Dec
06
2024
What Is Portfolio Margin?

What Is Portfolio Margin?

By | Growing Wealth, invest, Investing | Comments Off on What Is Portfolio Margin?

Portfolio margin is a way of calculating the margin requirements for derivatives traders using a composite view of their portfolio. Portfolio margin accounts offset investors’ positive and losing positions to calculate their real-time margin requirements. Portfolio margining may provide investors with lower margin requirements, allowing them to use more of their capital in trades.

Key Points

•   Portfolio margin calculates margin requirements using a risk-based approach, potentially lowering requirements and freeing up capital.

•   It assesses a portfolio’s risk, considering market volatility and theoretical price changes.

•   Traders must maintain a $100,000 net liquidating value and get approval for margin trading.

•   The Chicago Board of Options Exchange sets rules, and brokers use the TIMS model for daily risk assessment.

•   Margin trading is risky and not recommended for beginners, but it can increase buying power for experienced investors.

Portfolio Margin, Defined

Portfolio margin is a type of risk-based margin used with qualified derivative accounts. It calculates a trader’s real-time portfolio margin requirements based on a risk assessment of their portfolio or marginable securities.

If a trader has a well-hedged portfolio they will have a lower margin trading requirement, allowing them to utilize more of their cash for trades and take advantage of more leverage. Of course the more margin a trader uses, the higher their risk of loss.

How Does Portfolio Margin Work?

Investors with qualified accounts where they trade derivatives including options, swaps, and futures contracts must maintain a certain composite-margin. Portfolio margin is a policy with a set of requirements that aim to reduce risk for the lender.

To determine portfolio margin, the lender consolidates the long and short positions held in different derivatives against one another. This works by calculating the overall risk of an investor’s portfolio and adjusting margin requirements accordingly.

The portfolio margin policy requirement must equal the amount of liability that remains once all the investor’s offsetting (long and short) positions have been netted against one another. Usually portfolio margin requirements are lower for hedged positions than they are with other policy requirements.

For example, the liability of a losing position in an investor’s portfolio could be offset if they hold a large enough net positive position in another derivative.

Margin vs Portfolio Margin

Here’s a closer look at how margin vs. portfolio margin compare when online investing, or investing with a broker.

Margin

Margin is the amount of cash, or collateral, that investors must deposit when they enter into a margin trade. Margin accounts work by allowing a trader to borrow money from their broker or exchange. By borrowing cash to cover part of the trade, an investor can enter into much larger positions than they could if they only used cash on hand.

Borrowing money, however, poses a risk to the lender. For this reason, the lender requires that traders hold a certain amount of liquid cash in their account to remain in margin trades. If a trader loses money on a position, the broker can then claim cash from the trader’s account to cover the loss.

Traditional margin loans under Regulation T require investors to put up a certain percentage of cash for margin trades based on the amount of the trade.

Portfolio Margin

Portfolio margin, on the other hand, calculates the required deposit amount based on the risk level of the investor’s overall portfolio. It looks at the net exposure of all the investor’s positive and losing positions. If a derivative investor has a well-hedged portfolio, their margin requirement can be much lower than it would be with traditional margin policies.

This chart spells out the differences:

Regulation T Margin

 Portfolio Margin
Maintenance margin = 50% of initial margin Initial and maintenance margin is the same
Traders can’t use margin on long options, and long options have a 100% requirement Traders can use margin on long options, and they can use long options as collateral for other marginable trades
Margin requirements are fixed percentages Trader’s overall portfolio is evaluated by offsetting positions against one another
Margin equity = stock + (+/- cash balance) Buying power (maintenance excess) = net liquidation value – margin requirements
Less flexibility on margin requirements Broad-based indices allow for more leverage
Margin requirement is a fixed percentage of trade amounts Stock volatility and hypothetical future scenarios are part of portfolio margin calculation

Portfolio Margin and Volatility

Portfolio margin calculations take into account investing in volatile markets by factoring in the outcome of various scenarios.

Portfolio Margin Calculation

Calculating portfolio margin is a multi-step process. The calculation includes hypothetical market volatility and theoretical price changes.

The steps are:

1.    Create a set of theoretical price changes across the trader’s margin account. These ranges may be different when trading options, stocks, and indices.

2.    Divide the range and calculate the gain or loss on the overall position for each theoretical scenario.

3.    Incorporate implied volatility into the calculated risk array.

4.    Calculate the largest possible loss that could occur with each theoretical scenario. That amount is the margin requirement.

Recommended: Calculating Margin for Trading

Key Considerations

Portfolio margin can be a great tool for experienced investors who want to invest more of their available cash. However, there are some important things to keep in mind:

•   Margin trading tends to be risky and is not recommended for beginning traders

•   Traders must keep $100,000 net liquidating value in their portfolio margin account (this is not the same as a client’s margin account). If the account goes below this, they may lose their active trading positions and the ability to trade on margin.

•   Traders must get approval to enable margin trading on a brokerage account before they can utilize the portfolio margin rules.

If an investor’s margin balance falls below the margin requirement, they could face a margin call, which would require them to either deposit more cash or sell securities in order to increase their balance to the required amount.

Portfolio Margin Requirements

The Chicago Board of Options Exchange (CBOE) sets the rules for portfolio margin. In 2006 it expanded margin requirements, with the goal of better connecting requirements to portfolio risk exposure. Reducing the amount of portfolio margin required for lower risk investment accounts frees up more capital for leveraged trades, benefitting both the trader and the broker.

Brokers must use the approved portfolio margin calculation model provided by The Options Clearing Corporation (OCC), which is the Theoretical Intermarket Margining System (TIMS). TIMS calculates the margin requirements based on the risk of the portfolio on a daily basis.

To remain qualified for portfolio margin, investors must maintain a minimum of $100,000 net liquid value in their account.

There are additional requirements derivatives traders should keep in mind if they use leverage to trade. Regulation T is a set of regulations for margin trading accounts overseen by the Federal Reserve Bank.

Brokers must evaluate potential margin traders before allowing them to start margin trading, and they must maintain a minimum equity requirement for their trading customers. In addition, brokers must inform traders of changes to margin requirements and of the risks involved with margin trading.

The Takeaway

Margin trading may be very profitable and is a tool for investors, but it comes with a lot of risk and isn’t recommended for most traders. If you use margin trading for derivatives, however, portfolio margin may free up more capital for trading.

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%*

Photo credit: iStock/filadendron

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.

*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.
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.

SOIN-Q424-012

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Dec
05
2024
Implied Volatility vs Historical Volatility

Implied Volatility vs Historical Volatility

By | Growing Wealth, invest, Investing | Comments Off on Implied Volatility vs Historical Volatility

Whether you are a new investor or a seasoned trader, it’s common to hear the word “volatility” when discussing the movements of a stock price or index. More volatile stocks tend to have larger swings in value, both up and down.

There are two forms of volatility, however. Historical volatility, which measures past price movements, and implied volatility, which estimates future price fluctuations based on options pricing. It’s crucial for participants in these markets to understand the difference between implied vs historical volatility.

Key Points

•   Historical volatility measures the range of returns on a market index or security over a given time period.

•   Traders use historical volatility to set stop-loss levels and analyze riskiness.

•   Historical volatility is different from implied volatility, which is forward-looking.

•   Implied volatility measures expected future volatility based on options prices, reflecting market expectations.

•   Higher implied volatility tends to lead to higher options premiums since the price is more likely to jump to a trader’s advantage (or disadvantage).

Historical Volatility Definition

As the name suggests, historical volatility measures a stock’s price as compared to its average, or mean. The most popular way to calculate a stock’s historical volatility is by calculating the standard deviation of its price movements during a period of time.

Investors use historical volatility to get an idea of how likely the stock is to make large movements in price. A stock with higher volatility may indicate elevated risk, because there is a higher potential that the stock’s price could rise or drop significantly.

Highly volatile investments purchased with leveraged accounts can create additional risk. On the other hand, a stock with higher historical volatility could also be potentially more rewarding, since there is also a possibility that the stock’s price could make a big jump upward (or downward). Stocks may become more volatile during times of recession or uncertainty.

Investors measure a stock’s historical volatility as a percentage of the stock’s price, and not as an absolute number. That makes it easier to compare historical volatility between stocks — even if they have very different values — while assessing investment opportunities. When comparing the volatility of stocks, it’s important to look at them during the same time period.

Implied Volatility Definition

Implied volatility measures a stock’s expected future price fluctuations, derived from options prices, and is commonly used by traders to assess market uncertainty. While historical volatility is backward-looking, implied volatility attempts to quantify a stock’s volatility going forward.

Implied volatility reflects the prices of the options contracts associated with a particular stock. Options traders often assess implied volatility using metrics like Vega, one of the Greeks in options trading, which measures how sensitive an option’s price is to changes in implied volatility.

A stock with a higher implied volatility generally has options contracts with higher premiums. This is because there is more uncertainty around the direction of the underlying stock.

Recommended: Understanding the Greeks in Options Trading

Historical vs Implied Volatility

Although both implied volatility and historical volatility measure the volatility of stocks, they measure it in different ways. Historical volatility reflects the past price movements of a particular stock or index, while implied volatility gauges future expectations of price movements based on the prices of options contracts. Traders use implied volatility when they are determining the extrinsic value of an option.

When to Use Historical vs Implied Volatility

Historical volatility is used for assessing a stock’s past price movements. It demonstrates a stock’s value fluctuation over a specific period, and may provide an idea of the risk associated with it. Investors use historical volatility to gauge the potential for future price swings based on historical data.

Implied volatility may help an investor evaluate options pricing or forecast potential future price movements. This figure reflects the market’s expectations for future volatility, based on the prices of options contracts. Traders often use implied volatility to determine whether options are overpriced or underpriced relative to expected price movements.

For example, a trader could look at options with implied volatility that differs from its historical volatility. If an option’s implied volatility is lower than the historical volatility of the underlying stock, that may be a signal of an undervalued option premium.

Comparing Implied and Historical Volatility

Here is a quick summary of the differences between historical and implied volatility:

Historical Volatility:

Historical volatility is used to analyze a stock’s past price movements, regardless of whether the investor is purchasing the stock itself or trading its options. It can help assess the stock’s risk or potential for large price swings, which is valuable for both stock investors and options traders.

Implied Volatility:

Implied volatility is specific to options because it’s derived from options prices, reflecting the market’s expectations of future volatility. Implied volatility isn’t just for options traders, however. It can also be useful for stock traders as an indicator of market sentiment about the stock’s future price movements.

Historical Volatility

 Implied Volatility
Calculated using the historical prices of a stock or index Determined indirectly based on the prices of options contracts
Used by investors as well as traders to analyze a stock’s movements Used primarily for options and based on options prices, which are based on market expectations of volatility
Measures past performance based on historical data Projects future performance, representing an indicator of future volatility

How to Use Implied and Historical Volatility Together

Because implied volatility and historical volatility measure different things, it can be useful to employ them both. The historical volatility of a given stock or index will measure how much the price has historically moved up and down. If you’re interested in investing in options for a stock, you can look at how its historical volatility compares to the implied volatility denoted by the prices of its options contracts.

One way you can incorporate some of these ideas into your trading strategies is through a volatility skew. A volatility skew depends on the difference in implied volatility between options contracts that are in the money, at the money, and out of the money.

Another relevant concept when it comes to implied volatility is a volatility smile, a graphic representation of the strike prices and the implied volatility of options with the same underlying asset and expiration date.


💡 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.

The Takeaway

Options traders often look at both historical and implied volatility when determining their options trading strategy. You may also use these tools while investing, or you might look at other factors to evaluate potential investments.

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

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

Explore SoFi’s user-friendly options trading platform.

FAQ

How is implied volatility calculated from historical volatility?

The historical volatility of a stock or index reflects the changes in historical stock prices. It is often, but not always, calculated as the standard deviation of a stock’s price movements. Implied volatility is not calculated directly from historical data. Rather, it is derived from the market prices of options contracts for the underlying stock.

Is there a difference between implied and realized volatility?

Realized volatility is another name for the historical volatility of a stock. So while implied and realized volatility both measure how volatile a stock is, they have different definitions, and investors use them in different ways.

Photo credit: iStock/kupicoo
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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q324-065

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Dec
05
2024
What Is Historical Volatility & How Do You Use It?

A Guide to Historical Volatility

By | Growing Wealth, invest, Investing, Terminology | Comments Off on A Guide to Historical Volatility

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.

Historical volatility (HV) measures the range of returns on a market index or security over a given time period. When an asset’s historical volatility is going up, that means its price is moving further away from its average (in either direction) more quickly than usual.

A stock’s historical volatility is commonly expressed as one standard deviation using daily returns, and it’s one factor that investors often look at to gauge the risk of a potential investment. An asset’s historical volatility is different from its implied volatility. Read on to learn what historical volatility is, how historical volatility works, and how to calculate historical volatility.

Key Points

•   Historical volatility measures deviations from a stock’s average price over a period of time.

•   The historical volatility of a stock is typically calculated using the standard deviation of daily returns.

•   Historical volatility is expressed as a percentage, but differs from forward-looking implied volatility.

•   High historical volatility suggests larger price swings, while low volatility indicates smaller movements.

•   Traders may use historical volatility alongside implied volatility — which indicates the expected future volatility of an option’s underlying asset — to inform their trading strategy or assess a security’s riskiness.

What Is Historical Volatility?

Historical volatility measures how much the price of a stock or index goes up and down over a certain period. Investors calculate historical volatility by measuring how much an asset’s price deviates from its average price during a certain time period. Historical volatility typically looks at daily returns, but some investors use it to look at intraday price changes.

Analysts can use any number of trading days when calculating historical volatility, but options traders typically focus on a time period between 10 and 180 days to balance capturing short-term fluctuations with longer-term trends. Options traders may use historical volatility and implied volatility when analyzing trading ideas.

Historical volatility is typically expressed as a percentage that reflects the standard deviation from the average price, based on past price behavior. But there are also other methods they can use to determine an asset’s historical volatility. For example, unstable daily price changes often result in high historical volatility readings.

How Historical Volatility Works

Historical volatility, expressed as a percentage, tracks how much a stock’s price fluctuates in relation to its average price during a certain period. This is usually calculated using the standard deviation of past price returns, which is then demonstrated as an annualized figure.

When a stock sees large daily price swings compared to its history, it will typically have a historical volatility reading. Historical volatility does not measure direction; it simply indicates the deviation from an average.

When a stock’s historical volatility is rising or above average, it means daily price changes are larger than normal. When it is lower than average, a stock or index has been relatively calm.

How Historical Volatility is Calculated

The historical volatility formula is typically a standard deviation measurement. It typically takes a stock’s daily price changes and averages them over a period. There are several steps to calculating historical volatility:

1.    Collect historical prices.

2.    Calculate the average price over the chosen period.

3.    Find the difference between each day’s price change and the average price.

4.    Square those differences.

5.    Find the sum of those squared differences (this finds the squared deviations).

6.    Divide the sum by the total number of prices (this finds the variance).

7.    Calculate the square root of the variance.

You can then calculate the annualized volatility of a stock in two ways:

•   Daily returns: multiply the standard deviation by the square root of 252 (the approximate number of trading days per year)

•   Monthly returns: multiply the standard deviation by the square root of 12 (the number of months per year)

Working through the historical volatility formula can be a lengthy process, but most brokerage platforms will automatically calculate it for you. Many brokers even offer historical volatility charts. With a historical volatility chart, you can easily compare changes through time.

For example, if a stock reacted sharply to an earnings release, its historical volatility charts may show a jump right after the earnings date, while implied volatility might drop sharply as the market makes adjustments to its expectations following the earnings results. Implied volatility measures market expectations of price fluctuations for a certain asset in the future, which is reflected in how its options are priced.

How to Use Historical Volatility

Traders may use historical volatility when analyzing a stock, fund, or index to get a sense of its riskiness. High or low historical volatility stocks are not inherently bullish or bearish. Day traders might seek high historical volatility stocks as candidates for high-profit trading opportunities (but they also come with high loss potential).

Traders sometimes use historical volatility to help set stop-loss levels, which are predetermined prices at which a trade will automatically close to limit losses. For example, a day trader might use three times a stock’s daily average range – a measure of historical volatility – to set a stop price. This is known as volatility ratio trading.

You can also use historical volatility to help determine whether a stock’s options are expensive to help determine an options trading strategy. If implied volatility is extremely high when compared to a stock’s historical volatility, traders may decide that options on the stock are undervalued and suitable as an investment.

Historical volatility can help traders understand the potential range of price movements, which may inform their risk management strategies and decisions about position sizing or exit points.

Recommended: Increase your buying power with a margin loan.

Historical vs Implied Volatility

Like historical volatility, implied volatility measures fluctuations in an underlying stock or index over a period of time, but there are key differences between the two indicators. Implied volatility is a forward-looking indicator of a stock’s future volatility.

The higher the historical volatility, the more risk-prone the security has been in the past. Implied volatility, on the other hand, uses option pricing to arrive at a calculation and estimate of future volatility. If implied volatility is significantly less than a stock’s historical volatility, traders typically anticipate a relatively stable period of trading, and vice versa.

Typically, when implied volatility is low, options tend to also be priced lower, which may make them more appealing to buyers who seek to capitalize on potential future price movements. Sometimes investors will use a graph to determine how an option’s implied volatility changes relative to its strike price, using a volatility smile.

Historical Volatility

Implied Volatility

Measures past price data to gauge volatility on a security. Uses forward-looking option-pricing data to gauge expected future volatility on a security.
Higher historical volatility often leads to higher options pricing and higher implied volatility. Imminent news, like a company earnings report or a key economic data point, may drive implied volatility higher on a stock or index.
May inform traders’ risk management strategies and decisions about position sizing or exit points. Traders may use implied volatility to find stocks expected to exhibit the biggest price swings.

The Takeaway

Historical volatility can be a useful indicator for both institutional and retail investors looking to monitor the level and frequency of a stock or index’s price fluctuations. It measures a security’s dispersion of returns over a defined period. Implied volatility is a similar tool, but it is forward-looking and uses option pricing to arrive at its output.

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

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

Explore SoFi’s user-friendly options trading platform.

FAQ

What is considered a good number for historical volatility?

It depends. Although one stock might have a high historical volatility reading, perhaps above 100%, another steady stock might have a low figure around 20%. The key is to understand the securities you trade. Historical volatility can be an indicator of a stock’s volatility, but unforeseen risks can make future volatility drastically different than the historical trend.

What is a historical volatility ratio?

The historical volatility ratio compares short-term and long-term historical volatility as a percentage of the price of a financial asset. You can interpret the historical volatility ratio by looking at short versus long historical volatility. If short volatility on a stock drops below a threshold percentage of its long volatility, a trader might think there will be a jump in future volatility soon.

This is similar to analyzing volatility skew in options. It is important to remember that the interpretation and technical rules of historical volatility can be subjective by traders.

How is historical volatility calculated?

Historical volatility calculations require finding the average deviation from the average price of an asset over a particular time. An asset’s standard deviation is often used. Historical volatility is usually stated as one standard deviation of historical daily returns.

Many trading platforms automatically calculate historical volatility, so you may not have to do the calculations manually.

Photo credit: iStock/Eva-Katalin

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q324-064

Read more
Dec
04
2024

Learning Finance Without a Finance Background

By | Family Finances, Life & Career, money | Comments Off on Learning Finance Without a Finance Background

An advanced financial degree isn’t a requirement for taking control of your finances. In fact, you can learn much (or all) of what you need to know about finance without a financial education background at all — if you’re willing to put in the work (and, possibly, spend a little money).

Learning about how the realm of money works can boost your financial literacy and may improve how well you spend, save, and invest your hard-earned cash.

So let’s take a look at some of the easiest ways to learn finance on your own time.

Key Points

•   There are multiple ways to learn finance without a formal background, including self-education through online courses, books, podcasts, and blogs.

•   Mastering finance skills like budgeting, debt management, and investing can lead to greater financial stability and freedom.

•   You can take online finance courses for free through Coursera, edX, and Udemy.

•   Follow finance blogs and listen to podcasts to stay informed and deepen your financial knowledge.

•   Other ways to learn finance include: in-person classes, seminars, and hiring a financial professional for personalized guidance.

Why Being Sound in Finance Is Important

Even if you don’t want to become an accountant or manage clients’ investment portfolios, learning about finance is an important practice for everyone. Knowing financial basics like how to build a budget, how to pay off debt, how ,a href=”https://www.sofi.com/banking/”>bank accounts work, and even how to do basic investing in stocks and bonds can be key to your financial stability. You’ll likely become a smarter consumer and savvier money manager, not turning a blind eye to your bank and IRA statements.

With more understanding of your finances, you’ll have more control over them. Financial literacy can help you avoid (or get out of) debt, save for important goals like a wedding or vacation, and increase your net worth through investments and home ownership. This can benefit the financial health and well-being of your family, too.

8 Ways to Learn About Finance

Wondering how to learn finance without enrolling in a four-year degree? Here are some of the easiest ways to teach yourself about finance. Dive in, and you may be rewarded with knowing how to manage your own money confidently and find your way to financial freedom.

1. Taking an Online Course

Taking an online course is one of the best ways to learn finance — and you can even do it in sweatpants. LinkedIn offers several finance and accounting courses that are ideal if you are working toward becoming a practicing financial professional, but you can also find free or affordable financial literacy classes for the average person.

Popular options for online financial courses include Coursera, edX, and Udemy. Just be sure to find courses aimed at non-finance pros. Many universities, including Massachusetts Institute of Technology (MIT) and the University of Michigan, offer some courses for free; you generally just have to pay if you want the certificate of completion.

2. Reading Books

Another way to learn about finance at a deeper level is through books. Your local library probably offers shelves of books on finance (maybe even digital versions for your e-reader), but you can also order books online or shop at second-hand bookstores.

Goodreads can be a great place to research personal finance books. Popular books for learning about finance, especially for beginners, include:

•   Get a Financial Life by Beth Kobliner

•   I Will Teach You to Be Rich by Ramit Sethi

•   Your Money or Your Life by Vicki Robin and Joe Dominguez

•   The Simple Path to Wealth by JL Collins.

3. Listening to Podcasts

If reading isn’t your thing, you can instead try learning finance basics via podcasts (or audiobooks). Listening to the top money podcasts means you can use your time efficiently: Stream the podcast during your commute to and from work, while exercising or walking the dog, or even while cooking dinner.

Some podcasts are aimed at beginners while others have more targeted audiences, usually those interested in investing.

If you’re a beginner, consider checking out:

•   So Money

•   AffordAnything

•   Freakonomics

Students may benefit from The College Investor; The Dave Ramsey Show is popular with people working to get out of debt; and investors who want to learn more about the market may want to queue up What’s News, Jill on Money, or Planet Money.

Recommended: 7 Tips to Managing Your Money Better

4. Utilizing YouTube and Other Visual Media

Podcasts are great for on-the-go learning, but if you want to sit and watch financial content so you can take notes, YouTube can be a great place to start. Here are some of channels with financial literacy video content you may want to check out:

•   The Financial Diet or Two Cents for general personal finance content

•   Wealth Hacker for investing and passive income advice

•   Bigger Pockets for real estate investing.

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5. Hiring a Financial Professional

While learning about how to use a checking and savings account is important, more complex topics like debt consolidation or investing in the stock market may be too intimidating for some.

If you find yourself too busy to learn or just struggling with the concepts, consider hiring a financial professional. Some financial professionals offer specific services like tax preparation and wealth management; you can also hire a financial consultant who can offer advice on all areas of your finances, from paying down student loan debt to building an emergency savings to refinancing a mortgage. This process, beyond providing guidance, can also help you build knowledge about the areas of finance about which you are most curious.

Recommended: What Is Financial Therapy?

6. Taking an In-Person Class or Seminar

How to learn about finance if you find yourself easily distracted? In-person classes at a local college or even seminars and workshops in your area could be a good option.

You can check out nearby universities and community colleges to see what classes they offer. If you have hired a financial advisor, they might be able to recommend upcoming seminars in your area. Finally, your local library may also host workshops.

7. Subscribing to Business and Investing Publications

Beginners can likely get by on podcasts and YouTube content, but once you advance to more complex investing concepts, you might want to subscribe to one or two business and investing publications, whether in print or digitally. Popular financial magazines include Barron’s, The Economist, Kiplinger’s, Forbes, and Money. The Wall Street Journal is a popular resource for monitoring investments.

Many investment apps now offer access to news about the market. If you are using an app rather than a traditional investment firm, see what information they offer access to before signing up for any subscriptions.

Recommended: 5 Ways to Achieve Financial Security

8. Follow a Finance Blog

If a newspaper delivered on your doorstep feels too archaic, you can instead use finance blogs to learn basic topics and stay on top of the latest news. One good place to start: See what your bank or investment management firm offers. Many have top-notch blogs covering an array of topics.

You may also find blogs that suit your particular needs, whether that’s understanding annuities, managing finances for a single-paycheck family, or estate planning. If you read a book on money that you like or listen to a podcast that you find valuable in one of your key areas of interest, search for more intel on the expert involved. They may well have a finance blog that can deepen your knowledge.

The Takeaway

Learning about finance when you don’t have any background in the subject can feel intimidating. Fortunately, there are numerous resources you can tap, including online courses, podcasts, books, blogs, publications, and apps. What’s more, many of these options are free, and a fair number are tailored to complete beginners.
Taking some time to learn the basics of personal finance — from budgeting to getting the best rate on your savings to building wealth through investing — can yield rewards, both right away and many years from now.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Is finance easy to learn?

Finance can be easy to learn if you are willing to seek out informative content from books, podcasts, videos, blogs, and even professionals and then invest some time soaking up knowledge. Learning about finance requires dedication and sometimes a little investment — but knowing how to manage your money can pay off in the long run.

What should I learn first about finance?

Some of the most fundamental personal finance concepts include building a budget, opening a bank account, and understanding your credit score. Once you have mastered those more basic concepts, you can then focus on things like retirement planning, debt consolidation, and real-estate and stock-market investing.

Can I make finance a career without a degree?

Having a degree of some kind (ideally in finance but even in mathematics or other allied areas) is very helpful for building a career in finance. Completing internships and/or industry courses outside of a college setting can put you on the right path, though you may still need a certification for a specific job in finance. For example, Certified Public Accountants and Certified Financial Advisors have completed specific programs to earn their credentials. That said, self-taught individuals might be able to build careers by creating financial educational content, like podcasts and blogs.

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Tax Loss Carryforward

Tax Loss Tax Loss Carryforward: What Is It and How Does It Work?

By | Growing Wealth, invest, Investing | Comments Off on Tax Loss Tax Loss Carryforward: What Is It and How Does It Work?

The tax loss carryforward rule allows capital losses from the sale of assets to be carried over from one year to another. In other words, an investor can use capital losses realized in the current tax year to offset gains or profits in a future tax year, assuming certain restrictions are met.

Investors can use a capital loss carryforward to minimize their tax liability when reporting capital gains from investments. Business owners can also take advantage of loss carryforward rules when deducting losses each year.

Knowing how this tax provision works and when it can be applied is important from an investment tax-savings perspective.

Key Points

•   Tax loss carryforward allows investors to offset capital losses against future gains, as well as taxable income.

•   Investors who take advantage of the tax loss carryforward rule may reduce their overall tax liability.

•   Capital loss carryforward rules prohibit violating the wash-sale rule and have limitations on deductions.

•   Net operating loss carryforward is similar to capital loss carryforward for businesses operating at a loss.

•   Losses can be carried forward indefinitely at the federal level, but capital losses must be used to offset capital gains in the same year.

What Is Tax Loss Carryforward?

Tax loss carryforward, sometimes called a capital loss carryover, is the process of carrying forward capital losses into future tax years. A capital loss occurs when you sell an asset, like a stock, for less than your adjusted basis.

Capital losses are the opposite of capital gains, which are realized when you sell an asset for more than your adjusted basis. In either case, taxes may come into play.

Adjusted basis means the cost of an asset, adjusted for various events (i.e., increases or decreases in value) through the course of ownership.

When you invest online or through a brokerage to purchase a stock or other security, knowing whether a capital gain or loss is short-term or long-term depends on how long you owned it before selling.

•   Short-term capital losses and gains occur when an asset is held for one year or less.

•   Long-term capital gains and losses are associated with assets held for longer than one year.

The Internal Revenue Service (IRS) allows certain capital losses, including losses associated with personal or business investments, to be deducted from taxable income.

There are limits on the amount that can be deducted each year, however, depending on the type of losses being reported.

For example, the IRS allows investors to deduct up to $3,000 from their taxable income if the capital loss is from the sales of assets like stocks, bonds, or real estate. If capital losses exceed $3,000 ($1,500 if you’re married, filing separately), the IRS allows investors to carry capital losses forward into future years and use them to reduce potential taxable income.

Recommended: SoFi’s Guide to Understanding Your Taxes

How Tax Loss Carryforwards Work

A tax loss carryforward generally allows you to report losses realized on assets in one tax year on a future year’s tax return. Realized losses differ from unrealized losses or gains, which are the change in an investment’s value compared to its purchase price before an investor sells it.

IRS loss carryforward rules apply to both personal and business assets. The main types of capital loss carryovers allowed by the Internal Revenue Code are capital loss carryforwards and net operating loss carryforwards.

Capital Loss Carryforward

Another way to describe the process of using capital losses to offset gains is that IRS rules allow investors to “harvest” tax losses, meaning they use capital losses to offset capital gains, assuming they don’t violate the wash-sale rule.

The wash-sale rule prohibits investors from buying substantially identical investments within the 30 days before or 30 days after the sale of a security for the purpose of tax-loss harvesting.

If capital losses are equal to capital gains, they will offset one another on your tax return, so there’d be nothing to carry over. For example, a $5,000 capital gain would cancel out a $5,000 capital loss and vice versa.

Remember that short-term capital losses must be applied to short-term gains, and long-term capital losses to long-term gains, owing to the difference in how capital gains are taxed.

However, if capital losses exceed capital gains, investors can deduct a portion of the losses from their ordinary income to reduce tax liability. Investors can deduct the lesser of $3,000 ($1,500 if married filing separately) or the total net loss shown on line 21 of Schedule D (Form 1040).

But any capital losses over $3,000 can be carried forward to future tax years, where investors can use capital losses to reduce future capital gains.

To figure out how to record a tax loss carryforward, you can use the Capital Loss Carryover Worksheet found on the IRS’ Instructions for Schedule D (Form 1040).

Recommended: A Guide to Tax-Efficient Investing

Net Operating Loss Carryforward

A net operating loss (NOL) occurs when a business has more deductions than income. Rather than posting a profit for the year, the company operates at a loss. Business owners may be able to claim a NOL deduction on their personal income taxes. Net operating loss carryforward rules work similarly to capital loss carryforward rules in that businesses can carry forward losses from one year to the next.

According to the IRS, for losses arising in tax years after December 31, 2020, the NOL deduction is limited to 80% of the excess of the business’s taxable income. To calculate net operating loss deductions for your business, you first have to omit items that could limit your loss, including:

•   Capital losses that exceed capital gains

•   Nonbusiness deductions that exceed nonbusiness income

•   Qualified business income deductions

•   The net operating loss deduction itself

These losses can be carried forward indefinitely at the federal level.

Note, however, that the rules for NOL carryforwards at the state level vary widely. Some states follow federal regulations, but others do not.

How Long Can Losses Be Carried Forward?

According to IRS tax loss carryforward rules, capital and net operating losses can be carried forward indefinitely. Note that the loss retains its short- or long-term characterization when carried forward.

It’s important to remember that capital loss carryforward rules don’t allow you to roll over losses without corresponding gains. IRS rules state that you must use capital losses to offset capital gains in the year they occur. You can only carry capital losses forward when and if they exceed your capital gains for the year.

As noted above, the IRS also requires you to use an apples-to-apples approach when applying capital losses against capital gains.

For example, you’d need to use short-term capital losses to offset short-term capital gains. You couldn’t use a short-term capital loss to balance out a long-term capital gain or a long-term capital loss to offset a short-term capital gain.

Example of Tax Loss Carryforward

Assume that you purchase 100 shares of XYZ stock at $50 each for a total of $5,000. Thirteen months after buying the shares, their value has doubled to $100 each, so you decide to sell, collecting a capital gain of $5,000.

Suppose you also hold 100 shares of ABC stock, which have decreased in value from $70 per share to $10 per share over that same period. If you decide to sell ABC stock, your capital losses will total $6,000 – the difference between the $7,000 you paid for the shares and the $1,000 you sold them for.

You could use $5,000 of the loss of ABC stock to offset the $5,000 gain associated with selling your shares in XYZ to reduce your capital gains tax. Per IRS rules, you could also apply the additional $1,000 loss to reduce your ordinary income for the year.

Now, say you also have another stock you sold for a $6,000 loss. Because you already have a $1,000 loss and there is a $3,000 limit on deductions, you could apply up to $2,000 to offset ordinary income in the current tax year, then carry the remaining $4,000 loss forward to a future tax year, per IRS rules.

This is an example of tax loss carryforward. All of this assumes that you don’t violate the wash-sale rule when timing the sale of losing stocks.

Recommended: What to Know about Paying Taxes on Stocks

The Takeaway

If you’re investing in a taxable brokerage account, it’s wise to include tax planning as part of your strategy. Selling stocks to realize capital gains could result in a larger tax bill if you’re not deducting capital losses at the same time.

With tax-loss harvesting, assuming you don’t violate the wash sale rule, it’s possible to carry forward investment losses to help reduce the tax impact of gains over time. This applies to personal as well as business gains and losses. Thus, understanding the tax loss carryforward provision may help reduce your personal and investment taxes.

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.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/bymuratdeniz

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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.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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