May
31
2023
candlestick stock chart

Important Candlestick Patterns to Know

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Important Candlestick Patterns to Know

Candlestick charts are one of many popular tools used for technical stock analysis. They are also called Japanese candlestick charts or patterns, because they were first invented in Japan in the 1700s to track the prices of rice. Today, candlestick patterns reveal patterns in stock prices.

They are also one of multiple types of charts that traders use to analyze stock prices, and there are some general patterns that are helpful to know and understand if you’re participating in the markets.

What Is a Candlestick Pattern?

A candlestick pattern is a sequence of price changes that can be identified as a formation on a chart. Each candlestick in a chart represents stock price increases or decreases within a specified time frame. Watching out for particular candlestick patterns in charts is a popular day trading strategy, and one that involves trying to predict whether a stock will go up or down in value, and make trades based on those predictions.

Again, this is a form of technical analysis, as opposed to fundamental stock analysis, which is different.

Candlestick patterns are also useful for specifically timing entry and exit points for trades. Based on how stock price movements have repeatedly occurred in the past following a pattern, traders can decide whether to put faith in them moving in a similar way again. The reason these patterns form is that human perceptions, actions, and reactions to stock price movements repeat.

Past events are not predictions of the future — no candlestick pattern is perfect, and it’s important to remember that there are always risks when trading stocks. But they can be useful guidelines and one more piece of information for those looking to make informed trading decisions.

Reading Single Candlesticks

Even a single candlestick chart can provide valuable insight into where stock prices may head. Each candlestick is composed of four parts:

•   The top “wick” or shadow of a candlestick marks the highest price the stock traded within the specified time period.

•   The bottom wick marks the lowest price the stock traded. If a candlestick wick is long, this means the highest or lowest trading price is significantly different from the opening or closing price. A shorter wick means the high or low trade was close to the opening or closing price. The difference between the top and bottom of the candlestick wicks is called the range.

•   In a red candlestick, the top of the thicker body of the candlestick, called the “real body,” marks the opening price of the stock within the specified time period, and the bottom marks the closing price. Red candlesticks mean the price has decreased.

•   In a green candlestick, the bottom marks the opening price, and the top marks the closing price. Green candlesticks show that the price has increased.

Candlesticks can represent different time frames. One popular time frame is a single day, so each candlestick on a chart will show the price change of one day. A one-month chart would have approximately 30 candlesticks.

Trending Candles vs Non-Trending Candles

If a candle continues an ongoing price trend, this is called a trending candle. Candles that go against the trend are non-trending candles.

Candles that don’t have an upper or lower wick can also show that there is a strong trend, support, or resistance in either direction. This means the opening or closing price was close to the high or low trade. And vice versa — a long wick can be an indicator that high or low prices aren’t holding.

Doji Candles

When a candle’s opening and closing price are almost the same, this forms a doji candle, which looks like a black cross or plus sign. The wicks of doji candles can vary in length.

A doji can either be a sign of a reversal or a continuation. It shows equal forces from buyers and sellers, with no gain in either direction.

Long Shadow Candles

Candles with a long wick or shadow can be a strong indicator. A candle with a long upper shadow can indicate a continuation of a bullish trend or reversal towards one, while long lower shadows can indicate a bearish trend or reversal.

Types of Candlestick Patterns

Candlestick patterns are used to help predict stock price action. There are dozens of candlestick patterns that some traders use to help recognize trading opportunities and better time their entries and exits, but there are four distinct ways to define potential outcomes of candlestick patterns:

1.    Bullish candlestick patterns show that a stock’s price is dominated by buyers and the price is likely to increase.

2.    Bearish patterns show that the stock is dominated by sellers, and the price is likely to decrease.

3.    Reversal candlestick patterns predict that the price trend of a stock is going to reverse.

4.    Continuation patterns predict that the price will continue to head in the direction it’s currently going.

It’s important to remember that some patterns are a signal not to trade. Knowing when not to buy or sell is just as important as knowing when to take action.

Bullish Candlestick Patterns

A bullish candlestick pattern can either be an indication of a continued bullish trend, or it could be a reversal from a bearish trend. There are a number of popular bullish candlestick patterns, each of which can tell a trader something different.

Morning Star: The Morning Star is a three-candlestick pattern indicating a reversal towards a bullish trend, so named because it gives traders hope of a reversal during a bearish trend. The first candle is long-bodied and red. The second candle opens lower and has a short body, it can be either red or green but its body doesn’t overlap with the body of the first candle. The third candle is green and closes at or above the center of the first candle body.

Morning Star Doji: This three-candlestick pattern tends to be a reversal from a bearish trend. The first candle has a long body showing a downtrend. The second candle opens at a lower price and trades within a narrow price range, then the third candle reverses in a bullish direction, closing at or above the center of the first candle body.

Bullish Engulfing: In this two-candle pattern, the first candle is bearish and the second is bullish. The body of the first candle fits completely within the body of the second candle, “engulfing” it. Although both candles are important, the higher the high of the second candle’s body, the stronger the indication of a reversal.

Three Line Strike: A four-candlestick bullish pattern that consists of three red candles followed by a long green candle. The red candles all fit inside the body of the green candle.

Hammer: This single-candle pattern can occur during or at the end of a bearish trend. The hammer candle looks like a hammer, with a short red candle body and a long lower shadow. This indicates that the low of the day is significantly lower than the close of the day, which can be a sign that the bearish trend is ending. However, it’s important for traders to wait and see if the reversal happens, because sometimes the hammer occurs during a continuing downtrend.

Bullish Harami: This reversal pattern happens during a downtrend and can indicate a switch toward upward price movement. It looks like a short green candlestick that follows several red candlesticks. The green candlestick body fits within the body of the previous red candlestick.

Abandoned Baby: This reversal pattern is made up of three candles. The middle candle is a doji which gaps up from the bottom of the previous red candle. The third candle is green and gaps up from the doji. The first and third candles have relatively long bodies. It’s so named because the gaps have space between the doji candle’s wick and both wicks of the first and third candle.

Dragonfly Doji: This is a strong indicator of a reversal. In this pattern, a doji candle opens and closes at or near the highest trade of the day. The lower shadow tends to be long, but it can vary in length.

Hanging Man: This is a single candlestick pattern which can indicate a coming bullish trend. The candle has a long lower wick and a short candle body.

Piercing Line: In this two-candle pattern, the first candle is long and red, followed by a green candle that opens at a new low but closes higher than the midpoint of the first candle. This can indicate a reversal away from a bearish trend.

Candlestick Sandwich: This is a three-candle pattern which consists of a long green candle sandwiched between two long red candles. The closing prices of the two red candles are similar, creating support that indicates a coming bullish trend.

Three Green Soldiers: A three-candle pattern that looks like a staircase towards higher prices. It consists of three green candles, each of which opens at a higher price than the previous day.

Bearish Candlestick Patterns

Bearish candlestick patterns may indicate an ongoing bearish trend, or they may indicate a reversal from a bullish trend. These are some common bearish candlestick patterns.

Evening Star: This three-candle pattern is the opposite of the Morning Star, indicating that a bullish trend is reversing into a bearish one. The first candle is long and green. The second candle opens higher and has a short body. The body can be either red or green but doesn’t overlap with the body of the previous candle. This shows that buying interest is coming to an end. The third candle is red and closes at or below the center of the first candle body.

Evening Star Doji: This three-candle pattern is the opposite of the Morning Star Doji. It indicates a possible reversal towards a bearish trend. The first candle is a long green candle. The second candle is a doji or very narrow and opens at a higher price. The third candle is red and closes at or below the center point of the first candle body.

Inverted Hammer: The inverse of the hammer pattern, this is a single-candle pattern which can indicate the end of a downtrend and reversal towards a bullish price movement. This candle has a short green body and a long upper shadow, making it look like an upside down hammer.

Shooting Star: This is a single-candle pattern in which there is a green candle with a short body, very little or no lower shadow, and a long upper shadow. The shooting star can mark the top of an upcycle and signal a reversal.

Dark Cloud Cover: A three-candlestick pattern that occurs when a red candle has an opening price that’s higher than the closing price of the previous day’s candle, and a closing price below the middle of the previous one. The first candle is green. To complete the pattern, the third candle is bearish.

Bearish Harami Cross: A trend-reversal pattern consisting of a series of green candlesticks followed by a doji, this pattern indicates that the uptrend may be losing momentum and preparing for a reversal.

Falling Tree: This is a five-candlestick pattern which signals a possible interruption of a bearish trend, with a continuing downtrend. The first is a long red candle, followed by three small green candles, which all stay within the range of the first candle. The last candle is another long red one. This pattern shows that bulls are unable to reverse a downtrend.

Two Black Gapping: This pattern happens when there is a new high in an uptrend, followed by two red candles that gap down. This can be a good indicator of a coming bearish trend.

Gravestone Doji: This is an inverted dragonfly pattern, in which the opening and closing price are at or near the low of the day. The upper candle shadow tends to be long, but can vary in length. It can indicate either a reversal towards a bearish trend, or an ongoing bearish trend.

Three Black Crows: In this pattern, a new high is followed by three long red candlesticks that each close with lower lows.

Reversal Patterns

The Harami Cross can indicate a reversal in either a bullish or a bearish trend. It’s a two-candlestick pattern in which the first candle opens or closes at a new high or low. The second candle is a doji which is inside the range of the previous candle’s body.

Other Patterns

These two patterns don’t fit into the bullish, bearish, reversal, or continuation categories.

Spinning Top: A short-bodied candlestick with equal top and bottom wicks that looks like a spinning top. This is an indication of indecision in the market. After the spinning top the market will likely move quickly one way or another, so if there’s a pattern prior to the top that may be an indicator of which way the spinning top will fall.

Supernova: If there’s a high volume stock with low float that experiences a price explosion, followed by a significant price drop, this is a supernova. There can be trading opportunities on the way up, and then opportunities to short sell on the way down as well.

The Takeaway

Candlestick charts are a stock analysis tool, and traders who can identify patterns within them may gain trend insights and try to predict security price movements. It can help them make a decision of when or if to buy, sell, or stand pat. There are numerous types of candlestick patterns, though it’s important to remember that patterns do not always lead to the predicted outcome.

Reading stock charts is only one small part of the investing world, and a rather complicated part, too. There are simpler, less-intensive ways to participate in the markets, too.

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

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

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May
30
2023

What Determines a Stock Price?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Determines a Stock Price?

Stock share prices go up and down throughout each trading day, and on a basic level, share prices for stocks traded on public stock exchanges are determined through supply and demand. Demand is determined by expectations and emotions.

What this means is if there is less supply of a stock, there may be more demand for it since it’s more rare. In that situation, the price of the stock will rise. Conversely, if there is more supply and less demand, the stock price will decrease. If either of these trends continues for a lengthened period of time, it can lead to a bull or bear market in which there’s an ongoing trend of increasing or decreasing prices.

7 Factors That Determine Stock Price

Beyond the basic principles of supply and demand, there are other factors that contribute to changes in stock prices. Those include investor behavior, the news cycle and earnings data, and more.

Investor Behavior

A current stock price is based on a prediction of the future success of a company. Hypothetically, if investors have reason to believe that a company will be successful in the future, they will invest in the company, causing the price of shares to increase. Similarly, if the outlook for a company is negative, investors may sell off the shares they own, causing the price to decrease.

Basically, if a few million people think that Company X is going to be successful in the near future and that shares of Company X will see price appreciation, that will lead them to buy the stock and its price will increase.

Emotions such as fear, panic, anxiety, greed, and hope can have a significant impact on investor behavior. This is the basis of the field of behavioral finance. There are a few different ways investors try to predict the future success of companies.

Company News and Data

You should know that stock price predictions can be made based on reading charts and making calculations, as well as looking at news stories, fundamental analysis like reading over company earnings and reports, and other information. News about changes in management, production, scandals, and other stories can cause share prices to quickly change.

World Events

Beyond news and outlooks specifically related to companies, outside factors can also influence investor behavior. For instance, a presidential election, a pandemic, political unrest, or signs of a recession can create panic in the market, influencing investors to sell off stock shares in order to protect from losses or put their money into safer investments.

Usually there is some up or down price movement in stock prices, and some stocks are more volatile than others. It’s rare for prices to completely stop moving or remain static. It’s also rare for prices to drastically increase or decrease suddenly, but this is what happens during a market crash.

A market crash can happen when many investors begin to sell, creating a snowball effect where more and more investors pull their money out of the stock market. At that point, the market could crash, resulting in actual losses that wouldn’t have occurred if people hadn’t sold.

Stock Buybacks

Another factor that can affect stock price is company buybacks of stocks. Companies will sometimes buy back their own stock from investors, thereby reducing the supply of shares to the public. They do this in an attempt to increase stock prices. If companies issue more shares of stock, they are then increasing the supply, which can cause the price to decrease.

Primary and Secondary Markets

When some companies first start selling stock to the public, they hold an IPO, or initial public offering. At the time of the IPO, an initial share price is set and investors can begin to buy the stock at that price. After the IPO ends, the stock gets listed on stock exchanges and the price starts to fluctuate as shares get bought and sold — and supply and demand begin to play a role in share price.

When companies don’t have an IPO, their shares get bought and sold privately, in which case share price is determined between the buyer and seller.

Stock Valuation

The valuation of a stock is made by looking at the company’s past and projected earnings, large trades made by institutional investors, overall market trends of the S&P 500, and ratios and calculations made by analysts.

Four ratios and calculations that are used to determine the valuation of a stock are price-to-earnings (P/E) ratio, price-to-book (P/B ratio), price-to-earnings-to-growth (PEG) ratio, and dividend yield. These calculations can help investors figure out whether a stock is currently under- or overvalued.

Bid and Ask Price

A share price ultimately gets determined through the bid, ask, and sale price on stock exchanges. The bid price is the maximum amount an investor will pay for shares of a stock, while the ask price is the lowest price a seller will accept. When the two prices match up, a sale is made, and that price sets the new price per share of the stock. Ultimately it gets down to what someone is willing to pay and if a stock owner is willing to sell to them at that price.

What someone is willing to pay or sell for is determined by psychological and market factors, as discussed. If a buyer thinks the stock is undervalued at the asking price, they will buy, and vice versa. Generally the difference between the bid and ask price isn’t very large, but if a stock doesn’t have a large trading volume it can be.

Companies that are a similar size or have a similar valuation can have very different share prices because the number of shares each company issues can differ greatly. Because of different market caps and numbers of liquid shares, the share price doesn’t say much about the actual value of the company, and one can’t use share prices to compare companies. However, the share price does reflect what investors currently think the stock of a company is worth.

How to Handle Changes in Stock Price

Attempting to time the market is extremely challenging, and can result in significant losses, not to mention anxiety. Once an investor sells a stock, they are then in the difficult position of trying to figure out when and whether to buy back into it at a lower price, if it even continues to decrease in value. Likewise, they could sell at what they think is the peak of the market, only to watch the price continue to rise.

Historically, the stock market has continued to rise over the long term, with plenty of ups and downs along the way. Although past trends are never a guarantee of future outcomes, it’s likely that investors with a longer time horizon, who are willing to hold onto their stocks throughout up and down cycles, will eventually see positive returns.

That said, market volatility can provide opportunities to invest when the stock market is down, or sell at higher prices, especially if they were already considering buying or selling a stock.

The Takeaway

Ultimately, supply and demand drive stock prices — which is informed by market conditions, world events, and investor behavior, among other influences. Although there is no way to look into the future to predict share prices, investors tend to look at past performance, charts, and market trends to attempt to predict price movements. In general, it’s best not to try and time the market, but to focus on building a solid long-term portfolio that will grow over time.

There are numerous investing strategies to explore, too, and some of them don’t involve investors worrying too much about stock prices in the immediate term.

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

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

SoFi Invest®

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

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

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

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May
30
2023
What Are Convertible Bonds?: Convertible bonds are a form of corporate debt that also offers the opportunity to own the company’s stock.

What Are Convertible Bonds?

By | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Convertible Bonds?

Convertible bonds are a form of corporate debt that also offers the opportunity to own the company’s stock. Like regular bonds, they offer regular interest payments. But they also allow investors to convert the bonds into stock according to a fixed ratio. As such, they’re often referred to as “hybrid securities.”

Most convertible bonds give investors a choice. They can hold the bond until maturity, or convert it to stock. This structure protects investors if the price of the stock falls below the level when the convertible bond was issued, because the investor can choose to simply hold onto the bond and collect the interest.

How Do Convertible Bonds Work?

Companies will often choose to issue convertible bonds to raise capital in order to not alienate their existing shareholders. That’s because shareholders often react badly when a company issues new shares, as it can drive down the price of existing shares, often through a process called stock dilution.

Convertible bonds are also attractive to issue for companies because the coupon — or interest payments — on them tend to be lower than for regular bonds. This can be helpful for companies who are looking to borrow money more cheaply.

Every convertible bond has its own conversion ratio. For instance, a bond with a conversion ratio of 5:1 ratio would allow the holder of one bond to convert that security into five shares of the company’s common stock.

Every convertible bond also comes with its own conversion price, which is set when the conversion ratio is decided. That information can be found in the bond indenture of convertible bonds.

Convertible bonds can come with a wide range of terms. For instance, with mandatory convertible bonds, investors must convert these bonds at a pre-set price conversion ratio. There are also reverse convertible bonds, which give the company — not the investor or bondholder — the choice of when to convert the bond to equity shares, or to keep the bond in place until maturity.

But it also allows the investor to convert the bond to stock when they’d make money by converting the bond to shares of stock when the share price is higher than the value of the bond, plus the remaining interest payments.

How Big Is the Convertible Bond Market?

In 2022, the size of the global convertible bond market was estimated to be about $375 billion. Securities have been issued by hundreds of companies. But note that these numbers are miniscule compared to the U.S. equity market, which has trillions in value and thousands of stocks.

The total size of the convertible bond market does expand and contract, though, often with the cycling of the economy. As such, it’s likely that the market could be bigger or smaller a year from now.

Reasons to Invest in Convertible Bonds

Why have investors turned to convertible bonds? One reason is that convertible bonds can offer a degree of downside protection from the bond component during stock volatility. The companies behind convertibles are obligated to pay back the principal and interest.

Meanwhile, they can also offer attractive upside, since if the stock market looks like it’ll be rising, investors have the option to convert their bonds into shares. Traditionally, when stocks win big, convertibles can deliver solid returns and outpace the yields offered by the broader bond market. However, when stocks retreat, convertibles tend to deliver short-term losses.

For example, In 2020, the U.S. convertibles market returned a blockbuster 43%, making it one of the top performing global asset classes. The convertibles market also did well in 2009, just as the global economy was recovering from the financial crisis, when it returned 49%.

Downsides of Convertible Bonds

One of the biggest disadvantages of convertible bonds is that they usually come with a lower interest payment than what the company would offer on an ordinary bond. And the chance to save on debt service is a big reason that companies issue convertibles. So for investors who are primarily interested in income, convertibles may not be the best fit.

There are also risks. Different companies issue convertible debt for different reasons, and they’re not always good. Convertible financing is sometimes labeled “death spiral financing.”

The death spiral is when convertible bonds drive the creation of an increasing number of shares of stock, which drives down the price of all the shares on the market. The death spiral tends to occur when a convertible allows buyers with a large premium to convert into shares at a fixed conversion ratio in which the buyer has a large premium.

This can happen when a bond’s face value is lower than the convertible value. That can lead to a mass conversion to stock, followed by quick sales, which drives the price down further.

Those sales, along with the dilution of the share price can, in turn, cause more bondholders to convert, given that the lower share price will grant them yet more shares at conversion. Being one of the shareholders who makes something out of such a catastrophe can be a matter of close study and good timing.

How to Invest in Convertible Bonds

Most convertibles are sold through private placements to institutional investors, so retail or individual investors may find it difficult to buy them.

But individual investors who want to jump into the convertibles market can turn to a host of mutual funds and exchange-traded funds (ETFs) to choose from. But because convertibles, as hybrid securities, are each so individual when it comes to their pricing, yields, structure and terms, each manager approaches them differently. And it can pay to research the fund closely before investing.

For investors, one major advantage of professionally managed convertible bonds funds is that the managers of those funds know how to optimize features like embedded options, which many investors could overlook. Managers of larger funds can also trade in the convertible markets at lower costs and influence the structure and price of new deals to their advantage.

Recommended: How to Trade Options

The Takeaway

Convertible bonds are debt securities that can be converted to common stock shares. These hybrid securities offer interest payments, along with the chance to convert bonds into stock.

While convertible bonds are complex instruments that may not be suitable for all investors, they can offer diversification, particularly during volatile periods in the equity market. Investors can gain exposure to convertible bonds by putting money into mutual funds or ETFs that specialize in them.

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

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

SoFi Invest®

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

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

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

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

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May
25
2023
charts and graphs investing

Tips on Evaluating Stock Performance

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Tips on Evaluating Stock Performance

Evaluating stock performance is not an exact science, and there are many factors, indicators, and tools that investors have at their disposal. However, it can be easy to get overwhelmed by the amount of information, charts, and choices available. After all, no amount of analysis can truly make accurate predictions about stock performance.

With this all in mind, for most investors, using a few simple strategies to evaluate stocks can provide a good understanding in order to help make an investment decision. Every investor has their own goals, investing and diversification strategies, and risk tolerance, so it’s beneficial for each person to come up with their own stock evaluation strategy.

Evaluating Stock Performance

Stock evaluation can involve both quantitative and qualitative analysis. Quantitative analysis involves looking at charts and numbers, whereas qualitative analysis looks into industry trends, competing firms, and other factors that can affect a stock’s performance. Both forms of analysis provide valuable information for investors, and they can be used in tandem to come up with a comprehensive picture of performance.

Here are a few key steps investors can take to evaluate stock performance or analyze a stock.

Total Returns

One of the most important metrics to look at when evaluating a stock’s performance is the total market return over different periods of time. A stock may have increased significantly in value within the past few days or months, but it could still have lost value over the past year or five years.

Investors may want to consider how long they plan to hold a stock and look into each stock’s historical performance. Some common periods to look at are the past year (52 weeks), the year to date (YTD), the five-year average return, and the 10-year average return. Investors can also look at the average annual return of a stock.

Every investor has different goals and expectations for returns. One investor might be happy with a 3% return over five years, while another might not be.

Using Indexes

Another step investors may want to take to evaluate a stock’s performance is comparing it with the rest of the stock market. A stock might seem like an attractive investment if it has had a 7% return over the past 52 weeks, but if the rest of the stock market has increased by more than that, there might be a better choice.

A single stock can be compared to the overall stock market using stock indexes. Indexes show averages of the market performance of a handful or even hundreds of stocks. Index performance metrics show how any particular stock compares to the broader market. If a stock has been performing similarly or better than the market, it may be a good investment.

Looking at Competitors

An additional way investors might consider evaluating a stock’s performance is by comparing it to other companies within the same industry. One might discover that an entire industry is doing well in the current market, or that another stock within the industry would actually be a better investment. There are numerous industries and market sectors.

Not every company within an industry will be a good comparison, so it’s best to look at companies of a similar size, those that have been around for a similar amount of time, or that have other similarities. Even if a giant, established corporation offers a similar product or service to a small startup, they may not be the best two stocks to compare within an industry.

Two questions investors might consider asking are:

•   Does the company have a competitive advantage? If the company has a unique asset or ability, such as a patent, a new research or manufacturing method, or great distribution, it may be more likely to succeed within the industry.

•   What could go wrong? This could be anything from poor management to a new form of technology making a company irrelevant. Nobody can predict the future, but if there are any red flags it’s important to pay attention to them.

Reviewing Company Revenue

Looking at stock returns is useful, but it’s also a good idea to look into the actual revenue of a company through its profit and loss statement, or earnings reports. Stock prices don’t necessarily follow a company’s revenue, but looking at revenue gives investors an idea about how a company is actually performing.

Like stock returns, investors can look at revenue over different periods of time. Revenue is categorized as operating revenue and nonoperating revenue. Operating revenue is more useful for investors to look at because non-operating revenue can include one time events such as selling off a major asset.

Using Stock Ratios in Evaluations

There are several financial ratios that can be used to evaluate a stock and find out whether it is currently under or overpriced in the market. These ratios can help investors gain an understanding about a company’s liquidity, profitability, and valuation. Some of the most commonly used ratios are:

Price to Earnings (P/E) Ratio

The most popular ratio for evaluating stock performance is the price to earnings ratio, or P/E ratio, which compares earnings per share to the share price. P/E is calculated by dividing stock share price by the company’s earnings per share. It’s important because a stock’s price can shoot up based on good news, but the P/E ratio shows whether the company actually has the revenues to back up that price. One can compare the P/E ratios of companies in the same industry to see which is the best investment.

There are two different ways to calculate P/E. A trailing P/E ratio can be calculated by dividing current stock price by earnings per share. A forward P/E ratio is a prediction that can be calculated by dividing stock price by projected earnings.

Price to Earnings Growth (PEG) Ratio

P/E is a useful ratio, but it doesn’t take growth into account. PEG looks at earnings, growth, and share price all at once. To calculate PEG, divide P/E by the growth rate of the company’s earnings. If the PEG is higher than 2, the stock may be overpriced, but if it’s under 1, the stock may be underpriced.

Price to Sales (P/S)

The price to sales ratio is calculated by dividing the company’s market capitalization by its 12-month revenue. If the P/S is low in comparison to competitors, it may be a good stock to buy.

Price to Book (P/B)

The P/B ratio looks at stock price compared to the book value of the company. The book value includes assets such as property, bonds, and equipment that could be sold. Essentially, the P/B looks at what the value of the company would be if it were to shut down and be sold immediately. This is useful to know because it shows the value of a company in terms of assets, rather than valuing it based on growth.

If the P/S is low, the stock may be a good investment because the stock might be underpriced.

Dividend Yield

Dividend yield is calculated by dividing a stock’s annual dividend amount by the current price of the stock. This gives investors the percentage return of a stock’s price. If the dividend yield is high, this means an investor may earn more cash from the stock. However, this can change at any time so isn’t a good long-term indicator.

Dividend Payout

The dividend payout ratio tells investors what percentage of company profits get paid out to shareholders. Companies that don’t pay out dividends or pay low dividends are likely reinvesting their profits back into the business, which could help the business continue to grow. Paying out dividends isn’t a negative thing, but if a company pays out high dividends they will have less money to reinvest and may not be able to continue to grow.

Return on Assets (ROA)

The ROA ratio compares a company’s income to its assets, which gives investors an indicator of how they handle their business.

Return on Equity (ROE)

ROE provides a calculation of how much profit a company makes with every dollar that shareholders invest. To calculate ROE, divide a company’s net income by shareholder equity. This gives an indication of how a company handles its resources and assets. However, as with every calculation, ROE doesn’t always provide a full and accurate picture of a stock’s performance. Companies can temporarily boost their ROE by buying back shares, which lowers the amount of equity held by shareholders.

Profit Margin

Profit margin compares a company’s total revenues to its profits. If a company has a high profit margin, this shows that a company is good at managing expenses, because they are able to keep revenue rather than spending it.

Current Ratio

The current ratio is calculated by dividing a company’s current assets by its current liabilities. This shows if a company will have enough money to pay off its debts. Current assets include cash and other highly liquid property. Current liabilities are any debts that a company must pay within one year.

Earnings Per Share (EPS)

This ratio is just what it sounds like, how much profit is a company generating per share of stock. A high EPS is a positive indicator. It’s a good idea for investors to look at EPS over time to see how it changes, because EPS could be boosted in the short term if a company has cut costs.

EPS is also useful for comparing different companies, since it gives a quick indication of how well each stock is doing. However, EPS doesn’t give a full picture of how a company is doing or how they manage their money, because some companies pay out earnings in the form of dividends, or they reinvest them back into the business.

Debt to Equity Ratio

Even if a company is growing and earning more profit, they could be doing so by getting into more and more debt. This could be a bad sign if they become unable to pay back their debts or if borrowing becomes more difficult. An ideal debt equity ratio is under 0.1, and over 0.5 is considered to be a bad sign.

Additional Factors

Aside from all the tools above, there are other factors to consider when evaluating a stock.

•   Dividends: If a stock pays dividends, investors may want to consider how those payments affect the overall returns of the stock.

•   Inflation: Factoring in how much inflation will affect stock returns is another helpful factor. This can be done by subtracting inflation amounts from a stock’s annual returns.

•   Analyst Reports: Another resource available to investors is Wall Street analyst reports put together by professional analysts. These can give in-depth insights into the broader market as well as individual companies.

•   Historical Patterns: Looking at past trends to get a sense of what the market might do in the coming months and years can help investors make informed decisions. Past trends aren’t predictions for the future, but they can still be useful.

The Takeaway

There are many tools available to help investors who are just getting started researching stocks and building a portfolio, and there’s no right or wrong way to evaluate stock performance. It can take a lot of time to gather information and research stocks, but investors can use tools to see everything at once and make quicker, more informed investment decisions.

If you’re ready to put your evaluation skills to the test, you can start investing in stocks and other securities to see if you’re on-point. But be aware that investing always involves risk.

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

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

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

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May
25
2023
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Understanding Inverse ETFs

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Understanding Inverse ETFs

An inverse ETF — or short ETF — is a portfolio of securities that allows investors to make a bet that either the broader markets or a particular asset class or market sector will go down in the short term.

There are a wide range of inverse ETFs to choose from — there are currently 89 traded in U.S. markets. They allow investors to make short-term investments in the likelihood that the price of a given asset will go down. Investors can use inverse ETFs to find returns when there are price dips in equities, fixed-income securities, and certain commodities.

How Does an Inverse ETF Work?

To understand inverse ETFs, an investor first needs to know about Exchange Traded Funds (ETFs). An ETF is a portfolio of stocks, or bonds or other securities that trades on an exchange, like a stock. Its share price fluctuates throughout the day, as investors buy and sell shares of the fund.

As with regular ETFs, investors can buy and sell inverse ETFs throughout the day. Unlike the way ETFs work, however, inverse ETFs are designed not to invest in a given index, but to deliver the opposite result. If the index goes down, the ETF is meant to go up, and vice versa.

What Do Inverse ETFs Invest In?

Inverse ETFs — or short ETFs — use complex trading strategies, involving a heavy use of futures contracts, to deliver the opposite result of the markets. Futures contracts are essentially agreements to buy or sell a given asset at a given date and price, regardless of the market price at the time. Using futures contracts, an investor can bet that a given asset, like a stock, will go up or down, without actually owning that asset.

Put simply, investors who think the price of a given stock will go down may buy a futures contract that allows them to sell a stock at a higher price than they think it will trade at by the expiration of the contract. If the price of that stock does go down, they can buy it on the open market cheaply and sell it to the other person or institution at the agreed-upon higher price, and pocket the difference.

An inverse ETF does that with a group of stocks, every trading day. The largest inverse ETFs aim to deliver the opposite returns of major stock indexes, like the Nasdaq or the S&P 500. For example, if the S&P 500 goes down 1% on a given day, then a corresponding inverse ETF could be designed to go up 1% that day.

Leveraged Inverse ETFs

There are other inverse ETFs that take the formula one step further, using leverage. That means they buy the futures contracts in their portfolios partially with borrowed money. That gives them the ability to offer outsized returns — two and three times the opposite of the day’s return — but it also exposes them to sizable single-day losses, and larger losses over time.

For example, on that same hypothetical day when the S&P 500 goes down 1%, the corresponding inverse ETF could be designed to go up by 2%.

Who Invests in Inverse ETFs?

An inverse ETF might seem like a good choice for an investor who is generally pessimistic about the prospects for the broader markets over the next few months or years. But that’s not necessarily the case.

Inverse ETFs only invest in one-day futures contracts. The futures contracts they invest in expire at the end of the trading day, locking in the ETFs’ gains and losses.

With an inverse ETF, it’s not enough to be right about the general direction of a given market, asset class or sector. The performance of inverse ETFs isn’t the exact opposite of the index it tracks over longer periods of time. So, the investor has to be correct on the right days, as well.

Inverse ETFs get a lot of attention in the media during market swoons, when they post eye-popping returns. But most financial professionals probably don’t recommend them as long-term investments. They’re generally best for sophisticated investors with a high tolerance for risk.

What Are the Risks of Inverse ETFs?

Investors who purchase inverse ETFs take on risks that are common to all investors, and also some that are unique to this specific investment vehicle.

•   Loss: If an investor buys an inverse ETF and the index that it shadows goes up, then the investor will lose money. If the given index goes up by 1% that day, then the fund offering the inverse of that index will go down by 1%; with a leveraged ETF, it could even go down by 2% or 3%.

•   Fees: While most ETFs have very low management fees, inverse ETFs may have higher fees, which may take a bite out of returns over time. (It’s worth noting that the management fee can be typically lower than the time and expense of shorting the stocks directly.)

The risks are significant enough that in 2019, the Securities and Exchange Commission proposed new regulations about inverse ETFs, requiring companies that manage leveraged and inverse ETFs to specifically make sure customers understood those risks. The regulation was not approved, which means the onus is still very much on investors to understand the risk.

The Takeaway

Inverse ETFs are designed as tools to allow investors to bet against the market, or specific asset classes. While they come with unique risks, inverse ETFs can help investors find returns during market dips — giving them the chance to short the market with one trade. These ETFs go up as the index goes down, offering opportunity when it might otherwise seem there is none.

The trick: choosing the right inverse ETF on the right day, in order to gain rather than lose. The funds are risky, but can be popular among investors who want to hedge their exposure to a given asset class or market sector, and investors who believe that a given market is due for a big drop.

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

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

SoFi Invest®

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

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

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

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

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