InvestHH Archives | Page 11 of 21

Aug

2023

What You Need to Know About SPACs Before You Invest

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

SPAC stands for “special purpose acquisition company,” and these entities act as a shell that can raise money in order to acquire another active company that wishes to go public.

Companies that want to have an initial public offering (IPO) can use SPACs to make it happen. SPACs themselves are publicly traded, and some investors are buying SPAC shares in an effort to get in as early as possible on companies going public — but it’s rare that the average investor will have access to SPAC shares.

But SPACs, like many investments, are not something you want to jump into without doing some homework first. In addition, the Securities and Exchange Commission (SEC) has proposed new rules to make SPACs more transparent, and limit conflict-of-interest in these mergers.

What Is a SPAC?

SPACs are legal business entities that don’t have any assets or conduct any sort of business activity. In effect, they’re empty husks. That’s why they’re often called “blank check companies.”

As for their purpose, SPACs can be used to take companies public. So, instead of going through the traditional IPO process, many companies are instead using SPACs to get themselves listed on the stock markets.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

SPACs and Acquisitions

As for how a SPAC takes a company public, the process is basically a reverse merger, when a private business goes public by buying an already public company.

Here’s a step-by step:

• A SPAC goes public, selling shares and promising to use the proceeds to buy another business.

• The SPAC’s sponsors set their sights on a company it wants to take public — an acquisition target.

• The SPAC often raises more money to acquire the target. Remember, SPACs are already publicly traded, so when it does acquire a target, the target is absorbed by the SPAC, and then becomes public too.

So, why would a company want to use a SPAC transaction to go public rather than go the traditional IPO route? The simple answer is that it can be much faster and easier.

For instance, a merger between a SPAC and its target can take between four to six months, whereas the traditional IPO route can take 12 to 18 months.

How Do I Invest in SPACs?

SPACs are designed to raise money so that they can acquire their target. To raise money, they need investors, which is why they’re generally publicly traded. In theory, retail investors can invest in SPACs — in most cases, a brokerage account is all that’s required. But a 2022 SEC analysis shows that very few retail investors actually gain access to SPAC shares.

5 Things to Know Before Investing in SPACs

Before you pursue what could be a risky investment, run through this list of considerations:

1. Failure to Find Target

SPACs exist for one reason: To acquire a target company and take it public. But there’s a chance that some could fail to do so — something that prospective investors should take seriously. The clock is ticking, too. If a SPAC does not acquire a target within a specific time frame — typically two years — it could liquidate.

💡 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.

2. Investor Dilution

SPAC investors also run the risk that their shares could be diluted, or lose value. Meaning: The folks running the SPAC may throw in additional funding that can erode the value of those shares.

That dilution can happen during the merger process. As the merger takes place, fees are paid, warrants are exercised, and the SPAC’s sponsor receives 20% ownership in the new entity. All this can take ownership from investors’ shares, diluting them.

3. Poor Performance

Some companies that go public via a SPAC transaction don’t do so well after the merger. Their stock values don’t perform as many investors have hoped. This is yet another very real risk that SPAC investors must contend with.

As SPAC targets are private companies, investors can be limited in the amount of research they can do on the targets. Their financial records may be difficult to find. As a result, investors are basically relying on the due diligence of the SPAC sponsor. So there’s an element of trust — and risk — at play.

What investors should know is that many companies that have gone public through a SPAC underperform compared to the broader market at large.

4. Big Names Can Cloud Investor Judgment

It can be easy to get caught up in the hype around certain SPACs. Whether the SPAC itself is targeting a particularly noteworthy company to take public, or if it’s being managed by a big-name investor or famous person, the glitz and glamor may blind investors to certain risks.

It may be fun to think that you’re getting in on an investment with a celebrity. But that doesn’t mean that the investment they’re attached to is necessarily a good one, or the right one for you.

5. Uncertain Future

SPACs, in recent years, were a hot commodity. But since there are some significant risks involved in investing in SPACs, regulators stepped in to make some changes that would protect average investors.

Given the lack of transparency around SPACs and the general fast-and-loose approach that the markets are talking to them, the government and other watch dogs are already calling for some reforms.

Among them: Tamping down on SPAC hype, like protecting investors from misleading information or expectations, enhancing disclosures, and being more forthcoming about the risks to investors.

The Takeaway

There’s a lot to consider about SPACs from an investor’s point of view. But the important thing to remember is that SPACs are speculative, risky investments. Investing in SPACs will likely require a high risk tolerance for most investors, and it’s a good idea that you have your other financial ducks in a row before dedicating any money to it.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.

SOIN0623092

Aug

2023

Beginners Guide to Understanding Support and Resistance

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Support and resistance are price levels that traders look at when they’re applying technical analysis to their investing. “Support” is where the price of an asset tends to stop falling and “resistance” is where the price tends to stop climbing.

While support and resistance levels are rarely the sole indicators used to determine when to buy or sell, they can provide helpful clues to estimating when a price trend may pause or reverse. That can be critical for investors to know and understand as they fine-tune their strategies.

What Is Support and Resistance?

As noted, support and resistance are price levels used by traders and investors. Specifically, they’re used as a part of what is called technical analysis, which involves looking at a number of technical indicators that describe how a stock is performing – and trying to determine what it may do in the future.

Specifically, support and resistance levels can be plotted on a stock chart to try and create a visual representation of a stock’s value range – it doesn’t tell a trader everything, but sort of gives a visual as to the “range” a stock’s value sits within. In short, at the higher end of the range a stock may hit “resistance,” while at the lower end, it may find “support.” That’s not to say that values don’t break out of that range – they can and do – but support and resistance act more as a general guideline for traders.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Technical Analysis 101

Technical analysis is a type of trading method that uses price patterns to forecast future movement. It differs from fundamental analysis, which is based on using a company’s financials, like its earnings and revenue. Professional technical analysts are called Chartered Market Technicians or CMTs.

A general rule of thumb in investing is that past performance never guarantees future results. However, technical analysts believe that because of market psychology and sentiments like fear and greed, history tends to repeat itself. For instance, if an asset falls a certain amount, buyers tend to swoop in.

In addition to price levels and their historical patterns, technical analysts may look at volume, oscillators – such as the Stochastic Oscillator, and momentum.

Another aspect of technical analysis is that it can be self-fulfilling. If many investors and traders believe a certain price is important, they may use stop-loss orders at certain levels. That, in turn, makes it likely those points will trigger a reversal or pause in an asset’s direction.

How Do You Identify Support and Resistance Indicators?

The support level is typically a price point at which investors or traders expect a downward price trend to pause or reverse. A resistance level is the price point at which an upward price trend is expected to pause or reverse.

Here are some different ways in which support and resistance levels can be determined.

1. Round Numbers

Round numbers like $100, $500 or $10,000 can be levels at which investors, traders and analysts believe a price trend will hit support or resistance.

For instance, in a hypothetical example in the stock market, a company’s shares may climb steadily and struggle to surpass the $100 level. This may be driven more by market sentiment, as the market doesn’t believe the stock can consistently trade above that $100 level.

There could also be a more fundamental reason, such as the $100 level pushing the valuation – something like the stock’s price-to-earnings ratio – to a level the market believes is too expensive.

2. Buy and Sell Orders

Technical analysts may come up with support and resistance points by studying where buy and sell orders are congregated. In other words, they’re determining support and resistance levels by the volume of trades.

Investors, traders and analysts may have access to actual buy or sell order books. They could study price targets that bank research analysts set. They may also scour sources like social-media platforms to get a sense of where investors believe the stock may find a floor or hit a ceiling.

3. Historical Highs and Lows

A previous high or low for an asset may be deemed a level at which there’s support or resistance.

For instance, let’s say Company Y stock had months ago climbed to hit a price level but then reversed. If Company Y stock nears that level again, investors may believe that’s a resistance point where the shares may struggle again.

How to Trade Using Support and Resistance Levels

There are roughly four types of investors who may be using trade and resistance levels:

1. Investors who are long and waiting to buy at a support level,

2. Investors who are shorting a stock or asset and may close their position,

3. Investors on the sidelines and want to buy at a support price,

4. Investors on the sidelines and simply monitoring to learn more about the stock.

One common way investors and traders utilize support and resistance levels is through stop-loss orders. Stop-loss orders are in general popular when it comes to technical analysis trading. They involve placing an order with an investor’s brokerage account to buy or sell once an asset reaches a specific price.

Recommended: How to Open a Brokerage Account

Stop-loss orders are a way for investors to manage their portfolio without having to monitor their holdings every day.

For example, let’s say an investor believes $1,000 is a level of resistance for Company Z stock. They could set a stop-loss order to sell the stock at $1,000, which the brokerage firm will automatically execute once the shares hit that price.

💡 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.

The Takeaway

Support and resistance levels are price points at which investors and traders in a market expect trends to reverse or take a pause. Individuals can think about support and resistance levels as the potential floors and ceilings for price moves in an asset.

While there’s no guarantee support and resistance levels come true, it can be a helpful way to try to time the market or have specific price points to monitor. They may also use these prices to gauge whether the velocity of a price movement will slow down, pick up or reverse course.

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.

Button:

Photo credit: iStock/Jay Yuno

SoFi Invest®

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

SOIN0723030

Jul

2023

Understanding the Greeks in Options Trading

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

The “Greeks” in options trading — known as delta, gamma, theta, and vega — are metrics that help traders understand the value and pricing of a given options contract.

Because options are derivatives, the value of each contract — the premium — depends on a complex interaction of different factors, including time to expiration, price volatility, and changes in the value of the underlying security. Each of these factors is represented by a Greek letter.

While there are a number of options Greeks to explore, delta, gamma, theta, and vega are the four main Greeks in options trading.

Options Greeks may sound like a foreign language, but to options traders the Greeks are essential to understanding how, or if, they’re making any money, since it can be so difficult to understand the true value of an option.

A Quick Look at Options

“Options” is short for “options contracts,” which are a type of investment that traders buy and sell much like stocks and bonds. But options are derivatives — that is, they aren’t really assets in and of themselves. Instead, their value (or lack thereof) derives from another underlying asset, typically a specific stock.

Traders buy different types of options, when they think that stock prices will go up (a call) or down (a put). They also use options to hedge or offset investment risks on other assets in their portfolio.

In a nutshell, though, traders typically buy options through an investment broker. Those options give investors the option, but not the obligation, to buy or sell a security at a later date, and at a specific price. Investors can buy an option for a price, called a premium, and then buy or sell that option.

So, while an option itself is a derivative of another investment, it can gain or lose value, too. For example, if an investor were to buy a call option on Stock A — basically, a bet that Stock A’s share price will increase — the value of that call option would go up if Stock A’s price goes up.

But the opposite would be true if an investor purchased a put option on Stock A, betting that Stock A’s price would go down. Similar to shorting a stock, the investor would effectively lose their bet (and see the value of their option fall) if Stock A’s share price increased.

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

Finally, user-friendly options trading is here.^*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

What Are Option Greeks?

Options traders use these letters to describe their option positions and make their best guess as to what might happen next with those positions as they relate to the underlying stocks.

In short, the Greeks look at different factors that could impact the price of an option. Calculating the Greeks isn’t an exact science. Traders use a variety of formulas, usually by a mathematical model. Because of that, these measurements are usually all theoretical.

Here’s a look at the most common Greeks used by traders.

Recommended: Options Trading Terms You Need to Know

Delta

Delta measures how much an option’s price will change if the underlying stock’s price changes. Specifically, it measures the option’s price change in relation to every $1 change in the underlying stock. It’s usually expressed as a decimal, like “0.50,” for example.

So, if an option has a delta of 0.50, in theory, that means that the option’s price will move $0.50 for every $1 move in the stock’s price. Another way to think of delta is that it gives an investor an idea as to the probability that they’ll make money from an option. If delta is 0.50, for example, that can equate to a 50% chance or so that an option will expire in the money — that an investor’s bet will have paid off.

Gamma

The second Greek, gamma, tracks the sensitivity of an option’s delta. If delta measures how an option’s price changes in relation to a stock’s price, then gamma measures how delta itself changes in relation to a change in the stock’s price.

Think of an option as a car going down the highway. The car’s speed would be its delta. The car’s acceleration would be its gamma, as acceleration is measuring the change in speed. Gamma is also typically expressed as a decimal. If we go back to our earlier example — that delta is 0.50 — and delta changes to 0.6, then gamma would be 0.1.

Theta

Theta measures an option’s sensitivity to time. It gives investors a sense of how much an option’s price decreases the closer it gets to expiration.

Similar to the “car on a highway” analogy, it may be useful to think of an option as an ice cube sitting on a countertop. The ice cube melts away — or, the option’s time value diminishes — and the melting becomes more rapid over time.

Theta is typically expressed as a negative dollar amount, and represents how much value an option loses each day as it approaches expiration.

💡 Quick Tip: The best stock trading platform? That’s a personal preference, of course. Generally speaking, though, a great platform is one with an intuitive interface and powerful features to help make trades quickly and easily.

Vega

Finally, vega is a measure of an option’s sensitivity to implied volatility.

Markets are volatile, and securities (and their derivatives) are subject to that volatility. Vega attempts to measure how much an option’s price will change as it relates to the underlying security’s volatility.

Volatility refers to the turbulence a security’s value experiences. We don’t know what level of volatility a security or option will experience in the future, however, so there’s a certain amount baked into the mix — that’s implied volatility. It’s the expected future level of volatility.

Changes in stock volatility can change an option’s value. That’s what vega is measuring — not volatility itself, but the option’s sensitivity to volatility changes.

And like delta and gamma, vega is expressed as a number, rather than a dollar figure.

5 Main Options Greeks: Overview

In summary, here’s how an investor may use this data when analyzing the risk and reward of an options contract.

Name	Symbol	Definition	How investors might think about it
Delta	∆	Measures the sensitivity of an option’s price to a change in the price of the underlying security.	For example, if the delta is 0.50 means that the option’s price will move $0.50 for every $1 move in the stock’s price. It can also indicate a 50% chance or so that an option will expire in the money right now. This probability may change over time and isn’t a guarantee.
Gamma	γ	Measures the rate of change for delta. It tells you how quickly delta will change as the stock price changes.	Think of an option as a car on the highway with its speed (delta) and acceleration (gamma, often expressed as a decimal). A stock trading at $10 with a delta of 0.4 and gamma of 0.10 means that a $1.00 increase in the stock’s price will adjust the delta by 0.10, increasing it to 0.50 and vice versa with a $1 decrease it will decrease delta to 0.3 impacting how quickly the value of the option will increase or decrease with further price movements.
Theta	θ	Measures the sensitivity of an option’s price to the passage of time.	An option’s theta is like an ice cube melting on a countertop – the time value diminishes as it melts and the melting becomes more rapid over time. This is expressed as a negative dollar amount. For example, a theta of -1 indicates that the option will lose $1 per day until it reaches the expiration date.
Vega	ν	The change in an option’s value as implied volatility goes up or down by 1 percent.	Vega rises with greater price swings (higher implied volatility), indicating higher uncertainty. Lower implied volatility implies lower uncertainty and smaller price movements.
Rho	ρ	Measures the sensitivity of an option’s price to a change in interest rates.	If an option has a rho of 1.0, a 1% increase in interest rates leads to a 1% increase in value. Options most sensitive to interest rate changes are those at-the-money or with the longest time to expiration.

Other Options Terminology to Know

The specific options (a call versus a put, for example) and the underlying stock’s performance determines whether an investor comes out ahead on their bet. That brings us to a few other key options terms that are important to know:

In the Money

A call option is “in the money” when the strike price is below the market price. A put option is “in the money” when the strike price is above the market price.

Out of the Money

A call option is “out of the money” when the strike price is above the market price. A put option is “out of the money” when the strike price is below the market price.

At the Money

The option’s strike price is the same as the stock’s price.

The Takeaway

There’s no getting around it: Options, and the Greeks, can get complicated, and may not be the best investment strategy for beginners. But experienced traders, or those willing to spend time to learn how to understand options, find them a valuable tool in creating an investment strategy.

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

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

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

Photo credit: iStock/photolas

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.
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.

SOIN0723501

Jul

2023

What Is UCITS?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Undertakings for Collective Investment in Transferable Securities (UCITS) are a category of investment funds designed to both streamline and safeguard investment transactions. UCITS are usually structured like traditional mutual funds, exchange traded funds, or a money market fund.

The European Union (EU) regulates UCITs, but they are widely available to non-EU investors. U.S. investors, for example, can buy shares of UCITS through U.S.-based fund managers, although local, EU-based money managers run the funds. Because they undergo a high level of regulatory scrutiny, many view UCITS as a relatively safe investment.

What Is a UCITS Fund?

UCITS funds are a type of mutual fund that complies with European Union regulations and holds securities from throughout the region. They emerged as part of an effort by the European Union to consolidate disparate European financial investments into one central sector, governed by the EU, with a “marketing passport,” that enables financial services firms across the EU to invest in multiple countries under a common set of rules and regulations.

The EU launched UCITS for two primary reasons:

1. To structure a single financial services entity under the EU umbrella that allowed for the cross-sale of mutual funds across the EU, and across the globe.

2. To better regulate investment asset transactions among all 28 EU member countries, giving investors inside and outside of the EU access to more tightly regulated investment funds.

Fundamentally, UCITS funds rules give EU regulators a powerful tool to centralize key financial services issues like types of investments allowed, asset liquidity, investment disclosures, and investor safeguards. By rolling the new rules and regulations into UCITS, EU regulators sought to make efficient and secure investment funds available to a broad swath of investors, primarily at the retail and institutional levels.

For investors, UCITS funds offer more flexibility and security. Not only are the funds widely viewed as safe and secure, but UCITS funds offer a diversified fund option to investors who might otherwise have to depend on single public companies for the bulk of their investment portfolios.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

A Brief History of UCITS

The genesis of UCITS funds dates back to the mid-1980’s, with the rollout of the European Directive legislation, which set a new blueprint for financial markets across the continent. The new law introduced UCITS funds on an incremental basis and has been used as a way to regulate financial markets with regular updates and revisions over the past three decades.

In 2002, the EU issued a pair of new directives related to mutual fund sales — Directives 2001/107/EC and 2001/108/EC, which expanded the market for UCITS across the EU and loosened regulations on the sale of index funds in the region.

The fund initiative accelerated in 2009 and 2010, when the Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 clarified the use of UCITS in European investment markets, especially in coordination of all laws, regulations, and administrative oversight. The next year, the European Union reclassified UCITS w as investment funds regulated under Part 1 of the Law of 17 December 2010.

In recent years, “Alt UCITS” or alternative UCITS funds have grown in popularity, along with other types of alternative investments.

How Does a UCIT Fund Work?

Structurally, UCITS are built like mutual funds, with many of the same features, regulatory requirements, and marketing models.

Individual and institutional investors, who form a collective group of unit holders, put their money into a UCIT, which, in turn, owns investment securities (mostly stocks and bonds) and cash. For investors, the primary goal is to invest their money into the fund to capitalize on specific market conditions that favor the stocks or bonds that form the UCITS. UCTIS funds may provide one way for American investors to get more international diversification within their portfolios.

A professional money manager, or group of managers, run the fund, and they are singularly responsible for choosing the securities that make up the fund. The UCITS investor understands this agreement before investing in the fund, thus allowing the fund managers to choose investments on their behalf.

An investor may leave the fund at any point in time, and do so by liquidating their shares of the fund on the open market. American investors should know that the Internal Revenue Service may classify UCITS as passive foreign investment companies, which could trigger more onerous tax treatments, especially when compared to domestic mutual funds.

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

UCITS Rules and Regulations

UCITS do have some firm regulatory and operational requirements to abide by in the European Union, as follows:

• The fund and its management team are usually based on a tax-neutral EU country (Ireland would be a good example.)

• A UCITS operates under the laws mandated by the member state of its headquarters. After the fund is licensed in the EU state of origin, it can then be marketed to other EU states, and to investors around the world. The fund must provide proper legal notification to the state or nation where it wants to do business before being allowed to market the fund to investors.

• A UCITS must provide proper notice to investors in the form of a Key Investor Information Document, usually located on the fund’s website. The fund must also be approved.

• A UCITS must also provide a fund prospectus to investors (also normally found on the fund’s web site) and must file both annual and semiannual reports.

• Any time a UCITS issues, sells, or redeems fund shares, it must make pricing notification available to investors.

The Takeaway

As discussed, Undertakings for Collective Investment in Transferable Securities (UCITS) are a category of investment funds designed to both streamline and safeguard investment transactions. Note that while UCITS are usually structured like traditional mutual funds, exchange traded funds, or a money market fund.

UCITS may be an interesting type of investment for U.S. investors looking to diversify their portfolios. As with any investment, investors must conduct thorough due diligence on the UCITS, which should include a review of fund holdings, past performance, management stability, fees, and tax consequences.

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/kupicoo

SoFi Invest®

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

Jul

2023

What Is Payment for Order Flow?

By Inyoung Hwang | invest, Investing | Comments Off

What Is Payment for Order Flow (PFOF)?

Payment for order flow (PFOF) refers to the practice of retail brokerages routing customer orders to market makers, usually for a small fee that’s less than a penny. Market makers, who are required to deliver the “best execution,” carry out the retail orders, profiting off small differences between what shares were bought and sold for.

Retail brokerages, in turn, use the rebates they collect to offer customers lower — or often zero — trading fees.

How Does Payment for Order Flow Work?

Here’s a step-by-step guide to how payment for order flow generally works:

1. A retail investor puts in a buy or sell order through their brokerage account.

2. The brokerage firm routes the order to a market maker.

3. The broker collects a small fee or rebate – the “payment” for sending the “order flow” or PFOF.

4. The market maker is required to find the “best execution,” which could mean the best price, swiftest trade, or the trade most likely to get the order done.

The rebates allow companies offering brokerage accounts to subsidize rock-bottom or zero-commission trading for customers. It also frees them to outsource the task of executing millions of customer orders.

Usually the amount in rebates a brokerage receives is tied to the size of the trades. Smaller orders are less likely to have an impact on market prices, motivating market makers to pay more for them. The type of stocks traded can also affect how much they get paid for in rebates, since volatile stocks have wider spreads and market makers profit more from them.

Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Why Is PFOF Controversial?

While widespread and legal, payment for order flow is controversial. Critics argue it poses a conflict of interest by incentivizing brokerages to boost their revenue rather than ensure good prices for customers. The requirement of best execution by the Securities and Exchange Commission (SEC) doesn’t necessarily mean “best price” since price, speed, and liquidity are among several factors considered when it comes to execution quality.

Defenders of PFOF say that mom-and-pop investors benefit from the practice through enhanced liquidity, the ability to get trades done. They also point to data that shows customers enjoy better prices than they would have on public stock exchanges. But perhaps the biggest gain for retail investors is the commission-free trading that is now a mainstay in today’s equity markets.

What Are Market Makers?

Market makers — also known as electronic trading firms — are regulated firms that buy and sell shares all day, collecting profits from bid-ask spreads. The market maker profits can execute trades from their own inventory or in the market. Offering quotes and bidding on both sides of the market helps keep it liquid.

Market makers that execute retail orders are also called wholesalers. The money that market makers collect from PFOF is usually fractions of a cent on each share, but these are reliable profits that can turn into hundreds of millions in revenue a year. In recent years, a number of firms have exited or sold their wholesaling businesses, leaving just a handful of electronic trading firms that handle PFOF.

In addition to profits from stock spreads, the orders from brokerage firms give market makers valuable market data on retail trading flows. When it comes to using institutional or retail investors, market makers also prefer trading with the latter because larger market players like hedge funds can trade many shares at once. This can cause big shifts in prices, hitting market makers with losses.

PFOF in the Options Market

Payment for order flow is more prevalent in options trading because of the many different types of contracts. Options give purchasers the right, but not the obligation, to buy or sell an underlying asset. Every stock option has a strike price, the price at which the investor can exercise the contract, and an expiration date — the day on which the contract expires.

💡 New to options? Check out our options guide for beginners.

Market makers play a key role in providing liquidity for the thousands of contracts with varying strike prices and expiration dates.

The options market also tends to be more lucrative for the brokerage firm and market maker. That’s because options contracts trading is more illiquid, resulting in chunkier spreads for the market maker.

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

Criticism of Payment for Order Flow

Payment for order flow was pioneered in the 1980s by Bernie Madoff, who later pleaded guilty to running the largest Ponzi scheme in U.S. history.

Critics argue retail investors get a poor deal from PFOF. Since market makers and brokerages are only required to provide “best execution” and not necessarily the “best possible price,” firms can make trades that are profitable for themselves but not necessarily in the best interest of individual investors.

In 2016, the U.S. Department of Justice (DOJ) subpoenaed market making firms for information related to the execution of retail stock trades. The DOJ was looking into whether the varying speeds at which different data feeds deliver market prices made it look like retail clients were getting favorable prices, while market makers knew they actually weren’t from faster data feeds. A trading firm settled with regulators in 2017.

Defenders of Payment For Order Flow

Proponents of payment for order flow argue that both sides — the retail investors and the market makers — win from the arrangement. Here are the ways retail customers can benefit from PFOF, according to its defenders:

1. No Commissions: In recent years, the price of trading has collapsed and is now zero at the biggest online brokerage firms. While competition has been a big part of that shift, PFOF has helped bring about low trading transactions for mom-and-pop investors. For context, online trading commissions were $40 or so a trade in the 1990s.

2. Liquidity: Particularly in the options market, where there can be thousands of contracts with different strike prices and expiration dates, market makers help provide trading liquidity, ensuring that retail customer orders get executed in a timely manner.

3. Price Improvement: Brokerages can provide “price improvement,” when customers get a better price than they would on a public stock exchange.

4. Transparency: SEC Rules 605 and 606 require brokers to disclose statistics on execution quality for customer orders and general overview of routing practices. Customers are also allowed to request information on which venues their orders were sent to. Starting in 2020, brokers also had to give figures on net payments received each month from market makers.

The Takeaway

Payment for order flow (PFOF) refers to the practice of retail brokerages routing customer orders to market makers, usually for a small fee. Payment for order flow is controversial, but it’s become a key part of financial markets when it comes to stock and options trading today.

Industry observers have said that for retail investors weighing the trade-off between low trading costs versus good prices, it may come down to the size of their trades. For smaller trades, the benefits of saving money on commissions may surpass any gains from price improvement. For investors trading hundreds or thousands of shares at a time, getting better prices may be a bigger priority.

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

SoFi Invest®

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

What You Need to Know About SPACs Before You Invest

What Is a SPAC?

SPACs and Acquisitions

How Do I Invest in SPACs?

5 Things to Know Before Investing in SPACs

1. Failure to Find Target

2. Investor Dilution

3. Poor Performance

4. Big Names Can Cloud Investor Judgment

5. Uncertain Future

The Takeaway

Beginners Guide to Understanding Support and Resistance

What Is Support and Resistance?

Technical Analysis 101

How Do You Identify Support and Resistance Indicators?

1. Round Numbers

2. Buy and Sell Orders

3. Historical Highs and Lows

How to Trade Using Support and Resistance Levels

The Takeaway

Understanding the Greeks in Options Trading

A Quick Look at Options

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

What Are Option Greeks?

Delta

Gamma

Theta

Vega

5 Main Options Greeks: Overview

Other Options Terminology to Know

In the Money

Out of the Money

At the Money

The Takeaway

What Is UCITS?

What Is a UCITS Fund?

A Brief History of UCITS

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

How Does a UCIT Fund Work?

UCITS Rules and Regulations

The Takeaway

What Is Payment for Order Flow?

What Is Payment for Order Flow (PFOF)?

How Does Payment for Order Flow Work?

Why Is PFOF Controversial?

What Are Market Makers?

PFOF in the Options Market

Criticism of Payment for Order Flow

Defenders of Payment For Order Flow

The Takeaway

CATEGORIES

JOIN THE COMMUNITY

Student Loan Refinancing

Personal Loans

Online Investments

Other

Finally, user-friendly options trading is here.^*

Student Loan
Refinancing

Personal
Loans

Online
Investments