Jun
22
2023
What Are Mega Cap Stocks?

Guide to Mega Cap Stocks

By | Growing Wealth, invest, Investing | Comments Off on Guide to Mega Cap Stocks

Mega cap, or “megacap,” is a term that describes the largest publicly-traded companies, based on their market capitalization. Mega cap stocks typically include industry-leading companies with highly recognizable brands.

Investing in mega cap stocks, along with companies that have a smaller market capitalization, can help build a diversified investment portfolio. Spreading investment dollars across different market caps may allow investors to minimize potential risks. But like any security, mega cap stocks have both pros and cons that investors should consider. Learning more about how they work and what sets them apart from other types of stocks can help you decide whether there’s a place for them in your portfolio.

Market Capitalization, Explained

Mega cap stocks sit at one end of the market capitalization spectrum, representing the very largest companies in the public markets. Market capitalization is a commonly used method for categorizing publicly-traded companies. In simple terms, market capitalization or market cap measures a company’s value, as determined by multiplying the current market price of a single share by the total number of shares outstanding.

For example, say a company’s stock is priced at $50 per share and it has 10 million shares outstanding. Following the formula of $50 x 10,000,000, the company would have a total market capitalization of $500 million.

Most often, companies are assigned to one of three categories, based on their market capitalization as follows:

•   Small cap: Market value of $250 million to $2 billion

•   Mid cap: Market value of $2 billion to $10 billion

•   Large cap: Market value above $10 billion

While most companies fit into one of these three groups, some outliers exist on either end of the spectrum. The smallest of the small cap stocks are microcap stocks, while the largest companies are the mega caps.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Mega Cap Stock Definition

Mega cap stocks have a market capitalization that’s significantly beyond $10 billion required for classification of large cap stocks. Instead, these companies have market capitalizations in the hundreds of billions or even of $1 trillion or more.

There are a handful of companies with market caps of more than $1 trillion, and those companies only passed the trillion-dollar mark in recent years. That said, it’s likely more companies will become mega cap stocks in the years ahead.

10 Companies With the Largest Market Cap

As of June 2023, these are the ten companies with the largest market caps. Note, too, that there isn’t always a direct correlation between market cap and stock price!

1. Apple

Apple, which trades under the market ticker AAPL, has a market cap of $2.9 trillion, and shares trade at more than $185. Apple is a tech company that produces consumer tech goods and software, including the iPhone. Its latest quarterly report (Q2 2023) showed revenue of almost $95 billion.

2. Microsoft

Microsoft trades under the MSFT ticker, and has a market cap of more than $2.5 trillion. Microsoft, like Apple, is a large tech company that creates software and hardware for businesses and consumers. Microsoft shares trade for nearly $340, and its latest revenue numbers tallied nearly $53 billion for the quarter.

3. Alphabet

Yet another large tech company, specializing in software and ad sales, Alphabet (the parent company of Google) has a market cap of more than $1.57 trillion. Alphabet trades under the GOOG ticker (it has numerous share classes), and shares trade for around $124. Its latest quarterly revenue was almost $70 billion.

4. Amazon

Amazon is an ecommerce company that sells just about everything under the sun on its digital platform, as well as offering cloud services to businesses. Amazon trades under the AMZN ticker, and has a market cap of $1.22 trillion, and shares trade for more than $125. Amazon’s latest quarterly revenue was $127 billion.

5. NVIDIA

NVIDIA makes computer chips, and has a market cap of $1.07 trillion, with share prices of around $434. NVIDIA trades under the NVDA ticker, and its most recent quarterly revenue was $7.19 billion.

6. Tesla

Tesla, an electric car maker, is not a mega cap stock, but close. Its market cap is $857 billion, with share prices of more than $270. It trades under the ticker TSLA, and saw revenue of $23.3 billion during Q1 2023.

7. Berkshire Hathaway

Berkshire Hathaway is a conglomerate holding company, meaning that it is involved in many industries, including real estate and insurance. It has many stock classes, but trades under the ticker BRK.A, and is valued at more than $516,000 (its other shares trade for significantly less). Its market cap is nearly $743 billion, and its latest quarterly revenue was more than $85 billion.

8. Meta

Meta is the parent company of Facebook, and trades under the ticker META. Its market cap is $726 billion, and shares trade for more than $283. Revenue for the first quarter of 2023 was almost $28 billion.

9. Visa

Visa is a financial services company, which most recently brought in quarterly revenue of almost $31 billion. Visa trades under the ticker V, and has a market cap of more than $466 billion, with shares trading for more than $227.

10. UnitedHealth Group

UnitedHealth Group is a healthcare and insurance company with a market cap of $437 billion. Shares are trading for nearly $470, and its latest quarterly revenue numbers amounted to $336 billion.

3 Pros of Investing in Mega Cap Stocks

There are several good reasons to consider making mega cap stocks part of your asset allocation strategy.

1. Diversification

Investing across different sectors and market capitalizations spreads out risk, since economic ups and downs may affect smaller, mid-sized and larger companies differently.

2. Stability

Established mega cap companies are among the most stable in the economy and may be better able to withstand a market downturn compared to smaller or newer companies without cash reserves or a solid brand reputation.

3. Dividends

Some mega cap stocks pay dividends to investors since they don’t need to reinvest profits into growth. That can provide an additional stream of income or allow for faster portfolio growth if they’re reinvested.

Cons of Investing in Mega Cap Stocks

While there are some things that make mega cap companies attractive to investors, it’s important to consider the potential downsides:

Limited Upside

Since many mega caps have already done most of their growing, there may be limited space for their share prices to increase.

Perception vs Reality

Market capitalization measures the stock market’s perceived value of a stock, not its intrinsic value. So mega cap status alone shouldn’t be considered a reliable indicator of a company’s fundamentals or financial health.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How To Invest in Mega Caps

If you understand the investment risk and potential rewards that come with mega cap stocks and you’re interested in adding them to your portfolio, there are two ways to do it. You can choose to invest in individual mega cap stocks, or you can put money into an investment fund, such as a mutual fund or an exchange-traded fund (ETF) that holds mega caps.

You can also look at investing in a market index that can give your portfolio exposure to mega cap stocks.

Buying individual stocks allows you to pick and choose which mega caps you want to purchase. But this may require more of a hands-on approach as you’ll need to research individual companies. There are similarities and differences, in that regard, between investing in mega cap and investing in small cap stocks.

Investing in a thematic ETF focused on mega cap stocks may be a simpler way to diversify with larger companies. This allows you to have exposure to more mega cap stocks in your portfolio.

ETFs can be traded on an exchange, just like a stock, allowing for greater liquidity and flexibility than traditional mutual funds. Lower turnover ratios can make ETFs more tax-efficient than regular mutual funds. Depending on which mega cap ETF you choose, you may pay a much lower expense ratio than you would with traditional mutual funds.

Buying Stocks With SoFi

Mega cap stocks refers to stocks that have a market capitalization of more than $10 billion, and in some cases, more than $1 trillion. As of June 2023, there are only a handful of mega cap stocks out there, but several companies may become mega cap stocks in the subsequent years.

Mega cap stocks offer stability and the potential for dividend income, though they may have lower upside than smaller stocks that have more room to grow. The right role for mega cap stocks in your portfolio will depend on your investment goals, risk tolerance, and time horizon.

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


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

FAQ

What are examples of mega caps?

Some examples of mega cap stocks include Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN), the first two of which have market caps of more than $2 trillion.

How many mega cap stocks are there in the U.S.?

Mega cap stocks are stocks with share prices of vastly more than $10 billion, and as such, there are many on the market – dozens, in fact. But there are only three or four with market caps of more than $1 trillion.

What is the difference between a large-cap and mega cap?

While mega cap stocks are typically defined as having market caps of more than $10 billion (often more than $200 billion), large-cap stocks have market caps ranging from $2 billion to $10 billion.

SoFi Invest®

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

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

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

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

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Jun
22
2023
What is a Charitable Gift Annuity and How Does it Work?

What Is a Charitable Gift Annuity and How Does it Work?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Charitable Gift Annuity and How Does it Work?

Funding your retirement is crucial—and donating money to worthy causes is a pretty great financial goal, too. When used correctly, a charitable gift annuity can help you accomplish both of those objectives at the same time.

What Is a Charitable Gift Annuity?

A charitable gift annuity allows a donor to make a contribution to a charity in exchange for a fixed monthly income for both the donor and an optional additional beneficiary later in life. This stream of payments can be a steady source of income in retirement, and is guaranteed through the annuity until all listed beneficiaries die.

However, there are important tax considerations to think through before purchasing a charitable gift annuity—or any annuity, for that matter. In this article, we’ll dive into the details on how charitable annuities work, what makes them different from other kinds of annuities, and how to determine whether or not one is right for you.

Understanding the Concept of Annuities

To fully understand charitable gift annuities, it’s important to have a background on annuities in general.

An annuity is a type of financial product used to create an income stream during retirement. It’s a contract—generally between the beneficiary and an insurance company or bank—that guarantees the buyer a set monthly payment in exchange for money the buyer pays in ahead of time.

Recommended: What is an Annuity, Exactly?

Depending on the type of annuity, the beneficiary might pay for it over time or in a lump sum. Sometimes, payments into the annuity can be made directly from an existing retirement account like an IRA or 401(k). Then, the annuity provider invests the money and makes payments back to the buyer once the retirement period starts. Payments might last for a set amount of time, like 10 years, or for the rest of the beneficiary’s life.

For the provider, an annuity is basically a wager against the buyer’s life expectancy. If the buyer passes away before the retirement savings they’ve paid into the annuity—along with any interest it’s earned in the meantime—has been paid back to them entirely, the annuity provider gets to keep the change.

With a charitable gift annuity, however, it works a little bit differently.

How Does a Charitable Gift Annuity Work?

With a charitable gift annuity, the contract is drawn up not between the buyer and an insurance company or bank (as with a standard annuity), but between a donor and a qualified charity. The donor makes a gift to the charity, some of which is used immediately for whatever needs the organization supports. However, part of the money is set aside in a reserve account, where it’s invested and will grow. Money from the reserve account—both principal and interest—are used to pay out the monthly stipend the beneficiary or beneficiaries receive.

Charitable annuity payments are made to the donor and beneficiary until both have passed away—at which point, the extra money is kept by the charity and used for charitable purposes.

In this way, the buyer of a charitable gift annuity can make a gift to a cause they support even after they’re gone, all while helping themselves create a secure and reliable retirement income in the meantime.

What are the Benefits of Charitable Gift Annuities?

Along with helping donors support a charity of their choosing both in and after life, charitable annuities have some other features that can make them attractive retirement vehicles for some people.

Non-Cash Donations

Many charitable gift annuities allow donors to contribute non-cash donations, including fixed income securities and investments—but also tangible items like art and real estate. Having this option means that donors might save money on taxes down the line. Annuity income is generally taxed as normal income at both the federal and state levels, but by donating physical securities, buyers of charitable gift annuities might pay less in capital gains taxes. (That said, regular income tax will still apply on any and all income received through the annuity.)

Payment Flexibility

Another nice thing about charitable gift annuities is the flexibility buyers have in receiving the payments when there are more than one beneficiary. Payments can either be structured to go to both beneficiaries at once, or to only kick in for the second beneficiary after the death of the first. In any case, any leftover funds will be donated to the charity when all beneficiaries have passed away.

Alternatives to Charitable Gift Annuities

Although charitable gift annuities can be a valuable tool, they may not be the right choice for every investor for a variety of reasons, including:

•   Gift annuities tend to have lower rates than most commercial annuity types, so they might not maximize your retirement income.
•   If you don’t have physical assets to donate, there may be more efficient ways to invest your cash.
•   Income streams from any type of annuity are usually still subject to federal and state income tax, unless they’ve been purchased using a Roth IRA or Roth 401(k), whose funds have already been taxed.

For investors who’d like more control over their investments, and fewer restrictions around when and how they can access the money, there are other places to put your retirement money.

One likely option is to take advantage of an employer-sponsored retirement account like a 401(k) at work. And almost anyone can bolster their retirement savings by investing in an IRA. Those under set income limits can invest in a Roth IRA, which will allow them to take tax-free distributions once they reach retirement age.

Even if you choose an alternative retirement option, you can continue to make donating to charities part of your financial lifestyle. It may even be possible to set aside money for charitable giving while on a tight budget.

The Takeaway

A charitable gift annuity is an annuity in which a donor contributes money to a charity, with the promise of getting regular payments in return later in life—for themselves and an optional beneficiary. Part of the initial payment, as well as any leftover funds, are donated to the participating charity after all the beneficiaries have died, making it a good way to secure retirement income while being charitable at the same time.

While a charitable annuity may be attractive to some investors, other types of retirement savings may allow an individual more nuanced control of their investments and more flexibility in the size and frequency of their withdrawals upon retirement.

There are many ways to invest for retirement, including opening a traditional, Roth, or SEP IRA with a SoFi Invest® online investing account. Members can choose between an active or automated account, and get access to a broad range of investment options, member services, and a robust suite of planning and investment tools.

Find out how to plan for retirement with SoFi Invest.


SoFi Invest®

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

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

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

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Jun
22
2023

Investing in Retail Stocks

By | Growing Wealth, invest, Investing | Comments Off on Investing in Retail Stocks

When a consumer walks into a favorite store and spends money there, they might wonder if they should invest in that brand. Enter: retail stocks–companies that sell everything from clothing, books, computers, homeware, tools, groceries to auto parts.

It may feel like a good idea to invest in retail stocks because we’re familiar with their stores, the products and understand the brand identities.

However, retail investing can actually be tricky, especially in today’s ecosystem. Retail companies have dealt with a lot in recent years: shifting consumer preferences, the rise of online shopping, a slew of store closures, trade wars, a global pandemic that brought about quarantine measures.

Here are some things you need to know about retail stocks before diving into them.

How to Invest in Retail Stocks

First, investors need to check to see if the retail company is public. Being public means shares of the business are available for any investor to buy in the stock market. They can do this by looking up the company’s stock ticker symbol on the internet or via their brokerage account. For those who just want exposure to the industry as a whole, they can find a retail-stock exchange-traded fund, or ETF.

Recommended: What Is an ETF?

Why do retail companies go public? Typically in order to raise additional funds that are used to open more stores, expand overseas, invest in their e-commerce platform, or buy another retail company.

As a stockholder in a retail company, the investor holds a partial ownership, or a share, of the business. The owner of a stock is also entitled to dividends the company may disburse, and benefit from any potential increase in its share price. They also have the right to participate in shareholder votes.

Being a retail investor isn’t for the faint of heart. It takes a lot of due diligence. Investors should read quarterly earnings reports the company makes, monitor for any additional announcements the company makes related to company performance or new products, and pay attention to management changes like a new CEO or CMO.

Recommended: Reading an Earnings Report

It also takes an investor who isn’t afraid of a little volatility. Retail stocks can be particularly turbulent when reporting earnings for the back-to-school or holiday seasons–when many companies make a majority of their sales.

Changes in the Retail Industry

Remember back in the day when the mall was the place everyone went to hang out or go shopping? That reality has shifted radically with the advent of ecommerce. Consumers have increasingly migrated online to make their purchases, and retail companies have had to change alongside them.

Take holiday spending, the most important season for many retailers. Online spending has continued to outpace in-store spending, with the gap widening in recent years due to mobile spending.

The shift also accelerated as the Covid-19 pandemic caused consumers to avoid crowds and buy more through web purchases, according to a 2020 Deloitte survey . The average spend online in 2020 was $892 versus $390 in person, the survey shows.

Question: What percentage of your total holiday budget do you expect to spend…

2015

 2016

 2017

 2018

 2019

 2020
Online? 51% 50% 55% 57% 59% 64%
In-store? 46% 45% 38% 36% 36% 28%

Source: Deloitte

The e-commerce revolution has changed the stores along Main Street or malls into more of a marketing tool, rather than a first point of sale. Over the last few decades, stores have had to adapt to create exclusive consumer experiences only found in-store.

Those that couldn’t keep up with the changing times had to shut their doors. According to research and advisory group Coresight Research, a record 10,000 stores could close in the U.S. in 2021. That would mark a 14% jump in total closures from 2020. Coresight also predicted about 4,000 store openings in 2021, but mainly by discount grocers and dollar-chain stores.

Looking at Retail Stock Metrics

Here are some ways investors can evaluate whether to invest in a public retail company:

1. Visit a few physical locations. This way, an investor can get a sense of what’s happening on the ground. Is the store selling timely merchandise? Is the store well lit and laid out? Is there a lot of foot traffic? All of these are important ways an investor can try to gauge a company’s health.
2. Visit the store’s online platform. If the store’s e-commerce operation seems strong, it is easy to navigate and offers customer service. This, too, points to the good health of a company.
3. Next, it’s time to dig deeper into the company’s finances. Some measures that can be particularly helpful to retail investors include comparable store sales–also known as same-store sales. These are sales trends of stores that have been open at least one year.
4. Also examine margins, or how much the revenues a company makes after subtracting the cost of goods sold (COGS), and inventories, or how much in goods the company has stocked. Too much inventory can signal slow sales, while too little may be a sign of operational or production issues down the road. These numbers may fluctuate depending on the season.
5. Use traditional valuation metrics, such as price-to-earnings ratio or price-to-sales ratio. Public retail companies are required to report net income and revenue figures, which investors can use to gauge how expensive or cheap the shares are trading at.
6. Pay attention to broader industry trends by looking at earnings of competitors or changes in e-commerce trends. The National Retail Federation (NRF) could also be a good resource for information.

Possible Risks of Investing in a Retail Stock

Like all investments, retail stocks can come with risks. Take the global Covid-19 pandemic, which led to a quarantine across many cities in the world in 2020, causing consumers to be stuck at home and be wary of visiting stores.

Here are some of the other ways the industry can be vulnerable:

•   Retail stocks can be highly cyclical, or tied to economic conditions. In a recession, non-essential purchases may be the first to go for many consumers and may cause an otherwise healthy retail store to sink. Investors may benefit from balancing their portfolio with non-cyclical companies, like utility, telephone or health-care stocks.

Recommended: Why Portfolio Diversification Matters

•   Retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain.
•   Retail stocks are also often at risk of consolidation. The retail industry is shrinking in some ways, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.

Recommended: What Happens to a Stock During a Merger?

The Takeaway

Retail businesses can be volatile stock investments, going up and down with the seasons, along with changes in consumer confidence. Furthermore, the e-commerce and mobile phone revolution has added pressures to the retail financial landscape.

Investing in retail stocks involves keeping tabs on how brands are dealing with shutting malls, building digital platforms and changing expectations among consumers. Investors can also benefit from understanding more retail-specific metrics like same-store sales, margins and inventories. They can also use traditional valuation measures like P/E or P/S ratios.

It takes time and research to invest in retail stocks. With SoFi Invest®’s Active Investing platform, investors can pick and monitor the retail companies they’d like to be shareholders of. If a particular company’s price is outside what an investor can afford, they may be able to buy fractional shares, or stock bits of a whole stock, through SoFi’s Stock Bits offering.

Try trading Stock Bits on SoFi Invest today.


SoFi Invest®

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

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

Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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

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Jun
22
2023
Quant Trading: What It is and How to Do It

Quant Trading: What It Is and How to Do It

By | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off on Quant Trading: What It Is and How to Do It

Quant trading is a trading strategy that relies on quantitative analysis, employing statistical and mathematical models to find profitable trades.

Quantitative analysis takes advantage of the massive amount of market data, as well as recurring trends, to offer investment insights and evaluate stock performance. As a strategy, quant trading uses that analysis of a given stock’s metrics, including price and volume, to predict performance and make bets based on those predictions.

What is Quantitative Trading?

Historically, quant trading has been the province of large, institutional investors and hedge funds, who have had access to sophisticated research and computer models that make it easier to use technical analysis to research stocks. But that’s starting to change, with more individuals taking advantage of the tools that the internet has provided to engage in a host of quantitative trading strategies.

Some of the most common quantitative trading strategies include statistical arbitrage, high-frequency trading and algorithmic trading. Most of those tactics involve trades with very short time horizons.

What different quant strategies have in common is that they use data-based models to locate trading opportunities, and to calculate the likelihood of a positive outcome for those opportunities. Unlike some investment strategies, it doesn’t rely on deep research of the companies underlying the securities themselves. Rather, it looks to statistical methods and computer models to find promising trades.

How Quant Traders Track Data Points

Most quant traders start by tracking specific data points. While most commonly tracked data points are price and volume, any metric can be used to build a strategy. There are some traders who even build programs to monitor social media for investor sentiment.

Quant traders use that data to discover trends or correlations that have proven to be predictive of certain outcomes, such as a stock going up or down. Then they will build a model to identify those trends and correlations as they occur. Some investors, especially high-volume investors, will even go so far as to automate their trading to execute purchases and sales whenever those conditions arise.

For example, a quant trader who believes in the power of market momentum might write a computer program that teases out stocks that have won in previous upward market swings. When the markets begin another bull run, a simple version of that program will either alert the trader to those stocks, or buy them directly. A more complex version of the program might identify a common metric for the stocks that had excelled during the last runup, and then build a repository of those stocks for when the next upward swing.

That example could equally apply to stocks in a down market, or stocks during sinking interest rates, or stocks during periods of persistently low unemployment. A quant trader looks at the math to anticipate the next market moves.

Getting Started With Quant Trading

For an investor who is looking to build their own models for quant trading, they need to find the right software to get started. Some of these programs can be expensive, and many require a major time investment to use them well. So it’s helpful to do some research before choosing a software package.

If an investor is looking for software that will help them build models, spot opportunities, and execute trades, then the stakes of choosing the right software are even higher. These software packages are typically provided by brokerages, or from specialized software firms. Most ready-made quant trading software suites will offer free trial versions that allow customers to try them out. But they can come with blind spots, or shortfalls that can cost an investor real money. That’s why some more tech-savvy and adventurous investors will go so far as to build their own software to identify—and act on—investment opportunities.

Features to Look for in Quant Trading Software

Most ready-made trading software packages offer real-time market data and price quotes. Quant traders want access to company fundamentals such as P/E ratios, earnings and other metrics updated in real time. And lacking that, they should look for software programs that allow them to easily integrate outside data sources, which can open up new and unique possibilities for research and discovery.

Recommended: How to Calculate Earnings Per Share

Depending on the breadth of their outlook, quant traders may want to trade across several different markets. But each exchange might provide data via a different digital language. Be sure that any software package can integrate feeds in these different formats, or that it has access to popular third-party data purveyors such as Bloomberg or Reuters.

While those capabilities will help quant traders focus on the right data and build the right models, there’s another side, namely trading on those models. This is where finding or building the right software can make or break a quant trader.

For quant traders, especially traders who make many short-term trades in the course of a day, one vital feature for software comes down to latency. If it takes 0.2 seconds for a price quote to get to your software vendor’s data center from the exchange, and it takes 0.3 seconds for it to get from there to your screen, and then 0.1 seconds for the trading software you use to process the data, and then another 0.3 seconds for the trading software to receive the data, analyze it, and make a trade, that matters. Especially in quant trading, time is money. But the lag continues. It may take 0.2 seconds for a trade order to get to a broker, and another 0.3 seconds for the broker to deliver that trade order to the exchange.

Especially in a stock hat’s seeing heavy volume, that 1.4 seconds could mean the difference between a successful and unsuccessful trade. That means that any delay in a software constitutes a real disadvantage to a quant trader, and should be considered when buying software.

Pros and Cons of Quant Trading

Emotion can be one of the biggest obstacles to successful trading. Investors may hold onto losing positions too long, thinking they’ll turn around. And they may let winning investments run too long, and lose money when they take a turn. But computer models have no emotions. That’s one reason why quantitative trading is so popular.

That said, quantitative trading can come with its own unique problems. The main one is that the financial markets are always changing. The rules, trends, correlations, cycles and even fundamental logic of the markets often seem to change with dizzying speed. As a result, even the most back-tested and seemingly promising quantitative trading model will occasionally fail. And while many models and trading programs may be profitable for a time, a successful quant trader is always looking for the next big change.

Some investors may find that using fundamental analysis on stocks offers a bit of the best of both worlds. Fundamental analysis incorporates both quantitative and qualitative analysis, in an effort to create a better overall picture of a given stock.

The Takeaway

Quant trading—once the province of institutions and hedge funds—has gone mainstream. Individuals are getting in on this strategy, using data to try and predict the markets, rather than relying on emotion and instinct.

For individuals ready to jump into investing, SoFi Invest® online brokerage offers an active investing solution that allows you to choose your stocks and ETFs without paying commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a SoFi management fee.

Find out how to get started with SoFi Invest.

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