Jan
02
2023
woman tablet advisor

Do I Need a Financial Advisor? Essential Considerations

By | Growing Wealth, Investing | No Comments

Financial advisors can help their clients to define their financial goals, prioritize them, and develop a plan to achieve them. But depending on the specific individual, a relationship or level of engagement with a financial advisor can vary, as different investors have different needs.

Generally, deciding whether you need a financial advisor will come down to whether you feel you need some advice or a guiding hand in handling your finances. There are important considerations to make, too, as financial advisors don’t typically work for free — but they can help with a variety of finance-related issues.

Understanding the Role of Financial Advisors

Financial advisors can offer many services, but broadly, they’ll dissect a client’s financial picture, discuss their goals with them, and create a plan as to how to move forward.

What Financial Advisors Do

Financial advisors can help clients zero-in on specific financial goals, put together plans for investing or getting out of debt, and more.

An advisor can provide financially based education, which can help their clients identify whether they’re on track for achieving their goals. They can also help clients determine whether their habits are causing problems for their overall financial wellness.

Further, financial advisors can guide their clients through paying off debt, saving for the future, investing in a diversified portfolio, and aligning an investment approach with specific goals, timelines, and risk-tolerance levels.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Assessing Your Need and Readiness for a Financial Advisor

There are numerous things to consider when trying to determine if you’re ready or in need of a financial advisor and their services.

When to Consider Hiring a Financial Advisor

As clients make their decision about whether to use a financial advisor or not — and, if so, which one will offer what they want and need — here are some items they could consider:

•   What type of help is needed from an advisor? Education? Coaching? Management?

•   What services can the financial advisors provide?

•   How well does this match up with your specific needs?

•   How does the advisor charge? In other words, how does your advisor get paid?

•   What context can be provided about fees? How does a percentage translate into real dollars, both today and in the future?

Evaluating Net Worth, Earnings, Spending, and Financial Goals

It’s important to note that not everyone’s financial situation will warrant professional financial advice. As such, you’ll want to take some time to try and evaluate your net worth, earnings, and goals — do you feel that you can keep a grasp on those aspects of your financial picture? Or do you feel like you’re in over your head?

If you feel like you could use some advice, then it may be a good idea to reach out to a financial professional and see how they may be able to help.

Life Events and SituationsThat Warrant Professional Advice

Also keep in mind that your situation will change over time. You may get a new job, a big promotion, or a big raise — all of which can drastically change your financial situation. In such cases, if the change is significant enough, it could be a good idea to reach out for guidance.

Types of Financial Advisors and Their Services

“Financial advisor” is a broad term that describes several different specialties. Accordingly, it can be helpful to understand the different types of financial advisors out there.

Different Financial Advisor Specializations

Here are some (but not all) of the different types of advisors:

•   Certified professional planners (CFP®): CFPs are advisors who’ve earned a specific designation, and that can help people with a large range of financial services.

•   Wealth managers: Wealth managers take a broad approach to helping individuals with their finances, and typically offer a range of services.

•   Investment advisors: Investment advisors focus on providing advice and management related to investment portfolios.

•   Retirement planners: Like investment advisors, retirement planners tend to focus on a specific area of a person’s financial picture: Retirement.

Choosing the Right Type of Advisor for Your Needs

The specific type of financial advisor that is a good particular fit for any individual will vary depending on the person’s specific situation. As such, there’s no “one-size-fits-all” for financial advisors, and you’ll likely be best off giving some serious thought as to your needs, and how an advisor can help you.

It may be worth speaking with several different advisors to get a better sense of how they could help, and then making a decision as to which, if any, to work with.

Understanding Advisor Fees and Payment Structures

There are many types of fees and payment structures that may apply to financial advisors.

Commissions

When advisors are compensated on a commission basis, they receive pay based on the products they sell. The amount of commission paid can vary widely depending upon the product and the company.

Multiple arrangements can exist for advisors paid on commission, including receiving a percentage of a client’s assets before money is invested or being paid by the financial institution involved after a transaction takes place. Or, the client might be charged each time that stocks are bought or sold.

Advisory Fees

When an advisory fee is charged by the advisor, the general charge for the client is a percentage of the assets they manage. It’s reasonable to expect that an advisor can explain the reasoning behind the fee being charged, given a client’s specific circumstances — and if it’s higher than expected, it’s also reasonable to ask what added value the client is receiving.

Perhaps, for example, the advisor also helps with tax planning, or estate planning. They may be investigating a client’s financial vulnerabilities or otherwise going beyond standard money management services.

Actively managed portfolios may come with a higher fee because the advisor may charge more for putting more effort into getting the best value for their client.

Planning Fees

With this type of fee, the advisor would charge an upfront fee, or a subscription-based one, to provide either a financial plan or ongoing advice. As a potential client considers financial advisors, they may find themselves talking to someone who charges a fixed planning fee to create an initial plan and then uses a different fee structure to actually manage the portfolio. What’s most important is to be clear about what will be charged, and how.

Hourly Fees

In this case, the financial advisor charges a straight hourly fee for their services. On the one hand, having an advisor charge an annual fee means that a client may not need to worry as much that their advisor is recommending products because of the income the advisor would earn off of that recommendation.

Choosing a financial advisor that charges per hour can be costly, though, especially if more investigation needs to be done to find a product that fits a client’s needs. This may or may not be a huge concern, but if resources are limited these fees can potentially be hefty.

How to Choose the Right Financial Advisor

There’s no “right” financial advisor for everyone, but there can be some who may be better fits for your specific situation than others.

Tips for Finding and Selecting an Advisor

Starting broadly, it can be helpful to try and discern what types of services you need, or what type of advice you think would be most beneficial. From there, you’ll want to winnow down the types of advisors you’re looking for — you can review the short list above, or dig even deeper — and think about how those types of advisors can address your needs.

Then, consider the fees and costs, also as discussed. Some may not necessarily be worth the cost of retaining their services — but again, it’ll depend on the individual.

You can also look at, or search for advisors through various trade groups — there are many for financial professionals. It can be helpful to narrow down your search to a few selections, meet or interview them, and then make a decision.

Red Flags and Key Factors to Consider

A few things to look out for when you’re shopping around for financial advisors or planning services: Conflicts of interest, a lack of credentials or qualifications, and high-pressure sales tactics. While these aren’t necessarily deal-killers, they can be things to look out for. And remember, if you feel uncomfortable, you can always move on and talk to other advisors – there are hundreds of thousands of them in the U.S.!


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

Working with a Financial Advisor

Working with a financial advisor should be a rewarding experience. Here’s what to expect.

What to Expect in the Relationship

You should anticipate that your relationship with your advisor will be close — but not too close. They’ll take a hard look at your finances, consider your goals, and (hopefully) do their best to give you actionable advice and guidance. They may not want to get too personable, though, as emotion can enter the picture and make the process a bit murkier.

You should be ready to share fairly detailed aspects of your financial life, your career, family and personal goals, and more. That may be uncomfortable for some, but it’s important for an advisor to get the whole picture and map out a way to help you reach your goals.

The Takeaway

Financial advisors help individuals reach their financial goals by offering advice and guidance. There are many different types of financial advisors, and many different ways in which they are paid or charge for their services. As such, there’s no catch-all “financial advisor,” and not every type of advisor will be right for each individual.

For that reason, it’s important that you take the time to figure out your needs, and determine what type of advisor, if any, is the best fit for your situation. It may take some time to figure it out, but if you want the most bang for your buck, it could be worth it down the road.

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

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

FAQ

Is it really worth having a financial advisor?

It can be worth having a financial advisor, but it’ll ultimately depend on each individual. Some people may not feel that an advisor is worth it, while others will say the opposite – there’s no clear, one-size-fits-all answer.

Does the average person need a financial advisor?

Whether someone needs a financial advisor depends on several factors, and while many “average” people feel they can handle their finances perfectly fine without a professional, others might not.

Do I need a financial advisor for my 401(k)?

You don’t necessarily need a financial advisor for a 401(k), but they may be helpful if you want to add an element of active management into the mix. That said, not everyone will feel that they need an advisor to oversee or help manage one retirement account.

Why don’t people use financial advisors?

Some people may not want to use financial advisors because they don’t feel that they have enough money or wealth to warrant it, and because they want to avoid the fees and costs associated with professional advice.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1023171

Read more
Jan
02
2023
What Is the Chicago Board Options Exchange (CBOE)?

What Is the CBOE?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is the CBOE?

The CBOE is CBOE Global Markets, the world’s largest options trading exchange. While you may already be familiar with the New York Stock Exchange and Nasdaq, those are only two of the exchanges investors use to trade securities.

In addition to the option trading exchange, CBOE has also created one of the most popular volatility indices in the world.

Learn more about CBOE and what it does.

What Is the CBOE Options Exchange?

CBOE, or CBOE Global Markets, Inc., is a global exchange operator founded in 1973 and headquartered in Chicago. Investors often turn to CBOE to buy and sell both derivatives and equities. In addition, the holding company facilitates trading over a diverse array of products in various asset classes, many of which it introduced to the market.

The organization also includes several subsidiaries, such as The Options Institute (an educational resource), Hanweck Associates LLC (a real-time analytics company), and The Options Clearing Corporation or OCC (a central clearinghouse for listed options).

The group has global branches in Canada, England, the Netherlands, Hong Kong, Singapore, Australia, Japan, and the Philippines.

CBOE is also a public company with a stock traded on the cboe exchange.

What Does CBOE Stand For?

Originally known as the Chicago Board Options Exchange, the company changed its name to CBOE in 2017.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

History of the Chicago Board of Options Exchange

Founded in 1973, CBOE represented the first U.S. market for traders who want to buy and sell exchange-listed options. This was a significant step for the options market, helping it become what it is today.

In 1975, the CBOE introduced automated price reporting and trading along with The Options Clearing Corporation (OCC).

Other developments followed in the market as well. For example, CBOE added “put” options in 1977. And by 1983, the market began creating options on broad-based indices using the S&P 100 (OEX) and the S&P 500 (SPX).

In 1993, the CBOE created its own market volatility index called the CBOE Volatility Index (VIX). In 2015, it formed The Options Institute. With this, CBOE had an educational branch that could bring investors information about options.

CBOE continues its educational initiatives. The Options Institute even schedules monthly classes and events to help with outreach, and it offers online tools such as an options calculator and a trade maximizer.

From 1990 on, Cboe began creating unique trading products. Notable introductions include LEAPS (Long-Term Equity Anticipation Securities) launched in 1990; Flexible Exchange (FLEX) options in 1993; short-term options known as Weeklys in 2005; and an electronic S&P options contract called SPXpm in 2011.

Understanding What the CBOE Options Exchange Does

The CBOE Options Exchange serves as a trading platform, similar to the New York Stock Exchange or Nasdaq. It has a history of creating its own tradable products, including options contracts, futures, and more. Cboe also has acquired market models or created new markets in the past, such as the first pan-European multilateral trading facility (MTF) and the institutional foreign exchange (FX) market.

The CBOE’s specialization in options is essential, but it’s also complicated. Options contracts don’t work the same as stocks or exchange-traded funds (ETFs). They’re financial derivatives tied to an underlying asset, like a stock or future, but they have a set expiration date dictating when investors must settle or exercise the contract.That’s where the OCC comes in.

The OCC settles these financial trades by taking the place of a guarantor. Essentially, as a clearinghouse, the OCC acts as an intermediary for buyers and sellers. It functions based on foundational risk management and clears transactions. Under the Security and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), it provides clearing and settlement services for various trading options. It also acts in a central counterparty capacity for securities lending transactions.

Recommended: How to Trade Options

CBOE Products

Cboe offers a variety of tradable products across multiple markets, including many that it created.

For example, CBOE offers a range of put and call options on thousands of publicly traded stocks, (ETFs), and exchange-traded notes (ETNs). Investors use these tradable products for specific strategies, like hedging.

Or, they use them to gain income by selling cash-secured puts or covered calls. These options strategies give investors flexibility in terms of how much added yield they want and gives them the ability to adjust their stock exposures.

Investors have the CBOE options marketplace and other alternative venues, including the electronic communication network (ECN), the FX market, and the MTF.


💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

CBOE and Volatility

The CBOE’s Volatility Index (VIX) gauges market volatility of U.S. equities. It also tracks the metric on a global scale and for the S&P 500. That opens up an opportunity for many traders. Traders, both international and global, use the VIX Index to get a foothold in the large U.S. market or global equities, whether it’s trading or simply exposing themselves to it.

In late 2021, CBOE Global Markets extended global trading hours (GTH) on CBOE Options Exchange for its VIX options and S&P 500 Index options (SPX) to almost 24 hours per business day, five days a week. They did this with the intention to give further access to global participants to trade U.S. index options products exclusive to CBOE. These products are based on both the SPX and VIX indices.

This move allowed CBOE to meet growth in investor demand. These investors want to manage their risk more efficiently, and the extended GTH could help them to do so. With it, they can react in real-time to global macroeconomics events and adjust their positions accordingly.

Essentially, they can track popular market sentiment and choose the best stocks according to the VIX’s movements.

Recommended: How to Use the Fear and Greed Index to Your Advantage

The Takeaway

While CBOE makes efforts to educate and open the market to a broader range of investors, options trading is a risky strategy.

Investors should recognize that while there’s potentially upside in options investing there’s usually also a risk when it comes to the options’ liquidity, and premium costs can devour an investor’s profits. That means it’s not the best choice for those looking for a safer investment.

While some investors may want further guidance and less risk, for other investors, options trading may be appealing. Investors should fully understand options trading before implementing it.

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

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

Photo credit: iStock/USGirl

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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.

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

SoFi Invest®

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

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

SOIN1023180

Read more
Jan
02
2023
pencils on blue background

How to Keep Track of Your Student Loans

By | Fresh Out of School, Student Loans, student_loan | No Comments

Nearly two-thirds of students graduate college with some debt. The average student loan debt, including federal and private loans, is $37,338. The key to paying down that debt quickly is to stay organized. If you have a mix of federal and private loans (with different payment plans, interest rates, and due dates), however, that’s easier said than done.

Unfortunately, lenders are not very forgiving. One late payment can tarnish your credit history. Before you get into any trouble, it is a good idea to put together a system and a plan for making payments and keeping track of your loans. The following tips and strategies can help.

Understanding Your Student Loans

If you’re like many borrowers, you may have a combination of different types of student loans. Each type has different benefits and features, so it’s important to differentiate between federal and private student loans, and to take note of each loan’s amount, interest rate, and payment requirements.

If you’re not sure what type of federal student loans you have, you can log on to StudentAid.gov and select “My Aid” in the dropdown menu under your name. There you can find:

•   Your student loan amounts and balances

•   Your loan servicer(s) and their contact information

•   Your interest rates

•   Your current loan status (e.g., repayment, in default, etc.)

The government’s database won’t tell you about private loans, though. For that, you can get details from the bank or lender where you obtained the loan. If you completely lost track of what private loans you have, you can check your credit report. You can get a free credit report at AnnualCreditReport.com.


💡 Quick Tip: Ready to refinance your student loan? You could save thousands.

Understand Loan Repayment Options

Federal student loans offer multiple payment options. If you don’t choose a specific plan, you’ll automatically be placed on the 10-year standard repayment plan, which can be a good choice if you’re looking to save on interest. Other options include the Extended Payment Plan and Graduated Repayment Plan.

If you want low monthly payments and student loan forgiveness, you might want to apply for an income-driven repayment plan. With these plans, your payment amount is a percentage of your discretionary income (typically 10% to 20%). After making payments for 20 or 25 years, any remaining loan balance is forgiven.

Private student loans generally offer less flexibility, but you likely had a choice of a few different repayment plans when you initially borrowed the loan. Typically, lenders will let you choose a loan term between five and 20 years when you first sign for a student loan.

Organizing Your Loan Information

If you’re feeling overwhelmed by your student loans, these tips can help you get organized and make the repayment process simpler and less stressful.

Gather Your Documents

An important first step toward keeping track of your student loans is to gather all of your documents and keep them in one place (such as a three-ring binder or file folders). These documents may include:

•   Financial aid award letters

•   Promissory notes (legal contracts detailing the terms that you received when you originally signed for your student loans)

•   Disclosure documents (which include information about rates, fees, disbursement dates, and amounts)

•   Monthly billing statements and emails from your loan servicers
As any mail comes in regarding your loans, be sure to add it to your binder or file system.

Create a Spreadsheet

A spreadsheet allows you to have all of the details of your student loans summarized in one place. You could use something like Microsoft Excel or Google Sheets, or just a regular computer document. Details you may want to include in your master spreadsheet:

•   Name of the federal loan and whether it is subsidized or unsubsidized

•   Name of the private lender (if applicable)

•   Name and contact details of the lender or loan servicer

•   Total amount borrowed

•   Term of the loan

•   Interest rate (this can help you decide which loans you should pay off first)

•   Payment due date

•   Current loan balance (this will go down as you update your spreadsheet)

With all your loan details in one place, you’ll likely find it easier to stay on top of your student loans. It’s also a good idea to take a few minutes every month to update the columns to reflect the latest status of every loan.

Recommended: Tips to Lower Your Student Loan Payments

Sign Up for Autopay

If you have a job with a steady income, you may want to set up autopay for all of your loan payments. Since your payments will be automatically taken from your bank account, you won’t have to worry about missing a payment or getting hit with a late fee. Plus, you’ll receive a 0.25% interest rate deduction on your federal loans. Many private lenders will also lower your interest rate by .25% to .50% when you enroll in autopay. This can add up to substantial savings over the life of your loan.

You’ll want to be careful, however, that you have sufficient funds in your bank account. If you don’t, you will have to manually adjust your payment amount accordingly.

Organize Your Login Details

Organizing your login details for each student loan website can save you a lot of time and frustration in the coming years. It also makes it quick and easy to check in on your loans and track your repayment progress.

You can go old school and simply write down all of your usernames and passwords on a piece of paper and store the document in a secure place. Or, you might choose to go more high-tech and use a password manager app or website (such as Dashlane or 1Password) or a built-in manager like Apple’s Keychain. This can save you the headache of repeatedly trying — and failing — to access your accounts.

Utilize Online Tools and Apps

There are free websites and online student loan trackers that can help you stay on top of your student loans. There are also apps that specialize in managing and paying off loans easily. Some you might want to check out:

•   Undebt.it This free app can help you eliminate all debt, not just student loans. Once you enter your loan information, you can see how quickly you can pay them off using the debt snowball strategy, as well as the amount that you’ll save on interest over the life of each loan.

•   Debt Payoff Assistant This free iPhone app lets you view all of your debts in one place. Simply enter your loan information and the dashboard will break down your different types of debts and your total amount of debt. You can then use the app to see how much you’ll save using the debt snowball payoff method.

•   Changed You link your credit or debit card to the app and every time you make a purchase, the app rounds it up to the nearest dollar and puts the change into your Changed account. Once you reach a certain threshold, that money gets deposited to your student loan provider. The app also offers a dashboard that lets you see all your loans in one place. (There is a $3/month fee.)

Recommended: 6 Strategies to Pay off Student Loans Quickly

Simplify Your Loans by Refinancing

When you refinance your student loans, you combine your federal and/or private loans into one private loan with a single monthly payment. This can simplify repayment and might be a smart move if your credit score and income can qualify you for lower interest rates.

With a refinance, you can also change your repayment terms. You might choose a shorter term to pay off your student loans faster. Or, you might go with a longer repayment term to lower your monthly payments (note: you may pay more interest over the life of the loan if you refinance with an extended term).

If you’re considering a refinance, keep in mind that refinancing federal loans with a private lender disqualifies you from government benefits and protections, such as income-driven repayment plans and generous forbearance and deferment programs.


💡 Quick Tip: It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to financial advisors, networking events, and more — at no extra cost.

The Takeaway

When it comes to paying off your student loans, knowledge is power. So a great first step is to take inventory of all the loans you have, noting the loan amounts, interest rates, payment amounts, and due dates. Other ways to stay organized include: storing all of your loan paperwork and mail in one place, creating a master student loan spreadsheet, and using technology (like apps and loan platforms) to help you track your progress and pay off your loans faster.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

SOSL1223007

Read more
Dec
28
2022
What Is Cash Settlement in Options?

What Is Cash Settlement in Options?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Cash Settlement in Options?

Cash settlement in options is a method where the buyer of an option contract can exercise their right to receive the underlying asset, such as a stock or commodity, in the form of cash rather than the physical delivery of the asset. This means that instead of receiving the stock or commodity, the option holder will receive an amount of cash equal to the value of the underlying asset when the option is exercised.

Cash settlement may be used in options trading because it allows traders to speculate on the price movement of securities without actually having to own or hold the underlying assets. This can be particularly useful for traders looking to hedge their positions or who want to avoid the risks associated with holding the underlying assets.

What Is Cash settlement?

As noted above, cash settlement refers to a settlement method where the buyer of an option contract receives the cash difference between the strike price and the current market price of the underlying security. This is in contrast to the more traditional method of physical settlement, where the buyer of the option contract would receive the underlying security upon exercise.

When trading options, there are two primary methods for settling the contract: physical delivery and cash settlement. In physical delivery, the buyer of the option receives the underlying asset, such as a stock or commodity, when the option is exercised. Most listed equity options contracts are settled with the actual delivery of shares.

On the other hand, cash settlement allows the buyer of an option to receive the value of the underlying asset in the form of cash when the option is exercised. This means that the buyer does not receive the stock or commodity but receives an amount of cash equal to the value of the underlying asset when the option is exercised. Often, equity index and binary options are cash-settled.

💡 Recommended: Options Trading 101: An Introduction to Stock Options

How Does Cash Settlement Work?

The cash settlement process in options works like this:

When an options contract is exercised, the buyer has the right — but not always the obligation — to buy or sell the underlying security at the agreed-upon price (called the strike price). In a cash settlement, the buyer of the option is not required to purchase or sell the underlying security. Instead, they receive a cash payout based on the difference between the strike price and the current market price of the underlying security.

💡 Recommended: 10 Options Trading Strategies for Beginners

Example of Cash Settlement

Suppose an investor buys a call option on stock ABC with a strike price of $50. This means that the investor has the right to buy the stock at $50 per share at any time before the option expires if the stock’s price is above the strike price. If the stock’s market price rises above $50, the option becomes “in the money,” and the investor can exercise their right to buy the stock at $50, even if the market price is higher.

Suppose that, when the option expires, the stock’s market price is $55 per share. If the option is cash-settled, the investor can exercise their right to buy the stock at $50 per share and receive a cash payment of $5 per share (the difference between the strike price and the market price) multiplied by the number of options contracts that are exercised. This means the investor would receive a total cash payment of $500 (assuming they exercised a standard options contract of 100 shares).

Alternatively, if the stock’s market price is below $50 when the option expires, the option becomes “out of the money,” and the investor will not exercise their right to buy the stock. In this case, the option would expire worthless, and the investor would not receive any cash payment.

💡 Recommended: In the Money vs Out of the Money Options

Pros and Cons of Cash Settlement

Pros

 Cons
Improves liquidity across derivatives markets Prices have a risk of manipulation
Does not require cumbersome delivery coordination and costs in commodities markets or delivery of shares in options trading Only available on European-style options
Allows parties to hedge and speculate financially on products that cannot be physically delivered Commodities producers and consumers might prefer physical delivery when the product is needed for use

Advantages of Cash Settlement

There are several advantages to using cash settlement in options trading. First, it can be more convenient for the buyer, as they do not have to worry about physically receiving and storing the underlying asset. Cash settlement can be beneficial for traders who cannot hold the underlying asset, such as those who are trading options on futures contracts of commodities.

Another advantage of cash settlement is that it can be more cost-effective. Since the buyer does not have to take possession of the underlying asset, they do not have to pay any additional fees or expenses associated with holding an asset like gold, oil, wheat, or other commodities. This can help to reduce the overall cost of trading options and make them more accessible to a broader range of investors.

In addition to these advantages, cash settlement can provide greater flexibility for options traders. With physical delivery, the buyer must take possession of the underlying asset when the option is exercised, which can limit their ability to trade the asset in the future. With cash settlement, the buyer can use the funds received from the option to buy or sell the underlying asset in the market, allowing them to take advantage of changing market conditions.

Furthermore, cash settlement allows for a more efficient transaction in the overall derivatives markets — which includes options — adding to its liquidity.

Drawbacks of Cash Settlement

However, there are some drawbacks to cash settlement compared to physical settlement. For example, some investors may prefer the security and control that comes with physically owning and holding the underlying asset rather than receiving a cash payment. This is because cash can be more easily lost, stolen, or subject to inflation, whereas physical assets may provide a more tangible form of wealth. Also, physical settlement is not usually subject to manipulation by either party involved in the options contract because the activity is monitored by the broker and clearing exchange.

Other cash settlement drawbacks include that it is usually only available to European-style options, where the option holder can only exercise the contract at expiration rather than early like American-style options. Also, physical settlement may be preferred by traders who need the underlying asset for use.

Cash Settlement vs Physical Settlement

There are several important differences between cash settlement and physical settlement.

Definitional Differences

Cash settlement of options is a financial reconciliation. Physical settlement reconciles a contract with the underlying asset. A common physical delivery example is a commodity, but it can also be shares of an underlying financial asset such as stock.

Mode of Payment

Option cash settlement payments are made instantly by parties. It is a straightforward financial account transfer of the difference between the underlying asset’s spot price and the options contract or strike price.

Physical settlement’s mode of payment is a full payment of the underlying asset — the option contract’s underlying asset is physically delivered to the buyer.

Level of Liquidity

Liquidity is better in markets with a cash settlement option versus those with physical settlement only. More market traders — hedgers and speculators — can participate in cash-settled derivative markets since there can be lower capital requirements. Options traders also can engage in rolling options instead of exercising them.

Time Taken

Option cash settlement can be done with instantaneous financial transactions. Physical delivery involves potentially lengthy delivery times of an underlying commodity.

Level of Risk

Another upshot in markets with a cash settlement option is market risks are lower. Physical settlement often involves transfer certificates and other documents that could be susceptible to manipulation, loss, and theft.

Convenience

It is hard to argue with the convenience of cash settlement. Two parties square up using straightforward price differences rather than figuring out the logistics of the physical delivery of an asset. With equity index options, taking delivery of all the shares of a stock index can also be unwanted by the buyer. There can also be fewer fees with cash settlement, resulting in fewer trades.

Practicality, costs, and simplicity make cash settlement easier than physical settlement.

Practicality

Due to lower costs and quick payments, option cash settlement is more practical than physical settlement.

Costs Involved

Trades with cash settlements have low or even zero cost until settlement when the buyer and seller reconcile with a payment. With physical delivery, there are several costs, such as transportation costs, delivery expenses, and broker fees.

Simplicity

A final aspect that makes cash settlement advantageous versus physical settlement is the pure simplicity of cash settlement. Cash settlement is a netted payment from one party to the other.

Popularity

Cash Settlement

 Physical Settlement
Popular with retail traders who might not want to take large physical deliveries Popular with commodities firms that use the underlying asset
Popular with exchanges since more traders can transact, leading to more commissions and better liquidity Popular with large exchanges since a single exchange can become the primary exchange for a certain asset
Popular with large traders since they can quickly settle contracts with low cost Popular with listed stock options traders if they want to take delivery of shares

The Takeaway

Cash settlement in options trading may provide a convenient and cost-effective way for buyers of options contracts to exercise their rights to the underlying asset. By receiving the asset’s value in cash, traders can avoid the costs and complications associated with physical delivery while still maintaining the flexibility to trade the underlying asset in the market. However, investors should be aware that most equity options are not cash-settled but are settled with the delivery of underlying shares of stock.

If you’re ready to try your hand at options trading, SoFi can help. You can trade options from the SoFi mobile app or through the web platform. And if you have any questions come up along the way, SoFi offers educational resources about options to learn more.

Trade options with low fees through SoFi.

FAQ

What is the difference between a physical and cash settlement?

Cash settlement is a financial payment for the value of a stock or commodity underlying an options or futures contract when the holder exercises. Physical settlement entails the actual delivery of the underlying asset. In commodities markets, that means the commodity is delivered to the buyer. With equity options, physical delivery happens when the buyer receives shares of the underlying asset specified in the options contract.

Can you trade with unsettled cash?

Yes. You can use the proceeds from a sale to make another purchase in a cash account while your funds remain unsettled. Unsettled cash from a day trade cannot be used for another purchase until the settlement date

Which futures are cash settled?

According to the CME Group, equity indexes and interest rate futures are the most common cash-settled markets. Some precious metals and foreign exchange markets also settle in cash, along with agricultural products. In the options market, cash-settled options include digital options, binary options, and plain-vanilla index options.

Photo credit: iStock/FreshSplash

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN1221527

Read more
Dec
28
2022
Prepaid College Plans: What Does Each State Offer?

Prepaid College Plans by State: What Does Each State Offer?

By | Going to College, Student Loans, student_loan | Comments Off on Prepaid College Plans by State: What Does Each State Offer?

College is a major expense. Even with years of thoughtful saving and planning, the costs can add up quickly. Prepaid college plans are one option families are choosing to work out a smoother financial process for students and parents alike. These plans used to be more readily available in the past. Still, it’s worth looking at prepaid college plans, where you can get one, and whether they’re a smart financial decision.

What Are Prepaid College Tuition Plans?

If you have a student who definitely plans on going to college someday, a prepaid college tuition plan can help set them up for success. You, as a parent, guardian, or relative, can start paying for college now, long before the student actually attends. This locks in the current tuition rate. Even as tuition costs go up in subsequent years, these plans allow you to keep paying the tuition rate you initially locked in.

You can think of it as a loan of sorts. You pay up front, and the state earns money off of those payments. When it comes time for your student to attend college, the state pays the tuition out of the funds you provided.

Of course, you need to be confident in your student’s plans for this to work. You will probably need to live in the same state as the college the student will attend since these plans tend to apply only to in-state tuition.

Pros and Cons of College Prepaid Plans

Obviously, locking in a lower tuition rate can be a tremendous financial benefit. With college costs constantly on the rise, a prepaid tuition plan offers the potential of a steep discount. And you might even enjoy some tax breaks if you choose this approach, such as a deduction based on your contribution to a prepaid plan, depending on where you live.

However, this sort of plan can be somewhat inflexible. You may be limited in the choices you have in terms of schools. While you can get a refund if your student chooses a different school than you all expected, you may end up feeling some pressure to stay the course when investing in a plan like this.

And you can’t use the money freely. There are restrictions to how you can use the funds in a prepaid college plan. For example, room and board probably aren’t covered. These plans generally focus specifically on tuition and fees.

Despite this, many choose prepaid college plans to lock in a rate. They also enjoy the high contribution limits and tax benefits. Here are the major pros and cons of these plans.

Pros Cons
Steady tuition rate Lack of flexibility
Tax breaks Eligibility limitations
High limits Lack of control

Prepaid College Plans vs 529 Program

College prepaid plans and 529 college savings plans are similar. They serve the same basic function. However, when you look closer, they can be quite different. Prepaid tuition plans are a type of 529 plan, in fact, but 529 savings plans have distinct features that might sway your decision about investing in one or the other. Here are three of the biggest differences.

Prepaid College Plan 529 Savings Plan
Timeframe You must start investing within a certain time period. Different states will have different rules about this. You can generally invest whenever you like.
Flexibility These plans are less flexible. You generally have to spend the money on tuition and fees specifically. You have more flexibility in how you spend your money here. You can use funds for books, room and board, and other expenses, as well as tuition.
Risk These plans are stable. However, they won’t earn much over time. If your student changes their mind and you withdraw the money, expect to break even. These plans aren’t risky, but they aren’t going to earn much either. This is an investment. It could earn far more than a prepaid plan, but it does involve stock investments.

The National Prepaid College Plan

While many prepaid college plan options are state-run, there is also a national program called the Private College 529 Plan. Unlike other prepaid college plans, there’s no state residency requirement to join this plan. It applies to nearly 300 colleges and universities. However, they are all private institutions, not public. They span 30 states plus the District of Columbia.

The national plan offers a bit more flexibility than state plans, and you don’t need to choose a school to start saving. That decision can wait until your student is actually enrolling, in fact. As long as it’s one of the private institutions that are part of the plan, you can use your funds there.

Recommended: How to Start Saving for Your Child’s College Tuition

States With Prepaid College Plans

Only nine states still have prepaid college plan options, and each state will offer something a little bit different. You can compare all of the options below to see if any of these state plans work for you.

State Plan Features
Florida Florida 529 Prepaid Plan The child must be a Florida resident. This plan covers tuition and fees and you can opt into a one-year dorm plan as well. Florida lets you use this plan nationwide and it’s guaranteed by the state so you won’t lose money.
Maryland Maryland Prepaid College Trust You can start by prepaying for just a single semester. This plan also works for out-of-state tuition. And it offers an income tax deduction for Maryland residents.
Massachusetts Mefa U.Plan You can contribute the full cost of tuition and fees to this plan, which is invested in bonds. You can transfer the funds or cash out and receive your investment plus interest if your plans change.
Michigan Michigan Education Trust Michigan offers a discounted, age-based pricing structure. Plus, you can transfer the funds to other family members. The funds work at in-state, out-of-state, and even trade schools.
Mississippi MPACT You pay a lower monthly rate for younger children when you enroll in this plan. You have to use the funds on tuition and fees, but anyone can contribute to the plan.
Nevada Nevada Prepaid Tuition Program There are some eligible out of state and private institutions that qualify under this plan. The student must use the funds within six years of graduating high school.
Pennsylvania PA 529 Guaranteed Savings Plan This plan only applies to state universities. However, you can also use it for up to $10,000 at elementary and secondary public, private or religious schools. You can alter your contribution levels at any time by changing your tuition level.
Texas Texas Tuition Promise Fund Save for public colleges and universities in Texas with this plan, excluding medical and dental institutions. You must enroll between September and March.
Washington Guaranteed Education Tuition You can use your funds on schools nation-wide. You can even use the funds for room and board, books, computers, and other expenses. As long as you use the funds for higher education, they won’t be subject to tax.

Are Prepaid College Plans Tax Deductible?

It depends on the state and plan, but in many cases, yes! There may be stipulations, though. For example, you’ll probably have to use the funds for higher education only. However, withdrawals for educational purposes may be tax-free. Moreover, your contributions to the plan could earn you deductions.

Are Prepaid College Plans Worth It?

That depends on where you live and what your student’s goals are. If the future is pretty certain, or you live in a state with a very flexible plan, a prepaid college plan can be a safe, stable way to save up money for college.

Because of the limitations and lack of flexibility, though, it may not be right for everyone. If, for example, you want to be more aggressive about your college planning, a 529 savings plan might suit your goals better. Plus, you can spend that money on things beyond just tuition and fees.

Recommended: Parent PLUS Loans vs Private Parent Student Loans for College

Alternative Methods for Prepaid College Plans

Beyond a prepaid tuition plan, you can also try a college savings plan to build up cash for college. This allows you to save up money and spend it on qualified education expenses. It doesn’t lock in a tuition rate, but because it’s a more aggressive type of savings plan, you could end up saving up more money in the long run.

There is also a national option. This plan applies even in many states that don’t have their own prepaid tuition plans. It also locks in rates, but you will have to choose one of the schools covered by the plan. Luckily, there are almost 300 to choose from.

Of course, if your child is headed to college in the next few years, you may not have time to save much money. Parent PLUS loans can help. When an undergraduate’s financial aid doesn’t meet the cost of attendance at a college or career school, parents may take out a Direct PLUS Loan in their name to bridge the gap.

The Takeaway

The thought of large student debt scares off many who would otherwise attend a college or university. But with some strategic and long-term planning, college can fit in the budget. You can mix and match approaches to find what works for you. For example, you could combine a prepaid tuition plan with a private student loan to pay for college. No matter what you ultimately choose, it will help to start planning well in advance.

Photo credit: iStock/dangrytsku

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

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.

SOPS1121043

Read more

CATEGORIES

  • All
  • No categories
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2024 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender