic booms have come with an annual inflation rate of about 1% to 2%, a range that reflects solid consumer sentiment amidst a growing economy. An inflation rate of 5% or more can be a different story, with higher rates associated with an overheated economy.

Inflation rates often correlate to economic growth, which is sometimes good for consumers. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash flows through the economy, demand for goods and services grows, leading food and services producers to raise prices. That triggers a rise in inflation, with the inflation rate growing even more as demand for goods and services outpaces supply.

Recommended: Is Inflation a Good or Bad Thing for Consumers?

Conversely, prices fall when demand slides and supply is abundant; the inflation rate tumbles as economic growth wanes.

The main barometer of inflation in the United States is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, healthcare, transportation, food and beverage, and education, among other economic sectors. The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE), in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

Investing & Inflation: How Are They Related?

Inflation may affect the stock market, and investors may have less money to put into the markets when prices rise and their budgets become tighter. Overall, it means there may be less liquidity in the markets. The relationship between investing and inflation may further be affected as interest rates are increased to combat rising prices, potentially affecting business profitability.

Inflation’s Impact on Stock and Bond Investments

Investing during inflation can be tricky. It’s important to know that inflation impacts both stock and bond markets, but in different ways.

Inflation and the Stock Market

Inflation has an indirect impact on stocks, partially reflecting consumer purchasing power. As prices rise, retail investors may have less money to put into the stock market, reducing market growth.

Perhaps more importantly, high inflation may cause the Federal Reserve to raise interest rates to cool down the economy. Higher interest rates also make stock market investments less attractive to investors, as they can get higher returns in lower-risk assets like bonds.

Recommended: How Do Interest Rates Impact Stocks?

Also, when inflation rises, that puts pressure on investors’ stock market returns to keep up with the inflation rate. For instance, consider a stock portfolio that earns 5% before inflation. If inflation rises at a 6.0% rate, the portfolio may actually lose 1.0% on an inflation-adjusted basis – hypothetically speaking, of course.

However, some stocks and other assets can perform well in periods of rising prices, which can be a hedge against inflation. When inflation hits the consumer economy, companies often boost the prices of their goods and services to keep profits rolling, as their cost of doing business rises at the same time. Consequently, rising prices contribute to higher revenues, which helps boost a company’s stock price. Investors, after all, want to be in business with companies with robust revenues.

Overall, rising inflation may raise the investment risk of an economic slowdown or recession. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth, thus reducing company earnings which leads to sliding equity prices.

Inflation and the Bond Market

Inflation may be a drag on bond market performance, as well. Most bonds like U.S. Treasury, corporate, or municipal bonds offer a fixed rate of return, paid in the form of interest or coupon payments. As fixed-income securities offer stable, but fixed, investment returns, rising inflation can eat at those returns, further reducing the purchasing power of bond market investors.

Additionally, the Federal Reserve’s response to inflation — higher interest rates — can lower the price of bonds because there is an inverse relationship between bond yields and bond prices. So, bond investors and bond funds may experience losses because of high interest rates.

Recommended: How Does the Bond Market Work?

What to Consider Investing in During Inflation

Investors can take several steps to protect their portfolios during periods of high inflation. Choosing what to invest in during inflation is like selecting investments at any other time — you’ll need to evaluate the asset itself and how it fits into your overall portfolio strategy both now and in the future.

1. Retail Stocks

Investors might consider stocks where the underlying company can boost prices in times of rising inflation. Retail stocks, like big box stores or discount retailers with a global brand and a massive customer base, can be potential investments during high inflation periods. In that scenario, the retailer could raise prices and not only cover the cost of rising inflation but also continue to earn profits in a high inflation period.

2. Consumer Goods Stocks

Think of a consumer goods manufacturer that already has a healthy portion of the toothpaste or shampoo market and doesn’t need excess capital as it’s already well-invested in its own business. Companies with low capital needs tend to do better in inflationary periods, as they don’t have to invest more cash into the business to keep up with competitors — they already have a solid market position and the means to produce and market their products.

3. Commodities

Investing in precious metals, oil and gas, gold, and other commodities can also be good inflation hedges. The price growth of many commodities contributes to high inflation. So investors may see returns by investing in commodities during high inflationary periods. Take the price of oil, natural gas, and gasoline. Businesses and consumers rely highly on oil and gas and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices. That makes oil — and other commodities — a good portfolio component when inflation is on the move.

Recommended: Commodities Trading Guide for Beginners

4. Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) can be a good hedge against inflation. By design, TIPS are like most bonds that pay investors a fixed rate twice annually. They’re also protected against inflation as the principal amount of the securities is adjusted for inflation.

5. I Bonds

During periods of high inflation, investors may consider investing in Series I Savings Bonds, commonly known as I Bonds. I Bonds are indexed to inflation like TIPS, but the interest rate paid to investors is adjustable. With an I bond, investors earn both a fixed interest rate and a rate that changes with inflation. The U.S. Treasury sets the inflation-adjusted interest rate on I Bonds twice a year.

The Takeaway

Investors should proceed with caution when inflation rises. It may be tempting to readjust your portfolio because prices are rising. However, massive changes to a well-planned portfolio may do more harm than good, especially if you are investing with a long time horizon. Periods of high inflation usually wane, so throwing a long-term investment plan out the window just because inflation is moving upward may knock you off course to meet your long-term financial goals.

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

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

Photo credit: iStock/pondsaksit

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2024
A Guide to the 403b Retirement Plan

Understanding the 403(b) Retirement Plan: A Comprehensive Guide

By | invest, Investing, Preparing for Retirement | Comments Off on Understanding the 403(b) Retirement Plan: A Comprehensive Guide

If you work for a tax-exempt organization or a public school, you typically have access to a 403(b) plan rather than a 401(k). What is a 403(b)? It’s a workplace retirement plan that can help you start saving for your post-work future.

In this guide, find out how 403(b) plans work, who is eligible for them, and the rules for contributing.

Key Points

•   A 403(b) plan serves as a retirement savings option for employees of tax-exempt organizations and public schools, allowing for tax-deductible contributions.

•   Two main types of 403(b) plans exist: traditional plans, which use pre-tax contributions, and Roth plans, which utilize after-tax dollars, impacting tax obligations at withdrawal.

•   Contribution limits for a 403(b) in 2025 are $23,500 and for 2024 are $23,000, with additional catch-up contributions available for long-term employees and those aged 50 or older.

•   Investment options in a 403(b) may be more limited compared to other retirement plans, often focusing on annuities and mutual funds rather than a diverse portfolio.

•   Employees can adjust their contributions to a 403(b) and may access funds through loans or hardship distributions, subject to specific plan rules and penalties.

Demystifying the 403(b) Plan

A retirement plan for employees of tax-exempt organizations and public schools, a 403(b) is also known as a tax-sheltered annuity or TSA plan. Employees can contribute to the plan directly from their paycheck, and their employer may contribute as well. A 403(b) can help you save for retirement.

What Exactly is A 403(b) Retirement Plan?

What is a 403(b)? The 403(b) retirement plan is a type of qualified retirement plan designed to help employees save for retirement. Certain schools, religious organizations, hospitals and other organizations often offer this plan to employees. (In layman’s terms, it’s the 401(k) of the nonprofit world.)

Like 401(k)s, 403(b) plans allow for regular contributions toward an employee’s retirement goal. Contributions are tax-deductible in the year they’re made. Also, you won’t pay taxes on any earnings in the account until you make withdrawals.

However, unlike 401(k)s, 403(b)s sometimes invest contributions in an annuity contract provided through an insurance company rather than allocate it into a stocks-and-bonds portfolio.

Distinguishing Between Different 403(b) Options

There are two main types of 403(b) plans: traditional and Roth. With a traditional 403(b), employees contribute pre-tax money to their 403(b) account. This reduces their taxable income, giving them an immediate tax advantage. They will pay taxes on the money when they withdraw it.

With a Roth 403(b), employees contribute after-tax dollars to the plan. They will not owe taxes on the money when they withdraw it.

Not every 403(b) plan offers a Roth version.

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The 403(b) Plan in Action: Participation and Contributions

The IRS states that a 403(b) plan “must be maintained under a written program which contains all the terms and conditions…” In other words, for the plan to be legitimate, paperwork is required.

An employee may get a whole packet of information about the 403(b) plan as part of the onboarding process. This package can include salary reduction agreement terms (this refers to employee contributions from the plan that come from the employee’s paychecks), eligibility rules, explanations of benefits, and more.

In certain limited cases, an employer may not be subject to this requirement. For example, church plans that don’t contain retirement income aren’t required to have a written 403(b) plan.

Who Gets to Participate?

Only employees of specific public and nonprofit employers are eligible to participate in 403(b)s, as are some ministers. You may have access to a 403(b) plan if you’re any of the following:

•   An employee of a tax-exempt 501(c)(3) nonprofit organization

•   An employee of the public school system, including state colleges and universities, who is involved in the day-to-day operations of the school

•   An employee of a public school system organized by Indian tribal governments

•   An employee of a cooperative hospital service organization

•   A minister who works for a 501(c)(3) nonprofit organization and is self-employed, or who works for a non-501(c)(3) organization but still functions as a minister in their day-to-day professional life

Employers may automatically enroll employees in a 403(b), though employees can opt out if they so choose. Of course, participating in an employer-sponsored retirement plan is one good way to start saving for retirement.

Universal Availability Rule: Who Doesn’t Qualify for 403(b) Participation?

Employers must offer 403(b) coverage to all qualifying employees if they offer it to one — this rule is known as “universal availability.” However, plans may exclude certain employees, including those under the following circumstances:

•   Employees working fewer than 20 hours per week

•   Employees who contribute $200 or less to their 403(b) each year

•   Employees who participate in a retirement plan, like a 401(k) or 457(b), of the employer

•   Employees who are non-resident aliens

•   Employees who are students performing certain types of services

The same laws that allow these coverage limits also require employers to give employees notice of specific significant plan changes, like whether or not they have the right to make elective deferrals.

Types of Contributions: Understanding Your Options

You can contribute to your 403(b) through automatic paycheck deductions. This process is similar to that of a 401(k) — the employee agrees to have a certain amount of their salary redirected to the retirement plan during each pay period.

However, other types of 403(b)contributions are also eligible, including:

•   Nonelective contributions from your employer, such as matching or discretionary contributions

•   After-tax contributions can be made by an employee and reported as income in the year the funds are earned for tax purposes. These funds may or may not be designated Roth contributions. In this case, the employer needs to keep separate accounting records for Roth contributions, gains, and losses.

The Cap on Contributions: Limits and Regulations

In 2025, workers can put up to $23,500 into a 403(b) plan. In 2024, workers can put up to $23,500 into a 403(b) plan. Workers who’ve been with their employer for 15 years may be able to contribute an additional $3,000 if they meet certain requirements. Those age 50 or older can contribute an additional $7,500 to a 403(b).

Combined contributions from the employee and the employer may not exceed the lesser of 100% of the employee’s most recent yearly compensation or $69,000 in 2024 and $66,000 in 2023.

Investing Within Your 403(b) Plan

A 403(b) may offer an employee a more limited number of investment options compared to other retirement savings plans.

Exploring Investment Choices for Your 403(b)

One way 403(b) plans diverge from other retirement plans, like 401(k)s and even IRAs, is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds (ETFs), 403(b)s commonly invest in annuity contracts sold by insurance companies.

Part of the reason these plans are known as “tax-sheltered annuities” is that they were once restricted to annuity investments alone — a limit removed in 1974. While many 403(b) plans still offer annuities, they have also largely embraced the portfolio model that 401(k) plans typically offer. 403(b) plans now typically also offer custodial accounts invested in mutual funds.

Comparing 403(b) with Other Retirement Plans

How does a 403(b) stack up against other retirement plans, such as 401(k)s, IRAs, and pension plans? Here’s how they compare.

403(b) vs. 401(k): Similarities and Differences

These two plans share many similarities. However, one notable difference between 403(b) plans and 401(k) plans is there is no profit sharing in 403(b)s — workplaces that are 403(b)-eligible aren’t working toward a profit.

Another way 403(b) plans diverge from 401(k)s is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds, 403(b)s commonly invest in annuity contracts sold by insurance companies or in custodial accounts invested in mutual funds.

403(b) vs. IRA vs. Pension Plans: What’s Right for You?

An IRA offers more investment choices than a 403(b). With a 403(b), your investment options are narrower.

403(b) plans may also have higher fees than other retirement plans. In addition, certain 403(b) plans aren’t required to adhere to standards set by the Employee Retirement Income Security Act (ERISA), which protects employees who contribute to a retirement account.

However, 403(b)s have much higher contribution limits than IRAs. IRA contributions are $7,000 for 2024 for individuals under age 50, compared to $23,000 in contributions for a 403(b). IRA contributions are $6,500 for 2023 for individuals under age 50, compared to $22,500 in contributions for a 403(b).

As for pension plans, public school teachers are typically eligible for defined benefit pension plans that their employer contributes to that gives them a lump sum or a set monthly payment at retirement. These teachers should also be able to contribute to a 403(b), if it’s offered, to help them save even more for retirement.

Advantages and Challenges of a 403(b) Plan

There are both pros and cons to participating in a 403(b) plan. Here are some potential benefits and disadvantages to consider.

Tax Benefits and Employer Matching: The Upsides

As mentioned, a 403(b) offers tax advantages, whether you have a traditional or Roth 403(b) plan. Contribution limits are also higher than they are for an IRA.

Employers may match employees’ contributions to a 403(b). Check with your HR department to find out if your employer matches, and if so, how much.

Potential Drawbacks: Fees and Investment Choices

Some 403(b)s charge higher fees than other types of plans. They also have a narrower range of investment options, as mentioned earlier.

Making Changes to Your 403(b) Plan

If a situation arises that requires you to make changes to your 403(b), such as contributing less from your paychecks to the plan, it is possible to do so.

When Life Changes: Adjusting Your 403(b) Contributions

You can adjust your contributions to a 403(b). Check with your employer to find out if they have any rules or guidelines for when and how often you can make changes to your contributions, and then get the paperwork you’ll need to fill out to do so.

Plan Termination: Understanding the Process and Implications

An employer has the right to terminate a 403(b), but they’re required to distribute all accumulated benefits to employees and beneficiaries “as soon as administratively feasible.”

Employees may be eligible to roll their 403(b) funds over into a new retirement fund upon termination.

Loans, Distributions, and Withdrawals from 403(b) Plans

Here’s information about taking money out of your 403(b), whether it’s a loan or a withdrawal.

Borrowing from Your 403(b): What You Need to Know

There are rules that limit how and when an account holder can access funds in a 403(b) account. Generally, employees can’t take distributions, without penalties, from their 403(b) plan until they reach age 59 ½.

However, some 403(b) plans do allow loans and hardship distributions. Loan rules vary by the plan. Hardship distributions require the employee to demonstrate immediate and heavy financial need to avoid the typical early withdrawal penalty. Check with your employer to find out the particulars of your plan.

Taking Distributions: The When and How

Like other retirement plans, 403(b)s have limits on how and when participants can take distributions. Generally, account holders cannot touch the funds until they reach age 59 1/2 without paying taxes and a penalty of 10%. Furthermore, required minimum distributions, or RMDs, apply to 403(b) plans and kick in at age 73.

If you leave your job, you can keep your 403(b) where it is, or roll it over to another retirement account, such as an IRA or a retirement plan with your new employer.

Maximizing Your 403(b) Plan

If you have a 403(b), the amount you contribute to the plan could potentially help you grow your savings. Here’s how.

Strategic Contribution Planning: How to Maximize Growth

If your employer offers a match on contributions to your 403(b), you should aim to contribute at least enough to get the full match. Not doing so is like leaving free money on the table.

Beyond that, many financial advisors suggest aiming to contribute at least 10% of your income for retirement. You may be able to save less if you have access to guaranteed retirement income such as a pension, as many teachers do, but consider all your options carefully before deciding.

If 10% seems like an unreachable goal, contribute what you can, and then consider increasing the amount that you save each time you get a raise. That way, the higher contribution will not put as much of a dent in your take-home pay.

Doing some calculations to figure out how much you need to save and when you can retire can help you determine the best amount of save.

The Takeaway

If you work for a nonprofit employer, contributing to a 403(b) is a tax-efficient way to start saving for retirement. The earlier you can start saving for retirement, the more time your money can have to grow.

If your employer does not offer a 403(b), or if you’re interested in additional ways to save or invest for retirement, you may want to consider opening another tax-advantaged retirement savings account such as an IRA to help you reach your financial goals.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Easily manage your retirement savings with a SoFi IRA.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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

SoFi Invest®

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

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

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