There are plenty of reasons people don’t invest their money. Some of them are valid—for example, you probably shouldn’t invest a ton if you don’t have all of your high-interest credit card debt paid off. Or, if you’re planning to make a big purchase next year, you wouldn’t want to take the risk that comes with investing your savings.
But other reasons don’t quite make sense, and they’re often based on misconceptions about investing, or a lack of knowledge about the process. The truth is, if you have long-term financial goals, like buying a home, starting a business, or retiring someday, investing may get you there far more quickly than saving alone.
Here the most common reasons people drag their feet when it comes to investing—and why they might be holding you back.
Common Reasons People Avoid Investing
1. Saving Money in a Savings Account
Savings accounts pay you interest—but not a lot. The average savings account interest rate is only .01%, and the best rates out there hover around 1.7%. But, with the current inflation rate at 0.6%, all that money you’ve socked away in savings is actually losing money.
Yes, having money in savings is recommended for any cash you need to access immediately or don’t want to risk losing in the short-term. But for the rest of it? If you want it to grow, it may be a good idea to put it somewhere else.
2. Investing Later When They Have a Higher Salary
Let’s say you’re 25 years old and you hope to retire when you’re 65. (That may seem like forever, but ask any 65-year-old—it goes by in a flash.) If you save $5,500 a year and average 7% return per year (the average return on the S&P 500 from 1950-2009), you’d have a little over a million dollars.
If you wait until age 30 and do the same thing, you’d only have about $760,000. Start at age 40, and you’d only have about $348,000! If you’re reaching retirement age and want to have a million dollars before you retire, you’ll need to save much more each year to catch up to that goal. Want to see if you are on track? Consult SoFi’s article: Am I On Track For Retirement?
Many people think that it’ll be easier to save more when they’re older and making more money. And even if that is true, know that the earlier you start investing, the more time you have to weather the ups and downs of the market. Which brings us to:
3. Trying to Time the Market
It’s tempting to delay getting started because you think the market is too high, or you want to wait for stock prices to go down. The issue with that is, when the market does take a dip, most people fear it will go down more, so they continue to wait.
Few professional investors even try to time the market, and even fewer succeed. In reality, people who do try to time the market tend to buy at or near market tops and sell at or near market lows.
You might hear about the stock market going up or down by a number of points each day, and therefore assume it fluctuates too much for your taste. Market volatility is a reality, but there are ways to invest for every level of risk tolerance. Diversified retirement accounts, mutual funds, and ETFs, for example, all allow you to invest in a variety of assets in one fund.
Yes, financial crises have happened and chances are, they’ll happen again. But when you take a long-term view of our history, those crises are blips on the timeline.
Consider this: In the time period between 1929 and 2015 (when a whole lot of upswings and downturns happened), a diversified portfolio of 70% stocks and 30% bonds averaged 9.1% per year .
5. Investing is Intimidating
If you’re new to investing, it can be difficult to wrap your head around the concept. But the good news is, you don’t have to go at it alone.
A great place to start is investing for retirement in an employer-sponsored 401(k), an IRA, or (ideally) both.
Once you’re contributing the maximum possible to both of those accounts ($19,500 per year and $6,000 per year in 2020, respectively), you can consider opening a brokerage account, which lets you invest in stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs).
But you don’t even have to pick those investments yourself. A SoFi Invest® account makes it easy to get started. Our technology helps you set your financial goals and recommends the right investment strategy and level of risk to help you reach them within your desired time frame.
And our SoFi Invest Financial Planners help you plan for your future and answer any questions you have—absolutely free.
The bottom line: Investing is not just for the wealthy; it’s for anyone who wants to work toward achieving financial goals. Sounds like you? Well, it’s time to get started.
Not sure what the right investing account or investment strategy is for you? SoFi Invest financial planners are available to offer you complimentary, personalized advice. Consider working with a SoFi Invest advisor today.
Open an Invest Account today.
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.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
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.
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.
The bull put credit spread, also referred to as bull put spread or put credit spread, is an options trading strategy. In a bull put credit spread, an investor buys one put option and sells another. Each set of options has the same underlying security and the same expiration date, but a different strike (exercise) price. The strategy has limited upside and downside potential.
Investors employing a bull put credit spread receive a net credit from the difference in option premiums. The strategy seeks to profit from a modest increase in price of the underlying asset before the expiration date. The trade will also benefit from time decay or a decline in implied volatility.
In a bull put credit spread, the investor uses put options, which give the investor the right – but not the obligation – to sell a security at a given price during a set period of time. For that reason, they’re typically used by investors who want to bet that a stock will go down.
To construct a bull put credit spread, a trader first sells a put option at a given strike price and expiration date, receiving the premium (a credit) for the sale. This option is known as the short leg.
At the same time, the trader buys a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg, since the lower strike put is further out-of-the money. Thus, the trader receives a net credit for setting up the trade.
The difference between the strike prices of the two sets of options is known as the “spread,” giving the strategy its name. The “credit” in the name comes from the fact that the trader receives a net premium upfront.
In a properly executed bull put credit spread strategy, as long as the value of the underlying security remains above a certain level, the strategy produces a profit as the difference in value between the two sets of options diminish. This reduction in the “spread” between the two put options reflects time decay, a dynamic by which the value of an options contract declines as that contract grows closer to its expiration date.
As the “bull” in the name indicates, the strategy’s users believe that the value of the underlying security will go up before the options used in the strategy expire. For bull put credit spread investors, the more the value of the underlying security goes up during the life of the strategy, the better their returns, although there’s a cap on the total profit an investor can receive.
If the underlying security drops under the long-put strike price, then the options trader can lose money on the strategy.
Maximum Gain, Loss, and Break-Even of a Bull Put Credit Spread
Investors in a bull put credit spread strategy make money when the value of the underlying security of the options goes up, but the trade comes with limited loss and gain potential. The short put gives the investor a credit, but caps the potential upside of the trade. And the purpose of the long put position – which the investor purchases – protects against loss.
The maximum gain on a bull put credit spread will be obtained when the price of the underlying security is at or above the strike price of the short put. In this case, both put options are out-of-the-money, and expire worthless, so the trader keeps the full net premium received when the trade was initiated.
The maximum loss will be reached when the price of the underlying security falls below the strike price of the long put (lower strike). Both put options would be in-the-money, and the loss (at expiration) will be equal to the spread (the difference in the two strike prices) less the net premium received.
The breakeven is equal to the strike price of short put (higher strike) minus net premium received.
Example of a Bull Put Credit Spread
Here’s an example of how trading a bull put credit spread can work:
Bob, a qualified investor, thinks that the price of XYZ stock may increase modestly or hold at its current price of $50 over the next 30 days. He chooses to initiate a bull put credit spread.
Bob sells a put option with a strike price of $50 for a premium of $3, and buys a put option with a strike price of $45 for a premium of $1, both expiring in 30 days. He earns a net credit of $2, the difference in premiums. And because one options contract controls 100 shares of the underlying asset, the total credit received is $200.
Scenario 1: Maximum Profit
The best case scenario for Bob is that the price of XYZ is at or above $50 on expiration day. Both put options expire worthless, and the maximum profit is reached. His total gain is $200, equal to $3 – $1 = $2 x 100 shares, less any commissions. Once the price of XYZ is above $50, the higher strike price, the trade ceases to gain additional profit.
Scenario 2: Maximum Loss
The worst case scenario for Bob is that the price of XYZ is below $45 on expiration day. The maximum loss would be reached, which is equal to $300, plus any commissions. That’s because $500 ($50 – $45 x 100) minus the $200 net credit received is $300. Once the price of XYZ is below $45, the trade ceases to lose any more money.
Scenario 3: Breakeven
Suppose that on expiration day, XYZ trades at $48. The long put, with a strike of $45, is out-of-the-money, and expires worthless, but the short put is in-the-money by $2. The loss on this option is equal to $200 ($2 x 100 shares), which is offset by the $200 credit received. Bob breaks even, as the profit and loss net out to $0.
Related Strategies: Bear Put Debit Spread
The opposite of the bull put credit spread is the bear put debit spread, also known as a put debit spread or bear put spread. In a bear put spread, the investor buys a put option at one strike price and sells a put option at a lower strike price – essentially swapping the order of the bull put credit spread. While this sounds similar to the bull put spread, the construction of the bear put spread results in two key differences.
First, the bear put spread, as its name implies, represents a “bearish” bet on the underlying security. The trade will tend to profit if the price of the underlying declines.
Second, the bear put spread is a “debit” transaction – the trader will pay a net premium to enter it, since the premium for the long leg (the higher strike price option) will be more than the premium on the short leg (the lower strike price option).
Bull Put Credit Spread Pros and Cons
There are benefits and drawbacks to using bull put credit spreads when investing.
Pros
Here are the advantages to using a bull put credit spread:
• The inevitable time decay of options improves the probability that the trade will be profitable.
• Bull put credit spread traders can still make a profit if the underlying stock price drops by a relatively small amount.
• The timing and strategy for exiting the position are built into the initial trades.
Cons
In addition to the benefits, there are also some disadvantages when considering a bull put strategy.
• The profit potential in a put credit spread is limited, and may be lower than the return if the investor had simply purchased the security outright.
• On average, the maximum loss in the strategy is larger than the maximum gain.
• Options strategies are more complicated than some other forms of investing, making it difficult for beginner investors to engage.
The Takeaway
Bull put credit spreads are bullish options trading strategies, where the investor sells one put option and buys another with a lower strike price. That investor can make money when the value of the underlying security of the options goes up, but the trade comes with limited loss and gain potential.
If you’re ready to start trading options, check out SoFi’s options trading platform. It’s user-friendly, thanks to the platform’s intuitive design, and it offers a library of educational resources about options. Investors can continue to read up on options through the available library of educational resources.
Trade options with low fees through SoFi.
Photo credit: iStock/Ridofranz
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.
SOIN0921377
Exchange-traded funds or ETFs generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager.
The goal of an active manager is to outperform a certain market index, which they use as a benchmark for their portfolio. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.
There are two types of actively managed ETFs: transparent and non-transparent. Active non-transparent ETFs are a new option that was introduced in 2019; these funds are sometimes called ANTs.
Keep reading to learn more about the distinction among different ETFs, the pros and cons, and whether investing in actively managed ETFs makes sense for you.
Actively managed ETFs employ a portfolio manager and typically a team of analysts who do market research and make decisions to buy, hold, or sell the assets held within the fund. Most ETFs are designed to reflect a certain market sector or niche. They typically measure their success by using a known index as their benchmark.
For example, a technology ETF would be invested in tech companies and potentially use the Nasdaq composite index as a benchmark to measure its performance.
Despite the fact that passive (or index) ETFs strategies predominate in the industry — index ETFs represent roughly 98% of the ETF market — active strategies are gaining ground. That said, it has been historically quite difficult for active fund managers to beat their benchmarks.
Actively managed transparent and non-transparent ETFs are similar to traditional (i.e. index) ETFs. You can trade them on stock exchanges throughout the day, and investors can buy and sell in amounts as small as a single share. Broad availability and low investment minimums are an advantage that ANTs (and ETFs more generally) boast over many mutual funds.
Actively managed transparent ETFs
When exchange-traded funds first appeared some 20 years ago, only passive ETFs were allowed by the Securities and Exchange Commission (SEC). In 2008, though, the SEC introduced a streamlined approval process that allowed for a type of actively managed ETF called transparent ETFs. These funds were required to disclose their holdings on a daily basis, similar to passive ETFs. Investors would then know exactly which securities were being traded within the fund.
Many active fund managers, however, didn’t want to reveal their trading strategies on a daily basis — which is one reason why there have been fewer actively managed ETFs vs. index ETFs to date.
Non-transparent or semi-transparent ETFs
In 2019, another rule change from the SEC permitted an active ETF structure that would be partially instead of fully transparent. Under this new rule, an active ETF manager would be allowed to either reveal the constituents of their portfolio less often (e.g. quarterly, like actively managed mutual funds), or communicate their holdings more obliquely, by using various accounting methods like proxy securities or weightings.
The SEC ruling opened up a new channel for active managers, and since then the number of actively managed ETFs has grown. According to Barron’s, in just the past two years the number of actively managed ETFs has more than doubled. Nearly 60% of the ETFs launched in 2020 and 2021 were actively managed — more than all the actively managed ETFs established in the past decade.
From an investor’s perspective, the most noticeable difference between these two kinds of actively managed ETFs — transparent vs. non-transparent — would be the frequency with which these funds disclose their holdings. Both types of ETFs trade on exchanges at prices that change constantly during trading days; both rely on a team of managers to select and trade securities.
Index ETFs vs Active ETFs
So what is the difference between index ETFs and actively managed ETFs? It’s essentially the same difference that exists between index mutual funds and actively managed mutual funds.
How do index ETFs work?
Index ETFs, also called passive ETFs, track a specific market index. A market index is a compilation of securities that represent a certain sector of the market; indexes (or indices) are frequently used to gauge the health of certain industries, or as broader economic indicators. There are thousands of indexes that represent the equity markets alone, and Well-known indexes include the S&P 500®, an index of 500 of the biggest U.S. companies by market capitalization, as well as the Russell 2000, an index of small- to mid-cap companies, and many more.
Because index ETFs simply track a market sector via its index, there is no need for an active, hands-on manager. As a result the cost of these funds is typically lower than actively managed ETFs, and many active and passive mutual funds as well.
How do actively managed ETFs work?
Actively managed ETFs, often called active ETFs, rely on a portfolio manager and a team of analysts to invest in companies that also reflect a certain market sector. But these funds are not tied to the securities in any given index. The ETF manager invests in their own selection of securities, but often uses an index as a benchmark to gauge the success of their strategies.
Transparent actively managed ETFs must reveal their holdings each day.
Actively managed non-transparent ETFs, or ANTs, aren’t required to disclose their holdings on a daily basis. This protects asset managers’ strategies from potential “front-runners” — traders or portfolio managers that try to anticipate their trades. By and large, the cost of these funds is lower than transparent ETFs, and also lower than actively managed mutual funds.
Mutual Funds vs Actively Managed ETFs
All mutual funds and exchange-traded funds are examples of pooled investment strategies, where the fund bundles together a portfolio of securities to offer investors greater diversification than they could achieve on their own. In addition to the potential benefits of diversification, which may mitigate some risk factors, the pooled fund concept also creates economies of scale which helps fund managers keep transaction costs low.
That said, the structure or wrapper of mutual funds vs. passive and active ETFs, is quite different.
Fund structure
Although a mutual fund invests directly in securities, ETFs do not. With both active and passive ETFs, the fund creates and redeems shares on an in-kind basis. So when investors buy and sell ETF shares, the portfolio manager gives or receives a basket of securities from an authorized participant, or third party, which generates the ETF shares.
By comparison, mutual fund shares are fixed. You can’t create more of them based on demand. But you can with an ETF, thanks to the “in-kind” creation and redemption of shares. This means that ETF fund flows don’t create the same trading costs that might impact long-term investors in a mutual fund. And fund outflows don’t require the portfolio manager to sell appreciated positions, and thus minimize capital gains distributions to shareholders.
Pricing
The price of mutual fund shares is calculated once a day, at the end of the day, and is based on a fund’s net asset value (NAV). Investors who place a trade must wait until the NAV is calculated because most standard open-end mutual funds can only be bought and sold at their NAV.
ETFs, by contrast, are traded like stocks throughout the day. And because of the way ETF shares are created and redeemed, the NAV can vary, creating a wider or tighter bid-ask spread, depending on volume.
Fees
The expense ratio of mutual funds includes management fees, operational expenses, and 12b-1 fees. These 12b-1 fees are a type of marketing and distribution fee that don’t apply to ETFs, which trade on stock exchanges.
Thus the expense ratio for most ETFs, including actively managed ETFs, can be lower than mutual funds.
Pros and Cons of Actively Managed ETFs
As with any investment vehicle, these funds have their pros and cons.
Pros
Potentially for higher returns
One advantage of an actively managed ETF is the potential for gains that could exceed market returns. While very few investment management teams beat the market, those who do tend to produce outsize gains over a short period.
Greater flexibility and liquidity
Active ETFs could also provide greater flexibility amid market turbulence. When world events rattle financial markets, passive investors can’t do much other than go along for the ride.
A fund with active managers might be able to adjust to changing market conditions, however. Portfolio managers could be able to rebalance investments according to current trends, reducing losses, or even profiting from panics and selloffs.
Like passive ETFs, active funds also trade throughout the day (as opposed to some mutual funds who only have their price adjusted once daily), allowing investors the opportunity to do things like short shares of the fund or buy them on margin.
Cons
Higher expense ratios
One disadvantage of investing in an actively managed ETF is the potentially higher expense ratio. Active funds, whether ETFs or mutual funds, tend to have higher expense ratios. The costs associated with paying a professional or entire team of professionals combined with the fees that result from additional buying/selling of investments typically adds up to higher costs over time.
Each purchase or sale might come with a brokerage fee, especially if the securities are foreign-based. These costs exceed those of passive funds, resulting in higher expense ratios.
Performance factors
While active ETFs aim to provide higher returns, most of them don’t. It’s a widely known fact in the investment world that the majority of actively managed funds (as well as most individual investors) do not outperform the market over the long term.
So, while an active ETF may have the potential for greater returns, the risk of lower returns, or even losses, can also be greater. The chances of choosing an active fund that fails to outperform its benchmark are greater than the odds of choosing one that succeeds.
Bid-ask spread
The bid-ask spread of ETFs can vary, and while it’s more beneficial to invest in an ETF with a tighter bid-ask spread, that depends on market factors and the liquidity and trading volume of the fund. To minimize costs, it’s wise for investors to be aware of the bid-ask spread.
Investing in Actively Managed ETFs
Once an investor opens an account at their chosen brokerage, they can begin buying shares or fractional shares of actively managed ETFs.
Historically, brokerages have required investors to buy a minimum of one share of any security, so the minimum investment will most often be the current price of one share of the ETF plus any commissions and fees (many brokerages eliminated fees for buying or selling shares of domestic stocks and ETFs in 2019).
Some brokerages like SoFi Invest® now offer fractional shares, which allow for investors to purchase quantities of stock smaller than one share. This option may appeal to those looking to get started investing with a small amount of money.
It’s important to note that many ETFs pay dividends, which are payouts from the stocks held in the fund. Investors can choose to have their dividends deposited directly into their accounts as cash or automatically reinvested through a dividend reinvestment program (DRIP).
Investors with a long-term plan in mind might do well to take advantage of a DRIP, as it allows for gains to grow exponentially. For those only looking for income, DRIP might defeat the purpose of holding securities that yield dividends, however.
The Takeaway
Like mutual funds, exchange-traded funds or ETFs are considered pooled investments and generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.
Although actively managed ETFs make up only about 2% of the ETF universe, owing to regulatory changes in recent years this category has been growing. In fact there are now two types of actively managed ETFs: transparent and non-transparent. These funds offer investors the potential upside of active management, with the lower cost, tax-efficiency, and accessibility associated with ETFs. If you’re curious about actively managed ETFs, you can explore these products by opening an account with SoFi Invest®.
Learn more about investing with SoFi.
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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
Cryptocurrency is a fast-moving space with new technologies and names arising on a daily basis. One of the largest and more polarizing subjects in the space is Ripple XRP, a private-company-founded platform and cryptocurrency launched in 2012. It has gained notoriety for its unique founding, structure, and operations.
Ardent supporters back its real-world adoption and growth potential. Dissenters contend that because of many of these same factors, it’s philosophically misaligned with cryptocurrency ideals and fundamentals.
Despite these contentions, Ripple XRP has grown to become a household name in cryptocurrency. Here’s everything you need to know about this cryptocurrency, and how to invest in it.
What Is Ripple?
Ripple is both a currency-exchange system designed to allow fast and low-cost transactions, and a cryptocurrency in its own right. Ripple’s primary goal is to connect financial institutions, payment providers, and digital asset exchanges to provide faster and cheaper global payments.
Created in 2012 by Jed McCaleb and Chris Larsen, Ripple is perhaps better known for its open-source, peer-to-peer decentralized platform, RippleNet, which enables money to be transferred globally in any fiat or cryptocurrency denomination between financial institutions.
Ripple makes some improvements on common shortfalls associated with traditional banks. Transactions on the Ripple Network are settled in seconds even under the regular stress of millions of transactions. Compare this to banks’ wire transfers which typically can take days to weeks to complete and can cost anywhere from $15 to $30 or more if sending or receiving internationally. Fees on Ripple vary based on the transaction size but overall are minimal, with the minimum cost for a standard transaction at 0.00001 XRP.
Whereas top cryptocurrencies like Bitcoin, Ethereum, and Litecoin are designed to be used primarily by individuals, Ripple’s system is designed to be adopted by banks, funds, and institutions.
What Is XRP?
XRP is the currency issued and managed by Ripple (though users can also create their own currency on the platform). Ripple began selling XRP in 2012 to fund company operations, allowing its users to buy cryptocurrency, though it has taken a backseat to the company’s primary objective of developing RippleNet.
Throughout Ripple’s lifespan, leadership has reframed how XRP fits into the company’s business model, originally proclaiming it as the fuel on which its borderless payments technology runs, and later as a more efficient medium of exchange than Bitcoin.
XRP tokens represent the transfer of value across the Ripple network and can be traded on the open cryptocurrency market by anyone. Unlike Bitcoin’s popular store-of-value narrative use-case, XRP is primarily used for payments and borderless currency exchange. While Ripple’s centralized infrastructure concerns some in the cryptocurrency space, its fast transaction speeds, low transaction costs, and low energy usage provide superior performance as a medium of exchange compared to many blockchain-based cryptocurrencies.
(Need a crash course on crypto before you can read any further? Check out our guide to cryptocurrency.)
What is the XRP Price?
At the time of reporting, the XRP price is $0.474494. It’s all-time high was $3.8419 in January 2018. It went as low as $.0041 in November 2015.
How Does Ripple Work?
There are two main technologies to be aware of when it comes to Ripple and XRP. Specifically, the XRP ledger (XRPL) and the Ripple Protocol Consensus Algorithm (RPCA). Here’s how they work.
XRP Ledger (XRPL)
RippleNet is built on top of its own blockchain-like distributed ledger database, XRP Ledger (XRPL), which stores accounting information of network participants and matches exchanges among multiple currency pairs. The transaction ledger is maintained by a committee of validators who act like miners and full-node operators to reach consensus in three to five seconds—versus Bitcoin’s 10 minutes. Because there are no miners competing to confirm transactions for block rewards, validators verify transactions for no monetary reward.
Anyone can become an XRP validator, but in order to gain trust and be used by others on the network, validators must make Ripple’s unique node list (UNL), deeming them a trusted Ripple validator. These centralized validators are critical to prevent double-spending and censorship of transactions. There are only 35 active XRP validators; six are run by Ripple.
Ripple Protocol Consensus Algorithm (RPCA)
XRP’s design is predicated on speed and cost, as opposed to decentralization. Unlike different types of cryptocurrency like Bitcoin and Ethereum, which are built on the blockchain and validated by miners through the Proof of Work consensus mechanism, Ripple confirms transactions through its own consensus mechanism, the Ripple Protocol Consensus Algorithm (RPCA).
By avoiding Proof of Work’s energy-intensive mining, Ripple transactions require less energy than Bitcoin or Ethereum, are confirmed faster, and cost less. However, this speed is ultimately achieved because of XRP’s centralized infrastructure, which some argue makes the network less secure, censorship-resistant, and permissionless than open-source blockchain networks.
Ripple Cryptocurrency Token Supply
Unlike many other cryptocurrencies, XRP is not mined. The token’s entire supply was created when the network first launched in 2012 and Ripple executives intermittently tap into an escrow to release segments of the supply to sell on the open market.
In other words, unlike Bitcoin’s decentralized economy, XRP’s supply and issuance is centralized and governed by a few authorities. Because the total supply already exists, no more will be created into existence, thus making XRP fixed in quantity and not inflationary.
As of January 2021, only 45 billion XRP tokens are in circulation, out of the maximum total 100 billion. Due to the vast circulating supply, XRP has had one of the largest market caps of any cryptocurrency, even briefly eclipsing that of Ethereum’s second-largest cap late in the 2017-2018 bull market.
Ripple Crypto and Regulatory Trouble
In late 2020, Ripple became the target of an SEC investigation . The regulatory body determined that Ripple Labs Inc. and two of its executives, Co-Founder Chris Larsen and CEO Bradley Garlinghouse, had raised over $1.3 billion through an “unregistered, ongoing digital asset securities offering” to finance the company’s operations. Consistent with recent cryptocurrency rules set by the SEC, Ripple’s leaders were charged with unlawful issuance of securities in the form of sales of its XRP token, raising questions about compliance with cryptocurrency taxes.
The XRP price crashed amid the fallout, from over $0.60 to under $0.30, as prominent crypto exchanges began delisting the token and Ripple executives, including Founder Jed McCaleb, sold off personal XRP holdings worth millions.
Is Ripple a Good Investment?
Though XRP has been impacted by Ripple’s legal blow, XRP is an independent token that can and does function somewhat outside of Ripple’s business model. The crash in price and soured fundamental outlook may not paint a bright picture of XRP as an investment to some. Whether XRP recovers and continues to evolve with the rest of the crypto herd remains to be seen, but as investors look for value in undervalued assets, it doesn’t hurt to do further research and form an educated conclusion.
Pros and Cons of Ripple XRP
Because Ripple is different in some ways from other cryptocurrencies, it makes sense to review its perceived pros and cons before making any investing decisions.
Pros of Ripple XRP
• Fast speeds
• Low fees
• Interest/tentative adoption by financial institutions
Cons of Ripple XRP
• Centralized infrastructure, governance, issuance
• Corruptible validators
• Unsupported by many exchanges
How to Invest in XRP
To start investing in Ripple, you first need to join a crypto exchange. Signing up for an account could include different verification processes, depending on the exchange. Once you’re signed up, you’re ready to trade or buy Ripple XRP. You can trade any current crypto you own, or you can buy a major cryptocurrency like Bitcoin or Ethereum and then use that to buy Ripple XRP.
The Takeaway
Ripple XRP is a global digital payments system that sacrifices decentralization for performance. The network and technology is owned and at least partly run by Ripple, the private company, which controls the underlying infrastructure, supply, and some of the limited network validators. While Ripple strays from the conventional decentralization model adopted by leading cryptos Bitcoin and Ethereum, it conforms to some degree through its own specially — designed infrastructure.
Although Ripple’s primary goal is providing a borderless payments and currency exchange gateway for financial institutions, its native cryptocurrency XRP has taken on a life of its own and is actively traded and analyzed by investors. With high-ranking metrics such as fast and inexpensive transactions, some investors argue XRP is a strong competitor to large cryptocurrency blockchains such as Bitcoin and Ethereum. Conversely, Ripple XRP’s centralization has been a major philosophical and security concern for others — including US regulatory bodies.
Cryptocurrency is an exciting new technology that’s disrupting money as we know it. With SoFi Invest®, members can trade some of the most popular cryptocurrencies, like Bitcoin, Ethereum, Cardano, Dogecoin, and Litecoin.
Find out how to invest in cryptocurrencies with SoFi Invest.
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Options spreads are multi-legged trading strategies used to limit risk while also capturing the potential for profits. Traders using an option spread simultaneously buy multiple options with the same underlying asset with different strike prices, different expiration dates, or both.
Understanding options spreads can help you decide whether these strategies will work for your portfolio, and which one to use in a given situation.
Credit and Debit Spreads
The difference between credit spread options and debit spreads is that an options trader sells one (credit), and buys the other (debit). When a trader sells an option, they receive a premium (a credit) to their account. Conversely, when they buy an option, they pay a premium to open the position, resulting in a debit to their account.
In options spread strategies, the trader buys and sells multiple options pegged to the same underlying asset or security. The type of options that the trader buys and sells are all of the same type (i.e., they’re all call options or put options), and they either have different strike prices or expiration dates.
There are several different types of option spreads. Here’s a look at a few common ones:
1. Vertical Spread Options
A vertical spread is an options strategy in which the options have the same expiration date but different strike prices. There are four types of vertical spread options that investors use depending on whether they are bullish or bearish and whether the spread is a debit or credit.
Bull Call Spreads
A bull call spread strategy involves buying a call option, and then also selling another call at a higher strike price. The call spread options have the same underlying asset and expiration date.
Investors using this bull spread options strategy anticipate an increase in the value of the underlying asset. With this strategy, a trader caps their potential losses to the net premium they paid for the options (essentially hedging their risk). Their maximum gain is capped at the differences in strike prices, minus the net premium paid.
For example, a trader buys a call option on Stock X at a strike price of $10, for a premium of $2. They also sell a call option with an identical expiration date at a strike price of $12, receiving a premium of $1. This is referred to as a “debit” spread, as the trader pays a net premium (of $1 in this case) to buy into their position.
Bear Call Spreads
The opposite of a bull call spread, a bear call spread benefits when the underlying asset’s value decreases. If we stick with Stock X from our previous example, a trader using a bear call spread would anticipate that Stock X’s value is going to decrease.
As such, the trader sets up the spread by selling a call option, and buying another call option at a higher strike price—the inverse of the bull call spread method. This is a “credit” spread,, so the trader can not gain more than the net premium the trader received for the position. Their potential loss is capped at the differences in strike prices.
Example: A trader sells a call option on Stock X at a strike price of $10, and buys another call at a strike price of $12.
Bull Put Spreads
A bull put spread is similar to a bull call spread, but it involves puts rather than calls. Using a bull put spread, a trader anticipates an increase in the underlying asset’s value. In our example, the trader would sell a put option at a strike price of $10, and simultaneously buy another at a lower strike price, say, $8.
The trader can not lose more than the difference between the strike prices or gain more than the premium received.
Bear Put Spreads
A bear put spread is the inverse of a bull put spread. In our example, the trader would buy one put option at a $10 strike price, and simultaneously sell another put at a lower strike price, like $8.
The trader can not lose more than the net premium the trader paid to take the position (again, because this is a “debit” spread) or gain more than the difference in strike prices.
2. Horizontal Spreads
Horizontal spreads (also called “calendar spread options”) involve options with the same underlying asset, the same strike prices, but different expiration dates. The main goal of this strategy is to generate income from the time decay effects, or volatility of the two options.
There are also two main types of horizontal spreads.
Call Horizontal Spreads
A call horizontal spread is a strategy which a trader would employ if they believe that the underlying asset’s price would hold steady. In this case, the trader would buy a call with an expiration date on January 15th, for example, and sell another call with a different expiration date, like January 30th.
The trader can also reverse these positions, by selling a call option that expires on January 15th, and selling another that expires on January 30th. The two positions with differing expiration dates act as buffers, reigning in potential losses (the premium paid) and gains.
Put Horizontal Spreads
Put horizontal spreads similar to call horizontal spreads, except that traders utilize puts instead of calls.
3. Diagonal Spreads
Finally, we have diagonal spreads, which incorporate elements from both vertical and horizontal spread strategies. That is, diagonal spreads involve the same option types and underlying asset (the same as before), but with differing strike prices and differing expiration dates.
Diagonal spreads—with different strike prices and expiration dates—allow for numerous combinations of options, making them a fairly advanced strategy. They can be bearish, and bullish for example, while also using calls or puts, with different time horizons (long or short).
Other Options Spreads
While we’ve covered the main types of options spread strategies, there are a few more you may run into.
Butterfly Spread Options
A butterfly spread incorporates multiple strike prices, and can utilize either calls or puts. It also combines a bull and bear spread across four different options.
An example would be a trader buying a call at a certain strike price, selling two more calls at a higher strike price, and then buying another call at yet an even higher strike price—of equal “distance,” or value, from the two central calls. This results in a cap on losses and gains, with the trader realizing gains depending on volatility levels of the underlying asset.
Box Spread Options
A box spread option strategy involves a bear put and a bull call with identical strike prices and expiration dates. Under very specific circumstances, traders can use the strategy to create profitable arbitrage opportunities.
The Takeaway
There are several different options spreads strategies that traders use to limit their losses and achieve potential gains based on their projections about the price of a specific asset. Options strategies can get complicated, but you don’t need to invest in derivatives in order to build a portfolio.
Whether you’d rather start slow or dive into derivatives, a user-friendly options trading platform like SoFi can help in your investing journey. SoFi’s platform offers an intuitive design and access to educational resources about options. You’ll have the ability to trade from either the mobile app or web platform.
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Photo credit: iStock/damircudic
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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