Financial Topics Archives | Page 682 of 824

Q: How Do You Execute a Carry Trade?

Imagine that the US dollar has a 1% interest rate, but the British pound has a 2% interest rate. A trader could take 100 US dollars, and then invest that 100 dollars into the equivalent number of pounds (according to the exchange rate), and earn a higher return in interest.

Jul

2023

What Is a Carry Trade in Currency Markets?

What Is A Currency Carry Trade in Forex Markets?

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

Carry trade is a strategy used by some traders who invest in currency markets to take advantage of differences in interest rates. In a carry trade, an investor buys or borrows a security or asset at a low interest rate, and then uses it to invest in another security or asset that provides a higher rate of return.

Carry trades have some clear uses in the foreign exchange market, or “forex” market. Given that they can be used to drive returns, they can be important for investors of all stripes to understand.

What Is a Carry Trade?

In a carry trade, forex traders borrow money at a low interest rate in order to invest it in an asset with a higher rate of return. In the forex markets, the currency carry trade is a bet that one foreign currency will hold or increase its value relative to another currency.

Of course, this investing strategy hinges on whether or not interest rates and exchange rates are in the traders’ favor. The wider the exchange rate between two currencies, the better the potential returns for the investor.

Recommended: What Is Forex Trading?

Even so, a carry trade strategy can be a relatively simple way to increase an investor’s returns, assuming they understand the difference in interest rates. In that way, it’s similar to understanding “spread trading” as they relate to stocks.

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

How Do You Execute a Carry Trade?

Executing a carry trade can seem nebulous without an example. Here’s a runthrough.

Carry Trade Example

Imagine that the U.S. dollar has a 1% interest rate, but the British pound has a 2% interest rate. A trader could take 100 U.S. dollars, and then invest that 100 dollars into the equivalent number of pounds (according to the exchange rate), and earn a higher return in interest. The discrepancy in interest rates allows traders to take advantage and earn higher returns.

This is a rather simplistic carry trade example, professional traders and investors can engage in complex carry trade strategies, and even employ the use of a carry trade formula to help them figure out expected returns, and whether the strategy is worth pursuing in a given situation.

Rather than simply buying one currency with another, traders often execute a carry trade that involves borrowing money in one currency and using it to purchase assets in another currency. In this scenario, traders want to borrow the money at the lowest possible interest rate, and do so using a weak or declining currency.

That can create higher profits when they close the deal and pay back the borrowed money. In general, carry trade is a short-term strategy, rather than one focused on the long-term.

Recommended: Short-Term vs Long-Term Investments

Is a Carry Trade Risky?

The concept of a carry trade is simple, but in practice, it can involve investment risk.

Most notably, there’s the risk that the currency or asset a trader is investing in (the British pounds in our previous example) could lose value. That could put a damper on a trader’s expected returns, as it would eat away at the gains the difference in interest rates could provide. Currency prices tend to be very volatile, and something as mundane as a monthly jobs report released by a government can cause big price changes.

The greater the degree of leverage an investor uses to execute a carry trade, the higher the potential returns — and the larger the risk. In addition to currency risk, the carry trade is subject to interest rate risk. Given the risks, carry trades in the currency markets may not be the most appropriate strategy for investors with a low tolerance for risk.

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

The Takeaway

Carry trades are one way for investors or traders to generate returns, although the approach involves some risks that aren’t present in other types of investment strategies. While the carry trade concept is straightforward, it can quickly get complex when institutional investors put it in place.

Carry trades can be advanced trading tools or strategies. For that reason, they may not be appropriate for all investors or traders. If you feel like you’re in over your head, it may be a good idea to speak with a financial professional for guidance, or to do some more homework to further your understanding.

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).

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/akinbostanci

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

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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0723020

Jul

2023

What’s the Reflation Trade?

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

The reflation trade is a bet that certain sectors of the market perform well immediately after a recession or economic crisis. Essentially, it’s a bet on cyclical stocks at the beginning of a market recovery.

Reflation is the inflation that typically comes immediately after a low-point in the economic cycle — often after economic stimulus, and the reflation trade is the purchase of specific stocks or sectors believed to outperform in that type of environment.

Reflation vs Inflation

While both reflation and inflation are characterized by rising prices, they are not the same thing.

Reflation is a recovery of prices lost during an economic downturn along with employment growth, and many economists see reflation as a healthy sign of an improving economy. It often accompanies economic stimulus, and may reflect monetary policy designed to stimulate spending and halt deflation.

Inflation, on the other hand, does not look at employment or any other economic factors. It is the rise in prices beyond their “normal” range, and poses a threat to economic recovery, since it can reduce the purchasing power of consumers and make it more expensive to borrow money.

Reflation is also different from what happens during stagflation, in which prices go up but wages don’t follow.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Understanding Reflation Trade Opportunities

Reflation doesn’t just mean that the market as a whole will rise as economic activity returns to normal or even higher levels. Instead there’s a focus on certain sectors as they reflate after a decline.

For example, some investors might see reflationary dynamics in sectors like hospitality or dining during a pandemic, along with travel and tourism. It may also be noticeable, under those circumstances, in more indirectly affected sectors like energy and materials.

Again, assuming an economy suffers a pandemic, part of the reflation trade could be a switch from purchases of goods to services, as people go out more, whether it’s movie theaters, restaurant meals, theme parks and hotels. These are the sectors that would perform well if the reflation thesis turned out to be true.

Investors interested in the reflation trade can invest in individual stocks, or get more diversified exposure by investing in sector-specific exchange-traded funds (ETFs) or index funds.

Reflation Trade Sectors

While hospitality stocks might make sense for investors considering a reflation trade, there are other sectors that typically perform well in most deflationary environments. Here’s a look at a few of them:

Financial Stocks

Banks and other financial institutions tend to do well after an economic recession, since they can benefit from both higher interest rates and ramped up consumer spending.

Value Investing

Companies that deliver steady, long-term growth often get undervalued during economic downtimes, meaning that they’re poised for better performance as the market begins to improve. That’s the logic behind value investing.

Bonds

When interest rates are rising–in either the short- or the long-term — investing in bonds may benefit from a reflationary market.

Commodities

Since commodities tend to perform well during both periods of inflation and periods of economic growth, they’re a favored investment among those looking for a reflationary trade. As such, commodities trading could be an attractive area in a reflationary market.

Small Cap Stocks

Investments in small cap stocks tend to increase in value after recessions or during periods of growth, making them another asset that investors might consider in a reflationary market.

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

The Takeaway

The reflationary trade is a bet on specific sectors of the economy or certain types of asset classes in the aftermath of an economic downturn. If you’re interested in incorporating the reflation trade into your portfolio, you could do so either via individual stocks or by buying sector-specific exchange-traded funds (ETFs) or mutual funds.

But note that the economy is a complicated thing, and that there are cycles it naturally takes, but it’s also susceptible to all sorts of other events. That includes natural disasters, political changes, or even pandemics and other global crises. With that in mind, it can be difficult to be sure of what sort of environment the economy is in, exactly, at any given 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/eugenesergeev

SoFi Invest®

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

Jul

2023

ETFs vs Mutual Funds: Learning the Difference

By Samuel Becker | Growing Wealth, invest, Investing | No Comments

Exchange-traded funds (ETFs) and mutual funds are both SEC-registered investment vehicles that offer investors a convenient way to build a diversified portfolio. Both are professionally managed and offer investors slices of the portfolio. Both can hold hundreds or thousands of securities. Both are not FDIC insured, which means an individual can lose their money.

For decades, ETFs and mutual funds have provided retail and institutional investors an efficient way to invest in stocks, bonds and other asset classes. Yet there are key differences.

Differences Between ETFs and Mutual Funds

While there are plenty of similarities between ETFs and mutual funds, let’s start with some key differences.

How to Buy Mutual Funds and ETFs

The biggest difference between mutual funds and ETFs is how they’re purchased and sold. Mutual funds transact once per day, with all investors selling or buying shares at the same closing price. ETFs trade throughout the day on public exchanges, with many shares exchanging hands at various prices as buyers and sellers react to changes in the market.

Data on Holdings

Mutual funds are required to report the total value of their portfolio once per day after the stock markets close. The fund then figures out how many shares they have and what each share is worth based on the total value. This is what is referred to in the industry as the Net Asset Value, or NAV. When investors buy or sell a share of the mutual fund, they transact at that NAV at the end of the day.

Meanwhile, ETFs have to report their holdings on a daily basis. The price of the ETF fluctuates throughout the day based on market conditions and the value of the ETF’s underlying holdings.

Passive vs Active

ETFs tend to be considered “passive investments.” That’s because investors are not necessarily making active trades but rather tracking an underlying index. However, actively managed ETFs have also cropped up, since the first ETF was launched in 1993.

Meanwhile, with mutual funds, it’s common to find an active fund manager who makes decisions on which holdings to buy and sell.

Fee Differences Between ETFs vs Mutual Funds

Mutual funds tend to charge different types of fees to cover their business costs. ETFs generally charge lower fees. Compared to active investing, passive investing usually incurs lower fees since they track a particular index, like the S&P 500 Index.

Tax Implications of ETFs vs Mutual Funds

You may get better tax efficiency with ETFs, because you are not buying or selling as much with them. There are fewer transactions to tax and ETFs are generally tax efficient given their unique creation and redemption mechanism that they employ.

You’ll have to pay capital gains taxes and dividend income taxes, but ETFs have a lower tax requirement than mutual funds. Due to the unique structure of ETFs, they’re often able to reduce the amount of capital gains they distribute each year relative to a comparable mutual fund.

Lower Initial Investment

As a general rule, mutual funds tend to require a higher initial investment. ETFs, on the other hand, allow investors to invest in as little as a single share. In some cases, brokerage firms allow investors to even buy ETF fractional shares, slices of a whole stock in an ETF.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Types of Mutual Funds

The first mutual fund was launched in the 1970s by the late Jack Bogle of Vanguard. Since then the investment type has steadily increased in popularity. They account for tens of trillions of dollars.

Here are some of the different types of mutual funds:

Load Mutual Funds

Load mutual funds charge a sales commission that’s paid to a financial professional or broker who helped the investor decide on which mutual fund to purchase.

There are typically two types of load mutual funds: Front-end load funds, which means the fee is paid when the mutual fund is purchased, and back-end load funds, which means the fee is paid when the mutual fund purchase is redeemed. Generally, back-end load funds charge higher fees.

No-Load Mutual Funds

Investors could look for a “no-load” mutual fund, which means the shares are bought and sold without charging commissions.

This plan may be best for investors who plan to do a lot of trading. If investors have to pay a commission charge every time they buy or sell a security, frequent trading will reduce returns. However, the expense ratios for no-load mutual funds are often higher.

Active vs Passive Mutual Funds

Most mutual funds are actively navigated by experienced money managers who steer the fund and invest in companies they believe will lead to outperformance. However, there are also passive mutual funds that track indices, similar to the way ETFs do.

Open-Ended Funds

Purchases and sales of fund shares typically happen directly between an investor and the fund company. As more investors buy into the fund, more shares are added, which means that the number of eventual fund shares can be nearly unlimited.

However, the fund must undergo a daily valuation by law, which is called marking to market (see a deeper dive on this below). The result of this process is a new per-share price, which has been adjusted to sync with any changes in the value of the fund’s holdings. An investor’s share value is not affected by the quantity of outstanding shares.

Closed-End Funds

Unlike open-ended funds, closed-ended funds (CEFs) are finite and limited. Only a specific number of shares are issued and no further shares are expected to be added.

The prices of close-ended funds are influenced by the NAV of the fund, but are ultimately determined by the demand investors have for the fund. Since the amount of shares is fixed, the shares often trade above or below the NAV. If the fund is trading above the NAV (what it’s really worth), it’s said to be trading at a premium; if trading below the NAV, it’s said to be trading at a discount.

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

Different Types of ETFs

ETFs are just one class of funds within the broader exchange-traded product (ETP) universe. Here’s a closer look at the different types of ETPs and ETFs.

Exchange-traded notes (ETNs)

Exchange-traded notes (ETNs) are usually debt instruments issued by banks that seek to track an index.

Leveraged ETFs

Leveraged ETFs use derivatives to amplify returns from a fund. For instance, if an underlying index moves 1% on a trading day, a regular ETF tracking the index would also move 1%. However, a leveraged ETF could move 2% or 3% depending on whether it’s double levered or triple levered.

Inverse ETFs

Inverse ETFs are similar to shorting a stock. Investors can use inverse ETFs to bet that the price of a market or stock sector will go down. So if the underlying goes down 1% on a given day, the inverse ETF will go up 1%.

Thematic ETFs

Thematic ETFs tend to focus on a slice of the stock market and follow a specific trend. Thematic ETFs that have cropped in recent years include those that cover renewable energy, the gig economy, or even pet care.

The major pros and cons of thematic ETFs include capturing a specific trend that appeals to an investor, as well as being too narrowly focused.

The Takeaway

Both ETFs and mutual funds allow investors to pool funds with other investors’ funds to ultimately buy and sell baskets of securities in the market. The aim is portfolio diversification and reducing risk compared to investing in a single company. If a person were to put all of their money into one company instead, their investment isn’t diversified because their fortunes are tied to that single company.

Investing in both ETFs and mutual funds, or a combination of both (or either) will depend on an individual investor’s preferences. Not all investments are right for each portfolio, and some research is necessary to see what’s right for you.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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

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.

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.
SOIN0623061

Jul

2023

Why is the U.S. Dollar the World's Reserve Currency?

How the dollar Became the World’s Reserve Currency

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

The U.S. dollar bears a lot of responsibility when it comes to global finance: It’s the currency kept on hand by central banks and other major financial institutions around the world to make transactions and investments, and to repay debts overseas.

The U.S. dollar is also the currency in which the world prices and trades vital commodities like gold and oil. And buyers and sellers in every country have to keep large amounts of U.S. dollars on hand to pay for them.

Historians disagree on exactly when the dollar became the reserve currency of the world. Some say the change took place right after the First World War, others say it happened closer to 1929, at the outset of the Great Depression.

But all are in agreement that as the Second World War drew toward a conclusion in 1944, the U.S. dollar had unseated the British Pound as the world’s undisputed reserve currency.

The Pound vs the dollar

The U.S. dollar as we know it didn’t actually exist until 1913, under the Federal Reserve Act of 1913, which created the Federal Reserve System.

The new central bank was created to set monetary policy and stabilize the U.S. currency, which had been issued based on bank notes issued by a number of individual banks.

At that point, the British pound was the world’s reserve currency. Though the U.S. economy was the largest in the world as World War I started in 1914, Britain remained at the center of the world’s trade, and most international transactions took place in British pounds. Like most countries’ currencies at the time, the British Pound was backed by gold.

Recommended: What Is Monetary Policy?

World War I changed all of that. The fighting was so ferocious, so widespread, and so costly that many countries had to deviate from that gold standard just to pay their armies.

Great Britain took the Pound off the gold standard in 1919, and the pound plummeted — which was catastrophic for international merchants and banks that traded primarily in pounds. Some scholars maintain that that was when the dollar became the world’s reserve currency.

Other historians maintain that global trade, especially international debt offerings, were denominated equally in dollars and Pounds until 1929. They even point to data that shows the British Pound was regaining ground on the dollar as the currency of choice for international trade up until 1939. Then World War II began.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

World War II and Bretton Woods

Although Germany didn’t surrender to the Allied nations until 1945, the outcome of World War ll was clear by the middle of 1944. In July of 1944, more than 700 delegates from 44 countries met in Bretton Woods, N.H., to negotiate and come to an agreement on the kind of economy that would emerge from the ashes.

The Bretton Woods conference lasted three weeks, and established the U.S. dollar as the currency par excellence for the world. Attendees agreed upon the Bretton Woods system, which established a number of key global economic points:

• The U.S. agreed that the dollar would be backed by gold, which was priced at $35 an ounce when the agreement took effect.

• The countries who signed the agreement promised that their central banks would establish fixed exchange rates between their own currencies and the U.S. dollar. If their currency weakened, their central bank would buy up the currency until its value stabilized relative to the dollar.

On the other hand, if the country’s currency grew too strong compared with the dollar, their central bank would issue more currency until the price fell and the relationship with the dollar returned to normal.

• Those countries also promised not to lower their currencies to goose trade. But it allowed them to take steps to increase or decrease the value of their currencies for other reasons, like stabilizing their economy, or to help with post-war rebuilding.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

The dollar Since Bretton Woods

By 1971, the gold owned by the U.S. government had reached a limit at which it could no longer cover the number of dollars in circulation. That’s when President Richard M. Nixon took the step of reducing the U.S. dollar’s comparative value to gold. This led to the collapse of the Bretton Woods system in 1973.

After the system fell, the countries took a wide range of approaches to how they valued their currency, and what policies their central banks would pursue. But the end of the system led to the creation of the foreign exchange or forex market, now the biggest and most active financial market in the world, with a daily trading volume of $6.6 trillion.

While the U.S. dollar — now considered a fiat currency — goes up and down in relation to other currencies every day, it is still the world’s reserve currency, with 59% of all non-U.S. bank reserves denominated in dollars, according to the International Monetary Fund (IMF).

The dollar retains its prominence not because of an international agreement, but because of a broad consensus about the size, strength and stability of the U.S. economy relative to other options. Globally, investors still see U.S. Treasury securities as an extremely safe bet, as is evidenced by their low yields.

The Takeaway

Most of the world’s trade happens in U.S. dollars. But it hasn’t always been that way. And while it’s been preeminent for about a century, the dollar’s status has changed over time.

For investors interested in understanding the world’s currencies, the dollar’s rise to prominence has implications for the U.S. economy, as well as many other world economies.

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/fizkes

SoFi Invest®

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

Jul

2023

Understanding the Gold/Silver Ratio

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

The gold-to-silver Ratio, also known as the silver-to-gold Ratio or “Mint Ratio,” is a metric that indicates the amount of silver required to buy an ounce of gold. For example, if the silver-gold ratio is 40:1, then it would take 40 ounces of silver to buy one ounce of gold.

This ratio fluctuates daily as the spot price of an ounce of gold and silver changes. This ratio is used by investors determining whether and how they want to invest in precious metals.

It’s a measurement that’s been around for thousands of years. Understanding how the two assets’ price relationship allows investors, governments, and manufacturers to compare and trade gold and silver in real-time.

Recommended: How to Invest in Precious Metals

How Is the Gold-Silver Ratio Calculated?

Investors calculate the gold-silver ratio by dividing the price of one ounce of gold by the price of one ounce of silver: e.g. how many ounces of silver equal one ounce of gold. For example, if one ounce of silver is $20 and one ounce of gold is $1,600, then the silver-gold ratio would be 80:1.

Unlike other physical items, precious metals are weighed by the Troy Ounce, an historic unit of measurement dating back to the Middle Ages equaling roughly 31.1 grams.

By comparison, the standard ounce equals about 28.35 grams. The price of one Troy Ounce of gold and silver fluctuates daily based on the spot price or current price at which the metal is trading.

Whereas most precious metals and commodities have futures contracts traded on the market, the spot price uses real-time price data. Premiums, or additional seller fees added to the price by metal retailers and merchants do not factor into the spot price or the gold-silver ratio.

💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

What Is the Historical Gold-Silver Ratio?

In modern times, the gold-silver ratio fluctuates daily. Before the 20th century, however, governments set the ratio between the two metals as part of their monetary policy, with many relying on a bi-metallic standard. The U.S. government set a gold-silver ratio of 15:1 with the Coinage Act of 1792, and adjusted the standard to 16:1 in 1834.

During the 20th century, nations started to migrate away from the bi-metallic currency standard and for some off the gold standard entirely to fiat currencies. This created more volatility in the metal prices.

Since then, gold and silver prices have traded independently of one another as alternative assets in the free market, resulting in a fluctuating gold/silver ratio.

When the United States abandoned the gold standard in 1971, the gold/silver ratio was 20.54:1. In 1985, it reached 51.68:1 and hasn’t fallen below that level since. It has climbed steadily upward since 2011, reaching an average 82.73 in mid-2023.

Within each year, however, there is significant day-to-day volatility. The ratio hit a record high of 124:1 in March 2020.

Recommended: 7 Investment Opportunities in 2023

Why Does the Gold-to-Silver Ratio Matter?

The gold/silver ratio can be useful to both traders and consumers of precious metals.

Traders

Investors focused on commodities or hard assets keep a close eye on the gold/silver ratio. When the gold/silver ratio is higher than expected, this signals to analysts and traders that silver’s price may be undervalued relative to gold. Conversely, an extremely low number could indicate that gold is undervalued.

Movement in the ratio may also shed light on the current demand or market sentiment toward either metal. A tightening of the ratio may indicate higher silver demand or lower gold demand. Investors in precious metals may compare this ratio to the current supply and demand of each asset to determine whether the fundamentals warrant the price change or if the ratio reflects heightened price speculation.

Consumers

For manufacturers purchasing precious metals such as gold and silver en masse to produce electronics and various consumer goods, the gold-silver ratio may help determine whether or not it’s a good time to buy more metal quantities or buy a futures contract that could offer a more favorable price.

This is a common strategy among various industries that rely heavily on imported materials to produce goods. Companies often hire in-house traders, analysts, or outside consultants to determine price forecasts of required commodities and will buy when the market is favorable and hedge when the outlook is less optimistic.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Can You Trade the Gold/Silver Ratio?

The gold-silver ratio is used in investing and trading to determine when one metal is undervalued or overvalued and thus a good value investment. However, like any other security, commodities carry some risks for investors.

Sometimes precious metals are extremely volatile and experience wild price swings, and sometimes gold and silver experience long periods of minimal price movement and volatility compared to other types of investments such as equities, commodities, and cryptocurrency. In fact many investors consider precious metals a store of wealth and allocate to it as part of their investors’ long-term investment portfolios.

The Takeaway

Measuring one asset against another is one way to determine an asset’s value, and Understanding the ratio, and the direction it’s moving, can help you make decisions about any precious metals allocations within your portfolio.

The SoFi Invest investment app can help you gain exposure to precious metals like gold and silver. You can use the platform to purchase exchange-traded funds (ETFs) that invest in specific commodities, or buy mining companies that produce such metals.

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/fizkes

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

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

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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0523129

What Is A Currency Carry Trade in Forex Markets?

What Is a Carry Trade?

How Do You Execute a Carry Trade?

Carry Trade Example

Is a Carry Trade Risky?

The Takeaway

What’s the Reflation Trade?

Reflation vs Inflation

Understanding Reflation Trade Opportunities

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

Reflation Trade Sectors

Financial Stocks

Value Investing

Bonds

Commodities

Small Cap Stocks

The Takeaway

ETFs vs Mutual Funds: Learning the Difference

Differences Between ETFs and Mutual Funds

How to Buy Mutual Funds and ETFs

Data on Holdings

Passive vs Active

Fee Differences Between ETFs vs Mutual Funds

Tax Implications of ETFs vs Mutual Funds

Lower Initial Investment

Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Types of Mutual Funds

Load Mutual Funds

No-Load Mutual Funds

Active vs Passive Mutual Funds

Open-Ended Funds

Closed-End Funds

Different Types of ETFs

Exchange-traded notes (ETNs)

Leveraged ETFs

Inverse ETFs

Thematic ETFs

The Takeaway

How the dollar Became the World’s Reserve Currency

The Pound vs the dollar

World War II and Bretton Woods

The dollar Since Bretton Woods

The Takeaway

Understanding the Gold/Silver Ratio

How Is the Gold-Silver Ratio Calculated?

What Is the Historical Gold-Silver Ratio?

Why Does the Gold-to-Silver Ratio Matter?

Traders

Consumers

Can You Trade the Gold/Silver Ratio?

The Takeaway

JOIN THE COMMUNITY

Student Loan Refinancing

Personal Loans

Online Investments

Other

Alternative investments,
now for the rest of us.

Student Loan
Refinancing

Personal
Loans

Online
Investments