Jun

2024

How to Invest in the Solar Energy Sector

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Solar energy investing focuses on companies or funds focused on some aspect of the solar energy industry. You can invest in the solar energy industry by putting money into companies involved in some part of the solar power supply chain, including manufacturers of solar panels and operators of solar energy facilities. Investors can also profit from solar energy by installing solar panels on their homes.

Solar energy is one of the most popular and growing renewable energy sources. There are several ways to invest in solar energy for investors interested in supporting an industry that may help reduce dependence on traditional fossil fuels and help combat climate change.

What Is Solar Investing?

Solar investing generally refers to investing in companies that produce or sell solar energy products. This can include solar panel manufacturers, installers, or companies operating solar energy facilities. Investors usually invest in solar through traditional products like stocks, mutual funds, and exchange-traded funds (ETFs).

Another common type of solar investing is the installation of solar panels on a home or business. Solar panels can be used to power all or part of a home or business, and the electricity generated can offset the cost of an energy bill. Investors can also use solar panels to generate income by selling their electricity back to a utility company.

💡 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.

💡 Recommended: Beginner’s Guide to Sustainable Investing

What Is Solar Energy?

Solar energy is a form of renewable energy that comes from the sun; it is an abundant source of energy that can be used to generate electricity, heat water, and provide other forms of energy for homes, businesses, and communities.

Solar energy is generally generated by solar panels, which are made up of photovoltaic (PV) cells that convert sunlight into electricity. Solar panels can be installed on an individual’s home or business or arrayed across open spaces that experience strong sunlight.

Though solar panels are common for most consumer and business applications, thermal solar is another type of solar energy. Thermal solar energy utilizes mirrors to reflect and concentrate sunlight onto receivers that collect the energy and convert it to heat, which can then be used to produce electricity or stored for later use. It is used primarily in large power plants.

Solar energy is considered a clean and sustainable energy source that can help reduce the dependence on fossil fuels to combat climate change. Analysts expect renewable energy sources like solar will make up a more significant portion of all energy generation in the coming decades.

Benefits and Risks of Investing in Solar

The trend of investing in renewable energy sources like solar energy is rising as the public becomes more aware of the environmental and economic benefits. However, before investing in this sector, there are benefits and risks to consider.

Benefits

A benefit of investing in solar is that it provides a renewable energy source that can help reduce your carbon footprint. This can be appealing to investors interested in environmentally friendly and socially responsible investing.

Solar energy is also sustainable, especially compared to fossil fuels and traditional energy sources. The amount of oil and coal in the ground is limited, but the sun, hopefully, isn’t going anywhere. Investors interested in investments with long-term growth potential may prefer solar energy to other energy stocks.

Additionally, if you install solar panels on your home, it can increase the value of your property.

💡 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.

Risks

A primary risk of solar energy is that it is intermittent, meaning that solar energy is only generated when the sun is shining. Solar energy is only available during daylight, and a cloudy day may interfere with energy production. While this is a problem, technology is advancing so solar energy can be more adequately captured and stored during periods of extreme sunshine.

Another downside to solar energy is that many technologies in the sector require rare earth materials in the production process. The solar industry must compete with other industries for these scarce resources. Because there can be supply and demand issues for these commodities, it can increase costs for solar energy producers.

And though solar energy is a renewable resource, that doesn’t mean it doesn’t create any harm to the environment. The materials used in solar technologies are difficult to dispose of and recycle, which cuts into the sustainability claims of solar energy investments.

💡 Recommended: What Every New Investor Should Know About Risk

4 Ways to Invest in Solar Energy

Investors can invest in solar energy by putting money into the stocks and bonds of companies in the solar energy industry. Mutual funds and exchange-traded funds (ETFs) with solar energy or renewable energy-focused strategies are also potential investment vehicles for those interested in adding solar energy to their portfolio.

Regardless of the type of investment vehicle, investors need to remember that many companies and funds are diversified, meaning they may be involved in sectors other than solar energy. For investors that want to invest in purely solar energy companies or funds, it’s essential to do research into potential investments.

Stocks

Investors can put money into various publicly-traded companies involved in some aspect of the solar energy industry. Solar energy companies may include manufacturers of components for solar technologies, installers of solar panels, and firms that operate solar energy facilities.

Some companies involved in the solar energy industry include:

• Enphase Energy (ENPH): This company designs and manufactures technologies that turn sunlight into energy

• SolarEdge Technologies (SEDG): This firm creates products that help photovoltaic systems convert solar energy into power

• First Solar (FSLR): This company is a manufacturer of solar panels and a provider of utility-scale photovoltaic power plants

• Sunrun (RUN): This firm is a leading provider of residential solar panels

• Daqo New Energy (DQ): This company manufactures monocrystalline silicon and polysilicon, primarily for use in solar photovoltaic systems

Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to solar energy companies and investments.

Several index funds invest in a basket of companies in the solar energy industry. These funds allow investors to diversify their holdings by investing in one security. However, not all solar energy funds follow the same criteria and may focus on different aspects of solar energy. These funds may also have holdings in traditional energy and utility companies that only are partially involved in the solar energy industry.

Bonds

The bonds of corporations involved in solar energy business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund solar energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

Install Solar Panels

As mentioned above, investors who want to profit from solar energy can purchase solar panels and install them on a home or business. This may be an appealing way to save money on your energy bills, generate income by selling electricity to a utility company and helping reduce your carbon footprint.

How to Start a Solar Investment Portfolio

If you are ready to start investing and want to build a portfolio of solar energy investments, you can follow these steps:

Step 1: Open a brokerage account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks and other securities. SoFi Invest® offers an active investing platform where you can start building your solar energy portfolio.

Step 2: Pick your assets

Decide what type of investment you want, whether in a company’s stock, a solar energy-focused ETF or mutual fund, or bonds.

Step 3: Do your research

It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

Step 4: Invest

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive environmental and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification may help to reduce your risk and maximize your returns.

The Takeaway

Solar investing has become increasingly popular in recent years as the cost of solar panels has fallen and the technology has become more efficient. Solar panels are now available for a fraction of the cost of traditional electric power, and they are becoming more efficient at converting sunlight into electricity.

Investing in the solar energy industry may be a way to profit from the growth outlook for solar energy. However, it’s necessary to do your homework before investing in any solar company or fund or installing solar panels on your home.

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.

Photo credit: iStock/deepblue4you

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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.

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Jun

2024

How to Calculate Expected Rate of Return

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

When investing, you often want to know how much money an investment is likely to earn you. That’s where the expected rate of return comes in; expected rate of return is calculated using the probabilities of investment returns for various potential outcomes. Investors can utilize the expected return formula to help project future returns.

Though it’s impossible to predict the future, having some idea of what to expect can be critical in setting expectations for a good return on investment.

Key Points

• The expected rate of return is the profit or loss an investor expects from an investment based on historical rates of return and the probability of different outcomes.

• The formula for calculating the expected rate of return involves multiplying the potential returns by their probabilities and summing them.

• Historical data can be used to estimate the probability of different returns, but past performance is not a guarantee of future results.

• The expected rate of return does not consider the risk involved in an investment and should be used in conjunction with other factors when making investment decisions.

What Is the Expected Rate of Return?

The expected rate of return — also known as expected return — is the profit or loss an investor expects from an investment, given historical rates of return and the probability of certain returns under different scenarios. The expected return formula projects potential future returns.

Expected return is a speculative financial metric investors can use to determine where to invest their money. By calculating the expected rate of return on an investment, investors get an idea of how that investment may perform in the future.

This financial concept can be useful when there is a robust pool of historical data on the returns of a particular investment. Investors can use the historical data to determine the probability that an investment will perform similarly in the future.

However, it’s important to remember that past performance is far from a guarantee of future performance. Investors should be careful not to rely on expected returns alone when making investment decisions.

💡 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.

How To Calculate Expected Return

To calculate the expected rate of return on a stock or other security, you need to think about the different scenarios in which the asset could see a gain or loss. For each scenario, multiply that amount of gain or loss (return) by its probability. Finally, add up the numbers you get from each scenario.

The formula for expected rate of return looks like this:

Expected Return = (R1 * P1) + (R2 * P2) + … + (Rn * Pn)

In this formula, R is the rate of return in a given scenario, P is the probability of that return, and n is the number of scenarios an investor may consider.

For example, say there is a 40% chance an investment will see a 20% return, a 50% chance that the investment will return 10%, and a 10% chance the investment will decline 10%. (Note: all the probabilities must add up to 100%)

The expected return on this investment would be calculated using the formula above:

Expected Return = (40% x 20%) + (50% x 10%) + (10% x -10%)

Expected Return = 8% + 5% – 1%

Expected Return = 12%

What Is Rate of Return?

The expected rate of return mentioned above looks at an investment’s potential profit and loss. In contrast, the rate of return looks at the past performance of an asset.

A rate of return is the percentage change in value of an investment from its initial cost. When calculating the rate of return, you look at the net gain or loss in an investment over a particular time period. The simple rate of return is also known as the return on investment (ROI).

How to Calculate Rate of Return

The formula to calculate the rate of return is:

Rate of return = [(Current value − Initial value) ÷ Initial Value ] × 100

Let’s say you own a share that started at $100 in value and rose to $110 in value. Now, you want to find its rate of return.

In our example, the calculation would be [($110 – $100) ÷ $100] x 100 = 10

A rate of return is typically expressed as a percentage of the investment’s initial cost. So, if you were to sell your share, this investment would have a 10% rate of return.

Different Ways to Calculate Expected Rate of Return

How to Calculate Expected Return Using Historical Data

To calculate the expected return of a single investment using historical data, you’ll want to take an average rate of returns in certain years to determine the probability of those returns. Here’s an example of what that would look like:

Annual Returns of a Share of Company XYZ
Year	Return
2011	16%
2012	22%
2013	1%
2014	-4%
2015	8%
2016	-11%
2017	31%
2018	7%
2019	13%
2020	22%

For Company XYZ, the stock generated a 21% average rate of return in five of the ten years (2011, 2012, 2017, 2019, and 2020), a 5% average return in three of the years (2013, 2015, 2018), and a -8% average return in two of the years (2014 and 2016).

Using this data, you may assume there is a 50% probability that the stock will have a 21% rate of return, a 30% probability of a 5% return, and a 20% probability of a -8% return.

The expected return on a share of Company XYZ would then be calculated as follows:

Expected return = (50% x 21%) + (30% x 5%) + (20% x -8%)

Expected return = 10% + 2% – 2%

Expected return = 10%

Based on the historical data, the expected rate of return for this investment would be 10%.

However, when using historical data to determine expected returns, you may want to consider if you are using all of the data available or only data from a select period. The sample size of the historical data could skew the results of the expected rate of return on the investment.

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How to Calculate Expected Return Based on Probable Returns

When using probable rates of return, you’ll need the data point of the expected probability of an outcome in a given scenario. This probability can be calculated, or you can make assumptions for the probability of a return. Remember, the probability column must add up to 100%. Here’s an example of how this would look.

Expected Rate of Return for a Stock of Company ABC
Scenario	Return	Probability	Outcome (Return * Probability)
1	14%	30%	4.2%
2	2%	10%	0.2%
3	22%	30%	6.6%
4	-18%	10%	-1.8%
5	-21%	10%	-2.1%
Total		100%	7.1%

Using the expected return formula above, in this hypothetical example, the expected rate of return is 7.1%.

Calculate Expected Rate of Return on a Stock in Excel

Follow these steps to calculate a stock’s expected rate of return in Excel (or another spreadsheet software):

1. In the first row, enter column labels:

• A1: Investment

• B1: Gain A

• C1: Probability of Gain A

• D1: Gain B

• E1: Probability of Gain B

• F1: Expected Rate of Return

2. In the second row, enter your investment name in B2, followed by its potential gains and the probability of each gain in columns C2 – E2

• Note that the probabilities in C2 and E2 must add up to 100%

3. In F2, enter the formula = (B2*C2)+(D2*E2)

4. Press enter, and your expected rate of return should now be in F2

If you’re working with more than two probabilities, extend your columns to include Gain C, Probability of Gain C, Gain D, Probability of Gain D, etc.

If there’s a possibility for loss, that would be negative gain, represented as a negative number in cells B2 or D2.

Limitations of the Expected Rate of Return Formula

Historical data can be a good place to start in understanding how an investment behaves. That said, investors may want to be leery of extrapolating past returns for the future. Historical data is a guide; it’s not necessarily predictive.

Another limitation to the expected returns formula is that it does not consider the risk involved by investing in a particular stock or other asset class. The risk involved in an investment is not represented by its expected rate of return.

In this historical return example above, 10% is the expected rate of return. What that number doesn’t reveal is the risk taken in order to achieve that rate of return. The investment experienced negative returns in the years 2014 and 2016. The variability of returns is often called volatility.

Standard Deviation

To understand the volatility of an investment, you may consider looking at its standard deviation. Standard deviation measures volatility by calculating a dataset’s dispersion (values’ range) relative to its mean. The larger the standard deviation, the larger the range of returns.

Consider two different investments: Investment A has an average annual return of 10%, and Investment B has an average annual return of 6%. But when you look at the year-by-year performance, you’ll notice that Investment A experienced significantly more volatility. There are years when returns are much higher and lower than with Investment B.

Year	Annual Return of Investment A	Annual Return of Investment B
2011	16%	8%
2012	22%	4%
2013	1%	3%
2014	-6%	0%
2015	8%	6%
2016	-11%	-2%
2017	31%	9%
2018	7%	5%
2019	13%	15%
2020	22%	14%
Average Annual Return	10%	6%
Standard Deviation	13%	5%

Investment A has a standard deviation of 13%, while Investment B has a standard deviation of 5%. Although Investment A has a higher rate of return, there is more risk. Investment B has a lower rate of return, but there is less risk. Investment B is not nearly as volatile as Investment A.

Recommended: A Guide to Historical Volatility

Systematic and Unsystematic Risk

All investments are subject to pressures in the market. These pressures, or sources of risk, can come from systematic and unsystematic risks. Systematic risk affects an entire investment type. Investors may struggle to reduce the risk through diversification within that asset class.

Because of systematic risk, you may consider building an investment strategy that includes different asset types. For example, a sweeping stock market crash could affect all or most stocks and is, therefore, a systematic risk. However, if your portfolio includes different types of bonds, commodities, and real estate, you may limit the impact of the equities crash.

In the stock market, unsystematic risk is specific to one company, country, or industry. For example, technology companies will face different risks than healthcare and energy companies. This type of risk can be mitigated with portfolio diversification, the process of purchasing different types of investments.

Expected Rate of Return vs Required Rate of Return

Expected return is just one financial metric that investors can use to make investment decisions. Similarly, investors may use the required rate of return (RRR) to determine the amount of money an investment needs to generate to be worth it for the investor. The required rate of return incorporates the risk of an investment.

What Is the Dividend Discount Model?

Investors may use the dividend discount model to determine an investment’s required rate of return. The dividend discount model can be used for stocks with high dividends and steady growth. Investors use a stock’s price, dividend payment per share, and projected dividend growth rate to calculate the required rate of return.

The formula for the required rate of return using the dividend discount model is:

RRR = (Expected dividend payment / Share price) + Projected dividend growth rate

So, if you have a stock paying $2 in dividends per year and is worth $20 and the dividends are growing at 5% a year, you have a required rate of return of:

RRR = ($2 / $20) + 0.5

RRR = .10 + .05

RRR = .15, or 15%

What is the Capital Asset Pricing Model?

The other way of calculating the required rate of return is using a more complex model known as the capital asset pricing model.

In this model, the required rate of return is equal to the risk-free rate of return, plus what’s known as beta (the stock’s volatility compared to the market), which is then multiplied by the market rate of return minus the risk-free rate. For the risk-free rate, investors usually use the yield of a short-term U.S. Treasury.

The formula is:

RRR = Risk-free rate of return + Beta x (Market rate of return – Risk-free rate of return)

For example, let’s say an investment has a beta of 1.5, the market rate of return is 5%, and a risk-free rate of 1%. Using the formula, the required rate of return would be:

RRR = .01 + 1.5 x (.05 – .01)

RRR = .01 + 1.5 x (.04)

RRR = .01 + .06

RRR = .07, or 7%

The Takeaway

There’s no way to predict the future performance of an investment or portfolio. However, by looking at historical data and using the expected rate of return formula, investors can get a better sense of an investment’s potential profit or loss.

There’s no guarantee that the actual performance of a stock, fund, or other assets will match the expected return. Nor does expected return consider the risk and volatility of assets. It’s just one factor an investor should consider when deciding on investments and building a portfolio.

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

How do you find the expected rate of return?

An investment’s expected rate of return is the average rate of return that an investor can expect to receive over the life of the investment. Investors can calculate the expected return by multiplying the potential return of an investment by the chances of it occurring and then totaling the results.

How do you calculate the expected rate of return on a portfolio?

The expected rate of return on a portfolio is the weighted average of the expected rates of return on the individual assets in the portfolio. You first need to calculate the expected return for each investment in a portfolio, then weigh those returns by how much each investment makes up in the portfolio.

What is a good rate of return?

A good rate of return varies from person to person. Some investors may be satisfied with a lower rate of return if its performance is consistent, while others may be more aggressive and aim for a higher rate of return even if it is more volatile. Ultimately, it is up to the individual to decide what is considered a good rate of return.

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

Jun

2024

What Does Buying the Dip Mean?

By Rachel Kim | Growing Wealth, invest, Investing | Comments Off

A down stock market could create an opportunity for investors to “buy the dip,” which, in simple terms, this strategy involves making an investment when stock prices are lower than they were at a previous time. The price has “dipped,” in other words.

Buying the dip is a way to capitalize on bargain pricing and potentially benefit from price increases down the line. But like any other investing strategy, buying the dip involves some risk — as it’s often a matter of market timing. Knowing when to buy the dip (or when not to) matters for building a solid portfolio while managing risk.

What Does It Mean to Buy the Dip?

As noted, to buy the dip means to invest when the stock market is down, anticipating that values will go back up. A dip occurs when stock prices drop below where they’ve previously been trading, but there’s an indication or expectation that they’ll begin to rise again at some point. This second part is crucial; if there’s no expectation that the stock’s price will bounce back down the line then there’s little incentive to buy in.

Why Do Stock Dips Happen?

Stock market dips can happen for various reasons, including a macroeconomic downturn, unexpected geopolitical events, or general stock market volatility that causes stock prices to tumble temporarily on a broad scale.

For example, in early 2022, the stock market fell from all-time highs due to several developments, like high inflation, tighter monetary policy, and the economic fallout from the Russian invasion of Ukraine. Accordingly, the S&P 500 Index fell nearly 20% from early January 2022 through mid-May, 2022, flirting with bear market territory.

Stock pricing dips can also be connected directly to a particular company rather than overall market trends. If a company announces a merger or posts a quarterly earnings report that falls below expectations, those could trigger a short-term drop in its share price.

What’s the Benefit of Buying the Dip?

Many investors buy the dip because it may help increase their returns. But again, it’s not without risks.

Buying the dip is, effectively, a form of buying low and selling high – if, that is, everything shakes out in the investor’s favor. When you buy into a stock below its normal price, there is a potential – but not a guarantee – to reap significant profits by selling it later if prices rebound. It’s really as simple as that.

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

Example of Buying the Dip

A hypothetical example of buying the dip could play out like this: Company A releases a quarterly earnings report that does not live up to expectations. As a result, its share price falls 5% on the day that report is released. But some investors have a hunch that Company A’s stock price will increase in the coming days, and buy shares at a reduced price.

Low and behold, share prices do rebound, increasing 10% over the next few days. Investors who bought at the dip sell, and reap a return.

As for a real-world example, the market experienced a larger dip and recovery during the spring of 2020 connected to economic fears surrounding the coronavirus pandemic. The S&P 500 Index declined about 34% in a little over a month, from February 19, 2020, to Mar. 23, 2020. The index then experienced a gradual rise, recouping its losses by August 2020 and increasing 114% through January 2022 from the March 2020 low.

If an investor bought at the lower end of the stock market crash, they would have seen substantial gains in the subsequent rally.

On an individual stock level, and as another hypothetical, say you’ve been tracking a stock that’s been trading at $50 a share. Then the company’s CEO abruptly announces they’re resigning — which sends the stock price tumbling to $30 per share as overall investor confidence wavers. So, you decide to buy 100 shares at the $30 price.

Six months later, a new CEO has been installed who’s managed to slash costs while boosting profits. Now that same stock is trading at $70 per share. Because you bought the dip when prices were low, you now stand to pick up a profit of $40 per share if you sell. The potential to earn big gains is what makes buying the dip a popular investment strategy for some people.

Risks of Buying the Dip

For any investor, it’s important to understand what kind of risk you’re taking when buying the dip. Timing the market is something even the most advanced investors may struggle with — as it’s impossible to perfectly predict which way stocks will move on any given day. Understanding technical indicators and what they can tell you about the market may help, but it isn’t foolproof.

For these reasons, knowing when to buy the dip is an inexact science. If you buy into a stock low and then are able to sell it high later, then your play has paid off. On the other hand, you could lose money if you mistime the dip or you mistake a stock that’s in freefall for one that’s experiencing a dip.

In the former scenario, it’s possible that a stock’s price could drop even further before it starts to rebound. If you buy in before the dip hits bottom, that can shrink the amount of profits you’re able to realize when you sell.

In the latter case, you may think a stock has the potential to recover but be disappointed when it doesn’t. You’ve purchased the stock at a bargain but the profit you’re able to walk away with, if anything, may be much smaller than you anticipated.

How to Manage Risk When Buying the Dip

For investors who are interested in buying the dip, there are a few things to keep in mind that may help with managing risk.

Understand Market Volatility

First, it’s important to understand how market volatility may impact some sectors or industries over others.

For example, take consumer staples versus consumer discretionary. Staples represent the things most people spend money on to maintain a basic standard of living, like food or personal hygiene products. Consumer discretionary refers to the “wants” people spend money on, like furniture or electronics.

In the event of a recession, people spend more on staples than discretionary expenses — so consumer staples stocks tend to fare better. But that may create a buying opportunity for discretionary stocks if they’ve taken a hit. That’s because as a recession begins to give way to a new cycle of economic growth, those stocks may start to pick back up again.

Consider the Reason for the Dip

Next, consider the reasons behind a dip and a company’s fundamentals. If you’ve got your eye on a particular stock and you notice the price is beginning to slide, ask yourself why that may be happening. When it’s specific to the company, rather than something general happening across the market, it’s important to analyze the stock and try to understand the underlying reasons for the dip — as well as how likely the stock’s price is to make a comeback later.

Buy the Dip vs Dollar-Cost Averaging

Buying the dip is more of a hands-on, active trading strategy, since it requires an investor to actively monitor the markets and read stock charts to evaluate when to buy the dip or when to sell. If an investor prefers to take a more passive approach or has a lower tolerance for risk, they might consider dollar-cost averaging instead.

Dollar-cost averaging is generally an investing rule worth keeping in mind. With dollar-cost averaging, an individual continues making new investments on a regular basis, regardless of what’s happening with stock prices. The idea here is that by investing consistently over time, one can generate returns in a way that smooths out the ups and downs of the market.

Example of Dollar-Cost Averaging

For example, you might invest $200 every month into an index mutual fund that tracks the performance of the S&P 500. As time goes by and the S&P experiences good years and bad years, you keep investing that same $200 a month into the fund.

You’ll buy shares during the dips and during the high points as well but you don’t have to actively track what’s happening with stock prices. This may be a preferable strategy if you lean toward a buy and hold investing approach versus active trading or you’re a investing beginner learning the basics.

The Takeaway

Buying the dip refers to purchasing shares at a price that is lower than a previous price, with the anticipation that values will recover and potentially overtake the previous peak. It can help investors increase returns, but as a strategy, has risks.

Knowing when to buy the dip can be tricky – timing the market usually is – but there are times when it may pay off for some. If investors maintain an eye on stock market and economic trends, it may help in determining when to buy the dip and how likely a stock or the market will rebound. However, it’s still important to consider the downside risks of timing the market and buying the dip.

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

Jun

2024

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Earnings Call: Definition, Importance, How to Listen

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Earnings calls and earnings reports recap a company’s quarter or fiscal year, giving investors critical information as to how a company is functioning and faring. Understanding what’s going on with stocks can be tricky for both new and seasoned investors. It’s not always clear where you can turn for accurate information that will help with investment decisions — that’s why earnings calls or reports may be helpful.

But an earnings report doesn’t tell the whole story. Therefore, companies will hold earnings calls to provide context and backstory behind the data in an earnings report to help investors make informed decisions.

What Is an Earnings Call?

An earnings call is a conference call between the management of a public company and any interested outside party — usually investors, analysts, and business reporters — to discuss the company’s financial results and future outlook. Earnings calls are generally held quarterly, in the form of a teleconference or webcast; anyone can listen to an earnings call.

The earnings call often comes on the heels of the release of an earnings report and covers a given reporting period, typically a fiscal quarter or fiscal year.

💡 Recommended: How To Know When to Buy, Sell, Or Hold a Stock

The Securities and Exchange Commission (SEC) requires that public companies disclose certain financial information regularly and on an ongoing basis. Companies must file Form 10-Q quarterly reports during the first three fiscal quarters of the year. A 10-Q includes unaudited financial statements and provides the government and investors with a continuing account of the company’s financial position throughout the year.

For the fourth quarter of the year, a company will file a Form 10-K, an annual report that shares audited financial statements, a look at the company’s business overall, and financial conditions over the previous fiscal year. The financial information and metrics included on these reports, like earnings per share, is discussed during an earnings call.

What Is the Importance of Earnings Calls?

An earnings call is important because it allows a company’s management to discuss pertinent financial information and a company’s outlook.

Publicly-traded companies are not required to hold earnings calls; they are only required to release the details of their financial performance in a Form 10-Q or Form 10-K. However, most public companies have quarterly conference calls to keep shareholders up to date with the latest financial developments and provide context beyond the earnings data.

Earnings calls are also important for investors, especially those practicing fundamental analysis. These calls help long-term investors decide whether or not to invest in or continue investing in a company. For short-term traders, earnings calls may be helpful to capitalize on short-term volatility in a stock’s price immediately following an earnings call.

💡 Recommended: How to Analyze a Stock

The Structure of an Earnings Call

A company will announce upcoming earnings calls several days or even several weeks before the event. The company will usually issue a press release containing dial-in or webcast access information for stakeholders interested in participating in the call.

Earnings calls are generally scheduled in the morning, before the stock market’s opening bell, or in the afternoon, following the end of the day’s trading. These calls occur shortly after an earnings report is made public.

Safe Harbor Statement

When the call begins, a company representative will likely share a safe harbor statement, which is a disclaimer about some of the comments executives will make. Specifically, some statements might be “forward-looking” and discuss future revenue, margins, income, expenses, and overall business outlook. Because no company can predict the future, the SEC requires that each warns investors that forward-looking statements may differ from actual results and trends.

Overview of Financial Results

The earnings call is usually led by the CEO, CFO, or other senior executives. During the call, these executives will deliver prepared statements covering financial results and the company’s performance for the reporting period.

This section of the call allows company leaders to give a more in-depth look at the company from their own eyes beyond the data found in the earnings reports. Executives may discuss market trends or even unpredictable factors that could influence how the company moves forward. Management will also likely share risks and their plans to take them on.

Question and Answer Session

At the end of the call, there may be a chance for investors and analysts to ask questions about the financial results the company presents. However, not everyone will get to ask a question. The company’s management may answer these questions, or they may decline or defer answering until they have the correct information to make an accurate response.

Preparing for an Earnings Call as a Shareholder

Before listening in on an earnings call, it may help to research the company and its earnings history and listen to previous earnings calls. Here’s additional information to know how to listen to an earnings call.

Where to Find Earnings Call Info?

Companies will send out a press release announcing when they will give an earnings call. Investors can also check the investor relations section of a company’s website for scheduled earnings calls. Additionally, some financial news websites may keep calendars of expected upcoming earnings reports and calls investors can check to stay current.

Many companies will post audio from the call on their website, making it available to investors and analysts for a few weeks. Companies also frequently offer transcripts of the call to read. This is especially useful for investors who may have missed an earnings call.

Much of the information discussed in conference calls, including Forms 10-Q and 10-K, are part of the public record and searchable on the SEC’s website. To find a company’s public filings, the SEC has a searchable Electronic Data Gathering, Analysis, and Retrieval system (EDGAR).

How Long is an Earnings Call?

An earnings call usually lasts for less than an hour. However, there are no requirements for how long an earnings call should be.

What to Listen For

Investors should treat earnings calls as valuable information on a company but know that it doesn’t typically paint the complete picture of its potential performance.

Some key things investors should listen for in an earnings call are:

• How the company performed compared to analysts’ expectations

• What the company attributes its financial performance to

• Any changes in guidance for the future

• Any significant challenges or headwinds the company is facing

• Questions from analysts and how management responds to them

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Additionally, it may help to listen to the tone of the company’s executives when they are talking about the company’s performance. It isn’t quantifiable, but learning to pick up on the tone of management’s description of the company’s financials and the answers to analysts’ questions can help investors better understand the outlook for the company.

The Takeaway

Earnings calls provide investors with valuable insights into a company’s financial performance and outlook. These calls, paired with quarterly earnings reports, give investors a thorough understanding of the company, which helps with making investment decisions.

While earnings calls and earnings reports can be helpful to investors, keep in mind that they don’t tell the whole story. You’ll want to do your due diligence and further research to better inform your investment decisions, too.

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

SoFi Invest®

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

Jun

2024

Guide to 529 Savings Plans vs ESAs

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

Saving for college may help minimize the need to take out student loans to pay for school. Education Savings Accounts (ESAs) and 529 plans both allow you to save on a tax-advantaged basis, but there are some key differences in how they work.

Comparing the features of Education Savings Accounts vs. 529 plans, as well as the pros and cons, can help you decide which one is right for your needs.

Education Savings Accounts (ESAs) vs 529 Savings Plans

Education Savings Accounts and 529 plans are both designed to help you save money for qualified education expenses. In other words, they’re accounts you can use to save money for college, as well as potentially other types of schooling.

These plans can help you avoid a situation where you’re using retirement funds for college. On some levels, they’re quite similar but there are notable differences between the two options, as well.

Similarities

When putting an ESA vs. 529 plan side by side, you’ll notice that they have some features in common. Here’s how they overlap:

• Contributions to ESA and 529 plans are generally made with after-tax dollars, and grow on a tax-free basis within these accounts.

• Withdrawals are tax-free when funds are used to pay for qualified education expenses, as defined by the IRS.

• You’re not limited to using ESA or 529 plan funds for college; both allow some flexibility in paying for elementary and secondary school expenses.

• Non-qualified withdrawals from ESAs and 529 plans may be subject to taxes and penalties, with some exceptions.

• Both plans allow you to transfer savings to another beneficiary if your student opts not to go to college or there’s money remaining after paying all of their education expenses.

• With both types of accounts, contributions are not deductible on your federal tax return.

Differences

The differences between a 529 plan vs. ESA largely center on who can contribute, contribution limits, and when funds must be used. Here’s how the two diverge:

• ESA contributions are limited by the IRS to $2,000 per child, per year, while 529 plans typically don’t have annual contribution limits.

• Income determines your ability to contribute to an ESA but doesn’t affect your eligibility to open a 529 plan.

• ESA contributions are only allowed up to the beneficiary’s 18th birthday unless they’re a special needs beneficiary.

• Remaining funds in an ESA must be withdrawn by the beneficiary’s 30th birthday unless they’re a special needs beneficiary.

• 529 plans have no age limits on who can be beneficiaries, how long you can make contributions, or when funds must be withdrawn.

• Some states allow you to deduct your 529 contributions from your state income tax, but ESA contributions are not tax deductible at the federal or state level.

	Education Savings Account	529 College Savings Plan
Income Limits	You cannot contribute to an ESA if your MAGI is over $110,000 (single filers); $220,000 (married, filing jointly)	Anyone can contribute, regardless of income
Annual Contribution Limit	$2,000 per child	None, though contributions above the annual gift tax exclusion limit may trigger the gift tax Contributions are subject to lifetime limits imposed by each state, but these are much higher, typically ranging from about $300,000 to $500,000
Eligible Beneficiaries	Students under the age of 18 or special needs students of any age	Students of all ages, including oneself, one’s spouse, children, grandchildren, or other relatives
Investment Options	May include stocks, bonds, and mutual funds	Typically limited to mutual funds
Tax Treatment of Withdrawals	Withdrawals for qualified higher education expenses are tax-free; non-qualified withdrawals may be subject to tax and a penalty on the earnings portion of the withdrawal	Withdrawals for qualified higher education expenses are tax-free; non-qualified withdrawals may be subject to tax and a penalty on the earnings portion of the withdrawal
Tax Deductions	Contributions are not tax deductible	Contributions are not deductible on federal returns; some states may allow a deduction
Qualified Expenses	Withdrawals can be used to pay for elementary, secondary, and higher education expenses, including tuition, fees, books, and equipment	Withdrawals can be used to pay for qualified higher education expenses, including tuition, fees, books, and equipment, as well as K-12 tuition, eligible apprenticeship expenses, and qualified education loan repayments
Required Distributions	All funds must be withdrawn by age 30 or rolled over to another beneficiary, unless the beneficiary is a special needs student	Funds can remain in the account indefinitely or be rolled over to another beneficiary
Financial Aid	Treated as parental assets for FAFSA purpose	Treated as parental assets for FAFSA purposes

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

💡 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).

What Is an ESA?

An Education Savings Account, now known as a Coverdell Education Savings Account (ESA), is a trust or custodial account intended for education savings. ESAs allow flexibility since you can use them to save for college but the IRS also allows withdrawals for qualified elementary and secondary school expenses.

Pros and Cons of ESAs

If you’re considering an ESA versus 529 plan, it’s important to consider the advantages and potential downsides. While ESAs offer tax benefits, there are some limitations to be aware of.

Pros:

• Tax-deferred growth. Funds in an ESA grow tax-deferred, meaning you pay no tax on the earnings in the account until you begin making withdrawals.

• Tax-free distributions. As long as the money you withdraw is used for qualified education expenses, you’ll pay no tax on ESA funds.

• Multiple uses. Money in an ESA can pay for a variety of expenses, including college tuition and fees, books and supplies, and room and board for students enrolled at least half-time. Parents of elementary and secondary school students can use the funds for private school tuition, academic tutoring, and school-mandated costs of attendance, such as uniforms or room and board.

Cons:

• Contribution limits. You can only contribute $2,000 per year to an ESA, and contributions are not tax deductible.

• Income caps. Single filers with a modified adjusted gross income exceeding $110,000 and married couples filing jointly with a MAGI over $220,000 cannot contribute to an ESA.

• Age restrictions. You can’t contribute anything to an ESA once the beneficiary turns 18, and they must withdraw all remaining funds by age 30, unless they are a special needs beneficiary. Withdrawals after the beneficiary turns 30 may be subject to taxes on earnings, but it’s possible to rollover the funds to an ESA for another beneficiary.

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What Is a 529 Savings Plan?

A 529 savings plan or Qualified Tuition Program (QTP) is a tax-advantaged account that you can use to save for education expenses. All 50 states offer at least one 529 account and you don’t need to be a resident of a particular state to contribute to its plan.

In addition to 529 savings plans, some states offer 529 prepaid tuition plans. These plans allow you to “lock in” rates, offering some predictability when it’s time to pay for your child’s college tuition.

Pros and Cons of 529 Savings Plans

There may be a lot to like about 529 savings plans but like ESAs, there are also some potential downsides to consider.

Pros:

• Contribution limits. There are no IRS limits on annual contributions to a 529 plan and states can determine where to set aggregate contribution limits.

• Eligibility. One of the advantages of a 529 savings plan is that anyone can contribute, regardless of income, and there are no age restrictions on who can be a beneficiary.

• Tax benefits. Earnings grow tax-deferred and qualified withdrawals are tax-free. In some states, you may be able to deduct your contributions on your state return.

• Funds use. 529 plan funds can be used to pay for qualified college expenses, K-12 private school tuition, qualified education loan repayment, and eligible apprenticeship expenses.

Cons:

• Tax penalties. Non-qualified withdrawals are subject to a 529 withdrawal penalty and taxes.

• Tax breaks. There are no federal tax deductions or credits for 529 plan contributions and while some states offer them, they may only be available to residents.

• Investment options. Compared to ESAs, 529 education savings plans may offer fewer investment options; it’s also important to consider the investment fees you might pay.

Which Savings Plan Is Right for You?

Deciding when to start saving for college for your child is the first question to tackle; where to do it is the next. Whether you should choose an Education Savings Account vs. 529 plan may hinge on your eligibility for either plan and your ability to save.

You might choose an Education Savings Account if you…

• Are within the income thresholds allowed by the IRS

• Would like a broader range of investment options to choose from

• Are comfortable with control of the account being transferred to the beneficiary when they turn 18

On the other hand, you might prefer a 529 plan if you…

• Want to be able to contribute more than $2,000 a year to the plan

• Don’t want to be limited by age restrictions for contributions or withdrawals

• Qualify for a state tax deduction or credit for making 529 contributions

You may also lean toward a 529 if you want more options concerning how you use the funds. While you can withdraw money from a 529 to repay student debt or pay for apprenticeship fees and supplies, you can’t do that with an ESA.

If you’re shopping for an ESA or 529 plan, consider the type of investment options offered and the fees you might pay. You might start with your current brokerage to see what college savings accounts are available, if any.

The Takeaway

Saving for college early and often gives you more time to potentially see your money grow. If you’re torn between an Education Savings Account vs. 529 plan, remember that you don’t necessarily have to choose just one. You could use both to save for education expenses if you’re eligible to do so. Just remember to prioritize saving in your own retirement accounts along the way so that you’re not shortchanging your nest egg.

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

Is it better to put money in a 529 or an education savings account?

One of the main advantages of a 529 savings plan is the opportunity to save more than you could with an ESA, which is limited to $2,000 per year, total, per beneficiary. In addition, some states may offer a tax deduction for contributions to a 529 plan.

What is the downside of 529 accounts?

If you take money out of your plan for anything other than qualified education expenses, you may have to pay tax on the earnings you withdraw, plus a 10% penalty, which could make a non-qualified distribution expensive.

What happens to the 529 if the child doesn’t go to college?

If you opened a 529 savings plan for your child and they decide not to go to college, you can use the funds for other types of higher education or training, including apprenticeships. You can also transfer the money to a different beneficiary. You may select yourself as the beneficiary or choose your spouse, another child, a grandparent, or another relative.

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SOIN-Q224-1854675-V1

How to Invest in the Solar Energy Sector

What Is Solar Investing?

What Is Solar Energy?

Benefits and Risks of Investing in Solar

Benefits

Risks

4 Ways to Invest in Solar Energy

Stocks

Mutual Funds and ETFs

Bonds

Install Solar Panels

How to Start a Solar Investment Portfolio

Step 1: Open a brokerage account

Step 2: Pick your assets

Step 3: Do your research

Step 4: Invest

The Takeaway

How to Calculate Expected Rate of Return

What Is the Expected Rate of Return?

How To Calculate Expected Return

What Is Rate of Return?

How to Calculate Rate of Return

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Different Ways to Calculate Expected Rate of Return

How to Calculate Expected Return Using Historical Data

How to Calculate Expected Return Based on Probable Returns

Calculate Expected Rate of Return on a Stock in Excel

Limitations of the Expected Rate of Return Formula

Standard Deviation

Systematic and Unsystematic Risk

Expected Rate of Return vs Required Rate of Return

What Is the Dividend Discount Model?

What is the Capital Asset Pricing Model?

The Takeaway

FAQ

How do you find the expected rate of return?

How do you calculate the expected rate of return on a portfolio?

What is a good rate of return?

What Does Buying the Dip Mean?

What Does It Mean to Buy the Dip?

Why Do Stock Dips Happen?

What’s the Benefit of Buying the Dip?

Example of Buying the Dip

Risks of Buying the Dip

How to Manage Risk When Buying the Dip

Understand Market Volatility

Consider the Reason for the Dip

Buy the Dip vs Dollar-Cost Averaging

Example of Dollar-Cost Averaging

The Takeaway

Earnings Call: Definition, Importance, How to Listen

What Is an Earnings Call?

What Is the Importance of Earnings Calls?

The Structure of an Earnings Call

Safe Harbor Statement

Overview of Financial Results

Question and Answer Session

Preparing for an Earnings Call as a Shareholder

Where to Find Earnings Call Info?

How Long is an Earnings Call?

What to Listen For

The Takeaway

Guide to 529 Savings Plans vs ESAs

Education Savings Accounts (ESAs) vs 529 Savings Plans

Similarities

Differences

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

What Is an ESA?

Pros and Cons of ESAs

What Is a 529 Savings Plan?

Pros and Cons of 529 Savings Plans

Which Savings Plan Is Right for You?

The Takeaway

FAQ

Is it better to put money in a 529 or an education savings account?

What is the downside of 529 accounts?

What happens to the 529 if the child doesn’t go to college?

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