Nov
15
2022
stack of hundred dollar bills

How To Switch Banks in 3 Easy Steps

By | Budgeting & Goals, money | No Comments

Do you love your bank? Is it convenient? Do you feel valued? Are you getting a top-notch interest rate? Paying low or no fees?

If you can’t answer “yes” to all of those questions, it might be time to make a switch.

Changing banks can be a surprisingly simple process (though not instantaneous), and it can save you time and money. Here, we’ll break it down for you into three super simple steps, so you can complete the process as quickly and easily as possible. Read on for the guidance you need.

How to Switch Banks: Step-by-Step Guide

1. Choose a New Account for Your Money

Identify the key benefits you want but currently don’t have and do an online search to compare options. For example, if you are looking to eliminate monthly fees, target that; if you are looking for a bank with branches near your home and office, make that your focus. The possible options should quickly come into focus via a search engine.

If lower fees and higher interest rates are driving your decision, you’ll likely want to review online banking options vs. traditional banks. Because these financial institutions don’t have the overhead of bricks-and-mortar locations and staffing, they can often pass those savings onto their customers. That’s a major benefit of online banking.

Similarly, credit unions vs. traditional banks often have lower fees and higher interest rates because they are non-profit organizations and therefore have a different business model.

2. Open Your New Account

Found a new home for your cash? Go and open that account. You can likely transfer funds from your old one to make that initial deposit.

Some bank accounts require no initial deposit if you sign on with direct deposit; others will need a small deposit of perhaps $25. If you are signing up for a premium checking account or high-yield account, there may be higher minimums involved.

Here’s an important point: Don’t whisk every last cent out of your old account into the new account. You may have pending transactions and autopays coming up that will take time to sort out. Leave a cushion in the old account; you’ll learn more about this in the next step.

Make sure to set up direct deposit from your employer directly into your new account. This will ensure that your pay appears in your account without having to deposit a physical check. Visit your HR or pay office and provide them with the new account information, including the new account number and routing number.

You may also want to link a savings account to your new checking account. This can make transfers easier and allow you to opt into overdraft protection.

💡 Recommended: How to Open a Bank Account

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

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3. Close Your Old Bank Account

Now that you have your new account, here’s how to close the old one while tying up any financial loose ends.

Cancel Automatic Payments and Direct Deposits

If you’re like most of us, you rely on autopay to simplify your banking; the pros of automatic payments are hard to ignore. This means that each month your various bills and subscriptions are seamlessly deducted from your primary account on their due date. To avoid falling behind on bills or accidentally getting your streaming service suspended, you need to turn off or redirect every automatic payment that currently comes out of the account you wish to close.

Take a look at your monthly account statement and make a list of every automatic deduction, from your electric bill to newspaper subscriptions. Once you’ve made your list, log in to each of your service provider accounts and change your payment information.

Also consider any automatic deposits you may receive. For instance, do you use P2P transfers on platforms like PayPal and Venmo? Update the info so when you transfer funds from those accounts, they go to your new checking.

Wait For Any Pending Transactions To Clear

After you’ve canceled or rerouted all the automatic payments that deduct from the account you want to close, you will need to wait for any pending transactions to clear. These pending transactions are usually for bills or subscriptions that have one remaining payment left before the company can change your payment information.

Waiting for all pending transactions to clear ensures that your bills will be paid and your subscriptions will continue without facing any overdraft fees. Make sure there is enough money in the account you wish to close to cover any pending payments. Wait two weeks to one month for any automatic payments to be deducted.

Cut the Cord

Once you have transferred all automatic payments and possible deposits and waited a cycle for those to update, you’re done. It’s time to close your old account. Depending on where it’s held, you may be able to finalize this online or by phone. In other cases (usually at smaller local banks or credit unions), you may have to send a written request or turn up in person.

Be sure to transfer out any remaining funds or get a check for the amount left in the account.

Whether you close your account online or in person, make sure to request written confirmation that the account has been closed, says the Consumer Financial Protection Bureau. This is a safety-net move to protect you if some issue were to arise. When you receive the letter confirming your bank account is closed, make sure to save it somewhere safe for future reference.

You’re done! How easy is it to switch banks? Hopefully, you’ve learned that it’s not too hard.

Should You Switch Banks?

There are many good reasons to switch banks. Perhaps one is advertising an incentive (such as a sign-on bonus) that’s too good to pass up. Or is offering a discount on a home loan rate if you open an account, and you want to snag that lower mortgage APR (annual percentage rate).

Or maybe you have realized that bank fees are eating away at your money. Consider these recent stats revealing how expensive banking can be:

•   Monthly fees on non-interest checking average $5.08 and $16.35 on interest-bearing accounts.

•   Insufficient or non-sufficient funds fees average a dizzying $33.58 each.

•   Out-of-network ATM fees are typically $4.59 (ouch) per transaction.

It’s worth noting that fees aren’t the only reason to make a change: Interest rates can vary wildly. On savings accounts, you might earn 0.01% at a traditional bank and 4.00% APY at an online one. Also, for some people, they want a bank that better suits their needs; perhaps a local one that caters to first-time homebuyers or is a niche bank and understands their student-loan debt issues among healthcare professionals.

The Takeaway

As the personal banking market becomes ever more competitive, you may find yourself thinking about changing banks for the sake of better services, greater convenience, lower fees, higher interest rates, or other features. If you do find a new home for your money, it takes just three steps to make the switch. Yes, it’s a bit of effort, but the payoff can be well worth it.

If you are thinking of making a swap, take a look at what SoFi offers. When you open an online bank account with us, your money can grow faster. When you set up Checking and Savings with direct deposit, you won’t pay any account fees and you’ll earn a hyper competitive APY.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How do I switch banks?

To switch banks, you’ll need to identify a new financial institution and fund your new account. Then, you will need to transfer automatic payments, deposits (say, via direct deposit or PayPal), and wait for them to update. Once that happens, you are ready to transfer any remaining funds and officially close your old account.

Are there downsides to switching banks?

If you’re wondering about cons or how hard it is to switch banks, know that changing banks requires some effort and patience. You will need to complete some forms and move any automatic payments or deposits to your new account, as well as wait a cycle while these update. But changing financial institutions should not involve a charge or impact your credit score.

What documents do I need to switch banks?

Typically, opening a new account requires government-issued photo ID, a Social Security or taxpayer identification number, and possibly proof of your current address (such as a copy of your utility bill). To close an account, you’ll probably need your government-issued photo ID and perhaps a bank statement or your debit card.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

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.

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Nov
13
2022
Margin vs Options Trading: Similarities and Differences

Margin vs Options Trading: Similarities and Differences

By | Going to College, invest, Investing | Comments Off on Margin vs Options Trading: Similarities and Differences

Margin and options trading are two investment strategies that investors may utilize when investing in the financial markets. Investors who use margin and options trading rely on leverage to potentially accelerate their gains while also risking big losses if their trades do not work out.

While margin and options trading have several similarities, there are also subtle differences between the two investing strategies. Savvy investors will want to know how both margin and options work to know when to choose the best strategy for their unique situation.

Options Trading vs Margin Trading

Similarities

Here are some similarities between margin trading and options trading:

•   Both options trading and margin trading allow you to leverage your investment dollars.

•   Higher potential rewards but also higher risk.

•   Requires additional account approvals from your broker.

Differences

Here is a look at the differences between options trading and margin trading:

•   Margin trading involves a loan from your broker. You can get involved with options trading without borrowing.

•   Using margin directly increases your buying power, while options trading allows you to control shares of stock with less money.

Options Trading and How It Works

Options are financial derivatives that allow an investor to control a particular security, like a stock or exchange-traded fund (ETF), without needing all the money to buy or sell the asset directly. The purchaser of an options contract has the right to buy or sell a security at a fixed price within a specific period of time, paying a premium for that right.

There are two main types of options contracts: call options and put options. A call option gives the purchaser the right – but not always the obligation – to buy a security at a specific price, called a strike price. In contrast, the purchaser of a put option has the right – but again, not always the obligation – to sell a security at the strike price.

Buying and selling call and put options are some of the various ways investors can use leverage to accelerate their gains. And since options contracts fluctuate in value, traders can buy or sell the contracts before expiration for a profit or loss, just like they would trade a stock or bond. This process of buying and selling options contracts is known as options trading.

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

How Does Options Trading Work?

Suppose stock ABC is trading at $40 per share. If you buy the stock directly like a traditional investment and the stock price goes to $44, you will have made a 10% profit.

However, you could also buy a call option for stock ABC and potentially accelerate your gains.

Say that a call option with a strike price of $40 for stock ABC is selling for a $1 premium. When the stock price moves from $40 to $44, the call option premium might move to $2. You could then sell the call option, pocketing the difference between the price of the option when you sold it and what you paid for the option ($2 – $1). That would represent a 100% return on your investment, not including commissions and fees.

Calculating the pricing of options can be complicated, but this simple example shows one way investors can use options trading to leverage their investments.

There are many ways to trade options, depending on your outlook on a particular asset or the market as a whole. Investors can utilize bullish and bearish options trading strategies that target short- and long-term stock movements, allowing them to make money in up, down, and sideways markets.

Aside from speculating on the price movement of securities, investors can use options to hedge against losses or generate income by selling options for premium.

💡 Recommended: How to Trade Options: An In-Depth Guide for Beginners

Pros and Cons of Options Trading

Here are some of the pros and cons of options trading:

Pros of Options Trading

 Cons of Options Trading
Allows you to use leverage for potentially increased returns Options generally have less liquidity than stocks
You can use options trading to speculate on the price movement of stocks, hedge against risk, or generate income Depending on your options strategy, you may have unlimited risk
Options trading may require a smaller upfront financial commitment than investing in stocks directly You need to be approved by your broker to trade options

Margin Trading and How It Works

Margin trading is an investment strategy in which you buy stocks or other securities using money borrowed from your broker to increase your buying power. You can potentially enhance your returns by using margin loans to purchase assets. However, using margin to buy securities can also magnify your losses.

In contrast, when you buy a stock directly, you pay for it with money from your cash account. Then, when you sell your shares, your profit (or loss) is based on the stock’s current price. This traditional way of investing limits gains, at least compared to margin trading, but also curbs potential risk: you can only lose as much as you invest.

Like options trading, margin trading is another way to increase your leverage in a particular investment. If you want to start trading on margin, you’ll likely need to upgrade the type of account you have with your broker. There are some subtle differences between a cash and margin account, and you’ll want to ensure you have the proper account to trade on margin.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

*For full margin details, see terms.

How Does Margin Trading Work?

After your broker approves you for a margin account, you can buy more stocks than you have cash available.

Here’s one example of how margin trading works: suppose that you have $5,000 in your account, and you want to buy shares of stock ABC, which is trading at $50 per share. With a regular cash account, you would only be able to buy 100 shares, since $50 multiplied by 100 equals $5,000. If the stock’s price goes up to $55, you can close your position with a 10% profit.

But if you have a margin account, you can buy additional shares. Your broker will approve you for a certain amount of margin. If your broker has approved you for a $5,000 margin loan, you now have $10,000 in buying power; you can buy 200 shares of stock ABC at $50 per share. If the stock’s price goes up to $55 in this example, your profits will be higher. You can sell your 200 shares for $11,000. Then, after repaying your margin loan, you still have $6,000 in your account, representing a 20% profit.

Keep in mind that the increased leverage works in both directions. If you buy a stock on margin and the stock’s price goes down, you will have higher losses than you would if you just purchased with your cash account.

If you enter into a margin position and the value of your account drops, your broker may issue a margin call and force you to either sell some of your holdings or put in additional cash. Your broker will require both an initial margin amount and a maintenance margin amount.

Pros and Cons of Margin Trading

Here are some of the pros and cons of margin trading:

Pros of Margin Trading

 Cons of Margin Trading
Increased leverage and buying power on your investments Higher risk if your trades move against you
Buying on margin may enhance your investment choices Your broker may force you to add more cash and/or sell your investments if they issue a margin call
Margin loans are often more flexible than other types of loans Most brokers charge interest on the amount they loan you on margin

How to Decide Which Is Right for You

Both options and margin trading can be successful investment strategies under the right conditions.

You may consider margin trading if you want to enhance your buying power with additional capital. If you want a type of investment with more flexibility, options trading might be suitable for you.

In either case, make sure you manage your risk so that you aren’t put in a situation where you lose more money than you have available.

Investing with SoFi

Options and margin trading are just two of the many investing strategies you can use to grow your wealth. If you’re ready to try your hand at either, and are comfortable with the risk, SoFi offers margin trading as well as an options trading platform. The options trading platform boasts an intuitive and approachable design that you can use whether you’re trading options from the mobile app or web platform. And if you find that any questions come up along the way, there are educational resources about options available for you.

Pay low fees when you start options trading with SoFi.

FAQ

Is margin trading better than options trading?

Neither margin trading nor options trading is necessarily better than the other. Both options trading and margin trading can make sense in specific situations. Which of these two investment options is best for you depends on your specific financial situation and goals.

How much margin is required to buy options?

Margin is not required to buy or sell options contracts. However, you may use a margin loan for options trading if it’s appropriate for your investing strategy.

Are options trading and margin trading the same thing?

While both options and margin trading allows you to use leverage to potentially increase your returns, they are not the same. Options trading involves trading options contracts, while margin trading involves borrowing money from your broker to make investments with more cash than you have in your account.

Photo credit: iStock/Just_Super

*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.
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Nov
13
2022
Binary Options Trading vs Gambling: How to Tell Them Apart

Options Trading vs Gambling: How to Tell Them Apart

By | Growing Wealth, invest, Investing | Comments Off on Options Trading vs Gambling: How to Tell Them Apart

Gambling is typically defined as risking something of value on an uncertain event. While common forms of gambling include the lottery, blackjack, or sports betting, the line between gambling and investing can be blurrier than you might think. Like some forms of gambling, binary options and other forms of options involve risking money for a possible reward.

However, there are some important differences between options trading and gambling, and it’s important to know what they are. That can help you decide whether your options trading behavior is investing or gambling.

What Is Options Trading?

Options trading is the trading of contracts that give a purchaser the right — but not always the obligation — to buy or sell a security, like a stock or exchange-traded fund (ETF), at a fixed price within a specific period of time. Since options contracts fluctuate in value, many traders can buy or sell the contracts before expiration for a profit or loss, just like they would trade a stock or bond.

Options are financial derivatives, meaning an option contract’s value is derived from the value of an underlying asset.

There are two main types of options: call and put options. A call option gives the holder the right — but not always the obligation — to buy an underlying asset. A put option gives the holder the right — but not always the obligation — to sell an underlying asset. In general, if you think the underlying asset price will go up, you would buy a call option. But if you believe the underlying asset price will go down, you would buy a put option.

You can buy and sell both call and put options, so no matter how you think the stock might perform, you can find an option strategy that suits you.

There are many strategies for trading options, depending on your outlook on the underlying asset. Options can be a way to hedge risk or increase leverage for a given investment.

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

Weekly Options

Most options contracts expire monthly, on the 3rd Friday of each month. However, many underlying securities also have options that expire weekly. These options are referred to as weekly options. Weekly options often have lower liquidity and higher volatility, since there is less time to smooth out the ups and downs of stock movement.

Is Options Trading Gambling?

There are many risks in playing the market, so investors should be cautious with their investments and have a risk mitigation plan in place before making any type of stock or option trade. While trading options is not generally considered gambling in and of itself, there are some risks associated with trading options like there are with gambling.

Are Weekly Options Gambling?

Weekly options — along with day trading — are another form of investing in the stock market that shares some characteristics with gambling. If you find yourself rapidly making trades in weekly options without a system in place, trading from social pressure, or because of excitement, you may be gambling rather than investing.

Mitigating Risk When Trading Options

Risk management is one of the most important parts of a solid investment strategy. If you are trading options, it’s crucial to have a plan for handling risk. One way that you can protect your capital and manage risk when trading options is through the use of protective collars. Protective collars can reduce your risk from larger-than-expected moves but also can reduce your overall gains.

How to Tell if You Are Investing or Gambling

There are no hard-and-fast rules to determine the difference between investing and gambling, but here are a few questions you can ask yourself to help tell the difference.

Trading Due to Social Pressure

If you find yourself trading options due to social pressure, that can signify that your activities are closer to gambling than investing. It can be common — especially in a bull market — for people to talk about investing with friends and co-workers. If you find that you are trading just because all of your friends are doing it, but you’re not in a financial position to bear the risk of trading, that may be a sign that you should reconsider trading stocks or options.

Trading Without a System

A good indicator that you are investing rather than gambling is that you have a system for how and when you trade. An investment system can include things like how to identify stocks to buy, technical and fundamental indicators, or a risk mitigation plan for what to do when a trade moves against you. If you are trading based on hunches and chance, that may indicate that you’re gambling and not investing.

Trading Because It Can Be Exciting

There’s no denying that excitement comes with making money, but if that excitement is the primary reason you’re trading, that is more akin to gambling than actual investing. It can be hard to separate emotions from rational thinking when making stock and option trades, which is another reason to have a trading strategy in place.

Investing With SoFi

There are no hard-and-fast rules that determine whether any particular trading behavior is investing or gambling. Instead, you might think about the reasons why you are investing. If you are trading options for the excitement, to fit in with others, or without a system, that may be a sign that your activity is closer to gambling than actual investing.

But if you understand the strategy and are willing to take the risk, you might have good reason to try options trading. With SoFi’s intuitive and approachable design, investors have the ability to trade options from the web platform or mobile app. And because options trading isn’t always straightforward to understand, there’s a library of educational resources about options offered.

Pay low fees when you start options trading with SoFi.

FAQ

What are the reasons to consider trading options?

For experienced investors, there are a lot of reasons to trade options. One reason can be to hedge an existing investment. Another possible reason is to get additional leverage; you can make (or lose) more money with a smaller investment using options.

What are the reasons to not trade options?

Options trading does carry some risk for investors, which can be one reason not to trade options. Options are also typically more volatile than their underlying stock, and some options strategies run the risk of losing your entire investment or even putting you in a position where you owe more than you have available. If you are just starting your investment journey, it might be a better idea to get practice by making less risky investments to gain experience.

Can you lose money from options trading?

Like nearly all investments, options trading carries the risk of losing money. Some options trading strategies run the risk of losing 100% of your investment. If you buy a call option and the stock closes at expiration below your strike price, your option will expire worthless. If you sell call options, you can even be in a position of losing a potentially unlimited amount.

Photo credit: iStock/fizkes

SoFi Invest®

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

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

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.
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Nov
07
2022
How Do Interest Rates Impact Stocks?

How Do Interest Rates Impact Stocks?

By | Growing Wealth, invest, Investing | Comments Off on How Do Interest Rates Impact Stocks?

The impact of interest rates and their fluctuations are a fact of life for investors. And there are several ways interest rates can affect the stock market, like how higher interest rates raise the cost of borrowing for consumers and corporations, which can ultimately affect public companies’ earnings. The reality for stock market investors is that even minor adjustments to interest rates can significantly impact their portfolios.

Below is a deeper dive into the effects interest rates may have on stock prices. For context, interest rates are rising to levels the economy hasn’t experienced in decades, thanks in part to the Federal Reserve’s attempts to fight rising prices. Here’s how that could affect stocks.

Interest Rates 101

Who controls interest rates? While many market factors come into play to determine interest rates, the short answer is that the Federal Reserve, or the U.S. central bank, influences rates.

The Fed has a “dual mandate”:

•  Create the best environment for maximum employment.

•  Stabilize prices, or keep inflation in check

One of the tools the Fed has in its toolkit to try to achieve these twin goals is controlling short-term interest rates. This is done by the Federal Open Market Committee (FOMC)–made up of 12 Fed officials–which meets eight times a year to set the federal funds rate, or the target interest rate.

The federal funds rate is the rate banks charge each other to lend funds overnight.

Other factors influence general interest rates, like consumers’ demand for Treasuries, mortgages, and other loans. But when the Fed adjusts the federal funds rate, it has sweeping ripple effects on the economy by broadly changing the cost of borrowing.

💡 Recommended: What Is the Federal Funds Rate?

How the Fed Reacts to Slow Economy

When economic activity in the U.S. is slow or contracting, the Fed may cut the federal funds rate to boost growth. This move, known as loose monetary policy, is one way the Fed attempts to hit the mandate of creating the best environment for maximum employment.

Lower interest rates make it easier for consumers, businesses, and other economic participants to borrow money and get easier access to credit. When credit flows, Americans are more likely to spend money, create more jobs, and more money enters the financial markets.

Recent history bears this strategy out. In 2008, when the global economy cratered, and both employment and spending were in free fall, the Fed slashed rates to near zero percent to make credit easier to get and restore confidence among consumers and businesses that the economy would stabilize. The Fed again cut interest rates in March 2020 to near zero percent to stimulate the economy during the initial waves of shutdowns due to the coronavirus pandemic.

How the Fed Reacts to Hot Economy

Alternatively, if the U.S. economy is growing too fast, the Fed might hike interest rates to get a grip on rising inflation, which makes goods and services more expensive. This is to make borrowing and getting credit more expensive, which curbs consumer and business spending, reduces widespread prices, and hopefully gets the economy back on an even keel.

For instance, in the early 1980s, Fed Chair Paul Volcker jacked up interest rates to above 20% in order to tame runaway inflation; prices were rising by more than 10% annually during the period. Volcker’s interest rate moves were a big reason why the average 30-year mortgage rate was above 18% in 1981.

More recently, the Fed started to raise interest rates rapidly through 2022 to combat rising prices, with inflation rates hitting the highest levels since the early 1980s.

Interest Rates and Markets

Most analysts note that interest rate changes, or the expectation of rate changes, can significantly affect the stock market beyond how rates may impact business and household finances.

Generally, higher interest rates tend to be a headwind for stocks, partly because investors will prefer to invest in lower-risk assets like bonds that may offer an attractive yield in a high-interest rate environment.

But lower rates may make the stock market more attractive to investors looking to maximize growth. Because investors cannot get an attractive yield from lower-risk bonds in a low rate environment, they will put money into higher-risk assets like growth stocks to get an ideal return.

💡 Recommended: Bonds vs. Stocks: Understanding the Difference

When it comes to stock market sectors or industries, the most obvious beneficiary of higher interest rates would be financial services companies. That’s because higher interest rates would mean banks and other loan providers would earn more for the money that they lend out.

Protecting Your Investments From Higher Rates

Fortunately, there are strategies you can use to protect your portfolio – and possibly – add value to it, when interest rates change.

•  Monitor the Federal Reserve and its rates policy. The FOMC meets eight times a year to discuss economic policy strategy. Even if they don’t result in an interest rate change, announcements from the meetings can significantly impact the stock market.

•  Diversify your portfolio. Investors can aim to protect their assets by diversifying their portfolio up front. A portfolio with a mix of investments like stocks, bonds, real estate, commodities, and cash, for example, may be less sensitive to interest rate moves, thus minimizing the impact of any volatile interest rate fluctuations.

•  Look into TIPS. Investing in Treasury Inflation Protected Securities (TIPS) can fortify a portfolio against interest rate swings. TIPS are a form of Treasury bonds that are indexed to inflation. As inflation rises, TIPS tend to rise. When deflation is in play, TIPS are more likely to decrease.

How Interest Rates Affect Consumers

In a period of high interest rates, publicly-traded companies face a potential indirect threat to revenues, which could hurt stock prices.

That’s due to the reduced levels of disposable income in a high-rate environment. Higher rates make it more expensive for consumers to borrow money with credit cards, mortgages, or personal or small-business loans.

Consumers’ tighter grip on their pocketbooks may negatively affect companies, who find it more challenging to sell their products and services. With lower revenues, companies can’t reinvest in the company and may experience reduced earnings.

How Interest Rates Impact Companies

Businesses that are publicly traded can experience significant volatility depending on interest rate fluctuations. For instance, changes in interest rates can impact companies through bank loan availability.

When rates rise, companies may find it more difficult to borrow money, as higher interest rates make bank loans more expensive. As companies require capital to keep the lights on and products rolling, higher rates may slow capital borrowing, which can negatively impact productivity, cut revenues, and curb stock growth.

Correspondingly, companies can borrow money more freely in a lower interest rate environment, which puts them in a better position to raise capital, improve company profitability, and attract investors to buy their stock.

The Takeaway

Changes in interest rates can have far-reaching effects on the stock market. In general, higher interest rates tend to have a dampening impact on stocks, while lower interest rates tend to boost market prices. Higher interest rates effectively mean higher borrowing costs that can slow down the economy and companies’ balance sheets and drag down stock prices. Additionally, higher interest rates can boost the appeal of bonds relative to equities, which also acts as a drag on stocks.

But changes in interest rates don’t have to be daunting. If you want to create a well-diversified portfolio, SoFi can help. With a SoFi Invest® investment account, you can trade stocks, exchange-traded funds (ETFs), and fractional shares with no commissions for as little as $5.

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

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Nov
01
2022
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How Marriage Can Affect Your Student Loan Payments

By | Family Finances, Life & Career, Student Loans, student_loan | No Comments

Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Your marriage status can affect your financial life in unexpected ways, and student loans are no exception. If you have an income-driven repayment plan, your spouse’s income might change your monthly payment calculation. But such challenges also present opportunities. For instance, you may be able to rejigger your student loan payments to save money on interest, lower your monthly payment, or shorten your repayment term so you can become debt-free faster.

Here we’ll show you how getting married affects student loans. Learn strategies for restructuring your debts, and tips for saving money that you can put toward other goals.

Marriage and Student Loan Repayments

Your marital status can affect everything from loan payments to tax breaks. Understanding how marriage impacts student loans (yours or your partner’s) can help you craft a new repayment plan and get ahead of your other financial goals. That way, you can focus on more urgent matters, like who’s making dinner tonight.

How Marriage and Student Loans Can Affect Your Taxes

If you paid student loan interest in the previous tax year, you may qualify for a student loan deduction. But your eligibility can change depending on if you are filing jointly or separately.

According to the IRS, as of the 2021 tax year, a single person (or head of household) with a modified adjusted gross income (MAGI) under $85,000 may be able to deduct up to $2,500 of qualified student loan interest paid in a given year. (Eligible MAGI for married filing jointly for this deduction is under $170,000.)

However, if you’re married but filing separately, that student loan interest deduction goes away. You can only take advantage if you file jointly. (See below for other deductions you may not qualify for if filing separately.)

Helping Each Other with Repayments

If you want to help your spouse with their student loan repayment, whether they have private or federal loans, you can. When one spouse takes out a loan before the marriage, typically that loan still belongs to the original borrower. However, you can choose to put both your names on the loan, and be equally responsible for the debt, by refinancing together.

Refinancing student loans gets you a brand-new loan in both your names. At the same time, you may be able to qualify for a lower interest rate or better terms. However, you will forfeit your federal student loan benefits if you refinance federal loans with a private lender.

Marriage Could Complicate Your Income-Driven Repayment Plan

When you’re married and filing separately (vs. jointly), student loan servicers count only your individual income. But if you file jointly and you or your spouse is enrolled in the Revised Pay As You Earn (REPAYE) plan — one of four income-driven repayment plans — you could see your monthly payments increase. When filing your taxes jointly, your combined AGI replaces your individual income in REPAYE’s calculations.

For the three other income-driven repayment plans — Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR) — you can potentially avoid higher payments by filing separately. However, when you do this you lose the ability to use the student loan interest deduction.

Filing separately also means you’ll no longer be able to qualify for the Earned Income Tax Credit, the American Opportunity Credit, and Lifetime Learning Credit. There is no one blanket answer for every married couple. Given the complexity of tax law, you’ll want to consult a tax professional to determine which option is best for you both.

Tips for Tackling Student Loan Debt Together

So what’s the best strategy for paying down student loans without letting them come between you and your spouse? Here are five tips to a debt-free happily ever after.

Tip #1: Create Your Big Financial Picture

Preparing to take on a big financial goal usually requires some conversation and preparation upfront. Before making any decisions, sit down and talk about your short- and long-term financial objectives, and make sure you’re both on the same page (or as close to it as possible). This can be an overwhelming topic, so see if you can break it down into chunks.

Have you established a household budget? How do student loans — and paying them off — fit into your long-term and short-term goals? Should you start aggressively paying off debt, or might it be better for you to ramp up over time? What other factors (e.g., buying a home, changing careers, having children) might influence your decisions?

Not only can this exercise give you more clarity to create an action plan, it can also be kind of fun. After all, planning a life together is part of the reason you got married in the first place. The key is to listen to each other.

Tip #2: Take Advantage of Technology

Once you’re clear on the big picture, it’s time to get into the weeds. Many people have more than one student loan, often with multiple lenders, so a good place to start is to gather all of your loan information together. You can use an online student loan management tool (try https://studentaid.gov/loan-simulator/) to compare repayment options and analyze prepayment strategies.

After crunching the numbers, your debt payoff strategy may include putting extra money toward your loans each month, which means creating and sticking to a budget that supports that goal.

Using a debt payoff planner can help you keep track of your debt payments, maintain spending within a budget, and show how close you are to paying off your debt in full. Tracking your spending may not feel good at first, but over time, this kind of discipline can help you see where your money goes and make conscious choices about your spending. Once you have your budget in place, these apps can be set up to alert you both when spending is getting off track.

Tip #3: Define the Who, What, When

Whether your finances are separate or combined, you’ll probably want to come to an agreement on how to collectively pay all of your financial obligations. Many couples address this based on each person’s share of the total household income.

For example, if one person contributes 40% of the household income, and the other 60%, the former might pay 40% of the shared bills and the latter 60%. Others find it simpler and more cohesive to have one household checking account and pay all bills from there. Or you can combine the two tactics, and have each spouse contribute a prorated amount to the joint bank account.

However you decide to split things up, consider setting up automatic payments for all household bills, because missed student loan payments can potentially impact both spouses’ credit. And a weak credit rating can make your future financial objectives tougher to achieve.

Tip #4: Look For Opportunities to Optimize

So now you’ve established a plan and a budget, and you know who’s on point for each bill. You’re on the path to getting student loan debt off your plate. Is there anything else you can do to speed up the process?

Short of winning the lottery, the most common ways to accelerate student loan payoff are prepayment (meaning, paying more than the minimum) or lowering the interest rate, the latter of which is most commonly accomplished through refinancing.

If you qualify to refinance your student loans, you’ll have to decide on your primary goal:

•   Lower your monthly payment by choosing a longer term. This frees up money in your budget, but you’ll potentially pay more in interest over the long term.

•   Lower your interest rate. This saves you money in interest over the long term. (It can also lower your monthly payment, but don’t count on it.)

•   Shorten the repayment period. This can save you money on interest over the life of the loan, and get you debt-free faster.

Tip #5: Be on the Same Team

Living with debt is stressful for any couple. But being in a committed relationship has its advantages. There’s a reason that weight loss experts often recommend finding a “buddy” to help cheer you on and keep you honest on your diet and exercise journey. The same applies to achieving a big financial goal like paying off student loan debt.

Keep it positive and the lines of communication open, and you may find that the journey to being debt-free makes your marriage stronger.

Refinancing Student Loans Separately vs. Jointly

If you and your new spouse decide you want to do more things with your money — have a child, buy a home, or invest more in retirement savings — it may be time to refinance student loans. Once again, you’ll need to run some numbers and decide whether to refinance your student loans together or separately.

When you apply to refinance your student loans, lenders typically evaluate your credit score and financial fitness. This determines your new interest rate and loan terms. The goal is for the new loan to be a better deal than your existing loans.

With a lower interest rate, you can reduce the amount of money you spend over the life of the loan. And with only one monthly student loan payment to worry about, your finances can be easier to manage.

But are you better off going it alone or together?

Refinancing Student Loans Separately

When you’re married, refinancing your student loans separately has pros and cons.

Advantages of refinancing separately Disadvantages of refinancing separately
You’re not responsible for anyone’s debts but your own. Financial responsibility may not be equitably distributed.
You can choose the loan you want, without compromise. If you hit a financial rough spot, you alone are on the hook for payments.
Your own credit score and history determine your interest rate and loan terms. If your credit score is weak, you’ll pay a higher interest rate.

Even if you’re married, refinancing student loans separately may be right for you if any of the following statements are true:

•   Your credit score and history are much stronger than your spouse’s, and you want to qualify for the lowest interest rate possible.

•   You and your spouse have different goals for refinancing — for instance, a lower monthly payment vs. saving money in interest.

•   Your spouse hopes to qualify for Public Service Loan Forgiveness (PSLF).

•   Your spouse is enrolled in an income-based repayment plan or is taking advantage of other federal repayment protections.

•   One of you has a much higher student loan balance, while the other has almost paid off their loans.

Refinancing Student Loans Jointly

On the other hand, there are compelling arguments for being married and refinancing student loans jointly.

Advantages of refinancing jointly Disadvantages of refinancing jointly
One of you is a stay-at-home parent who can’t qualify for refinancing alone. It can be difficult to get out of spousal consolidation if your relationship sours.
You want to simplify your student loans into one single payment. If your spouse dies before the loans are paid off, you’ll have to shoulder the burden alone (federal student loans are forgiven upon death only if held separately).
It’s possible you’ll both benefit from a lower interest rate than you’ll qualify for separately. There are few lenders who allow spousal consolidation of student loans.

Refinancing student loans jointly may be right for you given one of these scenarios:

•   Your credit score and history are much weaker than your spouse’s, and you can’t afford the interest rate and loan terms you qualify for alone.

•   You’re a stay-at-home parent with no earned income, making it difficult to qualify separately.

•   It’s important to both of you to be on the same team financially.

Refinance Student Loans With SoFi

For some couples, a lower interest rate can mean more flexibility and a more manageable repayment plan. After all, the average graduate holds 8-12 student loans. That gives married couples 16-24 different loan payments to make each month. Refinancing together can transform a student loan mess into a single, affordable payment.

To see how refinancing might impact your student loans and your partner’s, take a look at SoFi’s student loan refinance calculator. With SoFi, there are no application or origination fees, and no prepayment penalties.

Thinking about refinancing your student loans? Save thousands of dollars thanks to flexible terms and low fixed or variable rates.

FAQ

Does getting married affect student loan payments for you and your spouse?

If you or your spouse is enrolled in an income-driven repayment plan, you may see your payments increase after marriage. You can potentially avoid higher payments by filing your taxes separately. However, you’ll forfeit the ability to use the student loan interest deduction.

Is my spouse responsible for my student loans?

Loans taken out before the marriage still belong to the original borrower. Your spouse is not responsible for them unless they cosigned the loans with you. You can choose to put both your names on your loans, and be equally responsible for the debt, by refinancing together.

Does marriage affect financial aid?

Marriage typically has a positive effect on qualifying for financial aid. If you are under 24 and married, your parents’ income will no longer be considered in financial aid calculations, but your spouse’s will — this usually means your household income drops. However, if your spouse has significant income or assets, that can negatively affect your eligibility for financial aid.

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.

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.


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

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

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

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