Nov
18
2024
How and Why to Invest in Oil

How and Why to Invest in Oil

By | Growing Wealth, invest, Investing | Comments Off on How and Why to Invest in Oil

Oil is valuable, and one of the most widely used and widely traded commodities in the world. Despite the growth of many forms of alternative energy, oil remains essential to the functioning of industry and transportation around the globe.

Given all the factors that go into oil prices, it’s no wonder that they can fluctuate dramatically, often on a daily basis. The price of oil has an impact on a wide range of industries, and ultimately on the prices that consumers pay at the pump, in the supermarket, and beyond. That also makes it attractive to investors.

Key Points

•   Investing in oil remains attractive due to its critical role in global industry and transportation, despite the rise of alternative energy sources.

•   Various investment options exist, including oil company stocks, mutual funds, ETFs, and exchange-traded notes that track oil prices directly.

•   Market dynamics, including OPEC decisions, global supply and demand fluctuations, and production costs, heavily influence oil prices.

•   Natural disasters and geopolitical tensions can lead to significant price changes, affecting both supply and investor sentiment in the oil sector.

•   Oil investment carries inherent risks due to its volatility, making thorough research and consideration of individual investment goals essential before proceeding.

Ways to Invest in Oil

For those who are interested in incorporating crude oil investing in their portfolio, there are many ways to get started.

Oil Company Stocks

In addition to the massive global names, there are other companies that specialize in different aspects of energy production, oil exploration, drilling, equipment, delivery and more. There are also smaller oil companies with vertical operations, but only in specific parts of the world. Each of those types of companies will perform differently depending on the many geopolitical, economic, technological, and other factors that drive the price of oil up and down.

Recommended: Investing in the Energy Sector: What Any Investor Should Know

Oil Funds

Not every investor has the time or interest to research a host of oil companies. For those investors, a better approach might be investing in a mutual fund or exchange-traded fund (ETF) that focuses on the oil sector, or more broadly on the energy sector.

Since thematic ETFs and mutual funds hold many securities, they offer investors a level of diversification within their portfolio.

Recommended: Key Differences between Mutual Funds and ETFs

Exchange-Traded Notes (ETNs)

Exchange-traded notes are a vehicle that invests directly in oil futures contracts. Investors like them because they offer easy access to oil futures, without some of the other factors that can affect the performance of oil companies, such as currency fluctuations and swings in the equity markets. Because they buy oil futures directly, ETNs can offer investors a more direct investment in the price of oil.

Derivatives

More sophisticated investors may also consider investing in the derivatives markets, buying futures, and options. Crude oil options trade on the New York Mercantile Exchange (NYMEX) and on the ICE exchange.

Alternative Investments

Investors interested in alternative investments might get exposure to oil by purchasing mineral rights or buying into Limited Partnerships (LPs) that invest throughout the sector.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Trends in Oil Investing

crude oil prices 2023-2024 vs inflation expectations

Oil prices plummeted in 2020, as pandemic-associated lockdowns drove U.S. oil prices into negative territory for the first time in history. In April 2020, investors bid the price for West Texas Intermediate (WTI) from $18 per barrel, down to roughly negative $37 a barrel.

Later that year, oil prices began to normalize. Demand returned in 2021, and oil prices shot back up in 2022, when they reached levels not seen in decades. In 2023, prices did fall a bit again — but the point is that prices are always on the move. Given the unpredictability of the global economy, too, it’s very difficult to determine how oil prices will perform going forward.

Forces That Drive Oil Prices

There are many factors that determine oil prices. That, in turn, can affect prices for gasoline and more. Here are some of the forces at play.

The Organization of Petroleum Exporting Countries (OPEC)

Another important contributor to oil prices is the Organization of Petroleum Exporting Countries (OPEC), a group of 13 oil-producing countries, including Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.

Together, they’re responsible for nearly 80% of the planet’s oil supply. As an organization, OPEC meets regularly to set production levels. And its decisions can directly change the price of oil and gas. And while it has a massive influence on the price of oil, it doesn’t control the price.

Market Fundamentals

The global oil market is a force in its own right, as supply and demand tend to fluctuate sharply and unpredictably. There can be too much supply. Within OPEC, members don’t always follow through on the limits they agreed upon limits. There are also major oil suppliers, such as the United States, who are not OPEC members who may produce more oil than expected. That can cause high levels of supply relative to demand, which can drive down prices.

Production Costs

Oil in Canada’s oil sands or American shale reserves is far more labor-intensive and expensive to extract and refine than the oil in the Middle East. Those extraction costs contribute to the price of the oil, which can drive the oil prices higher or lower, depending on where the bulk of supply is coming from at any given time.

Natural Disasters

Oil prices are also susceptible to change as a result of natural disasters. Hurricanes, for example, regularly shut down oil production in the Gulf of Mexico, which can reduce the supply of oil and drive prices up.

International Relations

The headlines, especially international ones, can also drive oil prices. A significant amount of the world’s oil comes from the Middle East. Political instability in that region creates investor uncertainty, which can lead to price fluctuation. The same goes for countries like Russia, which produce a lot of oil, but as of 2023, are involved in geopolitical conflicts.

Economic Factors

While not always the case, recessions and economic turmoil can push oil prices lower.

The relative strength of the U.S. dollar also plays a role in the price of oil. The thinking is that a strong dollar allows American oil companies to buy more oil, and cut the cost to U.S. consumers, who buy 20% of the oil on the market.

However, while oil does not typically perform well during a recession, it does typically become more attractive to investors later in the business cycle.

The Takeaway

Oil is always in demand, and fluctuates a lot in price, which may make it attractive to many investors. But it’s a volatile investment, which can make investing in oil a risky endeavor. Given that many people are focused on renewable energy sources, too, investing in oil may not be as attractive as it once was.

The volatility of oil and its importance to the global economy makes it an important asset class for many investors. But again, it’s risky — so, whether you decide to invest in oil or oil-adjacent sectors and companies should be given considerable thought.

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/kckate16

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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Nov
18
2024
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ETF Fees: How Are They Deducted & How Much Do They Cost?

By | Growing Wealth, invest, Investing | Comments Off on ETF Fees: How Are They Deducted & How Much Do They Cost?

Because exchange-traded funds (ETFs) are typically passively managed and based on market index, ETFs tend to have lower overall fees as compared with many mutual funds.

In addition, the way ETFs are structured these funds typically generate fewer trades and thus the costs to run the fund (including applicable taxes) are also lower than mutual funds.

When it comes to calculating the cost of owning an exchange-traded fund (or ETF), an investor needs to factor in not just management fees and expense ratios, but also the costs associated with trading the ETFs.

Key Points

•   Exchange-traded funds (ETFs) generally have lower fees than mutual funds due to their passive management and reduced trading costs.

•   The total cost of owning an ETF includes management fees, expense ratios, and trading costs, which can impact an investor’s returns.

•   Management fees and expense ratios are expressed as a percentage of the fund’s net asset value, helping investors understand annual costs.

•   Unlike some mutual funds, ETFs typically do not have front-end load fees. However, they do have expense ratios and may potentially involve commissions, so it’s important to consider all costs when evaluating their cost-effectiveness as an investment option.

•   Knowing the expense ratio and other fees is crucial for investors, as these costs can significantly affect long-term investment returns.

Quick ETF Crash Course

An exchange-traded fund is a collection of dozens or even hundreds of securities such as stocks or bonds, that give an investor access to different companies within a single fund. ETFs can be a low-cost way to add diversification to a portfolio.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

How ETFs Work

Most ETFs are passive, which means they track an index. Their aim is to provide an investor with exposure to a particular segment of the market in an attempt to return the average for that market.

If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a portfolio manager or group of analysts make decisions about what securities to buy and sell within the fund. Generally, these active funds will charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.

Some of the largest ETFs, reflect large swaths of the market as a whole, similar to index mutual funds (though there are some differences between index mutual funds and ETFs).

ETFs typically reflect formulas investment companies come up with to select stocks or other assets with certain characteristics that make sense in a portfolio. There are also ETFs for commodities and leveraged ETFs that can magnify gains — or losses.

ETF Costs

Like any business, an ETF typically has operational expenses, including management and marketing costs. These costs are passed on to the shareholders of the ETF and are expressed as a percentage called an expense ratio. But ETFs can include other fees and costs as well. Some are easier to find than others.

How Are ETF Fees Calculated?

Investment fees are calculated in a range of ways.

ETF Management Fees

ETFs carry management fees, which tend to cover the technical and intellectual work involved in selecting and managing assets in an ETF.

When you look up the fees of a given ETF, they are shown as a percentage of the ETFs daily assets. One benefit of many ETFs that’s reflected in their low management fees is the lack of what’s known as “management risk” — i.e. the potential losses that may be incurred owing to the guidance of a live portfolio manager.

The Expense Ratio

The overall set of fees for an ETF is known as the expense ratio or the ETF expense ratio. ETFs typically have an expense ratio of 0.05%.

An investor can determine the expense ratio by dividing the annual expenses of the investment by the fund’s total value, though the expense ratio is also typically found on the fund’s website. Knowing the expense ratio will help an investor understand exactly how much money they will spend investing in an ETF fund annually.

For example, if an investor puts $1,000 into an ETF that has an expense ratio of 0.2%, they will pay $20 in fees every year.

ETF Commission Fees

One benefit of ETFs is that you can trade them like any other asset you buy or sell on an exchange, such as a stock or a bond. But as with those assets, investors may be charged a commission when buying and selling ETFs.

Some brokers no longer charge commissions or specifically offer commission-free ETFs. But the availability of these depends on both the ETFs “sponsor” and the brokerage or platform used to buy and sell the funds.

How Are ETF Fees Deducted?

ETF fees are calculated as a percent of the ETFs net asset value, averaged out over a year. These ETF fees are not paid directly — you don’t write a check to the ETF sponsor to pay the management fees. Instead they’re deducted from the Net Asset Value (NAV) of the fund itself, taken directly from returns that could otherwise go to the investor.

The SEC offers an example of just how important fees are: “If an investor invested $10,000 in a fund that produced a 5% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years the investor could have roughly $19,612. But if the fund had expenses of only 0.5%, then the investor would end up with $24,002 — a 23% difference.”


💡 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.

ETF Fees vs Mutual Fund Fees

One fee advantage ETFs have over mutual funds is that ETFs don’t have a front-end load fee. This is an expense associated with the selling of mutual funds that incentivizes brokers to sell one over the other.

Generally speaking, both ETF fees and mutual fund fees have been dropping in recent years as investors move to more passive strategies and providers of these productions compete on providing the lowest cost investment.

That said, though there are exceptions, ETFs tend to be more passive and thus have lower funds. They also don’t have some of the sales costs associated with mutual funds and their intensive marketing apparatuses.

If an ETF tracks an index, buyers can easily compare one provider’s fund to another and select the one with the lowest fee. This process can drive management fees and charges down as providers compete for business.

The Takeaway

ETF fees can be relatively low compared to mutual funds, but as with any investment fees, it’s good to know the potential costs upfront. Knowing an ETF expense ratio and other potential costs can go a long way toward helping an investor understand their total costs for investing in the fund.

For long-term investors, understanding the costs associated with different securities is important as fees can eat into returns. You may want to consider your investment costs when setting up your portfolio.

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

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.

*If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of 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.


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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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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18
2024
Commodities Trading Guide for Beginners

Commodities Trading Guide for Beginners

By | Growing Wealth, invest, Investing | Comments Off on Commodities Trading Guide for Beginners

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Commodities trading — e.g. agricultural products, energy, and metals — can be profitable if you understand how the commodity markets work. Commodities trading is generally viewed as high risk, since the commodities markets can fluctuate dramatically owing to factors that are difficult to foresee (like weather) but influence supply and demand.

Nonetheless, commodity trading can be useful for diversification because commodities tend to have a low or even a negative correlation with asset classes like stocks and bonds. Commodities fall firmly in the category of alternative investments, and thus they may be better suited to some investors than others. Getting familiar with commodity trading basics can help investors manage risk vs. reward.

Key Points

•   Commodities trading involves buying and selling raw materials like agricultural products, energy, and metals, which can be profitable with proper understanding of the markets.

•   The commodities market is driven primarily by supply and demand, making it susceptible to volatility from unpredictable factors such as weather and global economic changes.

•   Investors can engage in commodities trading through various methods, including futures contracts, stocks in related companies, ETFs, mutual funds, and index funds.

•   The advantages of commodity trading include portfolio diversification and potential hedging against inflation, while the main disadvantage is the high risk associated with price volatility.

•   Understanding personal risk tolerance is essential before investing in commodities, which may be more suitable for those comfortable with higher risk strategies.

What Is Commodities Trading?

Commodities trading simply means buying and selling a commodity on the open market. Commodities are raw materials that have a tangible economic value. For example, agricultural commodities include products like soybeans, wheat, and cotton. These, along with gold, silver, and other precious metals, are examples of physical commodities.

There are different ways commodity trading can work. Investing in commodities can involve trading futures, options trading, or investing in commodity-related stocks, exchange-traded funds (ETFs), mutual funds, or index funds. Different investments offer different strategies, risks, and potential costs that investors need to weigh before deciding how to invest in commodities.

Unique Traits of the Commodities Market

The commodities market is unique in that market prices are driven largely by supply and demand, less by market forces or events in the news. When supply for a particular commodity such as soybeans is low — perhaps owing to a drought — and demand for it is high, that typically results in upward price movements.

And when there’s an oversupply of a commodity such as oil, for example, and low demand owing to a warmer winter in some areas, that might send oil prices down.

Likewise, global economic development and technological innovations can cause a sudden shift in the demand for certain commodities like steel or gas or even certain agricultural products like sugar.

Thus, investing in commodities can be riskier because they’re susceptible to volatility based on factors that can be hard to anticipate. For example, a change in weather patterns can impact crop yields, or sudden demand for a new consumer product can drive up the price of a certain metal required to make that product.

Even a relatively stable commodity such as gold can be affected by rising or falling interest rates, or changes in the value of the U.S. dollar.

In the case of any commodity, it’s important to remember that you’re often dealing with tangible, raw materials that typically don’t behave the way other investments or markets tend to.

Commodity vs Stock Trading

The main difference in stock trading vs commodity trading lies in what’s being traded. When trading stocks, you’re trading ownership shares in a particular company. If you’re trading commodities, you’re trading the physical goods that those companies may use.

There’s also a difference in where you trade commodities vs. stocks. Stocks are traded on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. Commodities and commodities futures are traded on a commodities exchange, such as the New York Mercantile Exchange (NYME) or the Chicago Mercantile Exchange (CME).

That said, and we’ll explore this more later in this guide, it’s possible to invest in commodities via certain stocks in companies that are active in those industries.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Types of Commodities

Commodities are grouped together as an asset class but there are different types of commodities you may choose to invest in. There are two main categories of commodities: Hard commodities and soft commodities. Hard commodities are typically extracted from natural resources while soft commodities are grown or produced.

Agricultural Commodities

Agricultural commodities are soft commodities that are typically produced by farmers. Examples of agricultural commodities include rice, wheat, barley, oats, oranges, coffee beans, cotton, sugar, and cocoa. Lumber can also be included in the agricultural commodities category.

Needless to say, this sector is heavily dependent on seasonal changes, weather patterns, and climate conditions. Other factors may also come into play, like a virus that impacts cattle or pork. Population growth or decline in a certain area can likewise influence investment opportunities, if demand for certain products rises or falls.

Recommended: How to Invest in Agriculture

Livestock and Meat Commodities

Livestock and meat are given their own category in the commodity market. Examples of livestock and meat commodities include pork bellies, live cattle, poultry, live hogs, and feeder cattle. These are also considered soft commodities.

You may not think that seasonal factors or weather patterns could affect this market, but livestock and the steady production of meat requires the steady consumption of feed, typically based on corn or grain. Thus, this is another sector that can be vulnerable in unexpected ways.

Energy Commodities

Energy commodities are hard commodities. Examples of energy commodities include crude oil, natural gas, heating oil or propane, and products manufactured from petroleum, such as gasoline.

Here, investors need to be aware of certain economic and political factors that could influence oil and gas production, like a change in policy from OPEC (the Organization of the Petroleum Exporting Countries). New technology that supports alternative or green energy sources can also have a big impact on commodity prices in the energy sector.

Precious Metals and Industrial Metals

Metals commodities are also hard commodities. Types of metal commodities include precious metals such as gold, silver, and platinum. Industrial metals such as steel, copper, zinc, iron, and lead would also fit into this category.

Investors should be aware of factors like inflation, which might push people to buy precious metals as a hedge.

How to Trade Commodities

If you’re interested in how to trade commodities, there are different ways to go about it. It’s important to understand the risk involved, as well as your objectives. You can use that as a guideline for determining how much of your portfolio to dedicate to commodity trading, and which of the following strategies to consider.

Recommended: What Is Asset Allocation?

Trading Stocks in Commodities

If you’re already familiar with stock trading, purchasing shares of companies that have a commodities connection could be the simplest way to start investing.

For example, if you’re interested in gaining exposure to agricultural commodities or livestock and meat commodities, you may buy shares in companies that belong to the biotech, pesticide, or meat production industries.

Or, you might consider purchasing oil stocks or mining stocks if you’re more interested in the energy stocks and precious or industrial metals commodities markets.

Trading commodities stocks is the same as trading shares of any other stock. The difference is that you’re specifically targeting companies that are related to the commodities markets in some way. This requires understanding both the potential of the company, as well as the potential impact of fluctuations in the underlying commodity.

You can trade commodities stocks on margin for even more purchasing power. This means borrowing money from your brokerage to trade, which you must repay. This could result in bigger profits, though a drop in stock prices could trigger a margin call.

Futures Trading in Commodities

A futures contract represents an agreement to buy or sell a certain commodity at a specific price at a future date. The producers of raw materials make commodities futures contracts available for trade to investors.

So, for example, an orange grower might sell a futures contract agreeing to sell a certain amount of their crop for a set price. A company that sells orange juice could then buy that contract to purchase those oranges for production at that price.

This type of futures trading involves the exchange of physical commodities or raw materials. For the everyday investor, futures trading in commodities typically doesn’t mean you plan to take delivery of two tons of coffee beans or 4,000 bushels of corn. Instead, you buy a futures contract with the intention of selling it before it expires.

Futures trading in commodities is speculative, as investors are making educated guesses about which way a commodity’s price will move at some point in the future. Similar to trading commodities stocks, commodities futures can also be traded on margin. But again, this could mean taking more risk if the price of a commodity doesn’t move the way you expect it to.

Trading ETFs in Commodities

Commodity ETFs (or exchange-traded funds) can simplify commodities trading. When you purchase a commodity ETF you’re buying a basket of securities. These can target a picture type of commodities, such as metals or energy, or offer exposure to a broad cross-section of the commodities market.

A commodity ETF can offer simplified diversification though it’s important to understand what you own. For example, a commodities ETF that includes options or commodities futures contracts may carry a higher degree of risk compared to an ETF that includes commodities companies, such as oil and gas companies, or food producers.

Recommended: How to Trade ETFs

Investing in Mutual and Index Funds in Commodities

Mutual funds and index funds offer another entry point to commodities investing. Like ETFs, mutual funds and index funds can allow you to own a basket of commodities securities for easier diversification. But actively managed mutual funds offer investors access to very different strategies compared with index funds.

Actively managed funds follow an active management strategy, typically led by a portfolio manager who selects individual securities for the fund. So investing in a commodities mutual fund that’s focused on water or corn, for example, could give you exposure to different companies that build technologies or equipment related to water sustainability or corn production.

By contrast, index mutual funds are passive, and simply mirror the performance of a market index.

Even though these funds allow you to invest in a portfolio of different securities, remember that commodities mutual funds and index funds are still speculative, so it’s important to understand the risk profile of the fund’s underlying holdings.

Commodity Pools

A commodity pool is a private pool of money contributed by multiple investors for the purpose of speculating in futures trading, swaps, or options trading. A commodity pool operator (CPO) is the gatekeeper: The CPO is responsible for soliciting investors to join the pool and managing the money that’s invested.

Trading through a commodity pool could give you more purchasing power since multiple investors contribute funds. Investors share in both the profits and the losses, so your ability to make money this way can hinge on the skills and expertise of the CPO. For that reason, it’s important to do the appropriate due diligence. Most CPOs should be registered with the National Futures Association (NFA). You can check a CPO’s registration status and background using the NFA website.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Advantages and Disadvantages of Commodity Trading

Investing in commodities has its pros and cons like anything else, and they’re not necessarily right for every investor. If you’ve never traded commodities before it’s important to understand what’s good — and potentially not so good — about this market.

Advantages of Commodity Trading

Commodities can add diversification to a portfolio which can help with risk management. Since commodities have low correlation to the price movements of traditional asset classes like stocks and bonds they may be more insulated from the stock volatility that can affect those markets.

Supply and demand, not market conditions, drive commodities prices which can help make them resilient throughout a changing business cycle.

Trading commodities can also help investors hedge against rising inflation. Commodity prices and inflation move together. So if consumer prices are rising commodity prices follow suit. If you invest in commodities, that can help your returns keep pace with inflation so there’s less erosion of your purchasing power.

Disadvantages of Commodity Trading

The biggest downside associated with commodities trading is that it’s high risk. Changes in supply and demand can dramatically affect pricing in the commodity market which can directly impact your returns. That means commodities that only seem to go up and up in price can also come crashing back down in a relatively short time frame.

There is also a risk inherent to commodities trading, which is the possibility of ending up with a delivery of the physical commodity itself if you don’t close out the position. You could also be on the hook to sell the commodity.

Aside from that, commodities don’t offer any benefits in terms of dividend or interest payments. While you could generate dividend income with stocks or interest income from bonds, your ability to make money with commodities is based solely on buying them low and selling high.

The Takeaway

Commodities trading could be lucrative but it’s important to understand what kind of risk it entails. Commodities trading is a high-risk strategy so it may work better for investors who have a greater comfort with risk, versus those who are more conservative. Thinking through your risk tolerance, risk capacity, and timeline for investing can help you decide whether it makes sense to invest in commodities.

Fortunately, there are a number of ways to invest in commodities, including futures and options (which are a bit more complex), as well as stocks, ETFs, mutual and index funds — securities that may be more familiar.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.


Invest in alts to take your portfolio beyond stocks and bonds.

Photo credit: iStock/FlamingoImages


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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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Nov
18
2024
What Does Flood Insurance Cover?

What Does Flood Insurance Cover?

By | Family Finances, Insurance, servicing | Comments Off on What Does Flood Insurance Cover?

Flood insurance is designed to help homeowners, renters, and business owners cover losses caused by a flood. You can buy it to protect a building, the possessions in that building, or both.

Most standard homeowners policies don’t cover flood damage. So this separate insurance coverage is your best option for repairing or replacing property after rising water rises enters your home. In some areas, mortgage lenders can make buying flood insurance mandatory. Even if your lender doesn’t require flood insurance, you may want to consider it.

Read on for information that can help you decide if a flood policy should be part of your insurance coverage.

Key Points

•   Flood insurance covers direct physical losses due to floods, including damage to the building and its contents.

•   Coverage extends to foundation walls, electrical and plumbing systems, and major appliances.

•   Personal property such as clothing, furniture, and electronics are also covered under flood insurance.

•   The National Flood Insurance Program offers up to $250,000 for building and $100,000 for personal property damage.

•   Flood insurance does not cover items outside the building, cars, or business interruption losses.

What Is Flood Insurance?

According to the Federal Emergency Management Agency (FEMA), just one inch of floodwater can cause up to $25,000 in damage. And that damage probably won’t be covered by your homeowners or renters insurance. You can, however, purchase a standalone flood insurance policy to help cover your losses.

A flood insurance policy is meant to cover losses directly caused by flooding or, as FEMA describes it, “an excess of water on land that is normally dry, affecting two or more acres of land or two or more properties.”

If your sewer backed up after heavy rainfall, or rising inland or tidal waters flooded your property, the damage would likely be covered by flood insurance. But if the backup wasn’t caused by flooding, the damage wouldn’t be covered by flood insurance. (Whether it’s covered by your homeowners insurance depends on your individual policy.)

Most people get their flood policy through the National Flood Insurance Program (NFIP), which is managed by FEMA and works with a network of insurance companies across the country. But some private insurance companies also offer their own flood policies, which are not government-backed.

Recommended: Mortgage & Homeowners Insurance Definitions

What Is Included in Standard Flood Insurance?

The NFIP offers two types of flood insurance coverage: one that covers buildings and another that covers the owner’s or renter’s personal contents.

A policy purchased through the NFIP can reimburse up to $250,000 in building damage and typically covers:

•   Foundation walls, anchoring systems, and staircases

•   Detached garages

•   Electrical and plumbing systems

•   Furnaces and water heaters

•   Fuel tanks, well water tanks and pumps, and solar energy equipment

•   Appliances, including refrigerators, stoves, and built-in dishwashers

•   Permanently installed cabinets, paneling, and bookcases

•   Permanently installed carpeting and window blinds

An NFIP policy can provide up to $100,000 in personal property damage, and typically covers:

•   Personal belongings, such as clothing, furniture, and electronic equipment (TVs, computers, etc.)

•   Valuables (like original artwork and furs) up to $2,500

•   Portable and window air conditioners

•   Washers and dryers

•   Microwave ovens

•   Carpets that may not be included under building coverage

•   Curtains and other window coverings

What Doesn’t Flood Insurance Cover?

There are a few things NFIP flood insurance doesn’t cover, even if the damage is directly caused by flooding. Items that aren’t covered include:

•   Any property that’s outside the insured building (such as a well, septic system, deck or patio, fences, seawall, hot tub or pool, and landscaping)

•   Cars and most other self-propelled vehicles and their parts

•   Cash, coins, precious metals, stock certificates, and other valuable paperwork

•   Damage from mold or mildew that could have been prevented by the property owner

•   Financial losses caused by an interruption in business

Flood insurance also doesn’t cover costs incurred if you have to live in temporary housing because of damage to your property. Unfortunately, neither will the “loss of use coverage” you may have through your homeowners policy. (Loss of use coverage pays those expenses only when the reason you’ve been displaced is covered by your homeowners policy.)

What Does Flood Insurance Cover in the Basement?

The NFIP’s coverage for flood damage in the basement is limited to some specific (usually permanent or attached) items and cleanup. Some examples of what should be covered include:

•   Central air conditioners

•   Fuel tanks and the fuel in them

•   Furnaces and water heaters

•   Sump pumps, heat pumps, and well water tanks and pumps

•   Electrical outlets, switches, and junction and circuit breaker boxes

•   Elevators, dumbwaiters, and related equipment

•   Unfinished drywall for walls and ceilings

•   Attached stairways and staircases

•   Foundation elements and anchoring systems required for building support

Most personal property kept in the basement isn’t covered, including clothing, computers, TVs, and furniture.

Where Can You Get Flood Insurance?

Federal flood insurance isn’t sold directly by the federal government. Instead, you can buy NFIP policies through private insurance companies, under what’s known as a Write Your Own (WYO) program.

The NFIP partners with more than 50 insurance companies, so you may be able to work with the same insurance agent or broker who helped you purchase your home and auto policies to get flood coverage.

You can get help finding an NFIP provider online at floodsmart.gov/flood-insurance-provider or by calling the NFIP at 877-336-2627. You also can also check into any private, non-government-backed flood insurance policies that are offered in your area.

You may want to look at including flood insurance as part of your overall personal insurance planning. Don’t wait until you hear predictions of a storm heading your way to start inquiring about a policy, though. There is typically a 30-day waiting period for a flood insurance policy to go into effect.

How Much Does Flood Insurance Cost?

Like most insurance, the cost of a flood policy can depend on the coverage type (building and/or personal contents), the size and age of the building covered, the risk level in your location (based on your flood zone), and other factors, including whether you’re buying a private or NFIP policy.

According to the Federal Emergency Management Agency (FEMA), the average cost of one year of coverage with an NFIP policy is $786. And though that’s not nearly as much as the average cost of a homeowners policy, it can still be a hit to many household budgets.

You may be able to lower the cost of a flood policy by choosing a higher deductible. You can also elevate your home’s electrical panels, heating and cooling systems, and other utilities so they’re less vulnerable to water damage.

For renters, the NFIP offers contents-only policies for as low as $99 annually.

You can also look for a competitive quote on a private flood policy that isn’t backed by FEMA and the NFIP. Just make sure you’re getting a fair price from a stable company that is capable of paying out claims in the event of a major flood.

When Is Flood Insurance Required?

If you have a government-backed mortgage and your home or business is in a high-risk flood area, you are required to have flood insurance. If you don’t have a government-backed loan, your lender may still require that you purchase a flood policy. Even lenders in moderate- to low-risk locations may make it a loan requirement.

Recommended: Is Homeowners Insurance Required to Buy a Home?

Who Should Buy Flood Insurance?

Knowing your designated flood zone can help you decide whether you want to prioritize purchasing flood insurance. You can find your zone by entering your address at the FEMA Flood Map Service Center at MSC.FEMA.gov.

Structures in zones A and V are at the highest risk, while those in zones B, C, and X are considered at moderate to minimal risk. Keep in mind, though, that you can still experience flood damage even if you don’t live in a high-risk zone. According to NFIP data, more than 20% of all insurance claims come from moderate- to low-risk zones.

If you’re moving to a new area where flood insurance isn’t required, you may want to speak with your real estate agent or neighbors about the area’s history and potential for flooding.

How Much Flood Insurance Do You Need?

In many ways, shopping for flood insurance is similar to how you buy homeowners insurance: Calculating how much you’ll need will depend on what you plan to protect and what it might cost to replace if it’s destroyed.

In fact, whether you go with an online insurance company or a traditional insurer, your homeowners insurance company may give you an idea of what it might cost to rebuild or repair your home if it’s damaged. Then you can add on the value of your furnishings and other personal possessions to decide how much flood insurance you need. (If you’re a renter, you can purchase a policy that covers only your belongings.)

Remember, there are limits to how much coverage you can get through an NFIP policy ($250,000 for a building and $100,000 for the contents). If your needs go beyond those limits, you may want to consider buying excess flood insurance through a private flood policy.

The Takeaway

An average flood insurance policy for homeowners costs $786 a year. But most homeowners insurance policies don’t cover flood damage, which can leave a big gap when it comes to protecting your home and belongings. Purchasing a separate flood insurance policy can help fill that gap, and it can be an important part of your overall insurance planning.

Flood policies can cover the building itself, its contents, or both. Make sure you understand what isn’t covered by your policy, such as personal belongings stored in the basement or outside.

If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.

SoFi brings you real rates, with no bait and switch.

FAQ

What losses are covered by flood insurance?

A flood insurance policy covers direct physical losses caused by a flood. That could mean repairing or replacing your home, or the furnishings and other belongings in your home, or both.

How do I know if I’m in a flood zone?

Everyone is in a flood zone, but some areas are at a higher risk than others. You can find your zone by entering your address at the FEMA Flood Map Service Center at MSC.FEMA.gov.

Is flooding covered by homeowners insurance?

Some types of water damage are covered by a standard homeowners policy, but flooding usually is not.

Photo credit: iStock/onurdongel

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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Nov
15
2024
Similarities and Differences Between Initial and Maintenance Margin

Similarities and Differences Between Initial and Maintenance Margin

By | Growing Wealth, invest, Investing | Comments Off on Similarities and Differences Between Initial and Maintenance Margin

Initial and maintenance margin are separate margin requirements investors must adhere to when trading on margin. The two requirements are similar in that they are both sums of money that the broker requires the investor to have in their account to open or maintain a position with a margin loan. The main difference between the two is that the initial margin is the amount of money required to open a position, while the maintenance margin is the amount needed to keep a position open.

Investors interested in trading on margin need to understand the similarities and differences between initial and maintenance margin. Moreover, knowing how to calculate maintenance margin may help investors from being subject to a margin call or other adverse outcomes.

What Is Initial Margin?

Initial margin is the minimum amount of cash or collateral an investor must deposit in a margin account in order to buy securities on margin.

Initial Margin Requirements

The initial margin requirement is expressed as a percentage of the total purchase price of a security. The Federal Reserve Board’s Regulation T requires a minimum initial margin of 50% for stock purchases, meaning investors must have cash or collateral to cover at least half of the market value of stocks they buy on margin. However, Regulation T only sets the minimum for margin accounts. Stock exchanges and brokerage firms can set their initial margin requirement higher than 50% based on a stock’s volatility, the state of the markets, or other considerations.

How Initial Margin Works

If you meet the initial margin requirement, your broker will provide you with a margin loan to cover the rest of the trade’s purchase price. For example, if the initial margin requirement is 50% and an investor wants to purchase $6,000 of a stock, then the investor will have to cover an initial margin of $3,000 with cash or other equity and borrow $3,000 from the broker to make the trade.

Investors use margin trading as a way to increase their buying power. In the example above, if the investor bought the same amount of stock in a cash account, then they would need $6,000 in cash to make the trade. But by using a margin, the investor doubles their buying power by using only $3,000 to buy $6,000 worth of stock.

However, using margin involves risk, and may lead to more significant losses than buying stock directly in a cash account. If a trade declines below the threshold, investors will need to bring it back up to effectively pay back the margin loan.

Recommended: Cash Account vs Margin Account: Key Differences

What Is Maintenance Margin?

Maintenance margin is the minimum amount of equity an investor must have in their margin account to keep a position open after making a trade. The margin equity in the account is the value of securities minus the amount of the margin loan borrowed to make the trade. If the account’s equity falls below the maintenance margin, the broker may issue a margin call or close out the investor’s trade.

Maintenance Margin Requirements

Maintenance margin is usually expressed as a percentage of the position’s value. The Financial Industry Regulatory Authority (FINRA), which regulates maintenance requirements, says maintenance margin must be at least 25% of the total market value of the securities bought on margin. However, like initial margin, brokerage firms may have higher maintenance requirements, depending on various factors like market volatility and liquidity.

How Maintenance Margin Works

Suppose an investor purchased $6,000 worth of stock by paying $3,000 in cash and borrowing $3,000 from their broker, and the broker has a 25% maintenance margin requirement. If the market value of the stock drops from $6,000 to $5,000, the investor’s equity will now be $2,000 ($5,000 – $3,000 margin loan) and the maintenance margin will be $1,250 ($5,000 x 25%). In this case, the investor still has enough equity to cover the maintenance margin.

However, if the stock’s value drops to $3,500, the investor will no longer have enough equity to cover the maintenance margin requirement. The investor’s account has $500 in equity ($3,500 – $3,000), while the maintenance margin is $875 ($3,500 x 25%). The broker will likely issue a margin call, requiring the investor to deposit additional funds into the account or sell some assets to increase the equity in the account.

The broker may also sell some of the investor’s holdings without notifying them to bring the account back up to the maintenance margin level.

The purpose of the maintenance margin is to protect the broker in case the value of the securities in the account falls.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

*For full margin details, see terms.

Initial Margin vs Maintenance Margin

Here’s a quick look at how initial margin and maintenance margin stack up:

Initial Margin vs Maintenance Margin
Initial Margin

 Maintenance Margin
50% minimum initial margin requirement regulated by the Federal Reserve Board’s Regulation T 25% minimum maintenance margin requirement regulated by FINRA
Initial margin is deposited at the start of a trade Maintenance margin must be maintained throughout the life of a trade

Similarities

Initial margin and maintenance margin are similar in that they are both used as deposits to cover potential losses in a margin account. The two margin requirements are both calculated as a percentage of the value of the account’s assets.

Additionally, both initial margin and maintenance margin can be increased or decreased by an exchange or brokerage firm depending on a stock’s volatility, the financial situation of a client, and other factors.

Differences

The initial margin is the amount of cash or collateral an investor must deposit with a broker when buying or selling an asset on margin. In contrast, the maintenance margin is the minimum amount of equity an investor must maintain in their account to keep the account open and avoid a margin call.

Another difference between the two is that the initial margin is typically higher than the maintenance margin.

Calculating Initial and Maintenance Margin

There are formulas for calculating both initial margin and maintenance margin. Note that the examples below may not include margin figures that are indicative of a typical brokerage firm, or of SoFi.

Initial Margin Calculation

The formula for calculating initial margin is:

Initial margin = initial margin percentage x total purchase price of security

So, if a brokerage firm has an initial margin percentage of 65% and an investor wants to buy $10,000 worth of stock ABC, then the initial margin would equal $6,500:

$6,500 initial margin = 65% initial margin percentage x $10,000 total purchase price

In this scenario, the investor would need to have $6,500 in an account and borrow $3,500 with a margin loan.

Maintenance Margin Calculation

The formula to calculate maintenance margin is:

Maintenance margin = Total value of securities owned on margin x maintenance margin percentage

So, if a brokerage firm has a maintenance margin percentage of 30% and an investor holds $1,000 of stock XYZ (100 shares at $10 per share) in their margin account, then the maintenance margin would equal $300:

$300 = $1,000 x 30% maintenance margin percentage

In this scenario, the investor would need to have $300 in equity in their margin account to avoid being subject to a margin call.

Investing Tips From SoFi

Understanding the nuances of initial and maintenance margin is essential before investors start trading on margin. Utilizing margin can help investors increase their buying power, but it comes with more risk, like the chance for margin calls.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 11%*

FAQ

Why is initial margin higher than maintenance margin?

The initial margin is higher because the Federal Reserve Board’s Regulation T sets a 50% minimum initial margin requirement, while FINRA sets a lower 25% minimum maintenance margin requirement.

How do you calculate maintenance margin?

Maintenance margin is the minimum equity an investor must have in the margin account after making a trade. Maintenance margin is expressed as a percentage of an investor’s total trade. Investors can calculate maintenance margin by multiplying the maintenance margin percentage by the total value of the margin account.

Photo credit: iStock/PeopleImages

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.

*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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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