Dec
20
2022
Annual Report: What They Are

Annual Report: The Key Info Companies Provide in Theirs

By | Growing Wealth, invest, Investing | Comments Off on Annual Report: The Key Info Companies Provide in Theirs

An annual report is a document that provides insight into a company’s operations and financial performance over the previous year. While annual reports are primarily associated with large, publicly traded companies, small businesses and non-profit organizations may also release yearly reports.

Companies issue annual reports to provide shareholders, potential investors, employees, and other interested parties with a comprehensive overview of the company’s financial position. Companies also use annual reports to inform investors about the company’s performance and prospects for the future. Annual reports can be an essential tool for investors to make informed decisions about their investments.

What Is an Annual Report?

As noted above, an annual report is a document that publicly traded companies are usually required to issue each year to share information about their financial performance and activities with their shareholders. These reports typically include quantitative and qualitative details about the company’s revenue, expenses, profits, losses, and plans for the future.

Companies send annual reports to their shareholders before they hold annual meetings, often to assist in the shareholder voting process. Additionally, reporting companies will post their annual reports on their websites.

A company’s annual report is typically prepared by the company’s management team, with input from other members of the organization, such as the finance department and the board of directors.

The individuals and teams preparing the annual report can vary depending on the company and the information it wishes to include. It is typically a collaborative effort involving many different people within the organization. In some cases, a company may also enlist the help of external parties, such as auditors or consultants, to assist with preparing the annual report.

Often a company’s creative and communications teams will be involved in preparing the report, as they contribute to the narrative text, graphics, and photos that may be in an annual report. By making it visually appealing, companies can make it easier for readers to digest the information.

A publicly traded company’s annual report is related to, but different from, the Form 10-K annual report that they must file with the Securities and Exchange Commission (SEC). The Form 10-K annual report may contain more detailed information about the company’s earnings and financial condition than the annual report. Companies may send Form 10-K to their shareholders instead of – or in addition to – providing them with a separate annual report.

💡 Recommended: Earnings Call: Definition, Importance, How to Listen

What Information Is Contained In an Annual Report?

The main components of an annual report typically include an overview of the company’s operations and financial performance, financial statements, and information about the company’s management and board of directors.

The specific components of an annual report can vary depending on the company and the information it wishes to share with its shareholders. In addition to the main features outlined below, the contents of an annual report may also include other information, such as details about the company’s corporate governance practices, its environmental and social impact, and any additional information that the company feels is important for shareholders to know.

Letter from the CEO

Annual reports usually start with a letter from the chief executive officer (CEO) or chairman of the board that provides an overview of the company’s performance and highlights any significant events or developments that have occurred over the past year.

Performance Overview

Companies often provide a review of the company’s operations, including information about its products or services, market position, and any important milestones or achievements that have occurred over the past year, in an annual report.

Financial Statements

Financial statements, such as the balance sheet, income statement, and statement of cash flows, providing detailed information about the company’s financial performance and position, are a critical part of an annual report.

Corporate Leadership Overview

Annual reports include information about the company’s management and board of directors, including biographies and details about their backgrounds and experience. The reports may also have detailed information about executive compensation.

Future Outlook

A discussion of any risks or uncertainties that the company faces and how it plans to address them in the future is often included in the annual report. This can be helpful for shareholders and potential investors to gain an understanding of the company’s possible performance in the future.

Example of an Annual Report

Annual reports can vary depending on the company, its industry, and whether it is a publicly traded or privately held firm.

For example, an annual report for a company in the retail industry might include information about the company’s same-store sales over the past year. Additionally, the report may provide details about the products it sells, a breakdown of its inventory, an overview of its financial position, and information about the company’s management team and any potential risks or challenges it faces in the coming year.

To find out more about a specific company’s annual reports, you can usually find them under the investor relations portion of the company’s website or through the SEC’s EDGAR database .

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Who Can Benefit From Reading an Annual Report?

Several groups of people may benefit from reading an annual report. For example, the company’s shareholders are usually interested in an annual report to use the information to understand the company’s financial performance and make more informed decisions about their investments.

Other groups who may find annual reports useful include potential investors, who can use the information in the annual report to assess the company’s financial health and determine if it is a good investment opportunity. In addition, analysts, customers, journalists, and other stakeholders may find annual reports to be a valuable source of information about a company and its operations.

💡 Recommended: Stakeholder vs. Shareholder: What’s the Difference?

The Takeaway

An annual report is a crucial document that provides a comprehensive overview of a company’s performance and financial position. These documents can be a critical resource for investors to make informed investment decisions. It is important to understand the information contained in the report and to analyze the information critically. By doing so, investors can make informed decisions about their investments as they build a wealth-building portfolio.

If you’re interested in building a portfolio to build wealth, SoFi Invest® can help. With a SoFi online brokerage account, you can trade stocks, exchange-traded funds, fractional shares, and more with no commissions, all in the SoFi app.

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.
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20
2022
man reading newspaper

Business Cycle Investing

By | Growing Wealth, invest, Investing | Comments Off on Business Cycle Investing

Investors often pay attention to the ups and downs of economic activity – fluctuations known as the business cycle – and readjust their investments accordingly. With this business cycle investing strategy, investors typically adjust their exposure to various sectors with stocks or bonds in their portfolios. Some industries outperform during economic expansions, while others do better during contractions.

Business cycle investing is not an exact science, and past performance isn’t indicative of future returns. But historically, specific industries have prospered during each stage of the business cycle. Here’s a rundown of the different business cycle stages and which industries have been more favorable to invest in during each phase.

What Is a Business Cycle?

A business cycle refers to the periodic expansion and contraction of a nation’s economy. Also known as an economic cycle, it tracks the different stages of growth and decline in a country’s gross domestic product (GDP), or economic activity.

Worker productivity, population growth, and technological innovations are all factors that can contribute to whether an economy is going through a period of boom or bust. Such elements play a role in how many goods and services a nation’s businesses produce and how much its consumers purchase.

Other factors, such as wars, pandemics, natural disasters, and political instability, can also influence the economy. These can cause a recession to happen sooner or otherwise shift the economic environment of a nation or the world.

In the U.S., the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) announces whether the economy is in a recession or a new iteration of the business cycle. Policymakers attempt to manage the business cycle by adjusting fiscal and monetary policies, such as taxes, stimulus packages, or interest rates.

Some people refer to business cycles and market cycles interchangeably. However, the business cycle measures the entire economy, while market cycles refer to the ups and downs of the stock market. Although the two can be correlated, they aren’t the same.

How Does the Business Cycle Work?

The business cycle works by alternating between periods of economic growth and decline. During the expansion phase, economic activity grows, and the economy is relatively healthy. A period of economic expansion is typically characterized by low unemployment, rising wages, and increasing consumer and business confidence.

Eventually, the economy will reach its peak and start to contract. This is typically characterized by slowing economic growth, rising unemployment, and declining consumer and business confidence. As businesses see a decline in demand, they may lay off workers or reduce production, leading to a downward spiral of declining economic activity.

The trough phase is the lowest point in the business cycle. Economic activity is at its weakest, and unemployment is at its highest. This phase is also known as the recession bottom. From here, the economy begins to recover, and the business cycle starts over again.

How Reliable Is the Business Cycle?

The business cycle is a reliable pattern of economic activity observed over time, but it is not always predictable. Business cycles tend to follow a similar pattern, with periods of expansion followed by periods of contraction, but each phase’s timing, length, and severity can vary significantly.

Stages of the Business Life Cycle

There are four stages of the business cycle, which fall into two phases: a growth phase of expansion and a declining phase of contraction. A business cycle can last anywhere from one year to 10 or more years. Since 1945, there have been 12 business cycles.

Stage 1: Recession

The recession phase is the lowest point in the business cycle. Also known as the contraction phase, a weak economy and high unemployment define this period.

GDP, profits, sales, and economic activity decline during this stage. Credit is tight for both consumers and businesses due to the policies set during the last business cycle. It’s a vicious cycle of falling production, incomes, employment, and GDP.

The intensity of a recession is measured by looking at the three Ds:

•   Depth: The measure of peak-to-trough decline in sales, income, employment, and output. The trough is the lowest point the GDP reaches during a cycle. Before World War II, recessions used to be much deeper than they are now.

•   Diffusion: How far the recession spreads across industries, regions, and activities.

•   Duration: The amount of time between the peak and the trough.

A more severe recession is called a depression. Depressions have deeper troughs and last longer than recessions. The only depression that has happened thus far was the Great Depression, which lasted 3.5 years, beginning in 1929.

Recessions generally lead to shifts in monetary policy and government spending that lead to a recovery phase.

Stage 2: Early Cycle

Following a recession, the economy enters an expansion phase, where there tends to be a sharp recovery as growth begins to accelerate. The stock market tends to rise the most during this stage, which generally lasts about one year. Because of loose monetary policy by the central bank, interest rates are low, so businesses and consumers can borrow more money for growth and investment. GDP begins to increase.

Just as a recession is a vicious cycle, recovery is a virtuous cycle of rising income, employment, GDP, and production. And similar to the three D’s, a recovery period, which includes Stages 2-4, is measured using three P’s: how pronounced, pervasive, and persistent the expansion is.

Stage 3: Mid-Cycle

The mid-cycle phase is generally the longest phase of the business cycle, with moderate growth throughout. On average, the mid-cycle phase lasts three years. Monetary policies shift toward a neutral state: interest rates are higher, credit is strong, and companies are profitable.

Stage 4: Late Cycle

At this stage, economic activity reaches its highest point, and while growth continues, its pace decelerates. Monetary policies become tight due to rising inflation and low unemployment, making it harder for people to borrow money. The GDP rate begins to plateau or slow.

Companies may be engaging in reckless expansions, and investors are overconfident, which increases the price of assets beyond their actual value. Late cycles last a year and a half on average.

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What Industries Do Well During Each Stage?

Historically different industries have prospered during each stage of the business cycle, depending on whether they are cyclical or non-cyclical stocks.

When money is tight and people are concerned about the economy, they cut back on certain purchases, such as vacations and fancy clothes. Also, when people anticipate a recession, they tend to sell stocks and move into safer assets, causing the market to decline.

Industries do better or worse depending on supply and demand, and the need for specific products shifts throughout the business cycle. In general, the following sectors perform well during each stage of the business cycle:

Recession

During the recession phase, the lowest point in the business cycle, economic activity is at its weakest, and unemployment is at its highest. Many industries may struggle during this phase, especially those dependent on consumer spending or business investment.

However, certain industries are able to weather the storm during a recession because they offer products and services that people need no matter how the economy is performing. These industries include healthcare, consumer staples, and utilities.

💡 Recommended: How to Invest During a Recession

Early Cycle

During the early cycle expansion phase, when economic activity is growing and the economy is healthy, many industries tend to do well. These can include consumer-oriented sectors, such as retail and leisure, as well as industries that benefit from increased business investment, such as construction and manufacturing. Other sectors that benefit from increased borrowing due to low interest rates include financial services, real estate, and household durables.

Mid-Cycle

During the mid-cycle phase, when the economy is operating near full capacity, some industries may start to see slowing growth or declining profits. These can include industries sensitive to changes in consumer demand or highly competitive, such as technology and media. However, some industries perform well during the mid-cycle, like information technology and energy, because companies in these areas deploy capital that helps them grow.

Late Cycle

During the late cycle, economic activity slows down and the labor market shows signs of weakness. Additionally, the economy may face inflationary pressures due to the previous period of economic growth and low unemployment. While this inflationary pressure and economic slowdown negatively impact many industries, utilities and energy companies may do well during this period. Additionally, investors could research stocks that do well during volatility.

Who Should Invest With the Business Cycle?

Business cycle investing involves trying to anticipate changes in the business cycle and buying or selling assets based on the expected performance of those assets during different phases of the business cycle. For example, an investor following a business cycle investing strategy might buy stocks when the economy is expanding and sell them before the peak in anticipation of a downturn.

However, this active investing strategy is not suited for everyone. Investing and rebalancing a portfolio with the business cycle is difficult because timing the market is easier said than none. Business cycle investing is best for investors who have the time to stay up to date with the latest economic indicators and stock market news while also having the risk tolerance to time the market.

In contrast, some investors prefer a long-term buy and hold strategy, in which they don’t try to time the market and make few changes to their portfolio.

💡 Recommended: Is Stock Market Timing a Smart Investment Strategy?

Pros and Cons of Business Cycle Investing

Business cycle investing involves trying to anticipate and profit from changes in the business cycle. The goal is to buy assets likely to do well during certain business cycle phases and sell them before the next phase begins.

However, investors should note that the business cycle is not always predictable, and there are no guarantees that a business cycle investing strategy will be successful. Thus, it’s good to consider the pros and cons of business cycle investing.

Pros

The advantages of using a business cycle investing approach include the following:

•   The ability to potentially profit from changes in the business cycle: By anticipating and acting on changes in the business cycle, investors may profit from the upswing of a recovery or the downtrend of a recession.

•   A framework for decision-making: The business cycle provides a framework for analyzing economic trends and making investment decisions. This can help investors make more informed decisions about buying or selling assets.

•   Diversification: Business cycle investing can help investors diversify their portfolio by adding assets likely to do well in different phases of the business cycle.

Cons

The disadvantages of using a business cycle investing approach include the following:

•   Difficulty in predicting the business cycle: The business cycle is not always predictable, and it can be difficult to anticipate changes in the economic environment. This can make it challenging for investors to implement a business cycle investing strategy successfully.

•   Market volatility: Business cycle investing can involve buying and selling assets at different points in the business cycle, exposing investors to stock volatility.

•   Opportunity cost: By focusing on the business cycle, investors may fail to take advantage of opportunities to invest in assets that are not correlated to the business cycle but may still provide strong returns.

Investing With SoFi

No business cycle is identical, but history shows there can be a rough pattern to which industries do better as the economy expands and contracts. Investors can take cues from which stage of the business cycle the economy is in order to allocate money to different sectors.

One way to invest and keep track of the market is by using an online investing app like SoFi Invest®. With a SoFi online brokerage account, you can stay up-to-date with the latest financial market news, and trade stocks, exchange-traded funds (ETFs), and more with no commissions. Plus, you’ll have access to educational resources to support you as you continue to learn about the markets.

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

FAQ

What is an investment cycle exactly?

An investment cycle is a pattern of investment activity that occurs over time, usually in conjunction with the business cycle. It is typically characterized by periods of rising prices followed by periods of declining prices. The length and severity of the investment cycle can vary, and various factors, including economic conditions, market trends, and investor sentiment, can influence it.

How long are investment cycles?

The length of investment cycles can vary significantly, depending on economic activity and investor sentiment. Some investment cycles may last only a few months, while others may last several years or more.

What are the 4 stages of investment cycles?

The four stages of an investment cycle are expansion, peak, contraction, and trough. During the expansion phase, economic activity grows and investor confidence is high. Prices of investments, such as stocks and real estate, tend to rise, and demand for assets is strong. The peak phase is the highest point in the investment cycle. Prices of investments have reached their highest point, and demand for assets may start to wane. During the contraction phase, economic activity slows down and investor confidence may decline. Prices of investments tend to fall, and demand for assets may decrease. The trough phase is the lowest point in the investment cycle. Prices of investments have reached their lowest point, and demand for assets is at its weakest.

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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20
2022
How Bid and Ask Price Work in Trading

Bid and Ask Price: Definition, Example, How It Works

By | Growing Wealth, invest, Investing | Comments Off on Bid and Ask Price: Definition, Example, How It Works

Bid and ask are commonly used investing terms, and they refer to the best potential price at which a security on the market could be bought or sold for at any given time. In other words, the best price that buyers and sellers would potentially be willing to buy (the “bid” price) or sell (the “ask” or offer price) the asset.

It’s important for traders to understand the bid vs ask price of a security, as well as the difference between the two, which is known as the bid-ask spread.

The market price is a historical price: the price of the last trade that occurred with the security. The bid and ask prices, on the other hand, show what buyers and sellers would be willing to trade the security for now.

What Are Bid and Ask?

If you’re just getting started investing in stocks, you’re probably wondering about bid vs. ask prices. Bid and ask prices show the current market supply and demand for the security. The bid price represents demand for a security; the ask price represents supply.

When an asset has high liquidity — i.e. the market has a high trading volume not dominated by selling — the bid and ask prices will be fairly close. In other words the bid-ask spread, or the difference between the bid and ask prices, will be narrow in a highly liquid market. When there’s a greater gap between demand and supply, the spread will be wider.

That’s why the bid-ask spread is often considered a gauge of liquidity.

Bid Price

The bid price is the best potential price that retail investors would be willing to pay to buy a security.

So if a trader wants to sell a security, they would want to know how much they’d be able to sell it for. They can find out the best price they could get for the security by looking at the current bid price in the market, which would show the highest potential amount they could get for it.

Ask Price

Conversely, ask price is the lowest price investors are willing to sell a security for at any given time. If a trader wants to buy a security, they want to get the lowest possible price, so they look at the ask price to find out what that is.

Bid and Ask Price Examples

Let’s imagine that an investor wants to buy Stock X at the quoted price of $75, so they plan to buy 10 shares for $750. But they end up paying $752. That’s not an error, but rather because the ask price (the selling price) is $75.20.

The current price of $75 per share is the last traded price. But prices can change quickly, and in this case the ask price was 20 cents higher. The bid or buyer’s price is almost always lower than the ask price.

Investors can use limit orders to set specific parameters around the price at which they’re willing to buy or sell a security. This can give investors some control, so they’re not simply paying the current price, which may or may not be advantageous.

Evaluating the bid-ask spread can be part of an investor’s due diligence when trying to gauge rates of return for different securities.

What the Bid-Ask Spread Signals

How far apart the ask price and bid price are can give you a sense of how the market views a particular security’s worth.

If the bid price and ask price are fairly close together, that suggests that buyers and sellers are more or less in agreement on what a security is worth. On the other hand, if there’s a wider spread between the bid and ask price, that might signal that buyers and sellers don’t necessarily agree on a security’s value.

How Are Bid and Ask Prices Determined?

Essentially it’s the supply and demand of the market that sets the bid and ask prices. And many factors can play into supply vs. demand. Because of this, investors who are interested in active investing can use the difference in price between the bid and the ask of a security to gauge what the market thinks the security is worth.

Investors and market-makers can place buy or sell orders at a price they set. These orders will be fulfilled if someone is willing to sell or buy the security at that bid or ask price. Those order placements determine the bid and ask price.

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What’s the Difference Between Bid and Ask Prices?

In any market, from stocks to real estate to lemonade stands, there is almost always a difference between what someone is willing to pay for an item versus what someone wants to sell it for.

A buyer may want to buy a house for $300,000, but the seller is selling it for $325,000. An investor may want to buy a stock for $100, but the sell or ask price is $105.

That difference in price is called the spread, and when the spread is narrow it’s a lot easier to close the sale. When the spread is wider, there is a bigger gap between what the buyer thinks an item is worth vs. what the seller thinks it’s worth.

What Does It Mean When Bid and Ask Are Close?

A narrow spread, i.e. when the bid and ask price are close, means traders will be able to buy and sell the security at roughly the same price. This generally means there is a high trading volume for the security, with a lot of people willing to buy and sell because of high demand.

If demand increases for the security, the bid and ask prices will move higher, and vice versa. If there is a surge in demand, but not enough supply, that might drive the bid price up. Conversely, if supply outpaces demand, the bid price of a security could fall In either case, the spread would likely get wider when the bid or the ask prices outweighs the other.

The Bid-Ask Spread

The bid-ask spread is the gap between the two prices: the bid or buyer’s price and the ask or offer price. There are different factors that can affect a stock’s spread, including:

•   Liquidity. A measure of how easily a stock or security can be bought and sold or converted to cash. The more liquid an investment is, the closer the bid and ask price may be, since the market is in agreement about what the security is worth.

•   Trading volume. This means how many shares of a stock or security are traded on a given day. As with liquidity, the more trading volume a security has, the closer together the bid and ask price are likely to be.

•   Volatility. A way of gauging how rapidly a stock’s price moves up or down. When there are wider swings in a stock’s price, i.e. more volatility, the bid-ask price spread can also be wider as market makers attempt to profit from the price changes.

Who Benefits From the Bid-Ask Spread?

The difference in price between the bid and the ask is where brokers and market makers make their profit.

But traders can also benefit from the bid-ask spread, if they use limit orders to get the best possible price on a desired trade, as opposed to using market orders.

How the Bid-Ask Spread Is Used

When you understand how bid-ask spread works, you can use that to invest strategically and manage the potential for risk. This means different things whether you are planning to buy, sell, or hold a stock.

If you’re selling stocks, that means getting the best bid price; when you’re buying, it means paying the best ask price. Essentially, the goal is the same as with any other investing strategy: to buy low and sell high.

Bid-Ask Spread Impact on Trading Profits

Naturally, the bid-ask spread impacts trading profits, and in fact can act almost as a hidden cost.

For example, if an investor places a market order on a stock with a bid price of $90 and an ask price of $91, they’ll get the stock at $91 per share. If the price of the stock rises 5%, so the bid price is now $94.50 and the ask price is $95.55 and the bid-ask spread is $1.05.

If the investor decides to sell the shares they bought at $91 through a market order, they will receive $94.50 per share. So their profit is $3.50 per share, even though the stock price rose by $4.55. The $1.05 gap in profit reflects the $1.05 bid-ask spread on this stock.

Wide vs Narrow Bid-Ask Spread

What is the difference between wide and narrow bid-ask spreads, and what is the significance of each?

Narrow Bid-Ask Spreads

The bid-ask spread, often just called the spread, is tighter when a security has more liquidity, i.e. there’s higher trading volume for that stock. When you think of big companies, industry leaders, constituents of different indexes like the Dow Jones or the S&P 500, those companies may have higher volume and narrower spreads.

Wider Bid-Ask Spreads

Conversely, smaller companies or those that aren’t in demand tend to have wider spreads, reflecting a lower level of market interest. These trades tend to be more expensive, as investors must contend with lower liquidity.

Impact of the Bid-Ask Spread

The narrower the bid-ask spread, the more favorable it is for traders. If an investor wants to buy 100 shares of Stock A at $60, but shares are being offered at $60.25, that 25 cent spread may not seem like much. It would add up to $25 (100 x 0.25). But if that trader wanted to buy 500 shares or more, the cost of the spread is about $125.

The Takeaway

Bid and ask prices help traders know exactly how much they may buy and sell securities for. The bid price is the highest price a buyer is willing to pay for a security. The ask price is the lowest price a seller is willing to accept. The difference between them is the bid-ask spread, or “spread.”

The spread ends up being a transaction cost, as market makers pocket the cost of the spread.

Since the bid price and the ask price are essentially a function of supply and demand in the market, investors can consider the bid-ask spread as a gauge of risk. The narrower the spread, the more aligned buyers and sellers are on the value of a certain security, and thus there’s higher volume and more liquidity — and lower risk to the investor that the stock or security might lose value (although it could, as there are no guarantees).

To understand bid and ask prices, you can start trading stocks with only a few dollars using the SoFi app. When you set up an Active Invest account, you can research, track, buy and sell stocks, right from your phone or laptop. SoFi doesn’t charge a commission, and you can see all your financial information in one simple dashboard.

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

FAQ

Do I buy a stock at the bid or ask price?

You buy a stock at the ask price, that’s the lowest price the seller is willing to offer.

Is the last price the same as the market price?

The last price is the last traded price for a security, or the last price at which it closed. The market price is the best current price.

Is it better if your bid is higher than the asking price?

The bid price is typically lower than the seller’s price or ask price, so it would be unusual if the bid was higher than the ask. If a bid price is higher than the ask, a trade would occur, but it would put the buyer at risk of a potential loss.

Photo credit: iStock/eclipse_images

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.

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20
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Female dentist with patient

8 Smart Tips To Finance Expensive Dental Work

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So you need expensive dental work, and you’re wondering how to pay for it. After getting a quote from your dentist and learning how little your insurance will cover, you may be thinking, This can’t be right. I must be missing something.

We’ve got good news and bad news. Bad news first: Despite insurance, dental work can cost a lot out-of-pocket. The good news: While there’s no simple and obvious solution to covering the bills, there are many tricks you can use to make your dollar stretch farther (and get a tax break while you’re at it).

We’ll explain all the ways you can save a little here and there on dental work. Altogether, they can add up to quite a discount off your dentist’s quote.

8 Ways To Pay for Dental Work

Many people cover their dental work by combining several of the strategies below. It’s tough to avoid paying out-of-pocket entirely, but you can get a hefty discount off the original quote.

1. Medical Insurance

Dental work isn’t typically covered by medical insurance, but certain procedures may be covered if they’re deemed “medically necessary.” For instance, oral surgery potentially can be billed as a medical procedure. Before you move forward with any dental work, it’s a smart idea to talk to your medical insurance company to find out what may be covered.

Recommended: Beginner’s Guide to Health Insurance

2. Dental Insurance

You should know that there’s a difference between a dental office that takes your insurance and a dental office that is in-network. A dentist may take your insurance even though they are out-of-network.

When a dentist says that they take your insurance, that likely means that they will file an insurance claim for you. But if your insurance doesn’t cover a procedure or service, the price will generally be set at your dentist’s discretion — and you’ll typically be responsible for paying the costs out-of-pocket.

Generally, using an out-of-network dentist means your insurance will cover less and you’ll pay more. Being in-network, on the other hand, usually means that your insurance company has pre-negotiated the fees with the dentist and they generally can’t charge more than that. So you’ll usually pay less with an in-network dentist.

Recommended: Budgeting as a New Dentist

3. Payment Plans

Paying a bill on a weekly or monthly basis can be much more manageable than paying it in a lump sum. That’s why many dental offices offer payment plans for procedures not covered by insurance.

Payment plans can be offered directly through your dentist’s office, or by third-party services like CareCredit. Ask about the specific terms of any payment plan offered. For example:

•   What procedures qualify for a payment plan?

•   Will they charge interest? And if so, how much?

•   Do they have to check your credit first?

Asking these questions beforehand can help keep you from getting blindsided by unexpected costs.

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4. Flexible Spending Account

A Flexible Spending Account (FSA) is a special savings account offered through some employer benefit plans. FSAs allow employees to pay for certain out-of-pocket medical and dental costs with tax-free money.

The typical taxpayer saves about 30% in federal, state, Social Security, Medicare, and Unemployment taxes. That translates to a 30% discount off all eligible medical and dental expenses.

FSA rules cap the amount of money that can be placed in the account each year ($3,050 for 2023), and also dictate which types of expenses are FSA-eligible. Most routine dental work and orthodontia qualify: cleanings, X-rays, fillings, crowns, extractions, implants, and Invisalign.

FSAs can’t be used for any procedure that is considered “cosmetic,” including teeth whitening and veneers. But in some instances, if a typically cosmetic procedure is deemed medically necessary — as with some veneers — you may be able to use your FSA. Talk to your dental insurance company for more information.

One drawback of FSAs is that any funds that are unused at the end of the plan year are forfeited — so make sure you don’t leave any money on the table. In the plus column, because FSAs are funded with pre-tax dollars, they reduce your taxable income, which is always nice.

5. Health Savings Account

A Health Savings Account (HSA) is similar to an FSA in several ways:

•   Both are funded with pre-tax dollars

•   Both are used to cover healthcare expenses

•   Both can be established through your employer, and funded with payroll deductions

But there are also key differences between an FSA and HSA:

•   HSAs must be used with a High Deductible Health Plan (HDHP)

•   The 2023 HSA funding cap is $3,850 for individuals, $7,750 for families

•   HSA funds roll over from year to year

•   You can set up an HSA through some health insurance companies and banks, making them a good option for the self-employed

If you don’t have access to an FSA — and you are currently covered by a high-deductible health plan — you can open an HSA at any time.

6. Talk With Your Dentist

The cost of dental work can actually be negotiable, depending on your dentist and your situation. First, have your dentist walk you through the treatment plan. Ask lots of questions, including:

•   Are all the procedures they’re suggesting equally urgent? Can some be postponed?

•   Can you get a discount by paying cash or the entire cost upfront? Some dentists give a percentage off for this.

•   If you don’t have insurance, ask if you can score an uninsured rate.

Some dentists will be flexible, and the worst that can happen is they say no. Another thing you can do is to have an honest conversation with your dentist about your financial situation. If your budget has no breathing room, see if they are open to giving you a discount, or if they are willing to push out your bill for a few months.

If the planned dental work is important but not super urgent, you may be able to schedule your appointments so they straddle two plan years. For example, if your plan year is January-December, you might schedule half the appointments for December, and a half for the following January. That way, you can take advantage of two annual benefit maximums for insurance and two years’ worth of FSA or HSA funds.

7. Credit Cards

In some circumstances, a credit card can be a suitable payment option for dental bills. If you have a card that offers rewards or cash back, it can also provide some benefits in return.

You might also consider looking for a medical credit card. These cards are issued by banks, credit unions, and other lenders and can only be used for healthcare and within a specific provider network.

Some medical credit cards defer interest for a period of time after your healthcare charges are incurred — much like 0%-interest cards. No interest is charged so long as those charges are paid off in full before the interest-free period expires. Late payments or balances that have not been fully paid before the deferment period ends can incur interest charges.

Speaking of 0%-interest cards, they’re another option to finance expensive dental work. By law, these interest-free promotional financing offers must last at least six months. But the most competitive offers go well beyond this to offer 0% introductory APR financing for 14 months or longer.

Before you commit to a new card, it’s a good idea to shop around for the best terms and make sure dental work meets the requirements for any rewards.

8. Personal Loan

A personal loan is an unsecured loan that you can use for almost anything. Because of this flexibility, many people use personal loans to pay for out-of-pocket medical expenses.

Using a personal loan to finance dental work might be a better option than a credit card. The lower the interest rate, the lower your monthly payment. And personal loans tend to have lower interest rates than credit cards. Credit cards currently have an average interest rate of 22.4%, but online lenders such as SoFi offer personal loans with lower interest rates to qualified borrowers.

How much you can borrow is also flexible, and getting approved for a personal loan can be done entirely online. In short, a dental loan might be a good option to cover additional dental needs, from basic fillings to more complex, high-cost procedures.

Recommended: Secured vs. Unsecured Personal Loans

The Takeaway

There is no one perfect solution for financing expensive dental work. But there are a number of resources and tricks you can call upon to stretch your dollar. Discuss your options with your dentist to find out what discounts and payment plans they may offer. Avail yourself of an FSA or HSA to pay with pre-tax dollars — an effective discount of 30%. Another option is to pay your bill with a 0% interest credit card, rewards card, or medical credit card that defers interest for six months or more. And you can maximize your insurance and FSA/HSA benefits by scheduling your appointments so they straddle two plan years.

Another option is to finance your dental work with a personal loan. SoFi offers personal loans with low fixed rates, no fees, and flexible repayment terms. From a simple whitening treatment to a complicated root canal, SoFi loans help cover the costs that insurance won’t.

Pay for medical costs — without sinking into high-interest debt.

FAQ

What can I use as financial assistance for dental work?

To finance expensive dental work, you may have to employ a few different tricks. First, if you have an FSA or HSA, paying your bills with pre-tax funds will net you an effective 30% discount. You can also schedule work to straddle two plan years so that your dental insurance and FSA/HSA cover twice the annual amount. If you’re uninsured, explain your financial situation to your dentist to see if they’ll offer a discount. And consider taking out an unsecured personal loan.

Can I use a personal loan as financial assistance for dental work?

Yes, a personal loan can be a great option for covering expensive dental work, compared to high-interest revolving credit. Shop around for the best rate and terms, and watch out for hidden fees.

Is it hard to get financial assistance for dental work?

It will take some work on your part, but financial assistance is available for low-income patients through dental schools, clinical trials, United Way, Medicare, and Medicaid. Find out what kind of assistance you may be eligible for on the U.S. Department Health & Human Services website at HHS.gov.

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

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.

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Dec
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2022
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Defensive Investment Strategy: Definition and Types

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Defensive Investment Strategy: Definition and Types

When the stock market is volatile, investors might wonder if their investment strategy makes sense for the specific conditions. After all, a volatile market may act as a drag on a portfolio, making it harder for an investor to meet their financial goals. So, some investors will employ a defensive investing strategy during times of economic stress, which is a way to manage a portfolio to minimize risk and protect capital.

With all investing strategies, it helps to know the upsides and downsides before committing to a particular path. Defensive investing, like other investing strategies, has pros, cons, and timing factors to consider for when it might make the most sense to use this strategy.

What Is a Defensive Investment Strategy?

A defensive investment strategy is a way investors try to minimize losses on their investments. The goal of a defensive investment strategy is to reduce the risk of losing principal while still generating modest returns. Investors who are risk-averse or nearing retirement and want to preserve the value of their assets may employ a defensive investment strategy.

The strategy is what the name suggests: defensive. Instead of an aggressive or offensive strategy, which targets high-growth assets and has the potential for high risk, a defensive strategy focuses on preserving a portfolio’s capital while still pursuing modest growth in the form of dividend or interest payments.

Generally speaking, an investor with a defensive strategy portfolio would likely try to diversify their holdings across industries and regions, invest in blue-chip stocks, regularly rebalance their portfolio, buy short-maturity bonds, and place stop-loss orders.

What Are Defensive Investments?

Defensive investments are designed to provide stable, long-term returns with minimum volatility. These types of investments are often considered relatively low risk and, therefore, suitable for investors looking to preserve their capital.

Typical investments in a defensive portfolio include:

•   High-quality, short-maturity bonds (such as U.S. Treasury notes)

•   Exchange-traded funds (ETFs) that mimic market indices

•   Large, high-quality established company stocks (i.e., blue-chip stocks)

•   Dividend-paying stocks. These investments may provide lower returns than assets in a growth-oriented portfolio, but they can help investors preserve their wealth and generate a steady income stream.

Additionally, investors may hold cash and cash equivalents, like money market accounts and certificates of deposit (CDs), in a defensive portfolio. The advantage to these conservative investments is that they’re liquid assets, meaning that if an investor needs cash quickly, they’re easily convertible.

5 Examples of Defensive Investments and Strategies

There are several different types of defensive investments and strategies, each with its unique set of advantages and disadvantages. Some of the most common types of defensive investment strategies include:

Portfolio Diversification

Diversifying your portfolio spreads your investment across a wide range of asset classes, such as stocks, bonds, and cash. The idea behind portfolio diversification is that by investing in various assets – like defensive stocks, blue-chip stocks, and high-quality bonds – you can reduce the overall risk of your portfolio and protect yourself against market downturns.

Some defensive stock sectors include utilities, consumer staples, and healthcare.

Portfolio Rebalancing

Another tool for defensive investing is portfolio rebalancing. A portfolio’s asset allocation will change depending on how the assets perform. For example, if the stock market is particularly strong, stocks may become a higher percentage of a portfolio than desired.

Rebalancing is when an investor or portfolio manager adjusts investments to reflect the agreed-upon asset mix. For defensive investing, it would likely be a smaller percentage of stocks and a higher percentage of bonds or other, more conservative investments.

Dollar Cost Averaging

A dollar cost averaging strategy is when you regularly invest a fixed amount of money in a particular asset, such as monthly or quarterly. This can help smooth out the market’s ups and downs and reduce your exposure to volatility.

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Value Investing

Value investing is a strategy in which you focus on investing in companies with strong balance sheets and solid performance track records. Searching for value stocks can help protect your portfolio from the risks associated with more speculative investments.

💡 Recommended: Value vs Growth Stocks

Stop Loss Orders

Defensive investing includes strategies such as using stop-loss orders to minimize losses. A stop-loss order is when an investor tells a stockbroker to sell a stock when its price falls to a predetermined level. Setting up stop-losses helps an investor shed falling stocks automatically to minimize losses.

Pros and Cons of Defensive Investing

A defensive investor may find the risk-averse nature of a conservative portfolio appealing, but it’s still critical to be aware of the pros and cons of this investing strategy.

Pros

 Cons
Capital preservation Limited growth
Income generation Potential underperformance
Lower volatility Loss of purchasing power
Diversified portfolio Limited investments

Pros of Defensive Investing

Some of the advantages of using a defensive investing strategy include:

•   Capital preservation: Defensive investing focuses on preserving capital by investing in low-risk assets less likely to suffer significant losses in a volatile market. This can help investors avoid substantial losses and protect their wealth.

•   Income generation: Defensive investments often generate income through dividends or interest payments. This can provide investors with a regular stream of income they can use to meet their financial needs or to fund other investments.

•   Reduced volatility: Defensive investments are generally less sensitive to market fluctuations, making them less likely to experience significant price swings. This can make them a more stable option for investors who are risk-averse or have a low tolerance for stock volatility.

•   Diversification: A defensive investment strategy can help investors diversify their portfolios and reduce their overall risk. This can be especially beneficial for investors with concentrated holdings in a single asset or sector.

Cons of Defensive Investing

Some of the disadvantages of using a defensive investing strategy include the following:

•   Limited growth potential: Because defensive investments are generally less risky, they may offer a lower potential for high returns than investments in stocks or other growth-oriented assets. This means that investors who pursue a defensive strategy may miss out on opportunities for significant gains.

•   Underperformance in rising markets: Defensive investments may underperform in a bull market. Because these investments are designed to be less sensitive to market fluctuations, they may benefit less from increased market values. This can make them a less attractive option for investors who are looking to maximize their returns.

•   Loss of purchasing power: The income generated by defensive investments may not keep pace with inflation, which can erode the purchasing power of investors’ capital over time. This can make it difficult for investors to maintain their standard of living or meet their long-term financial goals.

•   Fewer investment options: Defensive investing typically involves investing in low-risk, income-generating assets such as government bonds and dividend-paying stocks. This limits the range of investment options available to investors and may not provide exposure to other asset classes or sectors that could offer higher returns.

When Is It Smart to Use a Defensive Investment Strategy?

When deciding how to invest, it’s important to know the options at hand, and when it’s best to employ a certain strategy.

For defensive investing, several factors come into play. If an investor is risk-averse, this type of conservative strategy may be recommended, as it typically offers less risk.

There are a number of reasons why an investor might be risk-averse. For example, a retiree on a fixed income could fall into this category, or, someone who has limited funds and not much wiggle room for losing capital.

Another possibility is someone who is nearing retirement, and who wishes to preserve the gains they made with earlier investing. An investor who wants to conserve money, yet still aim to outpace inflation, might also choose this strategy.

Outside of individual preferences and situations, defensive investing could be helpful in times of market downturn and volatility. In turbulent environments, a defensive investment strategy can help investors sleep at night by keeping assets in less risky investments.

During times of economic stress, investors might opt for a defensive strategy to help them hang on to capital. While no investment is risk free, shifting a portfolio to more conservative assets can help provide a cushion for volatility.

The Takeaway

A defensive investment strategy may be a useful way of mitigating risk and preserving the value of your investments. By understanding the different types of defensive strategies available, you can choose the approach that best suits your needs and goals.

You can start building a portfolio with a strategy that best suits your needs by opening a SoFi Invest® online brokerage account. With a SoFi Invest account, you can trade stocks, ETFs, IPOs, fractional shares, and more with no commissions for as little as $5.

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

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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.
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