Aug
17
2023

What Is the Ebitda Formula?

By | Growing Wealth, Investing, Terminology | Comments Off on What Is the Ebitda Formula?

EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization. The EBITDA formula is a common way for companies to assess their performance. By looking at earnings without deducting taxes, interest, or other expenses, it’s easier to assess business results and compare them to other companies in the same industry.

The EBITDA formula can also be useful for investors. When investing in the stock market, it’s important to research companies before buying shares of their stock, and EBITDA is a basic measure of profitability that can help investors gauge an organization’s performance.

💡 Recommended: NOPAT vs EBITDA

What Is EBITDA, and How Is EBITDA calculated?

The EBITDA formula is a way of considering a company’s net income — without deducting costs like interest, taxes, depreciation, and amortization. The idea is to create a more apples-to-apples view of how different companies’ perform. Two similar companies in the same industry could have very different tax rates or different capital structures (which can impact debt, and therefore interest paid), making it hard to compare one to the other.

By not deducting certain expenses that aren’t related to performance, EBITDA helps level the playing field and help investors evaluate companies.

EBITDA is also relatively easy to calculate. The information can be found on a company’s balance sheet and income statement. Here’s a quick breakdown of each letter of the acronym, and why it matters in the EBITDA formula:

Earnings

Earnings are a company’s net income over a specific period of time like a fiscal year or a quarter. This number can be found on the company’s income statement; it’s essentially the bottom line, after subtracting all expenses from total revenue.

Interest

This refers to any interest that the company pays on loans and debts. In some cases interest might include interest income, in which case you’d use the total interest amount (interest income – interest paid). Interest is added back to total earnings in the EBITDA formula because the amount of interest paid depends on the types of loans and funding a company has. This number can muddy the waters, when trying to compare two companies that might have very different financing situations.

Taxes

Federal, state, and local taxes are also added back because tax rates depend on where a company is based geographically, and where they conduct business. Thus, taxes aren’t something that a company has much control over, so they aren’t an indicator of performance.

Depreciation & Amortization

Depreciation calculates the decreasing value of tangible physical assets or capital expenditures over time (e.g., equipment, vehicles, buildings, etc.). Amortization is a way to account for the expenses of non-tangible assets like intellectual property, like patents and copyrights.

Depreciation and amortization are added back to earnings because they are non-cash expenses. As such, they don’t necessarily reflect on a company’s overall performance or profitability.


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EBITDA Formula and Calculation

EBITDA can be calculated simply by adding a company’s interest, taxes, depreciation, and amortization to net income. Another method is to add a company’s operating income — or Earnings Before Interest and Taxes (EBIT) to its non-cash expenses of depreciation and amortization.

Earnings, or net income, can be calculated as follows:

Net income = Revenue – Cost of Goods Sold – Expenses

How to calculate EBITDA

EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

Or

EBITDA = Operating income (EBIT) + Depreciation & Amortization

For example, if a company has $4,500,000 in revenue and $500,000 in expenses, their operating income (EBIT) is $4,000,000.

If the company’s assets have depreciated by $100,000 and they have an amortization amount of $75,000, the calculation would be as follows:

EBITDA = $4,000,000 (EBIT) + $100,000 (D) + $75,000 (A)

EBITDA = $4,175,000

It’s possible for EBITDA to be negative if a company has significant losses within a particular quarter or year.

A more specific EBITDA formula is LTM EBITDA, or Last Twelve Months EBITDA, also called Trailing Twelve Months EBITDA (TTM). This calculation finds EBITDA for only the past year.

💡 Recommended: Comparing Operating Income vs EBITDA

How Does EBITDA Differ From Other Measurements of Income?

There are a number of different ways to view an organization’s income, each with their pros and cons. Depending on which lens you use, or which formula, one metric can provide insights into a company’s performance that another won’t. Here are a few common measurements of company income:

•   Cash Flow is an analysis of the amount of money coming into a business versus the amount of money going out. Because of timing issues with sales, you can be profitable without being cash flow positive and vice versa.

•   EBIT is also known as operating income, as discussed above. EBIT adds back the expenses related to interest and taxes, but keeps deductions for depreciation and amortization to give a clearer picture of a company’s earnings inclusive of actual operating costs.

•   EBT is another variation on EBIT. It allows for interest expenses, but eliminates the impact of taxes — since a company’s tax burden has nothing to do with its performance.

•   Net Income appears at the bottom of an income statement, after subtracting all business expenses (including interest, taxes, depreciation, and amortization) from total revenue.

•   Revenue is also called gross income. It specifically refers to the money a company earns from sales. As such, it’s really only a window into one aspect of the business’s performance.

Understanding company performance can be a complex endeavor, and it’s best to use a combination of metrics that are most meaningful for that company or industry.

Why Is EBITDA Important?

The EBITDA formula is useful because it provides a view of company profitability, without the impact of capital expenditures and financing. By using the EBITDA formula, analysts can compare companies within an industry and investors can quickly use a technical analysis to evaluate companies they might want to invest in.

In that way, EBITDA can also be a tool used by financial advisors to help their clients make investment decisions.

It’s also useful for business owners to calculate their EBITDA each year to see how their company is performing. This is especially important if they are looking to take out a loan or seek investment. Business owners can use the EBITDA formula to gain insight into operating performance, how their company stands in relation to others in the same industry, and the company’s ability to meet its obligations and grow.

What Makes a Good EBITDA?

EBITDA is a measure of a company’s performance, so higher EBITDA is better than lower EBITDA when comparing two or more organizations in the same sector. This is important, because companies that vary in size or operate in different sectors can, of course, also vary widely in their financial performance. So one way to determine whether a company has “good” EBIDTA is to compare it to others of a similar size in the same industry.

Here are two other ways to gauge whether a company’s EBIDTA is good or not.

The EBITDA Coverage Ratio

To add more helpful information to the EBITDA calculation, the EBITDA Coverage Ratio compares EBITDA to debt and lease payments.

The EBITDA coverage ratio calculates a company’s ability to pay off lease payments, debts, and other liabilities.

The calculation for the EBITDA coverage ratio is:

EBITDA Coverage Ratio = (EBITDA + Lease Payments) / (Interest Payments + Principal Payments + Lease Payments)

A ratio equal to or greater than 1 indicates that a company will have a better ability to pay off liabilities. If the ratio is lower, a company may not be able to pay off its debts. The higher the ratio, the more solvent a company is. The current average coverage ratio is 2.


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EBITDA Margins

Another EBITDA calculation investors can do to learn about a company’s performance is the EBITDA Margin calculation. This formula compares annual cash profits to sales. It’s a useful indicator to find out if a company’s EBITDA is ‘good’ or not. The EBITDA Margin calculation is:

EBITDA Margin = EBITDA / Total Revenue

The resulting number is a percentage that shows what portion of revenue was able to be converted into profit within a year. The higher this percentage is, the better a company is performing because it means their expenses aren’t eating into their profits. In general, an EBITDA margin of 60% or higher is considered a good number.

Downsides of the EBITDA Formula

Although the EBITDA formula is a useful tool for investors, it also has some drawbacks. For example: EBIDTA is considered a “non-GAAP” measure, meaning it doesn’t fall under generally accepted accounting principles (a set of rules issued by the Financial Accounting Standards Board and procedures commonly followed by many businesses). This also means that the way EBIDTA is calculated isn’t wholly standardized.

Thus, companies also may not include the same information in each report, and they aren’t required to record all information that may be relevant to the equation. For these reasons, it’s best to calculate EBITDA along with other types of evaluations, such as net income and debt payments.

Companies with a low net income may use the EBITDA formula to make themselves look better since the EBITDA number will likely be higher than their income.

Or, because EBITDA tends to obscure the impact of debt and capital investments, a company that’s spending heavily on development costs, or has incurred a lot of debt, may look more robust than it is.

Also, the formula doesn’t work well with certain types of companies, such as companies that have a need to constantly upgrade their equipment.

The Takeaway

Comparing companies you may want to invest in can take a lot of time and technical analysis. If you’re choosing your first stocks, the amount of information and choices can be overwhelming.

EBITDA is one measure of company performance that can be useful, because it takes net income and then removes certain factors that can be confounding: interest paid or earned; federal, state, and local taxes; the impact of capital depreciation and amortization.

For investors interested in learning more about specific companies and building a stock portfolio, opening an online brokerage account can be a good way to get started with investing.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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

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Aug
15
2023
How Does the Iron Butterfly Spread Work?

What Is an Iron Butterfly Option Strategy?

By | Growing Wealth, invest, Investing | Comments Off on What Is an Iron Butterfly Option Strategy?


Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

An iron butterfly spread is a type of options trade involving four separate options contracts. It’s a complicated and advanced options trade, meaning that many beginner investors will likely never use it — they may not have even heard of it.

Iron butterfly spreads can be used as a part of a larger options trading strategy, however, so long as investors understand the ins and outs of how it works, and most importantly, the risks involved.

What Is an Iron Butterfly?

An iron butterfly spread, sometimes called an “Iron Fly” or a “Butterfly Spread” is a trade involving four separate options contracts.

As a strategy that earns investors money when stocks or futures prices make moves within a defined range, it’s especially popular with traders who expect a decrease in implied volatility. To succeed with an iron butterfly spread, traders will try to forecast when option prices will likely decline, usually when the broader markets are in a holding pattern, or gradually moving upwards.

How Does an Iron Butterfly Trade Work?

An Iron Butterfly is a four-legged options spread, since an investor buys four options contracts, two calls and two puts. The call options allow the investor to buy a stock at a given price, and the put options allow the investor to sell a stock at a given price.

In the trade, the calls and puts have three strike prices, but the same expiration date.

In a put or call option, the strike price is the price an investor can sell the underlying security when it is exercised. With a call option, the strike price is the price at which the investor can buy the security. With a put, the strike price is the value at which they can sell the security.

The three strike prices consist of one in the middle, called the options straddle, and two other strike prices, called the strangle, positioned above and below that price. As a trade, the Iron Butterfly has the propensity to deliver profits when the option’s underlying stock hits its expiration date at the middle strike price.

Recommended: Popular Options Trading Terminology to Know

Example of an Iron Butterfly

For the strategy to work, the call and put options that sit on either side of the target stock price should be far enough apart that they can still make money regardless of the unexpected price movement of the stock between the time when the trade is executed, and the expiration of the options.

As an example, you’re an investor with a sense that a stock would reach $50 in the next month, and that it would be at least within a range of $10 above or below the target price. To make an Iron Butterfly trade, you’d buy a call and a put option with a strike price of $50. Then you’d buy a call option ten dollars higher, followed by a put option ten dollars lower than the target price, or saddle price, of $50.

The theory behind the Iron Butterfly strategy is that there’s a high likelihood that the eventual price of the stock targeted in the strategy will trade within a profitable range by the time the strike price of the options arrives.

Pros and Cons of Iron Butterfly Spreads

There is a limit to the maximum profit that an investor can earn by using the Iron Butterfly. That’s because of the cost of the options they have to buy to make money on their bet, as well as the cost of the options they purchase to protect themselves in the event that their hunch is wrong.

In the strategy, the most money the investor can make becomes possible when the underlying stock reaches the stock price at which they’ve purchased the saddle options. But even in this best-case scenario, at least half of the options expire worthless.

While this limited return may seem like a downside, it also comes with limited risk. As long as the stock rises or falls — at the time of the options’ expiration — between the target price and the strike prices of the outlying call and put options, then the trade will not lose money. But the closer it is to the target price, the more money it will make.

The biggest risk in an Iron Butterfly strategy is that the stock trades outside of the strangle, making all of the options worthless.

Recommended: What Is Your Risk Tolerance?

How to Sell out of an Iron Butterfly Spread

The investor will have at least one option that is in the money, and possibly two options that are in the money, when the options expire. They will exercise those options, and make money on the trade.

Traders realize that it’s unrealistic that any given trade will reach its expiration date exactly at the strike price, or straddle price, that they choose. But with a smart spread on the outer range of the call and put options in the trade, the strategy can deliver returns on the capital put at risk that are consistently in the 15-20% range.

What Is the Difference Between Iron Condor and Iron Butterfly?

An Iron Butterfly is similar to another option strategy known as an Iron Condor. The strategies differ in terms of their strike prices and premiums. In an Iron Condor the strike prices are different and in an Iron Butterfly they’re the same. The premiums are higher in an Iron Butterfly than an Iron Condor.


💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

The Takeaway

The Iron Butterfly is a trading strategy that investors use when they believe that a stock price will trade within a specific range. Rather than buying the stock itself, an Iron Butterfly involves purchasing four options based on the investor’s price prediction for a certain security.

Again, trading options is an advanced investment strategy that requires a good amount of background knowledge and market experience. It may not be a good idea for beginning investors to wade into options, or advanced moves like the Iron Butterfly. However, speaking with a financial professional may help get you prepared for trading options.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

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Explore SoFi’s user-friendly options trading platform.

Photo credit: iStock/ponla1975

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

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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Aug
11
2023

Top 10 Fun Things to Do When Visiting San Diego

By | Life & Career, Money & Life | Comments Off on Top 10 Fun Things to Do When Visiting San Diego

They call San Diego “America’s Finest City” for good reason: It has year-round sunshine, gorgeous beaches, and plenty to see, do, and eat. There are parks, museums, zoos, baseball games, and vineyards waiting for you to explore.

The challenge will be narrowing down the things to do so they fit into the time you have for your San Diego vacation. But here’s help: an insider’s list of the top 10 fun things to do in this fantastic city, plus tips on planning a perfect trip.

Best Times to Go to San Diego

If you’re looking for great weather for your San Diego trip, any time of year is a good one. Temperatures are a little cooler in the winter (usually in the 60s) and can get as high as the 90s in the summer, though the average falls more in the range of high 70s to 80s.

There are a few events held throughout the year you might want to plan around:

•  January: Farmers Insurance Open (golf)

•  June/July: San Diego County Fair

•  July: Comic-Con International

•  July-September: Del Mar Racing Season

•  September: Miramar Air Show

•  November: Beer Week

•  November: San Diego Bay Wine + Food Festival

Bad Times to Go to San Diego

There really are no bad times to visit San Diego, though you will find most of the bigger events and festivals fall in the summer. The ocean water is cool throughout the year, so if taking a swim is high on your list, aim for the hotter summer months.

Recommended: Financial Prep for Travel

Average Cost of a San Diego Vacation

If you’re already planning your San Diego trip, you’ll want to create a budget. Traveling solo? The average cost for a weeklong trip is $1,886. For a couple, that cost is $3,387.

Hotel prices range from $80 to $267 a night or higher if you like to stay in posh accommodations, and vacation rentals are $250 to 610 a night. The level of luxury you want in your accommodations, as well as whether you dine out or eat in will impact your vacation budget. (Of course, you can also find ways to save on hotel costs, by becoming a member at a hotel chain’s website and via other smart strategies.)

You can save on your trip if you use a travel rewards credit card that lets you accumulate and redeem points for rewards. You might compare credit card miles vs. cash back to see which is a better fit.

When budgeting for your trip, you’ll also want to include transportation to and from San Diego. For those who live nearby or are frugal travelers, that will mean a drive or a bus or train ride. For others, it means plane tickets.

You may also want to set aside some money for trip insurance, just in case your plans don’t unfold smoothly. You may have credit card travel insurance, or you might buy a separate policy.

10 Fun Must-Dos in San Diego

Here are some of the best things to do in San Diego, based on recommendations from locals and knowledgeable travelers, as well as popular tourist websites.

Keep in mind that San Diego has several distinct neighborhoods, including North Park, South Park, Mission Hills, Normal Heights, Kensington, and more. Each is walkable and filled with restaurants, shops, and events to keep you engaged. Now, consider this list of the best things to do when vacationing in San Diego.

1. Explore Balboa Park

Balboa Park was the setting for the 1915 Panama-California Exposition, and, since then, it has become an icon in the city. Home to the Comic-Con Museum, Fleet Science Center, Japanese Friendship Garden, Mingei International Museum, the San Diego Zoo, and much more, the park is also filled with free things to do in San Diego. You can spend hours here, exploring all of the attractions, and, since there isn’t an admission fee, this can be a way for families to afford to travel.

However, some of the specific museums will charge for entry, so do a bit of research before you head over. balboapark.org/

2. Check out the San Diego Zoo

One of the top things to do in San Diego is to visit the zoo or its sister location, Safari Park. In addition to being able to see animals like sloths, koalas, giraffes, and elephants, you can also take part in exclusive experiences that bring you up close and personal with some of your favorite creatures. Tickets are typically $61 for kids ages 3 to 11, and $71 for ages 12 and up. (Ticket prices at the separate Safari Park are similarly priced.) The zoo is usually open daily, though hours can vary, sometimes as long as from 9 am to 9 pm. Check the website before visiting. zoo.sandiegozoo.org/

3. Explore North Park

If you’re seeking things to do in San Diego for adults and you like beer, head to the neighborhood of North Park. This hipster ‘hood is in the heart of San Diego and is home to some of the best breweries in this city known for its stellar craft beer. The neighborhood is highly walkable, and you’ll also find great options for dining and shopping. sandiego.org/explore/downtown-urban/north-park-south-park.aspx

4. Raise a Glass

If wine’s more your thing, one of the things to do in San Diego for couples or friends is to visit Temecula wine country, just an hour north of San Diego. This hidden gem offers more than 50 wine varietals, including award-winning versions of Cabernet Sauvignon, Sauvignon Blanc, Merlot, Mourvedre, Viognier, Chardonnay, and sparkling wines.
Many of the wineries have on-site restaurants, and some even offer live music. When heading to this area and maybe buying some bottles to take home, consider paying with plastic and snag some credit card rewards. temeculawines.org/

5. Stroll Around the Hotel del Coronado

One of the most unique things to do in San Diego is to visit the historic Hotel del Coronado. Known as “Hotel Del” to locals, this hotel was first opened in 1888, and was the setting for the film “Some Like it Hot” starring Marilyn Monroe. Set by the sea, this iconic red-roofed Victorian resort is a fascinating place to visit.

Even if you don’t stay at the hotel, you can explore its shops, restaurants, and beach. During the Christmas holidays, the hotel is transformed into a winter wonderland, complete with outdoor ice skating rink. hoteldel.com/

6. Catch a Ballgame

Baseball fans shouldn’t miss a San Diego Padres game at downtown’s Petco Park. The season is March through October, though there are also special events and tours at Petco Park.

Dining options at the park highlight some of the best restaurants and breweries in the city, including Hodad’s, Seaside Market, and Gaglione Brothers. mlb.com/padres/ballpark

7. Hit the Beach

If getting some sand between your toes is on your must-do list for your San Diego vacation, the iconic Mission Beach should be on your agenda. Anchored by the amusement park known as Belmont Park, Mission Beach offers two miles of boardwalk if you crave a bike ride, jog, or rollerblade. The beaches (and parking lots) can fill up, especially in the summer, so arrive early and plan to stay all day.

Are you traveling with pets? Leashed dogs are allowed on the beach at certain hours, so this might be a good place to explore together.

There are plenty of places to get a cocktail or meal along the boardwalk. The dress code? Flip flops and swimsuits! sandiego.org/explore/things-to-do/beaches-bays/mission-beach.aspx

8. Sample Some Nightlife

If you’re looking for things to do in San Diego at night, Gaslamp Quarter may have what you need. Filled with nightclubs, bars (including rooftop options), and restaurants, it’s a popular scene. Whether you’re in the mood to dance, catch a comedy show, try an escape game, or hear music, you’ll find it here. gaslamp.org/

Recommended: Where to Find Book Now, Pay Later Travel

9. See What Old Town Offers

One of the fun things to do in San Diego for all ages is visit Old Town, the birthplace of California. Filled with historic buildings that have been turned into restaurants and shops, Old Town is a great place to learn about the early days of San Diego.

There is also a “hop on, hop off” trolley tour that stops in Old Town, so you can see more of the city. oldtownsandiego.org/

10. Marvel at the Maritime Museum

The Maritime Museum, located on the Embarcadero, consists of more than a dozen sailing ships, submarines, and steam-powered ships that you can climb aboard and explore. Don’t miss the Star of India, the world’s oldest active sailing ship. Open daily from 10 am to 5 pm (last admission at 4 pm), the museum charges $20 admission for adults; $10 for children ages 3 to 12. sdmaritime.org/

The Takeaway

San Diego offers sun, fun, and plenty of things to do. It can be a great destination year-round, and whether you’re a couple in search of nightlife and wine tastings or a family who wants to spend the day at the zoo, you’ll find all kinds of amazing attractions in this Southern California city.

SoFi Travel is a new service offered exclusively to SoFi members. Earn 2x rewards when booking with your SoFi Mastercard or debit card. Then apply those rewards to your next trip when you book through our travel portal. SoFi makes planning a getaway fast, easy, and convenient — perfect for people on the move.

SoFi, your one-stop shop for travel.

FAQ

When is the best time to visit San Diego?

San Diego sees sunshine year-round, so any time is a good time to visit. However, the weather is warm but not too hot and the crowds are fewer between March and May and September to November.

What are things to do at night in San Diego?

San Diego has a robust nightlife in certain neighborhoods. North Park is known for its craft beer and restaurants, while Gaslamp Quarter is filled with nightclubs and bars.

What are things to do in Balboa Park in San Diego?

Balboa Park is home to numerous museums as well as the San Diego Zoo. It also hosts events throughout the year, including December Nights during the holiday season.

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

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Aug
11
2023
What is a Death Cross Pattern in Stocks? How Do They Form?

What Is a Death Cross Pattern in Stocks? How Do They Form?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Death Cross Pattern in Stocks? How Do They Form?

A death cross is the X-shape created when a stock’s or index’s short-term moving average descends below the long-term moving average, possibly signaling a sell-off. The death cross typically shows up on a technical chart when the 50-day simple moving average (SMA) of a stock or index peaks, drops, and then crosses below the 200-day moving average.

Because the 50-day SMA is more of a short-term indicator, it’s considered to be a more accurate indicator of potential volatility ahead than the 200-day SMA, which has averaged in 200 days worth of prices. That said, both the 50-day moving average and the 200-day are, by definition, lagging indicators. Meaning: They only capture what has already happened. Still, some death crosses have appeared to forecast major recessions — although they can also send false signals.

What Is a Death Cross, Exactly?

A death cross is based on a technical analysis of a security’s price. The short-term average dropping below the long-term average to create an X-shape is the “cross”; the “death” part of the name refers to the ominous signal that such a crossing may send for individual securities or overall markets.

A death cross tends to form over the course of three separate phases. In the first phase, the rising value of a security reaches its peak as the momentum dies down, and sellers begin to outnumber buyers. That brings on the second phase, in which the price of the security begins to decline to the point where the actual death cross occurs.

That’s typically marked as being when the security’s 50-day moving average dips under the 200-day moving average.
That crossing alerts the broader market to a potential bearish, long-term trend, which brings about the third and final phase of the death cross. In this phase, the stock may continue to lose value over a longer period.

If the dip following the cross is short-lived, and the stock’s short-term moving average moves back up over its long-term moving average, then the death cross is usually considered to be a false signal.


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What Does the Death Cross Tell Investors?

The death cross has helped predict some of some of the worst bear markets of the past 100 years: e.g., in 1929, 1938, 1974, and 2008. Nonetheless, because it’s a lagging indicator, meaning that it only reveals a stock’s past performance, it’s not 100% reliable.

Another criticism of the death cross is that the pattern sometimes won’t show up until a security’s price has fallen well below its peak. In order to alter a death cross calculation to see the downtrend a little sooner, some investors say that a death cross occurs when the security’s trading price (not its short-term moving average), falls under its 200-day moving average.

For experienced traders, investors, and analysts, a death cross pattern for a stock is most meaningful when combined with, and confirmed by, other technical indicators.

When interpreting the seriousness of a death cross, experienced investors will often look at a stock’s trading volume. Higher trading volumes during a death cross tend to reveal that more investors are selling into the death cross, and thus buying into the downward trend of the stock.

Investors will also look to technical momentum indicators to see how seriously to take a death cross. One of the most popular of these is the moving average convergence divergence (MACD), which is based on the moving averages of 15, 20, 30, 50, 100, and 200 days, and is designed to give investors a clearer idea of where a stock is trading than one that’s updated second by second.

Death Cross vs Golden Cross: Main Differences

The opposite of a death cross is known as a golden cross. The golden cross indicator is when the 50-day moving average of a particular security moves higher than its 200-day moving average.

While the golden cross is broadly considered a signal of a bull market, it has some of the same characteristics as the death cross in that it’s essentially a lagging indicator. Experienced investors use the golden cross in conjunction with other technical indicators such as trading volume and MACD.

Is a Death Cross a Reliable Indicator?

Historically, the death cross indicator has an impressive track record as a barometer of the broader stock market, especially when it comes to severe downturns, as noted above.

The Dow Jones Industrial Average (DJIA) went through a death cross shortly before the crash of 1929. More recently, the S&P 500 Index underwent a death cross in May of 2008 – four months before the 2008 crash. In both instances, investors who stayed in the market faced extreme losses. But the Dow also experienced a death cross in March of 2020. And the markets quickly rebounded, and rose to new heights.

The fact is that broad-market death crosses happen frequently. Prior to 2020, the Dow has gone through five death crosses since 2010, and 46 death crosses since 1950. Yet the index has only entered a bear market 11 times since the 1950s. A death cross doesn’t necessarily bring significant losses, either.

Even more noteworthy is that the Dow continued falling after a death cross only 52% of the time since 1950. And when it did keep falling, its median decline after a month was only 0.9%.

For short-term traders, the death cross has less value than it does for investors with longer-term outlooks. As an indicator, the death cross – especially one that’s market-wide – can be especially valuable for long-term investors who hope to lock in their gains before a bear market begins.

How to Trade a Death Cross

The death cross is a significant indicator for some investors. But it’s important to remember that it only shows past trends. As an investor, it’s equally important to use the death cross in conjunction with other indicators such as the MACD and trading volume, as well as other news and information related to the security you’re investing in.


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

The Takeaway

Although the ominous-sounding death cross stock pattern is valued by some analysts and investors as a way to foretell a downturn in a certain security or even the broader market, it’s really not that reliable. The main elements of the death cross — a stock’s short-term moving average and long-term moving average — are lagging indicators that may or may not predict a bearish turn of events.

The typical investor may not use or even look for death crosses as a part of their strategy. But knowing, on a basic level, what the term refers to, and why it may be important to the markets, is a good idea.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

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What Is Expected Family Contribution (EFC)?

By | Going to College, Student Loans, student_loan | Comments Off on What Is Expected Family Contribution (EFC)?

Expected Family Contribution (EFC), which will soon be replaced by the Student Aid Index (SAI), is a measure of how much a student and their family can be expected to contribute to the cost of college for an upcoming academic year. Your EFC/SAI is an important number because it impacts how much need-based financial aid you qualify for.

EFC meaning is sometimes mistaken as the dollar amount that a student and their family will pay for college. However, the amount families end up paying could be significantly more or less than the EFC, depending on the cost of attendance and scholarships.

As a result of this confusion, the EFC will be replaced by the Student Aid Index (SAI) starting in the 2024-2025 academic year. While the name change is essentially just a rebranding, there will be some changes in how a family’s expected contribution will be calculated. The change is part of the new, simplified Free Application for Federal Student Aid (FAFSA) that will be available to students in December 2023.

Here’s what you need to know about EFC/SAI and how it affects your potential aid.

Expect Family Contribution vs Student Aid Index

The Expected Family Contribution and Student Aid Index are essentially the same thing — an estimate of how much money a family can contribute out of pocket toward a student’s college education based on information provided on the FAFSA.

However, it’s only an estimate. As college tuition has gone up over the years, many students will pay significantly more than the EFC/SAI amount that the FAFSA form generates. The change from Expected Family Contribution to Student Aid Index reflects that the amount is simply a guideline, not a determination of what an applicant will pay. The switch to SAI also comes with some differences in how a family’s EFC is calculated (more on that below).

Like EFC, SAI is a vital metric used to determine how much — if any — federal financial aid students will receive to help them pay for college. However, it’s not the only factor. Eligibility for federal aid also takes into account a student’s year in school, enrollment status, and the cost of attendance at the school the student will be attending.


💡 Quick Tip: Some lenders help you pay down your student loans sooner with reward points you earn along the way.

How Colleges Used the Information

Once you complete the FAFSA, college financial aid staff will use all the information provided to determine your financial need.

Here’s the process:

1. The college financial aid staffers decide your cost of attendance (which includes tuition, fees, room and board, and books) at that school.

2. They then consider your EFC/SAI.

3. Next, they subtract your EFC/SAI from your cost of attendance to determine how much need-based aid you can get.

For example, let’s say a school’s total cost of attendance is $30,000 and your EFC/SAI is $8,000. You could qualify for up to $22,000 of need-based aid through programs like federal Pell Grants, direct subsidized loans, and the work-study program.

That doesn’t necessarily mean you will get that much aid, however. Colleges aren’t required to meet 100% of a student’s demonstrated financial need (the total cost of attendance minus your EFC/SAI). The amount you receive will depend on funding availability at your school, and how much has already been given out to other students.

Generally, the lower the SAI/EFC value, the higher the financial need, and the greater the eligibility for federal financial aid programs, such as Pell Grants, Direct Subsidized Loans, federal work-study programs.

Your offer of financial aid may change from year to year.

How Your EFC/SAI Is Calculated

EFC/SAI methodology utilizes financial information from the FAFSA (such as taxed and untaxed income, investments, assets, benefits, and household size) to quantify an applicant’s financial need. With the change to a simplified FAFSA, however, students and families will not only see a different measure of their ability to pay (SAI vs EFC), but will also experience a change in the methodology used to determine aid.

One key change is that, unlike the EFC, the SAI will not factor in the number of family members currently enrolled in college (which benefited families with multiple children in college). Three other changes that will happen with the switch from EFC to SAI:

•  Unlike the EFC, SAI can be a negative number (as low as -$1,500). This enables financial aid officers to better differentiate levels of need.

•  SAI will increase the Income Protection Allowance (IPA), which shelters a certain amount of parent income from being included in the calculation of total income.

•  The SAI calculation will eliminate the EFC allowance for state and local taxes.

After you complete the FAFSA, your EFC/SAI will be listed in the top right corner of your Student Aid Report, which outlines financial aid eligibility.

Calculating EFC/SAI With the CSS Profile

Around 200 colleges require students to provide supplemental financial information through the College Scholarship Service (CSS) Profile. The 2025-2026 list of participating institutions is available online .

Colleges may customize their questions on the CSS Profile to capture more information to evaluate a student’s financial need. For instance, the CSS Profile may ask about home value and financial information from both households if a student’s parents are separated. The CSS Profile may also consider the regional cost of living and personal circumstances in its calculation of financial need.

These colleges use the CSS Profile to calculate a different EFC/SAI for awarding their own financial aid funds. Typically, they will use their own institutional EFC/SAI methodology when determining a financial aid award.

While filling out the CSS Profile is extra work, it can give you access to private student aid from many universities and scholarship programs. However, the CSS is not used to determine federal financial aid.

Federal Need-Based Aid Available for Qualifying Students

Depending on your EFC/SAI and other eligibility criteria, a financial aid package could include the following need-based federal student aid programs.

•  Federal Pell Grant: Student eligibility for a Pell Grant is determined by financial need and the funding amount can fluctuate each year. For the 2023-2024 academic year, the maximum award is $7,395. The amount an individual student may receive depends on a number of factors.

•  Federal Supplemental Educational Opportunity Grant (FSEOG): Participating schools receive a set amount of federal funding that is distributed to students based on financial need each year. Eligible students can receive between $100 and $4,000 a year based on funding availability and their overall financial aid package.

•  Direct Subsidized Loans: Undergraduate students with financial need may qualify for subsidized loans — a type of federal student loan that does not accrue interest payments while you are in school at least half-time. Students also receive a six-month grace period on interest payments after graduation and may qualify for a deferment based on income, health, continuing education, military service, and other factors.

•  Federal Work-Study: This program provides part-time employment for undergraduate and graduate students with financial needs at participating schools. The total work-study award depends on the level of need, the timing of application, and a school’s available funding.

💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsididized and Unsubsidized loans first disbursed from Oct. 1, 2020, through Oct. 1, 2024). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.

Fill Out the FAFSA Early?

Even if you qualify for a specific amount of need-based aid, you may not receive all of it. That’s because the amount a student receives depends on the available funding at their school.

Colleges are not required to meet 100% of a student’s financial need, and some programs like the Pell Grant have limited funds that are divided up among schools each year.

It can be a smart idea to fill out the FAFSA as soon as possible to ensure they are among the first in line to receive available aid.

Typically, the FAFSA is available as of October 1 for the following academic year. However, the simplified FAFSA will not be available to students until December 2024 for the 2025-26 academic year. You have until June 30, 2025 to fill it out, but earlier may be better than later. Stay tuned for more updates on the new FAFSA deadline.

Bridging the Financial Gaps

Once you get your EFC/SAI and financial aid package (which may include scholarships, grants, work-study, and federal loans), you may find there are still some gaps in funding. If you’ve already exhausted federal loan options, you might consider looking into the possibility of getting a private student loan.

Unlike federal student loans, private loans require a credit check. Students who have strong financials (or who have cosigners who do) generally qualify for the best rates and terms. Just keep in mind that private loans don’t come with government protection programs, like forgiveness or forbearance, offered by federal student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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.

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