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Sep

2023

How Often Are Dividends Paid?

By Pam O’Brien | Growing Wealth, invest, Investing | Comments Off

Some companies make regular payments, called dividends, to investors who own shares of its stock. For investors, this may be considered an advantage of investing in a company — though they may wonder, when are dividends paid?

Not all companies pay dividends, so if steady dividend income is the goal, an investor would need to look specifically for dividend-paying investments.

How often do dividends pay? Dividends are typically paid quarterly, though there are cases where they are paid more or less frequently. But there’s more to it than simply investing in a stock and waiting for one’s dividend to roll in.

What Are Dividends?

Companies will sometimes share a portion of their profits with shareholders, and this is called a dividend. Dividends are typically distributed as cash, although it’s also possible to receive a dividend in the form of stock.

Typically, dividends work on a per-share basis. For example, if Company A pays a cash dividend of 50 cents per share, and an investor owns 50 shares, they would receive $25 in cash.

If a company pays a stock dividend, it’s usually a percentage increase in the number of shares an investor owns. So if Company A awards a 5% stock dividend and an investor owns 100 shares of Company A, they would have 105 shares after the dividend payout.

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How Often Are Dividends Paid Out?

In most cases in the U.S., dividends are paid quarterly, or four times a year, on the same schedule as they must report earnings (quarterly). If you’re wondering why companies generally pay quarterly vs. monthly dividends, logically, it makes sense that dividends would come only after a company has finalized its income statement and its board of directors has reviewed (and approved) the numbers.

Some investments pay dividends on other schedules, such as twice a year, once a year, or as monthly dividend stocks, or on no schedule at all (called “irregular” dividends), but this isn’t typical in the United States. Ultimately, the dividend payout schedule is up to a company’s board of directors.

It’s also possible for a company to pay a special one-time dividend. Usually a special dividend is paid out when a company has had a stronger-than-usual earnings period or has excess cash on hand — from the sale of a business, perhaps, or the liquidation of an investment, or a major litigation win. These special one-time dividends may be paid as cash, stock, or property dividends.

When it comes to mutual funds that invest in dividend-paying companies, they may pay dividends on a more frequent basis, such as monthly or even weekly.

Recommended: Do IPOs Offer Dividends?

Important Dividend Dates

Although the answer to the question “How often are dividends paid out?” may vary, there are four essential dates involved in the payment of dividends:

1. Declaration date: This is the day that a company’s board of directors states their intention to pay a dividend.

2. Date of record: This is the date on which a company will review its records to establish who its shareholders are. In order to receive a dividend, an investor must be a “holder of record,” which means they owned shares on or before the ex-dividend date.

3. Ex-dividend date: This is the date by which an investor must have purchased shares of a stock in order to receive an upcoming dividend. If an investor bought shares of Company A on or after the ex-dividend date, the dividend would go to the investor from whom they purchased the shares — they themselves would not receive a dividend.

4. Payment date: This is the date a dividend is paid to company shareholders.

IMPORTANT DIVIDEND DATES for 5 Companies in the S&P 500 Dividend Aristocrats Index
Company	Dividend Payout	Declaration Date	Ex-Dividend Date	Date of Record	Payment Date
AbbVie Inc. (ABBV)	$1.48	June 22, 2023	July 13, 2023	July 14, 2023	August 15, 2023
Atmos Energy Corp (ATO)	$0.74	May 3, 2023	May 19, 2023	May 22, 2023	June 5, 2023
Chevron Corp (CVX)	$1.51	July 28, 2023	August 17, 2023	August 18, 2023	September 11, 2023
General Dynamics (GD)	$1.32	August 1, 2023	October 5, 2023	October 6, 2023	November 10, 2023
Nucor Corp (NUE)	$0.51	June 8, 2023	June 29, 2023	June 30, 2023	August 11, 2023

Typically, investors wondering, when are dividends paid?, can get information about a company’s dividend dates by visiting its investor relations page. To find this, search for the company’s name and “investor relations” online. Or check a company’s dividend history online. Many investment websites, including Nasdaq.com, track this information.

When Are Dividends Paid?

Once a company’s board of directors approves a plan to pay out dividends, the company announces the dividend payment information, including: the amount to be paid out, the date it will be paid, the date of record, and the ex-dividend date.

On the payment date, the dividend is paid to investors who owned the stock before the ex-dividend date.

Example:

The Coca-Cola Company (NYSE: KO) announced a dividend of $0.46 per share on February 16, 2023. The payment date for the dividend was April 3, 2023 to shareholders of record on March 17, and the ex-dividend date was March 16. That means, to receive the dividend that was paid on April 3, you would have had to buy or have already owned Coca-Cola shares before March 16. (The Coca-Cola Company was chosen as an example only; this is not a recommendation to buy, sell, or hold KO.)

Different Dividend Payout Methods

These are some of the ways dividends may be paid to investors.

Cash Dividends

Dividends are often paid in cash. Companies typically send cash dividends directly to an investor’s brokerage, where the money is deposited into their account. The company might also mail a check to stockholders.

Company Stock Dividends

In other cases, investors will be paid in company stocks. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares for an investor with their dividends. This provides the advantages of both simplifying the process (since investors won’t have to receive the cash and buy more shares themselves) and potentially being more cost effective, since many DRIP programs don’t charge commissions.

Additionally, some DRIP programs discount the purchase of additional shares. For this and other reasons, some investors may specifically look to find dividend reinvestment stocks.

Property Dividends

More rarely, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company, or physical assets the company owns.

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Are Dividends Taxable?

Dividend income is always taxable, but tax treatment will depend on how long an investor has held the investment and what kind of account they’re holding it in.

For instance, if an investor is holding the investment in a retirement account such as a 401(k) or IRA, the dividend isn’t taxable at the time of distribution. (Though depending on the account, the income may be taxed upon withdrawal during retirement.)

If the investment is held in a taxable account, then a dividend is considered income, and the tax rate will depend on whether it’s a qualified dividend or nonqualified (ordinary) dividend.

Tax Rate for Qualified Dividends

These are dividends paid by a U.S. corporation or a qualified foreign corporation on stock that an investor has held for a certain period of time—generally more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.

For some preferred stock, the investor must have held it for 91 days out of the 181-day period starting 90 days before the ex-dividend date. Taxes on qualified dividends are paid at long-term capital gains rates, which range from 0% to 20% based on an individual’s modified adjusted gross income.

In other words, the taxes investors pay on qualified dividends are based on their overall income tax bracket, and they could pay 0%, depending on their income. Because the long-term capital gains tax rate is lower than ordinary income tax rate, qualified dividends are preferable to nonqualified dividends.

Tax Rates for Long-Term Capital Gains

Tax Rates for Long-Term Capital Gains
Filing Status	0% Rate	15% Rate	20% Rate
Single	Up to $44,675	$44,676 to $492,300	Over $492,300
Head of household	Up to $59,750	$59,751 to $523,050	Over $523,050
Married filing jointly	Up to $89,250	$89,251 to $553,850	Over $553,850
Married filing separately	Up to $44,675	$44,676 to $276,900	Over $276,900

Tax Rate for Nonqualified Dividends

The more common type of dividend is a nonqualified — or ordinary — dividend. When companies pay ordinary dividends, they’re considered ordinary income, so an investor will be taxed at ordinary income tax rates.

In general, investors should assume that any dividend they receive is an ordinary dividend unless told otherwise. (The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.)

Can You Live on Dividends?

In general, retirees should plan to live off a combination of Social Security, interest income from bonds, and selling a small portion of their investments each year. The 4% retirement rule maintains that if one withdraws no more than 4% of their portfolio each year, they’ll be able to make their nest egg last — although some financial professionals believe this formula is too conservative.

Investments that pay regular dividends may shift an individual’s retirement equation by providing steady income over time that may allow them to sell fewer investments — or no investments at all. The amount of dividends a stock pays often grows over time as companies get larger and continue to increase their profits.

Investing with an eye toward dividend income may allow an investor to create an income stream that could successfully supplement their Social Security and other income in retirement.

Investing With SoFi

Dividends — cash or stock rewards from a company to its shareholders—are typically paid quarterly to qualifying shareholders. These financial “bonuses” can be attractive to investors, who may seek out dividend-paying companies specifically in hopes of boosting their bottom line. Some investors look specifically for investments that pay dividends as a way to generate income and savings for retirement.

Dividends may provide a source of consistent and predictable income, which may be a helpful addition to an individual’s portfolio, depending on their investing goals. Investors may choose to use dividend income to supplement other income or to reinvest in their portfolio.

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).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How long do you have to hold a stock to get a dividend?

In order to get a dividend, an investor needs to be a “holder of record.” That means they need to buy, or already own, shares of the stock before what’s known as the ex-dividend date, which is the business day before the date of record. The date of record is when the company reviews its records to determine who its shareholders are. The date of record is generally announced when the dividend is announced.

Are dividends taxed if they are reinvested?

Yes. Dividends that are reinvested are considered income, just like cash dividends, and must be reported on your tax return. The way you are taxed on dividends depends on whether your dividends are qualified or nonqualified. The more common type of dividend is nonqualified, and these dividends are taxed at ordinary income tax rates. Qualified dividends are taxed at long-term capital gains rates.

What happens if you take more dividends than profit?

Typically, a portion of a company’s earnings should go to paying out dividends. This is known as the dividend payout ratio. Investors typically look for payout ratios that are 80% or less — meaning that the company is not paying all of its earnings in dividends.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

Sep

2023

Exit Strategy for Investors: Definition and Examples

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

An exit strategy is a plan to leave an investment, ideally by selling it for more than the price at which it was purchased.

Individual investors, venture capitalists, stock traders, and business owners all use exit strategies that set specific criteria to dictate when they’ll get out of an investment. Every exit strategy plan is unique to its situation, in terms of timing and under which conditions an exit may occur.

What Is an Exit Strategy?

Broadly speaking, the exit strategy definition is a plan for leaving a specific situation. For instance, an employee who’s interested in changing jobs may form an exit strategy for leaving their current employer and moving on to their next one.

What is an exit strategy in a financial setting? In this case, the exit strategy definition is a plan crafted by business owners or investors that cover when they choose to liquidate their position in an investment. To liquidate means to convert securities or other assets to cash. Once this liquidation occurs, the individual or entity that executed the exit strategy no longer has a stake in the investment.

Creating an exit strategy prior to making an investment can be advantageous for managing and minimizing risk. It can also help with defining specific objectives for making an investment in the first place. In other words, formulating your exit strategy beforehand can give you clarity about what you hope to achieve.

Exit strategies often go overlooked, however, as investors, venture capitalists, and business owners may move ahead with an investment with no clear plan for leaving it.

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How Exit Strategies Work

Investors use exit strategies to realize their profit or to mitigate potential losses from an investment or business. When creating an exit strategy, investors will typically define the conditions under which they’ll make their exit.

For instance, an exit strategy plan for investors may be contingent on achieving a certain level of returns when starting to invest in stocks, or reaching a maximum threshold of allowable losses. Once the contingency point is reached, the investor may choose to sell off their shares as dictated by their exit strategy.

A venture capital exit strategy, on the other hand, may have a predetermined time element. Venture capitalists invest money in startups and early stage companies. The exit point for a venture capitalist may be a startup’s IPO or initial public offering.

Again, all exit strategies revolve around a plan. The mechanism by which an individual or entity makes their exit can vary, but the end result is the same: to leave an investment or business.

When Should an Exit Strategy Be Used?

There are different scenarios when an exit strategy may come into play. For example, exit strategies can be useful in these types of situations:

• Creating a succession plan to transfer ownership of a profitable business to someone else.

• Shutting down a business and liquidating its assets.

• Withdrawing from a venture capital investment or angel investment.

• Selling stocks or other securities to minimize losses.

• Giving up control of a company or merging it with another company.

Generally speaking, an exit strategy makes sense for any situation where you need or want to have a plan for getting out.

Exit Strategy Examples

Here are some different exit strategy examples that explain how exit strategies can be useful to investors, business owners, and venture capitalists.

Exit Strategy for Investors

When creating an exit strategy for stocks and investing, including how to buy stocks, there are different metrics you can use to determine when to get out. For example, say you buy 100 shares of XYZ stock. You could plan your exit strategy based on:

• Earning target return from the investment

• Realizing a maximum loss on the investment

• How long you want to stay invested

Say your goal is to earn a 10% return on the 100 shares you purchased. Once you reach that 10% threshold you may decide to exit while the market is up and sell your shares at a profit. Or, you may set your maximum loss threshold at 5%. If the stock dips and hits that 5% mark, you could sell to head off further losses.

You may also use time as your guide for making an exit strategy for stocks. For instance, if you’re 30 years old now and favor a buy-and-hold strategy, you may plan to make your exit years down the line. On the other hand, if you’re interested in short-term gains, you may have a much shorter window in which to complete your exit strategy.

Exit strategies can work for more than just stock investments. For instance, you may have invested in crowdfunding investments, such as real estate crowdfunding or peer-to-peer lending. Both types of investments typically have a set holding period that you can build into your exit plan.

Exit Strategy for Business Owners

An exit strategy for business owners can take different forms, depending on the nature of the business. For instance, if you run a family-owned business then your exit strategy plan might revolve around your eventual retirement. If you have a fixed retirement date in mind your exit plan could specify that you will transfer ownership of the business to your children or sell it to another person or company.

Another possibility for an exit strategy may involve selling off assets and closing the business altogether. This is something a business owner may consider if the business is not turning a profit, and it looks increasingly unlikely that it will. Liquidation can allow a business owner to repay their creditors and walk away from a failed business without having to file bankruptcy.

Exit Strategy for Startups

With startups and larger companies, exit strategies can be more complex. Examples of exit strategy plans may include:

• Launching an IPO to allow one or more founders to make an exit

• A merger or acquisition that allows for a transfer of ownership

• Selling the company

• Liquidating assets and shutting the company down

If a founder is ready to move on to their next project, they can use an IPO to leave the company intact while extricating themselves from it. And angel investors or venture capitalists who invested in the company early on also have an opportunity to sell their shares.

Startup exit strategies can also create possible opportunities for some investors. IPO investing allows investors to buy shares of companies when they go public.

The mechanics of using an IPO as an exit strategy can be complicated, however. There are IPO valuations and regulatory requirements to consider.

It’s important for startup founders to know how to value a business before taking it public to ensure that an IPO is successful. And early-stage investors may have to observe IPO lock-up period restrictions before they can sell their shares.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

5 Types of Exit Strategies

There are different types of exit strategies depending on whether you’re an investor, a business owner, or a venture capitalist. Some common exit strategies include:

1. Selling Shares of Stock

Investors can use an exit strategy to set a specific goal with their investment (say, 12%), reach a certain level of profit, or determine a point at which they’ll minimize their loss if the investment loses value. Once they reach the target they’ve set, the investor can execute the exit strategy and sell their shares.

2. Mergers and Acquisitions

With this business exit strategy, another business, often a rival, buys out a business and the founder can exit and shareholders may profit. However, there are many regulatory factors to consider, such as antitrust laws.

3. Selling Assets and Closing a Business

If a business is failing, the owner may choose to liquidate all the assets, pay off debts as well as any shareholders, if possible, and then close down the business. A failing business might also declare bankruptcy, but that’s typically a last resort.

4. Transferring Ownership of a Business

This exit strategy may be used with a family-run business. The owner may formulate an exit plan that allows him to transfer the business to a relative or sell it at a particular time so that he or she can retire or do something else.

5. Launching an IPO

By going public with an IPO, the founder of a startup or other company can leave the company if they choose to, while leaving the business intact. As noted, using an IPO as an exit strategy can be quite complicated for business founders and investors because of regulatory requirements, IPO valuations, and lock-up period restrictions.

Why Exit Strategies Are Important

Exit strategies matter because they offer a measure of predictability in a business or investment setting. If you own a business, for example, having an exit strategy in place that allows you to retire on schedule means you’re not having to work longer than you planned or want to.

An exit strategy for investors can help with staying focused on an end goal, rather than following the crowd, succumbing to emotions, or attempting to time the market. For example, if you go into an investment knowing that your exit plan is designed to limit your losses to 5%, you’ll know ahead of time when you should sell.

Using an exit strategy can prevent doubling or tripling losses that could occur when staying in an investment in the hopes that it will eventually turn around. Exit strategies can also keep you from staying invested too long in an investment that’s doing well. The market moves in cycles and what goes up eventually comes down.

If you’re on a winning streak with a particular stock, you may be tempted to stay invested indefinitely. But having an exit strategy and a set end date for cashing out could help you avoid losses if volatility sends the stock’s price spiraling.

How To Develop an Exit Strategy Plan

Developing an exit strategy may look different, depending on whether it involves an investment or business situation. But the fundamentals are the same, in that it’s important to consider:

• What form an exit will take (i.e. liquidation, IPO, selling shares, etc.)

• Whether an exit is results-based or time-based (i.e. realizing a 10% return, reaching your target retirement date, etc.)

• Key risk factors that may influence outcomes

• Reasons and goals for pursuing an exit strategy

If you’re an individual investor, you may need to formulate an exit plan for each investment you own. For instance, how you exit from a stock investment may be different from how you sell off bonds. And if you’re taking on riskier investments, such as cryptocurrency, your exit strategy may need to account for the additional volatility involved.

For business owners and founders, exit strategy planning may be a group discussion that involves partners, members of the board, or other individuals who may have an interest in the sale, transfer, or IPO of a company. In either situation, developing an exit strategy is something that’s best done sooner, rather than later.

SoFi Investing

Investing can help you build wealth for the long-term and an exit strategy is an important part of the plan. It allows you to decide ahead of time how and when you’ll get out of an exit, and could help you lock in returns or minimize losses.

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FAQ

What are different exit strategies?

Examples of some different exit strategies include selling shares of a stock once an investor realizes a certain return or profit, transferring ownership of a family business so an owner can retire, or selling all the assets and closing down a failing business.

What are the most common exit strategies?

The most common exit strategies depend on whether you’re an investor, the owner of an established business, or the founder of a startup. For investors, the most common exit strategy is to sell shares of stock once they reach a certain target or profit level. For owners of an established business, the most common exit strategy is mergers and acquisitions, because doing so is often favorable to shareholders. For founders of startups, a common exit strategy is an initial public offering (IPO).

What is the simplest exit strategy?

For an investor, the simplest exit strategy is to sell shares of stock once they reach a certain profit or target level of return. At that point they can sell their shares for more money than they paid for them.

Photo credit: iStock/Christian Guiton

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Sep

2023

What Are Real Estate Options? Advantages for Buyers

Understanding the Basics of Real Estate Options

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

Another way to invest in real estate is through buying or selling real estate options. With an options contract, a buyer is granted the right to purchase a property for a specific price by a specific date, but they are not obligated to buy it.

In order to purchase this option, the buyer of the contract pays the seller a premium.

This is a flexible and typically less expensive way to enter the real estate market that may also help reduce risks involved in single property investment.

What Are Real Estate Options?

Real estate options are contracts between a potential buyer and seller. They grant the buyer the exclusive right to purchase a particular property within terms set in the contract. But the buyer doesn’t have to purchase the property.

However, if the buyer decides to exercise the option and purchase the property, the seller is obligated to sell the property at the agreed-upon price. Once the agreement is entered into, the property owner can’t sell to anyone else within the time period set in the option.

An options contract for a purchase is also known as a call option, whereas an option to sell would be called a put option.

Recommended: Call vs Put Options: Main Differences

How Do Options in Real Estate Work?

Generally, real estate options set a particular purchase price and are valid for anywhere from six months to one year. The buyer doesn’t have to purchase the property, but if they want to, the seller is obligated to sell to them even if the market price has gone up.

The buyer pays what is known as a “premium” in options terminology to enter into the contract. If they decide not to buy the property, the property owner (the seller) keeps that premium.

Real estate options are most often used in commercial real estate, but they can be used by retail investors as well. They aren’t sold on exchanges, and each contract is specific for the property it represents. Usually a contract is only for a single property, not multiple properties.

Real estate options are similar to stock options in that they set a specific price, premium, and period of time for a contract related to an underlying asset. Options can be exercised early or at the expiration date. They can also be sold to another investor.

• Most of the benefits involved in real estate options tilt in the buyer’s favor.

• If the property value goes up a few months into the contract, the buyer can exercise the contract and purchase the property, and sell it for a profit.

• If the property value drops, the buyer can simply let the option expire — thus losing only the premium they paid, which is typically a small percentage of the value of the underlying asset or property in this case.

If the buyer decides not to exercise the contract, they can sell it to another buyer at a potentially higher premium (and pocket the difference).

For a seller, there is the potential for them to make a profit if the buyer exercises their option to purchase the property. They may also profit if the buyer doesn’t exercise the option — at which point they can keep the premium amount, and then sell the contract (or the property) to someone else.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Lease Options

In addition to real estate options for purchases, there are also lease options. These are rent-to-own agreements between a buyer and seller. They let someone lease a property with the option to buy it after a certain amount of time, but not the obligation.

Generally with a lease option, some or all of the rental payment goes towards the purchase. Some lease options lock in a particular price, but others just give the buyer the exclusive right to buy at whatever the market price is.

Although lease options can be great for buyers, they are also more expensive than simply renting a property since they involve a premium. For this reason, it’s important for a buyer to carefully consider the contract and their future plans before entering into a lease option agreement.

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2 Advantages of Real Estate Options for Buyers

Options are a common investing strategy for commercial real estate investors. There are several reasons a buyer might enter into a real estate option contract with a seller.

It Can Allow Time for the Buyer to Amass Funds

One might choose a real estate option if they want to secure a piece of land or property at a certain price but they need some time to get funds in order for the purchase.

A Real Estate Option Locks in a Price

If a buyer thinks the price of a property might go up, they can purchase an option to lock in the current market price. However, some real estate options are not completely set in their sale prices. There may be clauses in the contract to determine what the final sale price will actually be.

2 Advantages of Real Estate Options for Investors

Real estate investors can also use options to their advantage.

It’s a Lower-Risk Way to Develop Property

For example, let’s say an investor finds a property they’re interested in developing into housing. The investor needs to create a plan for the property and get other investors involved before they can buy it, so they purchase a real estate option to give them the exclusive right to buy the land.

The investor can make a profit by bringing in investors at a higher rate than the option. They can then buy the land and sell it to the developers they brought in to make a profit.

If they aren’t able to get developers and investors involved before the contract expires then they simply don’t buy the land.

An Investor Can Buy and Sell Real Estate Options

Investors can also make a profit just on buying and selling real estate options contracts rather than the properties themselves. This is a much less capital-intensive way to get involved in real estate investing.

For instance, an investor might find a property they expect will increase in value in the coming months. They purchase a real estate option to buy the land at the current market rate within the next year, pay a premium, and wait.

At any point during the period of the agreement the investor can either act on the contract and buy the property, or they can sell the contract to someone else. Let’s say the value of the property increases three months into the contract. The investor can find another investor who wants to purchase the contract for them for a higher price than the premium the original investor paid.

Whether any investor buys the property or not, the seller of the property keeps the premium.

The Takeaway

Real estate options are a way for investors to get involved in real estate investing without directly buying properties. As with any other kind of options, the investor buys the right to buy or sell at a certain price, but is not obligated to do so.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Invest with as little as $5 with a SoFi Active Investing account.

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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.
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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Sep

2023

NBBO: What It Is and How It’s Calculated

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

NBBO stands for the National Best Bid and Offer, a regulation put in place by the Securities and Exchange Commission (SEC) that requires brokers who are working on behalf of clients to execute a trade at the best available ask price, and the best available bid price.

The NBBO is a quote available marketwide that represents the tightest spread, e.g. the highest bid price and the lowest ask price for a certain security trading on various exchanges.

Brokers must guarantee at least the NBBO to their clients at the time of a trade, per SEC rules.

How Does “Bid vs Ask” Work in the Stock Market

In order to understand NBBO, investors need to understand the bid-ask price of a security, e.g. a stock. This is also known as the spread (two of many terms investors and traders should know). If an investor is “bidding,” they’re looking to buy. If they’re “asking,” they’re looking to sell. It may be helpful to think of it in terms of an “asking price,” as seen in real estate.

The average investor or trader will typically see the bid or ask price when looking at prices for investment securities. Most of the bid-ask action takes place behind the scenes, and it’s happening fast, landing on an average price. These are the prices represented by stock quotes.

That price is the value at which brokers or traders are required to guarantee to their customers when executing orders. NBBO requires brokers to act in the best interest of their clients.

What Is NBBO?

The National Best Bid and Offer (NBBO) is effectively a consolidated quote of the highest bid and the lowest ask price of a security from all exchanges. NBBO was created by the SEC to help ensure that brokerages offer customers the best publicly available bid and ask prices when trading securities.

NBBO Example

Let’s run through a quick example of how the NBBO might work in the real world.

Let’s suppose that a broker has a few clients that want to buy a stock:

• Buyer 1 puts in an order to the broker to buy shares of Company X at $10

• Buyer 2 puts in an order to the broker to buy shares of Company X at $10.50

• Buyer 3 puts in an order to the broker to buy shares of Company X at $11

Remember, these are “bids” — the price at which each client is willing to purchase a share of Company X.

On the other side of the equation, we have another broker with two clients that want to sell their shares of Company X, but only if the price reaches a certain level:

• Client 1 wants to sell their shares of Company X if the price hits $12

• Client 2 wants to sell their shares of Company X if the price hits $14

In this example, the NBBO for Company X is $11/$12. Why? Because these are the best bid vs. ask prices that were available to the brokers at the time. This is, on a very basic level, how calculating the NBBO for a given security works.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How NBBO and “Bid vs Ask” Prices Are Calculated

To make those calculations on the fly requires a whole lot of infrastructure. Because the NBBO is updated constantly through the day with offers for stocks from a number of exchanges and market players, things need to move fast.

Most of the heavy lifting in NBBO calculations is done by Securities Information Processors (SIPs). SIPs connect the markets, processing bid and ask prices and trades into a single data feed. They were created by the SEC as a part of the Regulation National Market System (NMS).

There are two SIPS in the U.S.: The Consolidated Tape Association (CTA) , which works with the New York Stock Exchange, and the Unlisted Trading Privileges (UTP) , which works with stocks listed on the Nasdaq exchange.

The SIPS crunch all of the numbers and data to keep prices (NBBO) updated throughout the day. They’re incredibly important for traders, investors, brokers, and anyone else working in or adjacent to the markets.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Is NBBO Pricing Up to Date?

The NBBO system may not reflect the most up-to-date pricing data. Bid, ask, and transaction data is flying around every millisecond, and it takes time to ingest and process it all. For high-frequency traders that are making fast and furious moves on the market, these small price fluctuations can cost them.

To make up for this lag time, the SEC allows trading via intermarket sweep orders (ISO), letting an investor send orders to multiple exchanges in order to execute a trade, regardless of whether a price is the best nationwide.

The Takeaway

NBBO represents the crunching of the numbers between the bid-ask spread of a security, and it’s the price you’ll see listed on a financial news network or stock quote.

The NBBO adds some legal teeth for investors, effectively forcing brokers to execute trades at the best possible price for their clients.

Invest with as little as $5 with a SoFi Active Investing account.

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SoFi Invest®

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

Sep

2023

Stock Oscillator: Types & How to Use Them for Technical Analysis

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

A stock oscillator is an equation or software program used by traders to help them decide when to buy or sell a given stock. It works by identifying trends in a stock’s price along with other metrics, then using that data to help determine whether the stock is overbought — making it a good time to sell it — or oversold, in which case it might be a good time to buy.

Investors typically use oscillators at times when the trend for a stock’s price is unclear, either because it’s in a sideways trading pattern, or because the markets themselves are choppy. An oscillator will show underlying trends in other quantifiable aspects of the stock, such as its buying or selling volume, which may indicate if the stock is likely to move up or down in the near future.

Investors may have access to oscillators through their brokerage account or trading programs. Because oscillators are mathematical, it’s even possible for savvy investors to program them directly into a spreadsheet.

Stock Oscillators and Technical Analysis

Stock oscillators are valuable tools in technical analysis, an approach taken by investors to try to forecast the ways a stock might perform based on its current data and past movements. (Though it’s worth remembering that past performance is no guarantee of future success or failure.)

As a strategy, technical analysis involves looking at a wide range of data and indicators, such as a stock’s price and trading volume, to locate opportunities and risks.

But technical analysis typically doesn’t involve researching the underlying companies, their industries, or any macroeconomic trends that might drive the success or failure of those underlying companies. Rather, it solely analyzes the stock’s performance to find patterns and trends.

As such, these tools are mostly used by short-term traders who plan to hold onto a stock for days or weeks, rather than long-term investors who plan to hold a stock for periods of years.

Recommended: 5 Bullish Indicators for a Stock

How Do Stock Oscillators Work?

While every oscillator differs, they all tend to identify a normal range for a given stock, using specific criteria to determine if the stock is overbought or oversold based on that range.

Oscillators can help identify buying or selling opportunities. But they can also mislead investors if a stock undergoes a price breakout, which is when an event occurs that effectively resets the trading range of a stock higher or lower.

During a breakout, an oscillator may show that the stock is overbought or oversold for a long period of time. For this reason, many traders consider oscillators best used in sideways or choppy markets.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Types of Trading Oscillators

There are a number of different types of trading oscillators. Here’s what to know about them.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) works by taking measurements of a stock’s recent price changes to determine if it’s overbought or oversold. It’s a popular tool for investors looking for entry and exit points of a given stock position.

The RSI measures the speed and size of a stock’s price movements, and calculates the momentum using the ratio of higher closing prices to lower closing prices. In this oscillator, stocks that have more frequent or larger positive changes receive higher scores. Investors typically chart RSIs over a 14-day timeframe, and rate stocks on a scale from 0 to 100, though they may create custom timeframes.

The oscillator selects a “horizontal channel,” which is a common RSI score for a stock, then marks out price bands above and below that band at which the stock may be considered overbought or oversold.

Moving Average Convergence/Divergence (MACD)

The MACD is an oscillator traders use to understand the momentum of a given stock. It uses the moving average of a stock to determine where a stock is trading over a set period of time. Most investors prefer 12-day and 26-day time spans for their MACDs, but they can also create their own custom MACD measurements with time spans that better fit their own particular trading strategies.

The MACD compares the moving average of the short- and long-term moving average to see if those averages are getting closer (converging) or farther apart (diverging).

If the MACD of a given stock is positive, that means its short-term average is higher than its long-term average, which indicates that the stock’s price is on an upswing. A higher MACD indicates more pronounced momentum in that upswing. On the other hand, a negative MACD indicates that a stock is trending downward.

Recommended: What Is MACD?

Commodity Channel Index (CCI)

The CCI is a momentum-based oscillator that investors use to spot price extremes and possible price reversals, and to understand the strength of price trends for commodities, currencies, and stocks. The CCI measures the variation of a security’s price from its statistical mean.

So when the indicator goes above zero, that indicates the price is above the security’s historical average price. When it’s below zero, the price is below the historical average.

The CCI assigns scores that tend to fall between +100 and -100, but the indicator is unbound. CCI scores over +100 mean that a stock may be overbought, while scores below -100 indicate that a stock may be oversold, but there are no fixed points that indicate one condition or the other.

Stochastic Oscillator

A stochastic oscillator, or “sto indicator,” compares a stock’s average price levels to its current price levels to determine if a stock is overbought or oversold.

Specifically, a stochastic oscillator compares a stock’s closing price to a range of the security’s highest and lowest prices over a period of time that the trader can set. By changing the time frame of the oscillator, traders can adjust its sensitivity to recent market fluctuations.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Pros of Using Oscillator Indicators

There are a number of potential benefits to using oscillator indicators.

• Using multiple oscillators may help investors better understand how a particular stock is trading.

• Oscillators may provide useful alerts that a stock is nearing a price at which an investor may consider buying or selling it.

• Stock oscillators may be highly effective in helping investors identify overbought or oversold conditions in a specific stock.

• Oscillators may be highly effective tools in sideways or choppy markets, where a stock’s trading price remains within a fixed range.

Cons of Using Oscillator Indicators

There are also potential drawbacks to using oscillator indicators.

• While oscillators can be effective in helping investors identify overbought or oversold conditions in a specific stock, whether a stock is overbought or oversold is not necessarily a clear signal to buy or sell it.

• In strong bull or bear markets, an oscillator signal that a stock is overbought or oversold may be misleading.

• Oscillator signals only offer stock price information, and not the bigger picture of what’s happening with the company or its industry.

The Takeaway

Stock oscillators are one set of tools in technical analysis, which also employs close reading and interpretation of charts, as well as other technical indicators. Oscillators may help investors determine if a stock is overbought or oversold, even if the price of a stock isn’t giving clear indications.

Invest with as little as $5 with a SoFi Active Investing account.

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SoFi Invest®

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

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