Nov
21
2022
How to Invest and Profit During Inflation

How to Invest During Inflation

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

Inflation occurs when there is a widespread rise in the prices of goods and services. The inflation rate, or the rate at which prices increase, was rising throughout 2022 at the fastest pace in 40 years. That has an impact on both consumers and investors. High inflation makes common goods like groceries, gasoline, and rent more expensive for consumers, meaning paychecks might not go as far if wages don’t rise along with prices.

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

Investing & Inflation: How Are They Related?

Inflation’s Impact on Stock and Bond Investments

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

Inflation and the Stock Market

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

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

💡 Recommended: How Do Interest Rates Impact Stocks?

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

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

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

Inflation and the Bond Market

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

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

💡 Recommended: How Does the Bond Market Work?

What to Invest in During Inflation

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

1. Retail Stocks

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

2. Consumer Goods Stocks

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

3. Commodities

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

💡 Recommended: Commodities Trading Guide for Beginners

4. Treasury Inflation-Protected Securities (TIPS)

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

5. I Bonds

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

Inflation Basics, Explained

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

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

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

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

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

The Takeaway

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

If you’re ready to build a solid portfolio to meet your long-term financial goals, a great place to start is with a SoFi Invest® online brokerage account. With SoFi, you can trade stocks and exchange-traded funds (ETFs) with no commissions for as little as $5.

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

Photo credit: iStock/pondsaksit

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.

SOIN1122037

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Nov
21
2022
friends on smartphone

Should You Invest With Friends?

By | Growing Wealth, invest, Investing | Comments Off on Should You Invest With Friends?

Investing with friends can seem like an intriguing concept. Instead of being the sole decision maker, you can share financial and knowledge-based resources to come up with a compelling investment strategy that serves your collective goals.

Investing with friends may also be a way to make a substantial impact in a cause you believe in, such as raising funds to invest in a friend’s startup or business venture.

And investing is something you’re likely already using as a way to connect. According to SoFi’s research, 70% of SoFi Invest members talk about investing with friends, family, or colleagues at least once a week. So it might make sense to some people to pool that passion and capital and begin investing together.

Of course, investing with friends also comes with some particular concerns you’ll want to consider in advance:

•   Who controls the investment account and how are investment decisions made?

•   What is the process if one person wants to remove their portion of the investment?

•   How will any returns be distributed?

•   Does the investment have a set length of time, or will it continue in perpetuity, or until all parties have decided to withdraw or buy out their investment?

Talking through scenarios like this can be helpful. It can also be helpful to come up with some sort of contract that outlines contingencies, so you know everyone is on the same page.

Pros and Cons of Investing With Friends

There are a number of upsides to investing with friends, but also some reasons to be cautious.

Pros

 Cons
Friends can enjoy trust and similar POVs Friends may rely on an honor system rather than proper procedures
May be able to reach compromises more easily Strong emotions can lead people to make impulsive money choices
Friends add enthusiasm and support

Pros

When you invest with your friends, you enjoy a certain amount of trust and, often, similar values and perspectives on life. This can make it easier to explore new opportunities and set goals together.

Friends may have the ability to overcome disagreements and reach necessary compromises — a big plus when it comes to managing money.

Last, friends can cheer each other on, and pool enthusiasm as well as funds to generate momentum, and sustain commitment.

Cons

On the flip side, being friends sometimes leads people to rely on a “handshake” or honor system for doing business, rather than setting up proper protocols, paperwork, and protections.

This is understandable — you want to believe your friends have your back in all cases — but financial endeavors often function better with firewalls in place. That’s because, as much as you may like your friends, they’re only human. They may drop the ball, forget important details, or put their own interests ahead of yours.

In a similar vein, the camaraderie of good friends can generate a lot of enthusiasm for certain ideas or investment choices. But when it comes to money, as many behavioral finance studies have shown, emotions around money can lead people astray. It’s usually smarter to have a few guardrails in place, to guide any group.

What to Talk About Before You Invest With Friends

Before pooling resources, it may be wise to talk a little about how you each approach investing.

Maybe one friend is a Warren Buffett aficionado, while another is eager to invest in crypto.

Maybe one friend is eager to hit a specific financial goal while another is looking at investing with friends as a way to start an investment club to diversify their portfolio.

Before pooling resources, it’s a good idea to talk about how you each approach the market.

It can also be a good time to talk through all the what-ifs you can think of, including:

•   What if our investments lose money?

•   What if one of us needs the money for an emergency?

•   What if more people want to invest in the future?

Finally, make sure your goals are aligned. Are you looking for specific investment opportunities?

Some friend groups get together for what is called impact investing, or socially conscious investing — investing in companies that have positive social, environmental, and environmental impact on the world.

Other friends may pool their money to gain access to investment opportunities that may have a minimum investment threshold, such as private investments and alternative investments like venture capital.

Once you’re all on the same page, you can then assess different methods of investing as a group of friends.

How Do You Start Investing With Friends?

There are a few different ways to start investing with friends.

Set Up a Brokerage Account

One way to invest with friends is to designate someone as the account holder, and have them open a brokerage account online with your group’s pooled resources. But that method may not allow for safeguards to protect your capital, or empower each individual investor with decision-making power.

Opening a brokerage account for your pooled funds may work for groups where there is one designated, trusted leader who manages the execution of trades, and where everyone involved agrees about the group investing style, whether active investing or some other strategies.

💡 Recommended: How to Open a Brokerage Account

Create an LLC

You may also choose to invest with friends as a show of faith for a mutual friend or family member’s startup or business venture. In this case, it can be helpful to create a limited liability company (LLC). And LLC can provide a structure for raising and investing cash, as well as making sure there is an agreement laid out as to potential returns on the investment and whether investors will have any power in the direction and decisions the company makes.

In creating an LLC, it may be helpful to seek legal advice to help create a contract so that everyone is on the same page and there is no confusion as to how money is used and what the return on investment will look like for investors.

Investing in Real Estate With Friends

Real estate can be expensive, so pooling your resources with friends may make sense.

There are a number of different ways to invest in real estate with friends. Among the most common:

•   You might buy a long-term investment property, like a rental property.

•   You could buy a short-term investment property, where you renovate and flip a home, for example.

•   You could invest in a shared property where you and your friends live, or a property where one or more friends might live, with an agreement to sell it at a certain point, ideally for a profit.

However you approach your joint real estate venture, be sure to do research into the different types of business arrangements and real estate agreements that might suit your aims. Given how expensive and complicated real estate can be — even owning a shared home — and how many legalities could come into play, it’s best to get professional advice.

Investing in a Friend’s Business

While history abounds with successful businesses started by friends, think carefully before investing your own funds in a friend’s new venture. Ideally, you want to approach the question of whether to invest in your friend’s enterprise with your business hat on, so to say.

•   Wait to be asked. Just because your friend is on fire about their new startup doesn’t mean they want you or your money involved. If they ask for your advice, rather than money, that could be a lower-stakes way to provide support.

•   Kick the tires. If your friend does want you to invest, pretend you work on Wall Street. Read their business plan. Ask hard questions: how they’re raising capital, what kind of audience they’ve identified, and so on. Before deciding to put your own money into a project, you want to know it’s solid.

•   Sign on the dotted line. Don’t attempt to do business with friends over a beer and a handshake. Lay out all the terms and expectations in a contract that protects all parties.

•   Set emotional boundaries. You’re friends first, so have some rules in place that help you navigate when and where to talk business.

The Takeaway

For many people, there are tangible benefits to investing with friends: shared wisdom and experience, supporting each other’s financial goals, and in some cases the profits that may come from your joint venture. But there are disadvantages as well. It can be tempting to trust friends to do the right thing, when having a contract might provide more structure and clearcut consequences if an investment project goes awry.

There are many things to consider before investing with friends, and many different ways to go about it. In some cases, you might want to create an LLC with friends, to safeguard your own interests and make sure everyone is in agreement on the details of the arrangement.

If you’re not quite ready to invest your money directly with other people, and you want to gain more experience and wisdom on your own, you can start by actively trading stock with SoFi Invest.

SoFi’s investing platform has a feature available for Active Investing members that allows them to opt-in to share their investment portfolios, so you can see how your friends are doing and the market moves they’re making. Dollar amounts are hidden, but you can follow the holdings of friends who also have opted-into this feature, look at watchlists, and comment on trades.

You can also see you and your friends on a dynamic leaderboard with other members. This is a seamless way to see your friends’ investing behaviors, ask questions, and connect on investment decisions — while still keeping your finances separate.

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

FAQ

Is it a good idea to invest with a friend?

Investing with friends can offer some distinct advantages, including the power of combined finances, similar values, and basic trust. On the downside, though, friends might be tempted to do business with a handshake, rather than spelling out details and expectations clearly in an agreement or contracts that protects everyone involved.

Can a group of friends invest in stocks?

Friends can invest in stocks together in a few different ways. A set of friends can form an investment group or club, where they pool money and agree on a stock-picking strategy. It’s also possible for friends to invest in fractional shares.

How do I start an investing group with friends?

There are many different books and websites that can offer steps and guidelines for setting up an investment group with your friends.

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.

SOIN1122011

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Nov
21
2022
retro alarm clock

What Is After-Hours Trading?

By | Financial Independence, Growing Wealth, Investing | No Comments

After-hour trading is stock trading that occurs after the normal close of the trading session. Ordinarily, stock trading begins at 9:30 am ET and ends at 4 pm ET, Monday through Friday. The after-hours trading period begins following the close of regular trading at 4 pm and ends at 8 pm. Trading after hours may appeal to investors who have limited time to trade during the day or want to take advantage of overnight market movements.

If you’re new to trading stocks or even if you know some of the investing basics, aftermarket trading can still be a confusing concept to understand. Understanding what happens with the stock market after hours can help answer those questions.

Why Is Access to After-Hours Trading Important?

After-hours trading allows investors to respond to news and events that occur after regular stock market hours. This can be important because it will enable investors to take advantage of opportunities that may not be available during regular trading hours.

For example, if a company announces a significant acquisition after the markets have closed, investors who can trade after-hours will be able to buy shares of the company before the news is reflected in the stock price during regular trading hours.

Market Hours Schedule

Stock exchanges operate on a regular schedule during which investors can buy and sell securities. The New York Stock Exchange (NYSE) and Nasdaq are open between 9:30 am and 4 pm ET. Most stock trading occurs during these normal business hours.

After-hours trading does not follow this schedule.

How Does After-Hours Trading Work?

After-hours trading is what it sounds like: buying and selling stocks after the stock market has closed. However, unlike standard hours trading, after-hours trading is conducted through computerized trading systems called electronic communications networks (ECNs). Traders generally access ECNs through their preferred brokerage.

After-hours trading generally lasts four hours, from 4-8pm ET on weekdays. However, the precise time of after-hours trading depends on the brokerage that an investor uses.

Pre-Market Trading

Pre-Market trading occurs from 4 to 9:30 am ET on weekdays. After-hours and pre-market trading is sometimes called “extended-hours trading.”

Some online brokerages take after-hours trading a step further and offer 24/7 stock trading. This allows investors to make trades during the gap between after-hours trading and pre-market trading. The advantage of 24/7 trading is that investors are not bound by the regular market hours schedule for making trades.

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.

*Probability of Member receiving $1,000 is a probability of 0.028%.

Potential Advantages of After-Hours Trading

After-hours trading provides investors with several advantages over regular trading alone.

Convenience

One of the benefits of trading later in the day is convenience. If you’re busy with other pursuits during business hours or live in a different time zone, this might be a more optimal time to buy and sell stocks.

Leveraging New Information

Another potential advantage is the opportunity to take action based on new information, such as a company’s earnings report or a major news event, without having to wait for the market to reopen.

Potential for Cheaper Prices

Investors can sometimes find lower prices for individual stocks or exchange-traded funds (ETFs) during after-hours trading. This may reflect lower competition since fewer people are trading, but it’s far from guaranteeing you’ll get better prices.

Cons of After-Hours Trading

Buying and selling stocks outside regular trading hours come with risks and disadvantages.

Fewer Transactions Happen After-Hours

There are fewer transactions happening after-hours than while the stock market is open, which can affect the market’s liquidity.

Since there are fewer people buying and selling stocks, finding someone who wants to trade at the price you have in mind can be challenging. Likewise, getting a hold of a stock you want can be hard when trading volume is low. The trade will be canceled if there is no counterparty available for a trade you want.

Prices Are More Volatile

Another drawback is that prices are more volatile after-hours. Although it’s normal for the stock market to fluctuate, you tend to see much wider swings in price after-hours than during the typical trading day.

This is partly a result of lower liquidity: Since fewer people are participating in the market, trades may significantly affect a stock’s price due to wider bid-ask spreads.

Stock price volatility can also result from many people reacting quickly to major news or announcements. A company’s share price can climb in response to a news event after-hours and then fall dramatically as soon as markets open. Prices adjust after more information becomes available, or investors get the chance to digest it more thoroughly. And with major ups and downs, of course, comes greater risk and potential for losses.

Best Prices May Differ

Another thing to consider is that you might not be able to confirm the best available price during after-hours trading. During regular hours, brokerages must offer the best possible price at that time. However, this doesn’t extend into after-hours, and the share price you see in one place may differ from the one you see in another.

After-Hours Trading vs Standard Trading

After-Hours Trading

 Standard Trading
Trading occurs between 4 and 8 pm ET Trading occurs between 9:30 am and 4 pm ET
Trades conducted through ECNs Trades conducted through stock exchanges and market makers
Trades may not be completed due to low volume and liquidity Trades are generally executed quickly because of large trading volume and liquidity
Only certain stocks and ETFs available for trading A wide range of assets, like stocks, ETFs, mutual funds, and options, are available for trading

Is After-Hours Trading the Same Thing as Late-Day Trading?

Investors should be aware that after-hours trading differs from late-day trading. Late-day trading is an illegal practice in which mutual fund managers allow hedge funds to record some trades made after-hours as having happened right before closing during regular hours.

Late-day trading pushes up the mutual fund’s net asset value, which summarizes how much the fund is worth at the end of the trading day. When the net asset value (NAV) increases the following day to reflect those late-day trades, the hedge funds can sell the shares they bought at a higher price.

After-hours trading itself is considered ethical and is legal.

💡 Recommended: What Is Market Manipulation?

Access to Features When Trading After-Hours

After-hours trading typically only allows limit orders. Limit orders generally protect investors from unexpectedly bad prices, which are more likely to occur during after-hours trading than standard trading.

Stop, stop-limit, or orders with special instructions are not usually accepted. Moreover, orders are typically only good for the after-hours trading session in which they’re placed; if a trade is not executed during the session, it is usually canceled.

Additionally, only certain stocks and ETFs are available for after-hours trading. Trading bonds, mutual funds, and options are not allowed during after-hours.

Is It Bad to Trade After Hours?

Trading stocks after hours is neither bad nor good. But whether it makes sense for you to engage in after-hour trading can depend on your risk tolerance and investment goals.

As mentioned, the stock market after hours can be more volatile than regular trading hours. You could expose yourself to greater risk by trading stocks after the closing bell. Increased volatility can also make it more difficult to gauge how likely limit orders are to be executed.

Pricing risk could also cause you to pay more for securities after hours than during the regular trading day. In that scenario, you’d get less value for your investment dollars. So it’s important to consider how much of your time you’re willing to devote to watching the after-hours market and how much risk you’re willing to accept.

Specialist recommend that only highly active traders participate in after-hours trading — not average investors who intend to hold onto their stocks for a long time. Most everyday investors would be wise to remember the old adage: “Time in the market beats timing the market.”

Does After-Hours Trading Affect Opening Price?

After-hours trading can affect a stock’s opening price. Buying and selling activity can influence a stock’s price during normal market hours. The same is true for aftermarket trading.

A stock could close at one price point during regular trading hours but have a different open price once the new trading day begins. Whether this price difference is negligible or significant depends on how much trading activity occurred after hours and what motivated the activity.

For example, price fluctuations between the regular day’s closing and the next day’s opening could be more substantial if investors get wind overnight that a company is planning a merger or has a scandal brewing. Likewise, if a company’s earnings miss expectations or the Federal Reserve makes an announcement about interest rates, those things could affect stock pricing after hours.

💡 Recommended: What Determines Stock Price?

Is After-Hours Trading a Good Indicator of Market Sentiment?

After-hours trading activity could help investors gauge where the market will start on the next trading day. But it’s important to remember that this is a short-term prediction at best, as pricing can change at a moment’s notice.

Investor attitudes and behaviors can quickly shift the market’s momentum and stock prices along with it. Again, something as simple as the release of an earnings report or the announcement of an acquisition could affect a stock’s price. So rather than focusing on aftermarket trading as a sole indicator of what a stock may do next, it’s important to look at the bigger picture.

If you’re primarily a day trader, learning some technical analysis basics can help you become more attuned to market trends and how to interpret them when making investment decisions.

💡 Recommended: Day Trading Strategies

The Takeaway

If you are a hands-on investor and want to experiment, exploring after-hours trading may be an additional way to make trades. However, for most investors who don’t actively manage their investments and want to minimize risk, there may be better strategies than after-hours trading. Instead, they may want to feel confident that they’re investing their money with less risk, building wealth for long-term financial goals.

A great way to start building a portfolio to meet long-term financial goals is by opening an online brokerage account with SoFi Invest®. With SoFi, you buy and sell stocks and ETFs with no commissions for as little as $5.

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

FAQ

When does after-hours trading for SoFi start?

SoFi offers extended-hours trading, where investors can place limit orders during after-hours starting at 4 pm.

When does after-hours trading for SoFi end?

SoFi offers extended-hours trading, where investors can place limit orders after-hours ending at 8 pm.

What are the benefits of trading after-hours?

Some benefits of trading after-hours include the convenience of trading when the markets are closed and having the opportunity to make trades right after an important news event breaks.

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.

Probability of Member receiving $1,000 is a probability of 0.028%.

SOIN1022004

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Nov
21
2022
5 Bitcoin Scams to Avoid in 2021

7 Bitcoin Scams to Avoid in 2023

By | Growing Wealth, invest, Investing | Comments Off on 7 Bitcoin Scams to Avoid in 2023

The crypto market is rife with fraud, and Bitcoin scams are very common. While crypto itself may be relatively new in the financial world, many of the more common rackets involving cryptos use old school tricks and common deceit to achieve their goals. These can involve fake exchanges, social engineering scams, and more.

Almost all types of fraud — be they Bitcoin scams or run-of-the-mill phishing attempts — are rooted in a schemer’s ability to gain a victim’s trust. Many crypto investors can be easily swayed by hype and con artists, too, which means they need to remain vigilant when considering investing in Bitcoin or other cryptos. Here are some of the more common Bitcoin and cryptocurrency scams, some things to look out for, and what to do if you fall victim to one of them.

Common Bitcoin Scams to Avoid

1. Fake Cryptocurrency Exchanges

One way to attract potential crypto investors who are eager to get in on the action? Create a cryptocurrency exchange — even if it isn’t real.

Fake crypto exchanges exist, and in some cases, have been used to scam investors out of their money. For fraudsters, it can be as easy as luring crypto investors with the promise of free Bitcoin or another crypto to get them to sign up for the exchange. Then, after making an initial deposit, victims may find that none of it was real, and they’ve been bilked out of their deposit.

As for how to avoid these fake exchanges? Sticking to the known, established crypto exchanges is a start. Think twice before creating an account with a new or unfamiliar exchange, and be sure to do some research to make sure it’s above board before making any moves. Refer to industry sites and newsletters, message boards and forums, and other reputable sources of information to find out more about an exchange’s credentials and reputation.

And it never hurts to remember the age-old adage: If it sounds too good to be true, it probably is.

2. ICO and Fake Cryptos

If you’re familiar with buying IPO stocks, then ICOs should ring a bell. ICO stands for “initial coin offering,” and is similar to an IPO. It’s when a new coin or crypto makes its market debut. That’s sure to attract some attention, right? That’s what fraudsters think, too. And it’s why some people looking to invest in ICOs may fall victim to a fake ICO scam.

An ICO scam might work like this: A fake ICO is teased, asking investors to pony up some cash to get in early. Money is exchanged, but the ICO never occurs, and investors never get their money back.

These types of scams are common. So much so that the U.S. Securities and Exchange Commission (SEC) even published a website that simulates them, only to lead you to educational tools when you try to invest, instead of stealing your money.

As with any investment, it is a wise idea to do your research before putting money behind a crypto ICO. Try to find out as much as you can about the company in question — from sources other than itself or the tease that first grabbed your interest. And take advantage of tools like the ones provided by the SEC or groups like FINRA, to help build some background knowledge about what you’re investing in.

3. Social Engineering Scams

Many of the same tactics used in money scams or to con people out of their personal information are used in the crypto sphere, too. That includes things like hacking, social media scams, phishing attempts, and more.

For instance, crypto investors may get an email asking them to update their password or personal information on a crypto exchange — a phishing attempt, which is meant to trick users into providing their credentials. With that information, a fraudster could, potentially, gain access to an investor’s holdings and liquidate them.

The numerous types of social engineering scams mean that investors need to be extra judicious when being asked to reset their passwords or in their interactions in social media.

4. Ponzi Schemes

Ponzi schemes are very similar to pyramid schemes. They are, in essence, a game of hot potato, with investors who’ve been involved for a longer period of time being paid with the proceeds and investments from newer investors. It’s a common scheme in financial circles that has found its way to the crypto world.

The government has gone after Ponzi schemers in the crypto community, and that includes those that use Bitcoin to lure in fresh investors. In fact, government regulators say that they root out and prosecute many Ponzi scheme cases every year, which includes those involving cryptocurrencies.

One typical red flag indicating a Ponzi scheme (or nearly any type of fraud): the promise of investing your money at no risk to you with the guarantee of huge profits.

5. Pump-and-Dump Bitcoin Scams

For investors who are even somewhat familiar with the stock market, “pump-and-dump” should be a familiar term — especially after the Gamestop headlines of early 2021.

A pump-and-dump scheme involves a number of traders or investors buying up an asset (say, Bitcoin for example, or a penny stock) which causes its value to increase. Then, with values high, they sell it all off — or “dump” it. Investors who bought in during the initial run-up are often caught underwater as a result.

Naturally, this same play can be run with cryptocurrencies. Government regulators, such as the U.S. Commodity Futures Trading Commission (CFTC), have warned that pump-and-dump schemes can be particularly effective in the crypto sphere, and warn investors to do their homework before making any investment decisions.

6. Rug Pull Scams

A rug pull is a type of scam that is similar to ICO scams, in that a hyped up crypto project ends up being vaporware — it doesn’t actually exist. It may be common to see a crypto “aped” on social media or in crypto circles by founders or developers in an effort to gin up interest and get investors on board.

Then, the developer or creator simply disappears with investors’ money. In other words, investors have had the rug pulled out from under them. It doesn’t take much for a scammer to gin up hype, especially if they’re something of a showman, so these types of scams are somewhat prevalent in the crypto space.

7. Man-in-the-Middle Scams

A man-in-the-middle scam or attack involves a third party intercepting information between an investor and their exchange, or another investor. The scammer is able to gain access to sensitive information, like passwords or wallet keys, and use them to swipe your assets.

Scammers can pull these scams off by intercepting wireless internet signals and some technical trickery. They’re not the most common scams, but many investors may be at risk nonetheless.

How to Spot a Bitcoin Scam

As mentioned, most Bitcoin scams are age-old tricks used in many other areas of the financial world. As such, there are some common red flags to keep an eye out for.

Big Promises

If a project or crypto is promising massive returns on your investment, your radar should be going off as a possible scam. This is true for other types of scams as well, but in order to generate a large pool of potential schemes, a scammer needs to get people’s attention — by making big promises. If they do, tread carefully.

Scammers Often Request Up-Front Crypto Payments

It’s relatively uncommon that you’d be asked to pay upfront with cryptocurrency for a good or service. As such, this can be a common refrain from scammers. And if they take your money (or Bitcoin) and run, you’ll have little or no recourse. So, if someone asks you to send them Bitcoin with promises of delivering later, use caution.

Appeals to Emotion

A common tactic scammers use is to appeal to someone’s emotions — this is why dating scams are so common. If you find yourself growing close to someone (or believing that you are, anyway) and they start asking you to send them crypto for one reason or another, it could be another sign that you’re being scammed.

Ways to Protect Yourself from Bitcoin Scams

Given that there are a lot of people out there trying to swipe your Bitcoin, here are some ways to protect yourself from Bitcoin scams.

Stick to Known Exchanges

The crypto space is largely unregulated, and as such, there can be a lot of questionable exchanges and platforms out there. While you can create accounts and trade on many of them, it may be best practice to stick to ones that are well-known or generally well-regarded.

There are many bigger exchanges out there that are popular among traders and investors. You can easily look some of them up, too. This isn’t to say that a smaller exchange is a scam, necessarily, but your odds of falling victim are likely higher on a small, unfamiliar exchange than you are on a larger one.

Do Your Homework

It should go without saying, but before you sign up for an exchange or invest in a cryptocurrency of any kind, do some research. There should be supporting materials out there (white papers, etc.) or reviews to take a look at, so do some digging around to see what other people are saying before diving in yourself.

Tread Carefully

Aside from doing some research, you should always exercise a level of caution when investing. For instance, if you’re getting emails from a crypto founder or someone else in the space, always check the sender address on emails like this — one riddled with typos or oddball fonts is likely to be a fake.

It’s important to be careful on social media, too. Imposter social media accounts may contact you and ask for investments or deposits, only to take your money and run. A good rule of thumb? Go with your gut, and don’t trust social media accounts — it’s all too easy for bots or others to create fakes.

What to Do if You’ve Fallen Victim to a Bitcoin Scam

If you do fall victim to a Bitcoin scam — which is entirely possible, as many people do — there may not be much you can do to get your money back. Again, since crypto is still outside the scope of most government regulators, your assets or money may be as good as gone.

You can, and perhaps should, report it, however. You can report crypto fraud to the Federal Trade Commission (FTC), the CFTC, the SEC, the Internet Crime Complaint Center (IC3), and you can also consider lodging a complaint with the exchange on which you were scammed — is applicable.

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The Takeaway

Bitcoin scams, and those involving other cryptocurrencies, are very common. They can take numerous forms, too, such as rug pulls, fake ICOs, and even Ponzi schemes. You can take measures to protect yourself, however, and learn to recognize a scam when you see one. A good rule of thumb is that if something sounds too good to be true, it usually is.

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What Are Decentralized Stablecoins?

Decentralized Stablecoins: Types and How They Work

By | Growing Wealth, invest, Investing | Comments Off on Decentralized Stablecoins: Types and How They Work

What Are Decentralized Stablecoins?

Decentralized stablecoins, like any type of stablecoin, are cryptocurrencies that have a value pegged to a particular external asset, such as a national fiat currency like the U.S. dollar, or a commodity. In theory, being pegged to a real-world asset helps prevent volatility.

What makes decentralized stablecoins different from centralized stablecoins is that they have full transparency and they are non-custodial, meaning a company or centralized party doesn’t control them. Any collateral that backs the stablecoin is transparent to users, so they know it really exists.

Decentralization allows for a trustless and secure system in which a centralized party can’t tamper with the supply of the coin or pretend they have assets to back the coin that they really don’t. Instead, smart contracts and algorithms automatically control the coin’s supply.

There are a few different types of decentralized stablecoins. In this article we will look at the different types, and the pros and cons of this type of crypto asset.

The Need for Decentralized Stablecoins

Stablecoins were created as a crypto version of traditional currencies, which are typically backed by central banks and governments, and often pegged to real-world assets like cash or commodities (e.g. gold or silver).

As a result many stablecoins have a 1:1 ratio with fiat currencies like the U.S. dollar or the euro. So, are all stablecoins decentralized? No, most are still centralized.

Understanding Stablecoins

Stablecoins were launched so that traders could keep funds in an exchange to keep them available for trading, and have them in a stable asset that wouldn’t change in value.

Prior to the creation of stablecoins, any time a trader sold a coin they would have to move their money back into a fiat currency, and sometimes even move it off the crypto exchange completely, making it really inconvenient for day traders.

The emergence of stablecoins helped traders cope in periods of volatility, since they could move funds into a stablecoin temporarily, until they were ready to go back into the crypto market.

That said, having a form of crypto pegged to tangible assets (like fiat currencies) with real-world value hasn’t been a complete success. In fact, the stablecoin market has been plagued with allegations of fraud and other malfeasance, including questions of whether some coins actually had sufficient reserves.

With Decentralized Stablecoins Came More Security and Transparency

In order to make stablecoins more secure and transparent, decentralized stablecoins are being developed. (In order to understand why this is important, it helps to know what decentralized finance is, aka DeFi, and how it’s challenging traditional finance.)

Stablecoin values are kept stable through a process of controlling their circulating supply. With many stablecoins, this is done by the issuing company that created the coin. With decentralized stablecoins, this is typically accomplished using algorithms.

When the value of a decentralized stablecoin moves higher or lower than the value of its underlying asset, the algorithm adjusts the supply — sometimes by burning or removing coins — to bring it back to the desired 1:1 ratio.

Thus, decentralized stablecoins are considered trustless. Much of the reason traders are attracted to crypto is the ability to transact without middlemen and centralized parties. Therefore, stablecoins are heading in the direction of decentralization — which is how most cryptocurrencies work.

How Decentralized Stablecoins Work

Decentralized stablecoins use algorithms and smart contracts to control the supply of the token to maintain its stable value. If the price of the stablecoin starts veering up or down from the value of the asset it is pegged to, then the supply of the stablecoin can be adjusted to get the price back to where it should be.

With normal stablecoins this is done by the issuing centralized party. Ultimately, decentralized stablecoins could be created that aren’t backed by any external asset — which is basically what algorithmic stablecoins are. But it’s hard to put together a list of decentralized stablecoins right now.

Uses of Decentralized Stablecoins & the Need for Them

Decentralized stablecoins have similar uses to regular stablecoins. Day traders can easily move funds between crypto and stablecoins if they want to avoid volatility or wait to make another purchase. They provide a secure and efficient way to transfer funds almost anywhere in the world, and in some cases users can earn interest on them as well.

5 Types of Decentralized Stablecoins

What is a decentralized stablecoin, exactly? There are several types of decentralized stablecoins that provide different functionality and security for users. Below are the main types available on the market today:

1. Elastic Supply Chains

What Are They?

Most decentralized stablecoins fall within the category of elastic supply chains. These coins use automated contracts with user incentives to stabilize the value of the coin so it stays pegged to the external asset.

How Do They Work?

This type of decentralized stablecoin uses an elastic supply monetary policy. When the value of the stablecoin falls below the value of the pegged asset, stablecoin owners are incentivized to keep holding the stablecoin because they earn a high interest rate on it.

When the value of the stablecoin goes back up, the interest rate earned goes down. To earn interest, users have to lock up their coins until the value of the stablecoin goes back to the value of the pegged asset.

When the value of the stablecoin rises above the pegged value, the supply of the stablecoin is increased, and vice versa.

One risk with this type of decentralized stablecoin is that users will choose to sell off their coins instead of staking them. When this happens, the value of the decentralized stablecoin no longer matches the value of the pegged asset, and users lose trust in the stablecoin.

Examples

•   Ampleforth

•   BitBay

•   Kowala

•   NuBits

•   Xank

•   Ndau

•   StableUnit

2. Collateralized-Debt Positions

What Are They?

Decentralized stablecoins that use Collateralized-Debt Position (CDP) systems involve user-deposited collateral and smart contracts to maintain the value of the coin.

How Do They Work?

First, a stablecoin user deposits collateral into a smart contract. Then they are loaned stablecoins equal to the value of the collateral they deposited, and they pay interest on the loan. Basically the users loan money into the pool backing the coin and by doing so they enable the coin to exist so they can use it. This is similar to the way fiat currency works using fractional reserve banking systems. However, unlike the fiat system, decentralized stablecoins are generally fully backed or over-collateralized. This is important to know when buying and selling cryptocurrencies.

Examples

•   MakerDAO

•   Alchemint

•   Augmint

3. Self-Collateralized Stablecoins

What Are They?

Self-collateralized stablecoins are similar to CDP coins, except that the collateral users deposit is crypto instead of fiat currency. Also, users of these coins don’t always have to pay interest on their loans.

How Do They Work?

First, users deposit collateral that was generated by blockchains or smart contracts. Then they receive a loan of stablecoins equal in value to the amount they deposited.

Examples

•   Sweetbridge

•   Bitshares

•   Synthetix

4. Bond Redemption Coins

What Are They?

This type of decentralized stablecoin uses a bond exchange system to keep the coin price stable.

How Do They Work?

For example, Basis is a stablecoin pegged to the value of the U.S. dollar. When the value of Basis dips beneath $1, Basis users burn their Basis tokens and in exchange they receive Basis Bonds. Once the price of Basis goes back up to $1, users can exchange their Basis Bonds back to Basis coins.

There are 25 different bonds that Basis users can choose from, and they earn $0.2 for each Basis coin they burn. Conversely, when the price of Basis goes over $1, new Basis coins are created and sent to holders of Basis Shares until the price goes back down to $1.

Examples

•   Basis

5. Collateral-Redemption Coins

What Are They?

Collateral-redemption coins are similar to CDP-based coins in that stablecoins are created when users deposit collateral into a pool. However, CDP coins require users to receive stablecoins for all of the collateral they deposit, and they must pay interest on the loan.

Collateral-redemption systems let users just receive a portion of funds from their deposited collateral without paying any stability or penalty fees. Also, collateral-redemption systems let users deposit many different types of tokens into the smart contract collateral pool.

How Do They Work?

For example, let’s say a user deposits $200 worth of Bitcoin and $200 worth of ETH. They then receive 400 stablecoins. After that, they deposit just 9 stablecoins and take out $5 worth of ETH and $4 worth of Bitcoin from the collateral pool of the stablecoin’s smart contract. The 9 stablecoins that are deposited are burned so that the coin keeps a constant collateral-to-debt ratio.

Examples

•   Reserve Protocol

Pros and Cons of Decentralized Stablecoins

There are several upsides to decentralized stablecoins but they have some downsides as well.

Pros

 Cons
Increased transparency Many decentralized stablecoins are only partially decentralized and are still in an experimental phase of development.
Cuts so equal number of pros and cons There is a risk that a stablecoin will have a price meltdown
Increased security If the value of the external asset tanks, so will the stablecoin
More efficient than other stablecoins at maintaining value, so losses are potentially less Many decentralized stablecoins are not yet widely adopted. There’s a chance that they won’t exist long term or won’t have high liquidity
There have been legal challenges with issuing stablecoins that are solved with decentralized stablecoins Traders can earn interest on some stablecoins

Multi-Currency and Single-Currency Coins

Some stablecoins are backed by one particular fiat currency, while others are backed by a basket of currencies. For instance, Libra’s original goal was to release a stablecoin backed by 30 different fiat currencies. However, they then shifted their plan to say they might still create a multi-currency asset, but it would be backed by single-currency stablecoins.

Investing in Crypto

Stablecoins are just one of many types of crypto individuals can buy. They are a useful tool for day traders who want a convenient way to keep funds in exchanges and avoid volatility, but stablecoins have been fraught with problems. Decentralized stablecoins are still evolving, and could someday change how crypto is traded.

FAQ

Is USDT a decentralized stablecoin?

USDT, also known as Tether, is one of the first stablecoins and it is pegged to the U.S. dollar. It is not a decentralized stablecoin. It was the first fully centralized stablecoin and is managed by Tether Limited.

Are there any truly decentralized stablecoins?

There are a handful of stablecoins that claim to be fully decentralized, including: DAI, EOSDT, DeFi Dollar (DUSD), and GHO (a multi-collateralized stablecoin launched this year by AAVE). But it’s safe to say that decentralized stablecoins still face certain challenges in terms of transparency and maintaining a stable 1:1 value.

Is Bitcoin a stablecoin or not?

Bitcoin is not a stablecoin; it’s the oldest and largest form of cryptocurrency on the market. Bitcoin’s value is not pegged to the value of an external asset, but rather is determined by market forces, like any other crypto.

Photo credit: iStock/akinbostanci

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

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

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