Nov
21
2022

What Does It Mean to Be Unbanked?

By | Fresh Out of School, money, Terminology | Comments Off on What Does It Mean to Be Unbanked?

The term “unbanked” applies to an individual or household that doesn’t use a traditional banking account or credit union for financial services. An unbanked adult has no checking or savings account, relying instead on alternative financial services to pay for life’s expenses.

While the urge to store cash under a mattress may be strong for some, being unbanked can be both expensive and impractical. The benefits of using a financial institution may well outweigh those of the alternatives. However, many people encounter obstacles when trying to access a bank or credit union.

Here, you’ll learn:

•   What does “unbanked mean?

•   Why do people become unbanked?

•   What types of people are typically unbanked?

•   What are the pros and cons of being unbanked?

•   What are initiatives to help the unbanked?

What Does Unbanked Mean?

First, it’s important to give a definition of “unbanked.” If a person is unbanked, that means they are not served by a bank or similar financial institution. If you are over the age of 18 and have no checking or savings account and no credit or debit card, you are considered to be an unbanked adult.

You may wonder, how do unbanked adults conduct financial transactions? How do they go about cashing checks without a bank account and pay bills?

Many unbanked individuals deal in cash, whether by their preference or due to their circumstances. In order to conduct everyday financial transactions, they may use check cashing services, payday advances or loans, pawn shops, and/or make payments with cash or money orders.

Why Do People Become Unbanked?

People become unbanked for various reasons. These can include:

•   Lack of money to meet minimum balance requirements at financial institutions

•   Lack of the credentials needed to open bank accounts (say, a Social Security number)

•   An underlying distrust of financial institutions

•   A desire to avoid any fees involved in opening a checking or savings account, or the penalties for incurring a negative bank account balance

•   Inability to open an account due to having a previous account closed by a bank or credit union, or because they have bad credit

•   Living too far away from a bricks-and-mortar banking location or being unable to drive or take transportation to a financial institution

•   Lacking a computer, a Wi-Fi connection, and/or the tech skills to open an account online.

How Many People are Unbanked in the U.S.?

The United States has a considerable number of unbanked adults. A recent survey by the Federal Deposit Insurance Corporation (FDIC) found that over 6% of American households are unbanked, which accounts for about 14 million U.S. adults. According to a 2020-2021 Federal Reserve poll, 5% of adults in the United States are unbanked, having no traditional checking or savings accounts.

While these are large numbers, it’s worth noting that other nations have much larger percentages of unbanked people. The countries with the highest percentage include Morocco, Mexico, Vietnam, Egypt, and the Philippines, all with unbanked populations of 60% or more.

What Are the Types of People Who Are Unbanked?

The Federal Reserve of the United States estimates that most of the unbanked population fall into the following demographics:

•   Low-income: Families making below $25,000/year

•   Less-educated: A higher percentage of the unbanked never graduated from high school

•   Non-white: Blacks and Hispanics make up the majority of the unbanked

•   Women: More females are unbanked than males, possibly because some women don’t view themselves as in charge of household finances, with someone else in the family managing the bank account

•   Young people: They tend to be unbanked more often than older adults, possibly because they are college students, without jobs, and lack the financial means or the know-how to open an account. (It’s worth noting that some institutions offer college student bank accounts, which are specially designed to help students begin banking. These can be a useful option.)

What Is the Difference Between Unbanked and Underbanked?

You may also have heard the term underbanked as well as unbanked. An underbanked person typically does have a checking and savings account with an FDIC-insured institution, but regularly relies on alternative financial services. Despite having traditional accounts, they may still utilize check-cashing services, money orders, and short-term payday loans.

The Federal Reserve estimates that 13% of adults in the United States are underbanked. As with the unbanked population, this could be due to a lack of access to banking services, bad credit, a lack of financial or technical resources to open and maintain an account, a distrust of financial institutions, or having had a previous account closed.

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Initiatives to Help the Unbanked

Being unbanked can make it a challenge for a person to manage their money and build wealth. Fortunately, government programs and some financial entities are working to solve this issue. They are developing new ways to provide incentives and encourage unbanked individuals to choose traditional banking options. These include:

•   Eliminating banking fees. Getting rid of minimum balance requirements, monthly account fees, and other financial deterrents can encourage low-income individuals to open an account.

•   Developing banking apps. Banking on the phone or computer can help make it easier for people who don’t have a convenient banking branch or have physical challenges.

•   Second chance accounts. Some banks may offer a second chance checking account. When opening this type of account, the bank is willing to overlook bad credit, previously unpaid overdraft fees, or past forced account closures. The account will likely have some limitations, but it can be an on-ramp to a standard checking account.

•   Bringing back postal banking. Decades ago, an individual could perform basic banking transactions at their local post office—cashing checks, bill payment processing, sending money to other branches, and issuing modest loans. There is a movement to bring back these services, and some post offices are already offering to cash payroll checks and have the amount put on a debit card for a small fee.

•   Educational outreach. In 2021, the FDIC announced a “tech sprint” program, incentivizing participating banks to research and implement new ideas to reach the unbanked population in their communities. Among the offerings in development: workshops on how to balance your bank account and banking tutorial videos.

Why Is Being Unbanked a Problem?

Being unbanked can be a problem for a few reasons. For example:

•   It can be complicated and time-consuming to conduct banking transactions without having standard bank accounts.

•   Being unbanked can be expensive as well. A person may have to pay high fees for check cashing and other services from predatory businesses. Plus, an unbanked individual won’t earn any interest on your money.

•   It can be risky to carry cash versus safely keeping it with a bank or credit union.

•   Unbanked people may struggle to build wealth and have a solid credit and banking history.

Pros of Being Unbanked

Being unbanked could be seen as a positive for some people. The upsides include:

•   Not having to deal with the bureaucracy or paperwork of opening and maintaining accounts at banks

•   No checking or savings account fees

•   No overdraft or minimum balance fees

•   No record of one’s finances, if a person wants that kind of privacy.

•   Can be seen as more convenient to use cash vs. using debit cards, ATMs, and bank branches.

Cons of Being Unbanked

As mentioned above, being unbanked can be problematic. Those who don’t have checking and savings account may find that:

•   Using money orders and similar products to pay bills can be costly (fees) and time-consuming.

•   Carrying and/or keeping cash at home can be risky; what happens if you are robbed?

•   No convenient direct deposit for paychecks. The unbanked may have to utilize a check-cashing or payday loan service, which can charge very high fees or interest rates.

•   No opportunity to build up a banking history or possibly a credit history for future borrowing.

•   No access to safe and convenient money transfers.

•   No opportunity to securely save money for the future.

•   No interest earned on your money.

•   No access to other products and services that banks may offer when you are a customer, such as cashback programs or better mortgage rates.

Opening a Bank Account

There are many reasons people may shy away from opening a bank account. That said, being unbanked has a number of disadvantages. Your money may not be as secure, and it may be more costly and time-consuming to conduct transactions. What’s more, your funds won’t earn interest and grow.

Opening a bank account can be a very simple process. For most people, what you need is:

•   A valid government-issued photo ID

•   A Social Security number or taxpayer ID number

•   Proof of address.

Then, once you’ve selected a financial entity you trust, it can be quite quick to complete the sign-up process, whether you do so in person or if you’re someone who can open an account online. What’s more, there are banks that will allow you to open an account without an initial deposit and that don’t have minimum balance requirements either.

For those who have past banking problems, like having had accounts closed before, a second chance account can be a good move. While it may not be a full-fledged standard account (there are typically limitations, such as no overdraft protection), it can be a positive step towards becoming banked.

By the way, if you previously had an account that’s now shuttered, it’s unlikely that you can reopen your closed bank account. It’s usually best to start over with a new account, at your prior financial institution or elsewhere.

The Takeaway

By choice or circumstance, millions of Americans are unbanked. Typically, this means they don’t have a checking or savings account and don’t participate in personal banking. There can definitely be a downside to being unbanked, including factors like spending more time and money to conduct banking transactions and not earning any interest on one’s funds. For many people, becoming a client of a bank or credit union can be a positive step towards improving their money management and gaining wealth.

SoFi can be a great option if you are just starting out as a banking client. Our Checking and Savings, when opened with direct deposit, can be a secure place to deposit your paychecks, pay bills, transfer funds, and enjoy peace of mind. Plus, you’ll earn a competitive APY while paying no account fees. Opening a SoFi bank account can be a great way to help your money grow faster.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

What does it mean when a person is unbanked?

Being unbanked means an individual who doesn’t have access to or doesn’t use traditional financial services, such as checking and/or savings accounts or debit and credit cards.

What are the needs of the unbanked?

The unbanked need to hold onto cash securely, pay bills, and transfer funds. Without using the traditional banking system, they are likely to spend more time and pay higher fees and interest rates to conduct basic banking transactions.

How do unbanked people get paid?

Unbanked people can receive funds by cash, a money order, a money transfer service for cash pickup, or by receiving a prepaid debit card.

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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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Oct
30
2022
What Are Bull Put Spreads & How Do They Work?

Bull Put Spread: How This Options Strategy Works

By | Going to College, invest, Investing, Terminology | Comments Off on Bull Put Spread: How This Options Strategy Works

A bull put spread is an options trading strategy that someone may use when they have a moderately bullish view of an asset, meaning they think the price will increase slightly. The strategy allows you to profit from an increase in an underlying asset’s price while limiting losses if an asset’s price declines.

Bull put spreads and options trading are not for everyone, but learning the ins and outs of this strategy may help your financial portfolio.

What Is a Bull Put Spread?

A bull put spread is an options trading strategy that involves buying a put option and selling another put option on the same underlying asset with the same expiration date, but at different strike prices. The trade is considered a neutral-to-bullish strategy, since it’s designed so the maximum benefit occurs when an asset’s price moderately increases.

To execute a bull put spread, a trader will simultaneously sell a put option at a specific strike price (the short leg of the trade) and buy a put option with a lower strike price (the long leg of the trade).

The trader receives a premium for selling the option with a higher strike price but pays a premium for buying the put option with a lower strike price. The premium paid for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. The difference between the premium received and the premium paid is the maximum potential profit in the trade.

The goal of the bull put spread strategy is to finish the trade with the premium earned by selling the put (sometimes referred to as writing a put option) and lose no more than the premium paid for the long put.

A bull put spread options trading strategy is sometimes called a short put spread or a credit put spread.

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

How a Bull Put Spread Works

Bull put spreads focus on put options, which are options contracts that give the buyer the right – but not always the obligation – to sell a security at a given price (the strike price) during a set period of time.

The bull put spread strategy earns the highest profit in situations where the underlying stock trades at or above the strike price of the short put option – the put option sold with the higher strike price – upon expiration. This strategy, therefore, works best for assets that the traders of a bull put spread believe will trade slightly upwards.

The strategy provides a way to profit from a stock’s rising price without having to hold shares. An options strategy like this also caps downside risk because the maximum loss is the difference between the strike prices of the two puts minus the net premium received.

Even though the risk is limited, there can still be times when it makes sense to close out the trade.

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

Max Profit and Risk

A bull put spread is meant to profit from a rising stock price, time decay, or both. This strategy caps both potential profit and loss, meaning its risk is limited.

The profit of a bull put spread is capped at the premium you receive by selling the short leg of the trade, minus the premium you spent to buy the long leg put option. You achieve this maximum profit if the underlying asset finishes at any price above the strike price of the short leg of the trade.

Maximum profit = premium received for selling put option – premium paid for buying put option

The maximum losses (i.e., the risk) of a bull put spread is the difference between the strike price of the short put option and the strike price of the long put option, minus the net premium you received.

Maximum loss = strike price of short put – strike price of long put – net premium received

The breakeven point of a bull put spread is the price the underlying asset trades at expiration so that the trader will come away even. The breakeven point will equal the difference between the net premiums you receive up front and the strike price of the short put option. At the breakeven, the trader neither makes nor loses money, not including commissions and fees.

Breakeven point = strike price of short put – net premium received

Bull Put Spread Example

Alice would like to use a bull put spread for XYZ stock since she thinks the price will slowly go up a month from now. XYZ is trading at $150 per share. Alice sells a put option for a premium of $3 with a strike price of $150. At the same time, she buys a put option with a premium of $1 and a strike price is $140. Both put options have the same expiration date in a month.

Alice will collect the difference between the two premiums, which is $2 ($3 – $1). Since each option contract is usually for 100 shares of stock, she’d collect a $200 premium when opening the bull put spread.

Maximum Profit

As long as XYZ stock trades at or above $150 at expiration, both puts will expire worthless, and she will keep the $200 premium she received at the start of the trade, minus commissions and fees.

Maximum profit = $3 – $1 = $2 x 100 shares = $200

Maximum Loss

Alice will experience the maximum loss if XYZ stock trades below $140 at expiration, the strike price of the long leg of the trade. In this scenario, Alice will lose $800, plus commissions and fees.

Maximum loss = $150 – $140 – ($3 – $1) = $8 x 100 shares = $800

Breakeven

If XYZ stock trades at $148 at expiration, Alice will lose $200 from the short leg of the trade with the $150 stock price. However, this will be balanced out by the initial $200 premium she received when opening the positioning. She neither makes nor loses money in this scenario, not including commissions and fees.

Breakeven point = $150 – ($3 – $1) = $148

Bull Put Spread Exit Strategy

Often, trades don’t go as planned. If they did, trading would be easy, and everyone would succeed. What sets successful traders apart from the rest of the pack is the ability to make winning trades, mitigate risk, and limit losses.

Having an exit strategy can help by providing a plan to cut losses at a predetermined point, rather than being caught off guard or simply “waiting” and “hoping” that the market turns around in your favor.

An exit strategy may be a little complicated for a bull put spread. Before the expiration date, you may want to exit the trade so you don’t have to buy an asset you may be obligated to purchase because you sold a put option. You may also decide to exit the position if the underlying asset price is falling and you want to limit your losses rather than take the maximum loss.

To close out a bull put spread entirely would require that the trader buy the short put contract to close and sell the long put option to close.

💡 Recommended: Buy to Open vs Buy to Close

Pros and Cons of Bull Put Spreads

The following are some of the advantages and disadvantages of bull put spreads:

Bull Put Spread Pros

 Bull Put Spread Cons
Protection from downside risk; the maximum loss is known at the start of the trade The gains from the strategy will be limited and may be lower than if the trader bought the underlying asset outright
The potential to profit from a modest decline in the price of the underlying asset price Maximum loss is usually more substantial than the maximum gain
You can tailor the strategy based on your risk profile Difficult trading strategy for novice investors

Impacts of Variables

Several variables impact options prices, and options trading terminology describes how these variables might change in a given position.

Because a bull put spread consists of a short put and a long put, the way specific changes in different variables impact the position can be different than other options positions. Here’s a brief summary.

1. Stock Price Change

A bull put spread does well when the underlying security price rises, making it a bullish strategy. When the price falls, the spread performs poorly. This is known as a position with a “net positive delta.” Delta is an options measurement that refers to how much the price of an option will change as the underlying security price changes. The ratio of a stock’s price change to an option’s price change is not usually one-to-one.

Because a bull put spread is made up of one long put and one short put, the delta often won’t change much as the stock price changes if the time to expiration hasn’t changed. This is known as a “near-zero gamma” trade. Gamma is an estimation of how much the delta of a position will change as the underlying stock price changes.

2. Changes in Volatility

Volatility refers to how much the price of a stock might fluctuate in percentage terms. Implied volatility (IV) is a variable in options prices. Higher volatility usually means higher options prices, assuming other factors stay the same. But a bull put spread changes very little when volatility changes, and everything else remains equal.

This is known as a “near-zero vega” position. Vega measures how much an option price will change when volatility changes, but other factors are unmoved.

3. Time

Time decay refers to the fact that the value of an option declines as expiration draws near. The relationship of the stock price to the strike prices of the two put options will determine how time decay impacts the price of a bull put spread.

If the price of the underlying stock is near or above the strike price of the short put (the option with a higher strike price), then the price of the bull put spread declines (and makes money) as time goes on. This occurs because the short put is closest to being in the money and falls victim to time decay more rapidly than the long put.

But if the stock price is near or below the long put’s strike price (the option with a lower strike price), then the price of the bull spread will increase (and lose money) as time goes on. This occurs because the long put is closer to being in the money and will suffer the effects of time decay faster than the short put.

In cases where the underlying asset’s price is squarely in-between both strike prices, time decay barely affects the price of a bull put spread, as both the long and short puts will suffer time decay at more or less the same rate.

4. Early assignment

American-style options can be exercised at any time before expiration. Writers of a short options position can’t control when they might be required to fulfill the obligation of the contract. For this reason, the risk of early assignment (i.e., the risk of being required to buy the underlying asset per the option contract) must be considered when entering into short positions using options.

In a bull put spread, only the short put has early assignment risk. Early assignment of options usually has to do with dividends, and sometimes short puts can be assigned on the underlying stock’s ex-dividend date (the date someone has to start holding a stock if they want to receive the next dividend payment).

In the money puts with time value that doesn’t match the dividends of the underlying stock are likely to be assigned, as traders could earn more from the dividends they receive as a result of holding the shares than they would from the premium of the option.

For this reason, if the underlying stock price is below the short put’s strike price in a bull put spread, traders may want to contemplate the risk of early assignment. In cases where early assignment seems likely, using an exit strategy of some kind could be appropriate.

Start Investing Today With SoFi

Trading options isn’t easy and can involve significant risk. Many variables are involved in options trading, some of which have been notorious for catching newbie traders by surprise. While we’ve answered the fundamental question “what is a bull put spread” here, new investors looking to implement this strategy will still have a lot to learn.

For investors ready to dive into bull spreads and other options trading strategies, SoFi’s options trading platform is a good place to start, thanks to its intuitive design. Investors can trade options from the mobile app or web platform. Plus, they can check out educational resources about options if any questions arise.

Trade options with low fees through SoFi.

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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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Oct
10
2022
Guide to Short Put Spreads

Guide to Short Put Spreads

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Guide to Short Put Spreads

A short put spread, sometimes called a bull put spread or short put vertical spread, is an options trading strategy that investors may use when they expect a slight rise in an underlying asset. This strategy allows an investor to potentially profit from an increase in the underlying asset’s price while also limiting losses. An investor may utilize this strategy to protect against any downside risk; the investor will know their total potential loss before making the trade.

When trading options, you have various strategies, like short put spreads, from which you can choose. The short put spread strategy can be a valuable trade for investors with a neutral-to-bullish outlook on an asset. Which options trading strategy is right for you will depend on several factors, like your risk tolerance, cash reserves, and perspective on the underlying asset.

What Is a Short Put Spread?

A short put spread is an options trading strategy that involves buying one put option contract and selling another put option on the same underlying asset with the same expiration date but at different strike prices. This strategy is a neutral-to-bullish trading play, meaning that the investor believes the underlying asset’s price will stay flat or increase during the life of the trade.

A short put spread is a credit spread in which the investor receives a credit when they open a position. The trader buys a put option with a lower strike price and sells a put option with a higher strike price. The difference between the price of the two put options is the net credit the trader receives, which is the maximum potential profit in the trade.

The maximum loss in a short put spread is the difference between the strike prices of the two puts minus the net credit received. This gives the trading strategy a defined downside risk. A short put spread does not have upside risk, meaning the trade won’t lose money if the price of the underlying asset increases.

A short put spread is also known as a short put vertical spread because of how the strike prices are positioned — one lower and the other higher — even though they have the same expiration date.

How Short Put Spreads Work

With a short put spread, the investor uses put options, which give the investor the right — but not always the obligation — to sell a security at a given price during a set period of time.

An investor using a short put spread strategy will first sell a put option at a given strike price and expiration date, receiving a premium for the sale. This option is known as the short leg of the trade.

Simultaneously, the trader buys a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. Because of the difference in premiums, the trader receives a net credit for setting up the trade.

💡 Recommended: In the Money vs Out of the Money Options

Short Put Spread Example

Say stock ABC is trading around $72. You feel neutral to bullish toward the stock, so you open a short put spread by selling a put option with a $72 strike price and buying a put with a $70 strike. Both put options have the same expiration date. You sell the put with a $72 strike price for a $1.75 premium and buy the put with a $70 strike for a $0.86 premium.

You collect the difference between the two premiums, which is $0.89 ($1.75 – $0.86). Since each option contract is usually for 100 shares of stock, you’d collect an $89 credit when opening the trade.

Recommended: Guide to How Options Are Priced

Maximum Profit

The credit you collect up front is the maximum profit in a short put spread. In a short put spread, you achieve your maximum profit at any price above the strike price of the option you sold. Both put options expire worthless in this scenario.

In our example, as long as stock ABC closes at or above $72 at expiration, both puts will expire worthless and you will keep the $89 credit you received when you opened the position.

Maximum Loss

The maximum loss in a short put spread is the difference between the strike prices of the two put options minus the credit you receive initially and any commissions and fees incurred. You will realize the maximum loss in a short put spread if the underlying asset’s price expires below the strike price of the put option you bought.

In our example, you will experience the maximum loss if stock ABC trades below $70, the strike price of the put option you bought, at expiration. The maximum loss will be $111 in this scenario, not including commissions and fees.

$72 – $70 – ($1.75 – $0.86) = $1.11 x 100 shares = $111

Breakeven

The breakeven on a short put spread trade is the price the underlying asset must close at for the investor to come away even; they neither make nor lose money on the trade, not including commissions and investment fees.

To calculate the breakeven on a short put spread trade, you subtract the net credit you receive upfront from the strike price of the short put contract you sold, which is the option with the higher strike price.

In our example, you subtract the $0.89 credit from $72 to get a breakeven of $71.11. If stock ABC closes at $71.11 at expiration, you will lose $89 from the short leg of the trade with a $72 strike price, which will be balanced out by the $89 cash credit you received when you opened the position.

Set-Up

To set up a short put spread, you first need to find a security that you are neutral to bullish on. Once you have found a reasonable candidate, you’ll want to set it up by entering your put transactions.

You first sell to open a put option contract with a strike price near where the asset is currently trading. You then buy to open a put option with a strike price that’s out-of-the-money; the strike price of this contract will be below the strike price of the put you are selling. Both of these contracts will have the same expiration date.

Maintenance

The short put spread does not require much ongoing maintenance since your risk is defined to both upside and downside.

However, you may want to pay attention to the possibility of early assignment, especially with the short leg position of your trade — the put with the higher strike price. You might want to close your position before expiration so you don’t have to pay any potential assignment fees or trigger a margin call.

Exit Strategy

If the stock’s price is above the higher strike price at expiration, there is nothing you have to do; the puts will expire worthless, and you will walk away with the maximum profit of the credit you received.

If the stock’s price is below the lower strike price of the long leg of the trade at expiration, the two contracts will cancel each other, and you will walk away with a maximum loss.

Before expiration, however, you can exit the trade to avoid having to buy shares that you may be obligated to purchase because you sold a put option. To exit the trade, you can buy the short put contract to close and sell the long put contract to close.

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Impacts of Time, Volatility, and Price Change

Changes in the price and volatility of the underlying stock and the passage of time can affect a short put spread strategy in various ways.

Time

Time decay will generally work in favor of the short put spread. As both of the legs of the short put spread get closer to the expiration, any time value that the option contracts have will erode.

Volatility

The short put spread is more or less volatility neutral. Because you are both long and short one put option contract each, volatility in the underlying stock similarly affects each leg of the contract.

Price

A short put spread is a bullish option strategy. You have no risk to the upside and will achieve your maximum profit if the underlying stock closes above the strike price of the higher put option. You are sensitive to price decreases of the underlying stock and will suffer the maximum loss if the stock closes below the strike price of the lower put option.

Pros and Cons of Short Put Spreads

Here are some of the advantages and disadvantages of using short put spreads:

Short Put Spread Pros

 Short Put Spread Cons
No risk to the upside Lower profit potential compared to buying the underlying security outright
Limited risk to the downside; maximum loss is known upfront Maximum loss is generally larger than the maximum potential profit
Can earn a positive return even if the underlying does not move significantly Difficult trading strategy for beginning investors

Short Put Calendar Spreads

A short put calendar spread is another type of spread that uses two different put options. With a short put calendar spread, the two options have the same strike price but different expiration dates. You sell a put with a further out expiration and buy a put with a closer expiration date.

Alternatives to Short Put Spreads

Short put vertical spreads are just one of the several options spread strategies investors can use to bolster a portfolio.

Bull Put Spreads

A bull put spread is another name for the short put spread. The short put spread is considered a bullish investment since you’ll get your maximum profit if the stock’s price increases.

Bear Put Spread

As the name suggests, a bear put spread is the opposite of a bull put spread; investors will implement the trade when they have a bearish outlook on a particular underlying asset. With a bear put spread, you buy a put option near the money and then sell a put option on the same underlying asset at a lower strike price.

Call Spreads

Investors can also use call spreads to achieve the same profit profile as either a bull put spread or a bear put spread. With a bull call spread, you buy a call at one strike price (usually near or at the money) and simultaneously sell a call option on the same underlying with the same expiration date further out of the money.

The Takeaway

A short put spread is an options strategy that allows you to collect a credit by selling an at-the-money put option and buying an out-of-the-money put with the same expiration on the same underlying security. A short put spread is a bullish strategy where you achieve your maximum profit if the stock closes at or above the strike price of the put option you sold. While this trading strategy has a limited downside risk, it provides a lower profit potential than buying the underlying security outright.

Short put spreads and other options trading strategies can be complicated for many investors. An options trading platform like SoFi’s can make it easier, thanks to its user-friendly design and offering of educational resources about options. Investors have the ability to trade options from the mobile app or web platform.

Trade options with low fees through SoFi.

FAQ

Is a short put spread bullish or bearish?

A short put spread is a neutral to bullish options strategy, meaning you believe the price of an underlying asset will increase during the life of the trade. You will make your maximum profit if the stock closes at or above the strike price of the higher-priced option at expiration.

How would you close a short put spread?

To close a short put spread, you enter a trade order opposite to the one you entered to open your position. This would mean buying to close the put you initially sold and selling to close the put you bought to open.

What does shorting a put mean?

Shorting a put means selling a put contract. When you sell a put option contract, you collect a premium from the put option buyer. You’ll get your maximum profit if the underlying stock closes at or above the put’s strike price, meaning it will expire worthless, allowing you to keep the initial premium you received when you opened the position.

Photo credit: iStock/akinbostanci

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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2022
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Institutional vs Retail Investors: What’s the Difference?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Institutional vs Retail Investors: What’s the Difference?

Much of the trading on Wall Street is done by institutional investors: companies or organizations that invest large sums of money on the behalf of other people. Retail, or individual investors, make up a smaller percentage of capital market investments.

In other words, the main difference between institutional vs. retail investors is size: The first category is dominated by professional financial institutions or large organizations that trade investments in large quantities (in a municipal pension fund, for example). Retail investors are made up largely of non-professional individuals (e.g. someone who trades on their own through a brokerage account).

While size and scale are two of the primary differences between institutional vs. retail investors, they each have their own advantages and disadvantages. Retail investors are afforded certain legal protections; institutional investors can have the upside in terms of research and access to capital.

Who Is Considered a Retail Investor?

Any non-professional individual buying and selling securities such as stocks or mutual funds and exchange traded funds (ETFs) — through an online or traditional brokerage or other type of account — is considered a retail investor.

The parent who invests in their child’s 529 college savings plan, or the employee who contributes to their 401(k) are both retail investors.

So in this case the term “retail” generally refers to an individual trading on their own behalf, not on behalf of a larger pool of investors. Retail here references the purchase and selling of investments in relatively small quantities.

Who Is Classified as an Institutional Investor?

By comparison, institutional investors make investment decisions on behalf of large pools of individual investors or shareholders. In general, institutional investors trade in large quantities, such as 10,000 shares or more at a time.

The professionals who do this large-scale type of investing typically have access to investments not available to retail investors (such as special classes of shares that come with different cost structures). By virtue of their being part of a larger institution, this type of investor usually has a larger pool of capital to buy, trade, and sell with.

Institutional investors are responsible for most of the trading that happens on the market. Examples of institutional investors include commercial banks, pension funds, mutual funds, hedge funds, endowments, insurance companies, and real estate investment trusts (REIT).

What Are the Differences Between Institutional Investors vs Retail Investors?

The main differences between institutional and retail investors include:

•   Institutional investors invest on behalf of a large number of constituents (e.g. a municipal pension fund); retail investors are individuals who invest for themselves (e.g. an IRA).

•   Size (large institutions vs. individuals) and scale of investments.

•   Institutional investors typically have access to professional research and industry resources.

•   Retail investors are protected by certain regulations that don’t apply to institutional investors.

Institutional Investors

 Retail Investors
Professionals and large companies Non-professional individuals
Invest in large quantities Invest in small quantities
Invest on behalf of others Invest for themselves
Access to industry-level sources, research DIY
Access to preferred share classes and pricing Access to retail shares and pricing

What Are the Similarities Between Institutional Investors vs Retail Investors?

There are very few similarities between institutional vs. retail investors except that both parties tend to seek returns while minimizing risk factors where possible.

Retail vs. Institutional Investor

Do Institutional or Retail Investors Get the Highest Returns?

There are no crystal balls on Wall Street, as they say, so there’s no guaranteed way to predict whether institutional investors always get higher returns vs. retail investors.

That said, some institutional investors may have the edge in that they have access to industry-level research as well as powerful technology and computer algorithms that enable them to make faster trades and more profitable calculations.

Does that mean institutional investors always come out ahead? In fact, retail investors who have a longer horizon also have a chance at substantial returns over time, although there are no guarantees on either side.

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How Many Retail Investors Are There?

In the U.S., it’s fairly common to be a retail investor. About 58% of Americans say they own stock, according to a 2022 Gallup poll, meaning they own individual stocks, stock mutual funds, or they hold stock in a self-directed 401(k) or IRA.

Examples of retail investors include people who manage their retirement accounts online (e.g., an IRA) and those who trade stocks as a hobby.

Because individual investors are generally thought to be more prone to emotional behavior than their professional counterparts (and typically don’t have access to the resources and research of larger institutions), they may be exposed to higher levels of risk. Thus the Security Exchange Commission (SEC) provides certain protections to retail investors.

For example, the 2019 Regulation Best Interest rule states that broker-dealers are required to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy. This federal rule is intended to ensure that broker-dealers aren’t allowed to prioritize their own financial interests at the expense of the customer.

Another protection provided to retail investors is that investment advisors and broker-dealers must provide a relationship summary that covers services, fees, costs, conflicts of interest, legal standards of conduct, and more to new clients.

Types of Institutional Investors

The most common institutional investors are listed below.

1. Commercial Banks

Commercial banks are the “main street” banks many people are familiar with, such as Wells Fargo, Citibank, JP Morgan Chase, Bank of America, TD Bank, and countless others. Along with providing retail banking services, such as savings accounts and checking accounts, large banks are also institutional investors.

These large corporations have entire teams dedicated to investing in different markets: e.g. global markets, bond markets, socially responsible investing, and so on.

2. Endowment Funds

Typically connected with universities and higher education, endowment funds are often created to help sustain these nonprofit organizations. Churches, hospitals, nonprofits, and universities generally have endowment funds, whose funds often derive from donations.

Endowment funds generally come with certain restrictions, and have an investment policy that dictates an investment strategy for the manager to follow. This might include stipulations about how aggressive to be when trying to meet return goals, and what types of investments are allowed (some endowment funds avoid controversial holdings like alcohol, firearms, tobacco, and so on).

Another component is how withdrawals work; often, the principal amount invested stays intact while investment income is used for operational or new constructions.

3. Pension Funds

Pension funds generally come in two flavors:

•   Defined contribution plans, such as 401(k)s or 403(b)s, where employees contribute what they can to these tax-deferred accounts.

•   Defined benefit plans, or pensions, where retirees get a fixed income amount, regardless of how the fund does.

Employers that offer defined benefit pensions are becoming less common in the U.S. Where they do exist, they’re often linked to labor unions or the public sector: e.g. a teachers union or auto workers union may offer a pension.

Public pension funds follow the laws defined by state constitutions. Private pension plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA); this act defines the legal rights of plan participants.

As for how a pension invests, it depends. ERISA does not define how private plans must invest, other than requiring that the plan sponsors must be fiduciaries, meaning they put the financial interest of the account holders first.

4. Mutual Funds

As defined by the Securities and Exchange Committee (SEC), mutual funds are companies that pool money from many investors and invest in securities such as bonds, stocks, and short-term debt. Mutual funds are thus considered institutional investors, and are known for offering diversification, professional management, affordability, and liquidity.

Typical mutual fund offerings include money market funds, bond funds, stock funds, index funds, actively managed funds, and target date funds.

The last category here is often designed for retail investors who are planning for retirement. The asset mix of these target date funds, sometimes known as target funds or lifecycle funds, shifts over time to become more conservative as the investor’s target retirement date approaches.

5. Hedge Funds

Like mutual funds, hedge funds pool money from investors and place it into securities and other investments. The difference between these two types of funds is that hedge funds are considered private equity funds, are considered high risk vehicles, and aren’t as regulated as mutual funds.

Because hedge funds use strategies and investments that chase higher returns, they also carry a greater risk of losses — similar to high-risk stocks. In general, hedge funds also have higher fees and higher minimum investment requirements. So, they tend to be more popular with wealthier investors and other institutional investors. (In some cases, they’re only available to accredited investors).

6. Insurance Companies

Perhaps surprisingly, insurance companies can also be institutional investors. They might offer products such as various types of annuities (fixed, variable, indexed), as well as other life insurance products which are invested on behalf of the investor, e.g. whole life or universal life insurance policies.

Getting Started as a Retail Investor

Institutional investors may be larger, more powerful, and run by professionals — whereas retail investors are individuals who aren’t trained investment experts — but it’s important to remember that these two camps can and do overlap. Institutional investors that run pension funds, mutual funds, and insurance companies, for example, serve retail investors by investing their money for retirement and other long-term goals.

If you’re ready to start investing as a retail investor, it’s easy when you set up an online brokerage account with SoFi Invest.

You can invest in stocks, ETFs, IPO shares, fractional shares, and more. For folks who’d like to discuss their financial goals or questions, SoFi members can connect at no cost with financial advisors.

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.

FAQ

What are the different types of investors?

Institutional investors are big companies with teams of professional investment managers who invest other people’s money. Retail investors are individuals who typically manage their own investment (e.g. for retirement or college savings).

What percentage of the stock market is made up of institutional investors?

The vast majority of stock market investors are institutional investors. Because they trade on a bigger scale than retail investors, institutional trades can impact the markets.

Are institutional or retail investment strategies better?

Institutional investors have access to more research and technology compared with retail investors. Thus their strategies may be considered more sophisticated. But it’s hard to compare outcomes, as both groups are exposed to different levels of risk.

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.
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For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
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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.
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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What Is a Balance Transfer and Should I Make One?

What Is a Balance Transfer and Should I Make One?

By | Credit, Debt Payoff, personal_loan, Terminology | No Comments

When debt accumulates on a high-interest card, interest starts to add up as well, making it harder to pay off the total debt — which, in turn, can become a credit card debt spiral. If you end up with mounting debt on a high-interest credit card, a balance transfer is one possible way to get out from under the interest payments.

A balance transfer credit card allows you to transfer your existing credit card debt to a card that temporarily offers a lower interest rate, or even no interest. This can provide an opportunity to start paying down your debt and get out of the red zone. But before you make a balance transfer, it’s important that you fully understand what a balance transfer credit card is and have carefully read the fine print.

How Balance Transfers Work


The basics of balance transfer credit cards are fairly straightforward: First, you must open a new lower-interest or no-interest credit card. Then, you’ll transfer your credit card balance from the high-interest card to the new card. Once the transfer goes through, you’ll start paying down the balance on your new card.

Generally, when selecting to do a balance transfer to a new credit card, consumers will apply for a card that offers a lower interest rate than they currently have, or a card with an introductory 0% annual percentage rate (APR). Generally, you need a solid credit history to qualify for a balance transfer credit card.

This introductory period on a balance transfer credit card can last anywhere from six to 21 months, with the exact length varying by lender. By opening a new card that temporarily charges no interest, and then transferring your high-interest credit card debt to that card, you can save money because your balance temporarily will not accrue interest charges as you pay it down.

But you need to hear one crucial warning: After the introductory interest-free or low-APR period ends, the interest rate generally jumps up. That means if you don’t pay your balance off during the introductory period, it will start to accrue interest charges again, and your balance will grow.

Recommended: How to Avoid Interest On a Credit Card

What to Look For in a Balance Transfer Card


There are a number of different balance transfer credit cards out there. They vary in terms of the length of no-interest introductory periods, credit limits, rewards, transfer fees, and APRs after the introductory period. You’ll want to shop around to see which card makes sense for you.

When researching balance transfer credit cards, try to find a card that offers a 0% introductory APR for balance transfers. Ideally, the promotional period will be on the longer side to give you more breathing room to pay off your debts before the standard APR kicks in — one of the key credit card rules to follow with a balance transfer card.

You’ll also want to keep in mind fees when comparing your options. Balance transfer fees can seriously eat into your savings, so see if you qualify for any cards with $0 balance transfer fees. If that’s not available, at least do the math to ensure your savings on interest will offset the fees you pay. Also watch out for annual fees.

Last but certainly not least, you’ll want to take the time to read the fine print and fully understand how a credit card works before moving forward. Sometimes, the 0% clause only applies when you’re purchasing something new, not when transferring balances. Plus, if you make a late payment, your promotional rate could get instantly revoked — perhaps raising your rate to a higher penalty APR.

Should I Do a Balance Transfer?

Sometimes, transferring your outstanding credit card balances to a no-interest or low-interest card makes good sense. For example, let’s say that you know you’re getting a bonus or tax refund soon, so you feel confident that you can pay off that debt within the introductory period on a balance transfer credit card.

Or, maybe you know that you need to use a credit card to cover a larger purchase or repair, but you’ve included those payments in your budget in a way that should ensure you can pay off that debt within the no-interest period on your balance transfer card. Again, depending upon the card terms and your personal goals, this move could prove to be logical and budget-savvy.

Having said that, plans don’t always work out as anticipated. Bonuses and refund checks can get delayed, and unexpected expenses can throw off your budget. If that happens, and you don’t pay off your outstanding balance on the balance transfer card within the introductory period, the credit card will shift to its regular interest rate, which could be even higher than the credit card you transferred from in the first place.

Plus, most balance transfer credit cards charge a balance transfer fee, typically around 3% — and sometimes as high as 5%. This can add up if you’re transferring a large amount of debt. Be sure to do the math on how much you’d be saving in interest payments compared to how much the balance transfer fee will cost.

Recommended: When Are Credit Card Payments Due

Balance Transfer Card vs Debt Consolidation Loan

Both a personal loan and a balance transfer credit card essentially help you pay off existing credit card debt by consolidating what you owe into one place — ideally at a better interest rate. The difference comes in how each works and how much you’ll ultimately end up paying (and saving).

A debt consolidation loan is an unsecured personal loan that allows you to consolidate a wider range of existing personal debt, including credit card debt and other types of debt. Basically, you use the personal loan to pay off your credit cards, and then you just have to pay back your personal loan in monthly installments.

Personal loans will have one monthly payment. Plus, they offer fixed interest rates and fixed terms (usually anywhere from one to seven years depending on the lender), which means they have a predetermined payoff date. Credit cards, on the other hand, typically come with variable rates, which can fluctuate based on a variety of factors.

Just like balance transfer fees with a credit card, you’ll want to look out for fees with personal loans, too. Personal loans can come with origination fees and prepayment penalties, so it’s a good idea to do your research.

How to Make a Balance Transfer

If, after weighing the pros and cons and considering your other options, you decide a balance transfer credit card is the right approach for you, here’s how you can go about initiating a balance transfer. Keep in mind that you’ll need to have applied for and gotten approved for the card before taking this step.

Balance-Transfer Checks


In some cases, your new card issuer will provide you with balance-transfer checks in order to request a transfer. You’ll need to make the check out to the credit card company you’d like to pay (i.e., your old card). Information that you’ll need to provide includes your account information and the amount of the debt, which you can determine by checking your credit card balance.

Online or Phone Transfers

Another way to initiate a balance transfer is to contact the new credit card company to which you’re transferring the balance either online or over the phone. You’ll need to provide your account information and specify the amount you’d like to transfer to the card. The credit card company will then handle transferring the funds to pay off the old account.

The Takeaway

Whether you should consider a balance transfer credit card largely depends on whether the math checks out. If you can secure a better interest rate, feel confident you can pay off the balance before the promotional period ends, and have checked that the balance transfer fees won’t cancel out your savings, then it may be worth it to make a balance transfer.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

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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