Financial Topics Archives | Page 746 of 791

Jan

2022

What is Delta in Options Trading?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

In options trading, Delta is an important assessment tool used to measure risk sensitivity. Delta is a risk metric that compares changes in a derivative’s underlying asset price to the change in the price of the derivative itself.

Essentially it measures the sensitivity of a derivative’s price to a change in the underlying asset. Using Delta as part of an options assessment can help investors make better trades.

Delta is one of “the Greeks,” a set of options trading tools denoted by Greek letters. Some traders might refer to the Greeks as risk sensitivities, risk measures,or hedge parameters. The Delta metric is the most commonly used Greek.

Recommended: A Beginner’s Guide to Options Trading

Option Delta Formula

Analysts calculate Delta using the following formula with theoretical pricing models:

Δ = ∂V / ∂S

Where:

• ∂ = the first derivative

• V = the option’s price (theoretical value)

• S = the underlying asset’s price

Some analysts may calculate Delta with the much more complex Black-Sholes model that incorporates additional factors. But traders generally don’t calculate the formula themselves, as trading software and exchanges do it automatically. Traders analyze these calculations to look for investment opportunities.

Option Delta Example

For each $1 that an underlying stock moves, an the equity derivative’s price changes by the Delta amount. Investors express the Delta sensitivity metric in basis points. For example, let’s say there is a long call option with a delta of 0.40. Investors would refer to this as “40 delta.” If the option’s underlying asset increased in price by $1.00, the option price would increase by $0.40.

However, the Delta amount is always changing, so the option price won’t always move by the same amount in relation to the underlying asset price. Various factors impact Delta, including asset volatility, asset price, and time until expiration.

If the price of the underlying asset increases, the Delta gets closer to 1.0 and a call option increases in value. Conversely, a put option becomes more valuable if the asset price goes lower than the strike price, and in this case Delta is negative.

How to Interpret Delta

Delta is a ratio that compares changes in the price of derivatives and their underlying assets. It uses theoretical price movements to track what will happen with changes in asset and option price. The direction of price movements will determine whether the ratio is positive or negative.

Bullish options strategies have a positive Delta, and bearish strategies have a negative Delta. It’s important to remember that unlike stocks, options buying and selling options does not indicate a bullish or bearish strategy. Sometimes buying a put option is a bearish strategy, and vice versa.

Recommended: Differences Between Options and Stocks

Traders use the Delta to gain an understanding of whether an option will expire in the money or not. The more an option is in the money, the further the Delta value will deviate from 0, towards either 1 or -1.

The more an option goes out of the money, the closer the Delta value gets to 0. Higher Delta means higher sensitivity. An option with a 0.9 Delta, for example, will change more if the underlying asset price changes than an option with a 0.10 Delta. If an option is at the money, the underlying asset price is the same as the strike price, so there is a 50% chance that the option will expire in the money or out of the money.

Call Options

For call options, delta is positive if the derivative’s underlying asset increases in price. Delta’s value in points ranges from 0 to 1. When a call option is at the money the Delta is near 0.50, meaning it has an equal likelihood of increasing or decreasing before the expiration date.

Put Options

For put options, if the underlying asset increases in price then delta is negative. Delta’s value in points ranges from 0 to -1. When a put option is at the money the Delta is near -0.50.

How Traders Use Delta

In addition to assessing option sensitivity, traders look to Delta as a probability that an option will end up in or out of the money. The more likely an option is to generate a profit, the less risky it is as an investment.

Every investor has their own risk tolerance, so some might be more willing to take on a risky investment if it has a greater potential reward. When considering Delta, traders recognize that the closer it is to 1 or -1 to greater exposure they have to the underlying asset.

If a long call has a Delta of 0.40, it essentially has a 40% chance of expiring in the money. So if a long call option has a strike price of $30, the owner has the right to buy the stock for $30 before the expiration date. There is a 40% chance that the stock’s price will increase to at least $30 before the option contract expires.

Traders also use Delta to put together options spread strategies.

Delta Neutral

Traders also use Delta to hedge against risk. One common options trading strategy, known as neutral Delta, is to hold several options with a collective Delta near 0.

The strategy reduces the risk of the overall portfolio of options. If the underlying asset price moves, it will have a smaller impact on the total portfolio of options than if a trader only held one or two options.

One example of this is a calendar spread strategy, in which traders use options with various expiration dates in order to get to Delta neutral.

Delta Spread

With a Delta spread strategy, traders buy and sell various options to create a portfolio that offsets so the overall Delta is near zero. With this strategy the trader hopes to make a small profit off of some of the options in the portfolio.

Using Delta Along With the other Greeks

Delta measures an option’s directional exposure. It is just one of the Greek measurement tools that traders use to assess options. There are five Greeks that work together to give traders a comprehensive understanding of an option. The Greeks are:

• Delta (Δ): Measures the sensitivity between an option price and the price of the underlying security.

• Gamma (Γ): Measures the rate at which Delta is changing.

• Theta (θ): Measures the time decay of an option. Options become less valuable as the expiration date gets closer.

• Vega (υ): Measures how much implied volatility affects an option’s value. The more volatility there is the higher an option premium becomes.

• Rho (ρ): Measures an option’s sensitivity to changing interest rates.

The Takeaway

Delta is a useful metric for traders evaluating options and can help investors determine their options strategy. Traders often combine it with other tools and ratios during technical analysis. However, you don’t need to trade options in order to get started investing.

If you’re looking to begin options trading, a great way to start is with a user-friendly platform like SoFi’s. Thanks to its intuitive and approachable design, SoFi’s platform allows you to trade options through the mobile app or the web platform. Plus, you’ll have access to educational resources about options so you can learn more.

Pay low fees when you start options trading with SoFi.

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

Jan

2022

What Is a Bull Call Spread Option? A Comprehensive Overview

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

A bull call spread, also known as a long call spread or a vertical spread, is an options trading strategy used to capitalize on moderate price increases for a stock. The strategy has two legs and involves writing one option and buying another.

Investors use a bull call spread when they’d like to take advantage of a slightly bullish trend in a stock without taking too much risk. This type of options trading strategy limits both profits and losses, making it a popular strategy for investors with limited capital and a desire for downside protection.

Recommended: A Beginner’s Guide to Options Trading

What Is a Bull Call Spread Position?

To initiate a bull call spread, options traders buy a call option at a lower strike price while selling a call with a higher strike price. Both options have the same expiration date and underlying asset.

This options strategy establishes a net debit or cost and makes money when the underlying stock rises in price. The potential profits hit a limit when the stock price rallies higher than the strike price of the short call, while potential losses hit a limit if the stock price declines beneath the strike price of the long call (the one with a lower strike price).

In a bull call spread, a trader cannot lose more than the net premium plus commissions. A trader’s maximum gain is the difference between the strike prices of the short and long call and net premium plus commissions.

Recommended: How to Sell Options for Premium

Bull Call Spread Example

Let’s say a trader establishes a bull call spread by purchasing a call option for a premium of $10. The call option has a strike price of $50 and expires in April 2022. The trader also sells (or writes) a call option for a premium of $2. The call option has a strike price of $70 and expires in April 2022. The underlying asset of both options is the same and currently trades at $50.

In establishing these options positions, the trader paid $10 (from buying the long call) and gained $2 (from writing the short call). The net amount of these two contracts adds up to a net cost of $8.

Assume that the expiration date of April 2022 has arrived.

With a stock price of $60 or above, the trader’s investment cannot gain more than $3 due to both calls being in-the-money. If the stock price were $65, for example, the investor would gain through the long call by being able to buy shares for $50 and sell at the market price of $65. They would also lose through the short call due, since they’d have to buy shares at the market price of $65 and sell to the option holder at a price of $60.

After net commissions, the trader would realize a net gain of $3.

At a price of $50 or less, the trader’s loss is limited to $7, since both calls would be out-of-the-money. At a stock price of $45, for example: the trader wouldn’t gain from the long call, and would not lose from the short call.

After net commissions, the trader would realize a net loss of $7.

Variables Impacting a Bull Call Spread

As with any options trading strategy, various potential factors can have an effect on how the trade will play out. The ideal market forecast for a bull call spread is “modestly bullish,” or that the underlying asset’s price will gradually increase.

As with all options, the price of the underlying security is only one of several factors that can impact the trade.

Stock Price Change

A bull call spread will increase in value as its underlying stock price rises and decline in value as the stock price falls. This kind of position is referred to as having a “net positive delta.”

Delta estimates how much the price of an option could change as the underlying security price changes. The change in option price is usually less than that of the stock price – the stock price could fall by $1, but the option may only fall by $0.50, for example.

Because a bull call spread contains one short call and one long call, the net delta doesn’t change much when the stock price changes on any given day. In options vocabulary, this is called “near-zero gamma.” Gamma provides an estimation of how much the delta of a position could change when the stock price changes.

Change in Volatility

Volatility refers to how much a stock price fluctuates in percentage terms. Implied volatility (IV) is a factor in options pricing. When volatility rises, opti prices often rise if other factors remain unchanged.

Because a bull call spread consists of one short call and one long call, the price of this position changes little when volatility changes (an exception may be when higher strike prices carry higher volatility). In options vocabulary, this is called having a “near-zero vega.” Vega is an estimation of how much an option price could change with a change in volatility when other factors remain constant.

Time

Time is another important variable that influences the price of an option. As expiration approaches, an option’s total value decreases, a process called time decay.

The sensitivity to time decay in a bull call spread depends on where the stock price is in relation to the strike prices of the spread. If the stock price is near or below the price of the long call (lower strike), then the price of the bull call spread declines (and loses money) as time goes on. This occurs because the long call is closer to the money and loses value faster than the short call.

On the other hand, if the price of the underlying stock is near or above the strike price of the short call (higher strike), then the price of a bull call spread rises (and makes money) as time goes on. This occurs because the short call has become closer to the money in this situation and therefore loses value quicker than the long call.

In the event that the stock price is half-way between both strike prices, time decay will have little impact on the price of a bull call spread. In this scenario, both call options decay at more or less the same rate.

Risk of Early Assignment

Traders holding American-style options can exercise them on any trading day up to the day of expiry. Those who hold short stock options have no control over when they may have to fulfill the obligation of the contract.

The long call in a bull call spread doesn’t have early assignment risk, but the short call does. Calls that are in-the-money and have less time value than the dividends that a stock pays are likely to be assigned early.

This can happen because when the dividend payout is greater than the price of the option, traders would rather hold the stock and receive the dividend. For this reason, early assignment of call options usually happens the day before the ex-dividend date of the underlying stock (the day by which investors must hold the stock in order to receive the dividend payout).

When the stock price of a bull call spread is above the strike price of the short call (the call with a higher strike price), traders must determine the likelihood that their option could be assigned early. If it looks like early assignment is likely, and a short stock position is not desirable, then a trader must take action.

There are two ways to do away with the risk of early assignment. Traders can either:

• Close the entire spread by buying the short call to close and selling the long call to close, or

• Buy to close the short call and leave the long call open.

Pros and Cons of Using a Bull Call Spread

The main advantages of using a bull call spread is that it costs less than buying a single call option and limits potential losses. In the earlier example, the trader would have had to pay a $10 premium if she had only been using one call option. With a bull call spread, she only has to pay a net of $8.

The potential losses are lower as well. If the stock were to fall to zero, our trader would realize a loss of just $8 rather than $10 (if she were using only the long call option).

The biggest drawback of using a bull call spread is that it limits potential gains as well. In the example above, our trader can only realize a maximum gain of $27 because of the short call option position. In the event that the stock price were to soar to $400 or higher, she would still only realize a $27 profit.

The Takeaway

A bull call spread is a two-leg options trading strategy that involves buying a long call and writing a short call. Traders use this strategy to try and capitalize on moderately bullish price momentum while capping both losses and gains.

As with all trades involving options, there are many variables to consider that can alter how the trade plays out. That’s why a platform like SoFi’s that offers educational resources about options can come in handy. Plus, the SoFi options trading platform allows investors to trade options through the mobile app or web platform.

Trade options with low fees through SoFi.

Photo credit: iStock/kupicoo

SoFi Invest®

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

Jan

2022

What Is a Naked Put Options Strategy?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

A naked put option, also known as an “uncovered put,” is a risky options strategy in which a trader writes (i.e. sells) a put option with no corresponding short position in the underlying asset. While this strategy allows the trader to collect the option premium up front, in hopes that the underlying asset will rise in value, it carries significant downside loss potential should the price of the underlying asset decline.

Here’s what you need to know about naked put options:

Understanding Naked Put Options

As a refresher, the buyer of a put option has the right, but not the obligation, to sell an underlying security at a specific price. On the flip side, the seller of a put option is obliged to purchase the underlying asset at the strike price if and when the option buyer chooses to exercise.

Writing a naked put means that the trader is betting that the underlying security will rise in value or hold steady. If, at the option’s expiration date, the price of the underlying security is above the strike price, the options contract will expire worthless, allowing the seller to keep the premium. The potential profit of the trade is capped at the initial premium collected.

The risk of a naked put option trade is that the potential losses can be much greater than the premium initially gained. If the price of the underlying security declines below the strike price, the option seller can be forced to take assignment of shares in the underlying security. The options seller would then have to either hold those shares, or sell them in the open market at a loss (since they were obligated to purchase them at the strike price).

Requirements for Trading Naked Put Options

Investors have to clear some hurdles before being able to engage in a naked put transaction.

Typically, that begins with getting cleared for margin trading by their broker or investment trading firm. A margin account allows an investor to be extended credit from their trading firm in order to actually sell a naked put.

There are two main requirements to be approved for a margin account in order to trade naked put options.

• The investor must demonstrate the financial assets to cover any portfolio trading losses.

• The investor must declare they understand the risks inherent when investing in derivative trading, including naked put options.

Selling Naked Puts

A trader initiates a naked put by selling (writing) a put option without an accompanying short position in the underlying asset.

From the start of the trade until the option expires, the investor keeps a close eye on the underlying security, hoping it rises in value, which would create a profit for them. If the underlying security loses value, the investor may have to buy the underlying security to cover the position, in the event that the buyer of the put option chooses to exercise.

With a naked put option, the maximum profit is limited to the premium collected up front, and is obtained if the underlying security’s price closes either at or above the option contract’s strike price at the expiration date. If the underlying security loses value, or worse, the value of the underlying security plummets to $0, the financial loss can be substantial.

In real world terms, however, the naked put options seller would see the underlying security falling in value and would likely step in and buy back the options contract in advance of any further decline in the security’s share price.

Naked Versus Covered Puts

We’ve mentioned a few times so far that in a naked put, the trader has no corresponding short position in the underlying asset. To understand why that is important, we need to talk about the difference between covered puts and naked puts.

A covered put means the put option writer has a short position in the underlying stock. As a reminder, a short position means that the investor has borrowed shares of a security and sold them on the open market, with the plan of buying them back at a lower price.

This changes the dynamics of the trade, compared with a naked (uncovered) put. If the price of the underlying security declines, losses incurred on the put option will be offset by gains on the short position. However, the risk instead is that the price of the underlying security could move significantly upward, incurring losses on the underlying short position.

Recommended: The Risks and Rewards of Naked Options

Example of a Naked Put Option

Here’s an example of how trading a naked put can work:

XYZ stock is trading at $50 per share. Alice, a qualified investor, opts to sell a put option expiring in 30 days with a strike price of $50 for a premium of $4. Typically, when trading equity options, a single contract controls 100 shares – so the total premium, her initial gain, is $400. If the price of XYZ is above $50 after 30 days, the option would expire worthless, and Alice would keep the entire $400 premium.

To look at the downside scenario, suppose the price of XYZ falls to $40. In this case, Alice would be required to buy shares in XYZ at $50 (the strike price), but the market value of those shares is only $40. She can sell them on the open market, but will incur a loss of $10 per share. Her loss on the sale is $1,000 (100 x $10), but is offset by the premium gained on the sale of the option, bringing her net loss to $600. Alternatively, Alice could choose not to sell the shares, but hold them instead, in the hope that they will appreciate in value.

There’s also a break-even point in this trade that investors should understand. Imagine that XYZ stock slides from $50 to $46 per share over the next 30 days. In this case, Alice loses $400 ($4 per share) after buying the shares at $50 and selling them at $46, which is offset by the $400 gained on the premium.

The maximum potential loss in any naked put option sale occurs if XYZ’s stock price goes to $0. In this instance, the loss would be $5,000 ($50 per share x 100 shares), offset by the $400 premium for a net loss of $4,600. Practically speaking, a trader would likely repurchase the option and close the trade before the stock falls too significantly. This can depend on a trader’s risk tolerance, and the stop-loss setting on the trade.

The Takeaway

The big risk of a naked put option trade is that the potential losses can be much greater than the premium initially gained, while the maximum profit is limited to the premium collected up front. The seller of an uncovered put thinks the underlying asset will rise in value or hold steady.

If you’re ready to start trading options, check out SoFi’s options trading platform. A user-friendly options trading platform like SoFi’s is a good place to start, especially because it offers numerous educational resources about options.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/damircudic

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

Jan

2022

How Much Life Insurance Do I Need?

By Janet Siroto | Life & Career, Terminology | Comments Off

If you’re reading this, you’ve probably already decided that you are going to buy life insurance. Smart move: Life insurance will, in the case of your untimely death, protect your loved ones. If you keep up with your monthly premiums, your beneficiaries will receive a lump sum payment that will help them replace the money you would have otherwise earned. Expenses like your mortgage, a child’s education, monthly utilities and more need to be factored in.

Wondering how to do the math? Let us help you out with some simple methods for calculating that amount of coverage that will give you peace of mind.

How to Manually Calculate How Much Life Insurance You Need

Here’s a great way to get started: Take out a piece of paper or open a document on a computer and start making lists. In one list, you are going to look at all the financial obligations that lie ahead. In another, you’ll consider all the assets you have that could be used to fund these expenses for your loved ones if you were not around.

For the financial obligations ahead, make sure you come up with a figure that includes:

• Your income over the term of the insurance policy.

• Daily living expenses (food, utilities, medical care) if you don’t think the income in the line above would cover that sufficiently.

• Your mortgage. If this is covered by your income, you don’t need to add this, but if not, you want to make sure your loved ones can pay this loan off over the years.

• Any other debts. Do you have a chunk of credit card debt? Student loans? Those will need paying. Also think about end-of-life costs. Grim as it may be, you don’t want loved ones struggling to pay for funeral costs. These are not insignificant. In 2021, the cost of a funeral and burial was typically almost $8,000. In addition to that, there may be additional costs for gravestones, an obituary, and the like.

• Tuition. Think about how many children you have or plan to have. The current annual cost for an in-state student at a public 4-year institution is $25,615; for a private university, that number rises to $53,949. Don’t forget to account for inflation, too.

• Childcare if applicable. Think about whether your income alone would cover this, or if more funds would be needed to pay for these costs.

Add these costs up, and those are your life insurance needs. But now, let’s look at assets that might go towards paying these costs were you not alive. Include the following:

• Savings. What do you have in savings (include your retirement accounts if you believe your loved ones would tap into those versus keeping them aside)? Also look at any investment accounts you may own.

• Other insurance policies. You may already have some insurance. Just keep in mind if it is something you have via a group life insurance policy at work, it will probably end if and when you change jobs.

• College funds. If you already have, say, a 529 account that will help pay for your children’s higher education, add that to the assets list.

To find out how much insurance you need, take the first number (your financial obligations to be covered) and subtract from it the assets you have (the second number). Ta-da: You now have a number that you’d like your life insurance policy to at least equal.

3 Ways to Quickly Estimate Your Life Insurance Needs

Not everyone wants to do the math above, we get it. Here are a few other ways that may be a better match for you when it comes to estimating how much life insurance you need.

1. The DIME Formula

The DIME formula — an acronym that stands for debts, income, mortgage, and education — is a time-tested way to determine the right amount of life insurance to buy. Here’s how it works:

Debts Add them up, including car loans, student loans, personal loans, credit card balances (even if it’s a cringe-worthy number you plan on whittling down, you’ve got to include it), and so forth. Include everything except mortgage payments — because that’s the “M” portion of this formula — and add them up. What’s the total?

Income The goal of having a life insurance policy is to replace income that was coming in but would stop because of the death of the policy holder. Multiply your income and the potential number of years you want covered by life insurance.

Mortgage If you’re a homeowner, what balance remains on your home loan? If you are considering buying a home, what size mortgage would you get?

Educational costs If you have or are planning to have kids, estimate how much tuition would cost for each and determine the total needed to fund higher education.

Add up these D, I, M, and E amounts, and that’s how much life insurance coverage you need. Worth noting: This technique doesn’t recognize any assets you might have, so it might tend to have you buy more life insurance than you need.

2. Use an Online Calculator

Sometimes it’s easier to use a digital tool that holds your hand through calculations like these. If you love clicking your way to answers, try a life insurance calculator to help streamline the process. Many are available online.

3. Try the Multiplication Trick

Some people like to use a formula to figure out how much life insurance they should get. Typically, this says to take your income, multiply it by a number (usually 10, but sometimes much lower or higher) and bingo! That’s the amount. Prevailing wisdom, though, is that this can be a very inaccurate figure. And it certainly doesn’t take into account the subtleties of your situation, whether that means you have to pay whopping student loans from grad school, alimony, caregiving expenses for a parent, or another expense. So while you may hear about this shortcut, it’s not considered reliable.

Who Needs Life Insurance?

Many people would benefit from life insurance, and most Americans do have a policy. Buying life insurance protects your dependents in the event of your dying; it provides a lump sum payment that can keep them financially afloat.

If, however, you are a person without dependents or any shared debt (such as being a co-signer with your parents for a student loan or with a partner on a mortgage), then you may not need to buy a policy. But for those who do have people depending on their earning power, life insurance can be a wise buy.

Many people get a policy when they are anticipating the major “adulting” milestones of marriage or parenthood. It’s likely to be particularly important if you are the primary earner in your marriage. If tragedy were to strike and you died, your spouse could be hard-pressed to maintain their standard of living and pay the bills. The rule of thumb is that the sooner you get insurance, the better. Rates go up as you age.

Next Step: Buying Life Insurance

Once you know how much life insurance you need, it’s almost time to start shopping. Almost. Let’s take a quick look at the two main types of life insurance, term life versus whole life insurance — and the key differences between them.

Although they share the same goal of protecting families financially when a tragic loss occurs, the elements of the policies, how much they cost, their terms, and more can be quite different.

Term Life Insurance

As the name suggests, this kind of policy lasts for a certain period of time, or term. The policy is taken out for a designated dollar amount, usually with fixed premium payments — and, if the policy holder dies during that time frame, then designated beneficiaries can receive the payout they’re due. This can work well for people who think that, at the end of the term, they’ll have saved enough money that they no longer need income replacement. Or, they may believe that beneficiaries will have gained financial independence by the time the policy ends.

Whole Life Insurance

This option offers coverage for your “whole life” as the name suggests, and is a popular choice among the different kinds of permanent, or lifelong, insurance policies. Payments are typically higher, perhaps as much as five to 15 times more than the same amount of coverage as a term life policy, but part of this whole life premium is a contribution to the policy’s cash value account. This savings vehicle can grow and may be borrowed against if needed.

Choosing Term or Whole Life Insurance

If affordability is especially important, then term life insurance can make more sense. Term life may also be the right choice if coverage is only needed for a certain period of time, perhaps while money is still owed on a mortgage or young adult children are in college.

Another reason why some people may choose term insurance is because they take the difference between that premium and what they’d pay for a whole life premium, and then invest those dollars in another way.

That said, some people prefer the ongoing coverage of whole insurance and the peace of mind it can bring. Others may like watching their cash account grow. It’s a personal decision; only you can judge which kind of life insurance best suits your specific needs.

The Takeaway

Buying life insurance is an important step. It secures the financial future of your loved ones who rely on you and your income. Figuring out just how much life insurance you need is a necessary part of the process that can feel complicated. Fortunately, there are a number of different ways to get a solid estimate for that figure. The ideas we’ve shared not only help you do just that, they may also give you a deeper understanding of you and your family’s financial future.

Let SoFi Help Protect You

Once you have a rough idea of how much life insurance you’d like to buy, why not consider what SoFi is offering: affordable term life insurance in partnership with Ladder. Applicants can receive a quote in just a few minutes for policies that range from $100,000 to $8 million. It’s quick and easy to set up a policy, and the coverage amount and associated premiums can be adjusted at any time with just a couple of clicks. No hassles.

Rates are competitive with Ladder and, because the agents do not work on commission, there are no fees. Plus there are no medical exams required for qualifying applicants buying $3 million or less in coverage.

Interested in the fast, easy, and reliable route to life insurance? Check out what’s offered by SoFi in partnership with Ladder.

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

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

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

SOPT20010

Jan

2022

5 Reasons People Don’t Invest Their Money

By SoFi Editors | invest, Investing | Comments Off

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.

Interested in other investing misconceptions? Check out: 5 Investing Myths vs Realities

4. Investing is Too Risky

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.

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