InvestHL Archives | Page 15 of 52

May

2024

Choosing a Retirement Date: The Best Time to Retire

Choosing Your Retirement Date: Here’s What You Should Know

By Rebecca Lake | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Choosing a retirement date is one of the most important financial decisions you’ll ever make. Your retirement date can determine how much money you’ll need to save to achieve your desired lifestyle — and how many years that money will need to last.

Selecting an optimal retirement date isn’t an exact science. Instead, it involves looking at a number of different factors to determine when you can realistically retire. Whether you’re interested in retiring early or delaying retirement to a later age, it’s important to understand what can influence your decision.

The Importance of Your Retirement Date

When preparing to retire, the date you select matters for several reasons. First, your retirement date can influence other financial decisions, including:

• When you claim Social Security benefits

• How much of your retirement savings you’ll draw down monthly or annually

• In what order you’ll withdraw from various accounts, such as a 401(k), Individual Retirement Account (IRA), pension, or annuity

• How you’ll pay for health care if you’re retiring early and not yet eligible for Medicare

• Whether you’ll continue to work on a part-time basis or start a business to generate extra income

These decisions can play a part in determining when you can retire based on what you have saved and how much money you think you’ll need for retirement.

It’s also important to consider how timing your retirement date might affect things like taxes on qualified plans or the amount of benefits you can draw from a defined benefit plan, if you have one.

If your employer offers a pension, for example, waiting until the day after your first-day-of-work anniversary adds one more year of earnings into your benefits payment calculation.

Likewise, if you plan to retire in the year you turn 59 ½, you’d want to wait until six months after your birthday has passed to withdraw money from your 401(k) in order to avoid a 10% early withdrawal penalty on any distributions you take.

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

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Choosing Your Date for Retirement

There are many questions you might have when choosing the best retirement date: What is the best day of the month to retire? Is it better to retire at the beginning or end of the year? Does it matter if I retire on a holiday?

Weighing the different options can help you find the right date of retirement for you.

End of the Month

Waiting to retire at the end of the month could be a good idea if you want to get your full pay for that period. This can also eliminate gaps in pay, depending on when you plan to begin drawing retirement benefits from a workplace plan.

If you have a pension plan at work, for example, your benefits may not start paying out until the first of the following month. So, if you were to retire on the 5th instead of the 30th, you’d have a longer wait until those pension benefits showed up in your bank account.

Consider End of Pay Period

You could also consider waiting to the end of the pay period if you don’t want to go the whole month. This way, you can draw your full pay for that period. Working the entire pay period could also help you to accumulate more sick pay, vacation pay, or holiday pay benefits toward your final paycheck.

Lump Sums Can Provide Cash

If you’ve accumulated unused vacation time, you could cash that out as you get closer to your retirement date. Taking a lump sum payment can give you a nice amount of cash to start your retirement with, and you don’t have to worry about any of the vacation time you’ve saved going unused.

Other Exceptions to Consider

In some cases, your retirement date may be decided for you based on extenuating circumstances. If you develop a debilitating illness, for example, you may be forced into retirement if you can no longer perform your duties. Workers can also be nudged into retirement ahead of schedule through downsizing if their job is eliminated.

Thinking about these kinds of what-if scenarios can help you build some contingency plans into your retirement plan. Keep in mind that there may also be different rules and requirements for retirement dates if you work for the government versus a private sector employer.

Starting a Retirement Plan

The best time to start planning for retirement is yesterday, as the common phrase says, and the next best time is right now. If you haven’t started saving yet, it’s not too late to begin building retirement wealth.

An obvious way to do this is to start contributing to your employer’s retirement plan at work. This might be a 401(k) plan, 403(b), or 457 plan depending on where you work. You may also have the option to save in a Simplified Employee Pension (SEP) IRA or SIMPLE IRA if you work for a smaller business. Any of these options could help you set aside money for retirement on a tax-advantaged basis.

If you don’t have a workplace retirement plan, you can still save through an IRA. Traditional and Roth IRAs offer different types of tax benefits; the former allows for tax-deductible contributions while latter offers tax-free qualified distributions. You could also open a SEP IRA if you’re self-employed, which offers higher annual contribution limits.

If you decide to start any of these retirement plans, it may be helpful to use a retirement calculator to determine how much you need to save each month to reach your goals. Checking in regularly can help you see whether you are on track to retire or if you need to adjust your contributions or investment targets.

💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.

Retirement Investing With SoFi

Choosing a retirement date is an important decision, but it doesn’t have to be an overwhelming one. Looking at the various factors that can influence how much you’ll need to save and your desired lifestyle can help you pin down your ideal retirement date. Reviewing contributions to your employer’s retirement plan and supplementing them with contributions to an IRA can get you closer to your goals.

Not everyone’s journey to retirement is going to look the same, so you should weigh your options. Think about your goals, and what tools you can use to help you reach them. If you need guidance, it may be a good idea to speak with a financial professional.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

FAQ

Is it better to retire at the beginning or end of the month?

Retiring on the last day of the month is typically the best option. This enables you to collect all your paychecks during this period. You may also benefit from collecting any holiday pay that might be offered by your employer for that month. As a note, it doesn’t necessarily matter if the last day of the month is a work day for you.

What is the best day to retire?

The best day to retire can be the end of the month or the end of the year, depending on how pressing your desire is to leave your job. If you can wait until the very last day of the year, for example, you can collect another full year of earnings while maxing out contributions to your workplace retirement plan before you leave.

Is my retirement date my last day of work?

Depending on how your employer handles payroll, your retirement date is usually the day after your last day of work or the first day of the next month following the date you stop working.

Photo credit: iStock/Tatomm

SoFi Invest®

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

May

2024

15 Technical Indicators for Stock Trading

7 Technical Indicators for Stock Trading

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing, Tools & Calculators | Comments Off

One way traders seek to profit from short-term movements in security prices is by using technical analysis.

While some stock analysis tools examine company fundamentals, technical stock indicators identify patterns in price and volume data to give investors and traders insights about how a stock might move in the future.

For that reason, although technical indicators can assist with trend identification, it’s best to combine different indicators when conducting stock analysis.

Table of Contents

How Do Stock Technical Indicators Work?
Reasons to Use Stock Market Indicators
Top 7 Stock Indicators for Technical Analysis
The Takeaway

How Do Stock Technical Indicators Work?

Technical analysis uses various sets of data and indicators, such as price and volume, to identify patterns and trends. This type of stock market analysis is different from fundamental analysis, which looks at company financials, industry trends, and macroeconomics.

Rather, technical analysis solely analyzes a stock’s performance. Stock technical indicators are often rendered as a pattern that can overlay a stock’s price chart to predict the market trend, and whether the stock would be considered “overbought” or “oversold.”

Two Main Types of Technical Indicators

Stock technical indicators generally come in two flavors: overlay indicators and oscillators.

Overlay Indicators

An overlay indicator typically overlays one trend onto another on a stock chart, often using different colors to distinguish between the lines.

Oscillator Indicators

An oscillator typically uses metrics such as a stock’s price or trading volume to determine momentum, or rate of change, over time. It uses this info to generate a signal, or trend line, whose fluctuations between two values in a range can indicate if a stock may be overbought or oversold.

If the trend line moves above the higher value of the range, it can indicate a stock is overbought, while dipping below the lower value can indicate it’s oversold. The movements of the trend line thus can help traders determine support and resistance in certain price trends, so they can decide whether to sell or buy (support being the price at which a downturn generally bounces back up, and resistance being the point at which rising prices generally start to fall).

Oscillator indicators can be leading or lagging:

• A leading indicator tracks current market movements to anticipate where the trend is headed next.

• A lagging indicator is based on recent history and seeks patterns that will indicate potential price movements.

The moving average is a common oscillator; it’s considered a lagging indicator as it measures specific intervals in the past.

Naturally, every stock indicator has its pros and cons. Various trading indicators can be used by investors to analyze supply and demand forces on stock price, to help shed light on market psychology, or to manage risk.

But while stock indicators and trading tools can help with buy and sell points, false signals can also occur.

Reasons to Use Stock Market Indicators

Knowing some of the most popular trading tools might benefit your investing strategy by providing you with easier-to-spot buy and sell signals. You don’t have to know every single technical indicator, and there are many ways to analyze stocks, but using multiple stock indicators may help you improve trading results.

You can also use these stock indicators to help you manage risk when you are actively trading.

Price trend indicators are some of the most important technical trading tools since identifying a security price’s trend is often a first step to forming a trading strategy. Long positions are often initiated during uptrends, while short sale opportunities can occur when prices are in a downtrend.

Volume trend indicators are also helpful to gauge the power or conviction of an asset’s price move. Some believe that the higher the stock volume on a bullish breakout or bearish breakdown, the more confident the move is. Higher volume could signal a lengthier trend continuation.

💡 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.

7 Stock Indicators for Technical Analysis

It’s important to remember that these trading tools were developed based on the belief that mathematically derived patterns may be valuable as predictors of stock movements. Past performance, however, is not a guarantee of future results. So while it can be useful to employ stock technical indicators, they are best used in combination before deciding on a potential trade.

Also, many of these trading tools are lagging indicators, which can lead to an inaccurate reflection of current and future market conditions.

Following are seven of the most common technical stock indicators, along with their advantages and disadvantages.

Moving Averages (MA)
Moving Average Convergence Divergence (MACD)
Relative Strength Index (RSI)
Stochastic Oscillator
On-Balance Volume (OBV)
Accumulation / Distribution Line (ADL)
Standard Deviation

1. Moving Averages (MA)

A moving average (MA) is the average value of a security over a specific time. The MA can be:

• Simple Moving Average (SMA)

• Exponential Moving Average (EMA)

• Weighted Moving Average (WMA).

A moving average smooths stock price volatility, and is taken as an indicator of the direction a price may be headed. If the price is above the moving average, it’s considered an uptrend versus when the price moves below the MA, which can signal a downtrend.

Moving averages are typically used in combination with each other, or other stock indicators, to identify trends.

Pros

• Using moving averages can filter out the noise that comes from price fluctuations and focus on the overall trend.

• Moving average crossovers are commonly used to pinpoint trend changes.

• You can customize moving average periods: common time frames include 20-day, 30-day, 50-day, 100-day, 200-day.

Cons

• A simple moving average may not help some traders as much as an exponential moving average (EMA), which puts more weight on recent price changes.

• Market turbulence can make the MA less informative.

• Moving averages can be simple, exponential, or weighted, which might be confusing to new traders.

2. Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) helps investors gauge whether a security’s movement is bullish or bearish, and helps gauge the momentum of the trend. The MACD uses two different exponential moving averages (EMAs) to do so.

A 26-period EMA is subtracted from a short-term 12-period EMA to generate the MACD line. Then a signal line, based on a nine-day EMA, is plotted on top of the MACD to help reveal buy and sell entry points.

If the MACD line crosses above the signal line, that can signal a buy opportunity. If it crosses below the signal line, that could signal a price decline and an opportunity to sell or take a short position.

Pros

• The MACD, used in combination with the relative strength index (below) can help identify overbought or oversold conditions.

• It can be used to indicate a trend and also momentum.

• Can help spot reversals.

Cons

• The MACD might provide false reversal signals.

• It responds mainly to the speed of price movements; less accurate in gauging the direction of a trend.

3. Relative Strength Index (RSI)

The relative strength index or RSI is an oscillator tool that looks at price fluctuations in a given period and calculates average price losses and gains. It ranges from 0 to 100. Generally, above 70 is considered overbought and under 30 is thought to be oversold.

Traders often use the RSI in conjunction with the MACD to confirm a price trend. The RSI can sometimes identify a divergence, when the indicator moves in opposition to the price; this can show the price trend is weakening.

Pros

• An RSI can help investors spot buy or sell signals.

• It may also help detect bull market or bear market trends.

• It can be combined with moving average indicators to spot breakout trends or reversals.

Cons

• The RSI can move without exhibiting a clear trend.

• The RSI can remain at an overbought or oversold level for a long time, making this tool less useful.

• It does not give clues as to volume trends.

Recommended: 5 Bullish Indicators for a Stock

4. Stochastic Oscillator

Traders will often use the stochastic oscillator, which is a momentum indicator, to determine whether a given security is overbought or oversold. The stochastic oscillator allows traders to compare a specific closing price of a security to a range of its prices over a certain time frame.

By using a stochastic chart, traders can gauge the momentum of a security’s price with the aim of anticipating trends and reversals. A stochastic oscillator uses a range of 0 to 100 to determine if an asset is overbought (when the measurements are above 80) or oversold (when the measurement is below 20).

Pros

• Clearer entry/exit signals: The oscillator has a basic design and generates visual signals when it reaches the outer bounds of a price range. This can help a trader determine when it may be time to buy or to sell stocks.

• Frequent signals: For more active traders who trade on intraday charts such as the 5-, 10-, or 15-minute time frames, the stochastic oscillator generates signals more often as price action oscillates in smaller ranges.

• Easy to understand: The oscillator’s fluctuating lines are fairly clear for investors who know how to use them.

Cons

• Possible false signals: Depending on the time settings chosen, traders may misperceive a sharp oscillation as a buy or sell signal, especially if it goes against the trend. This is more common during periods of market volatility.

• Doesn’t measure the trend or direction: It calculates the strength or weakness of price action in a market, not the overall trend or direction.

💡 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.

5. On-Balance Volume (OBV)

OBV is a little different from the other indicators mentioned. It primarily uses volume flow to gauge future price action on a security or market. When there’s a new OBV peak, it generally indicates that buyers are strong, sellers are weak, and the price of the security may increase.

Similarly, a new OBV low is taken to mean that sellers are strong and buyers are weak, and the price is trending down.

The numerical value of the OBV isn’t important — it’s the direction that matters. In that respect it can be used as a trend confirmation tool. It can also signal divergences, when the price and the volume move in opposite directions.

Pros

• Volume-based indicator gauges market sentiment to predict a bullish or bearish outcome.

• OBV can be used to confirm price action and identify divergences.

Cons

• It can be hard to find definitive buy and sell price levels.

• False signals can happen when divergences and confirmations fail.

• Volume surges can distort the indicator for short-term traders.

Recommended: How to Find Portfolio Beta

6. Accumulation / Distribution Line (ADL)

The accumulation/distribution line (ADL) looks at the trading range for a certain stock, and uses price and volume data to gauge whether shares are being accumulated or distributed. Like OBV it also looks for divergences, so that if a price trend isn’t supported by volume flow it could indicate the trend is about to reverse.

Although this sounds similar to OBV, they are calculated differently, and the ADL gives more attention to price and volume data within a specified range.

Pros

• Traders can use the ADL to spot divergences in price compared with volume that can confirm price trends or signal reversals.

• The ADL can be used as an indicator of the flow of cash in the market.

Cons

• It doesn’t capture trading gaps or factor in their impact.

• Smaller changes in volume are hard to detect.

7. Standard Deviation

Standard deviation measures the extent to which a data point deviates from an expected value, i.e. the mean return. When used as a technical indicator, standard deviation is a common stock volatility measure; it refers to how far a stock’s performance varies from its average.

Investors often measure an investment’s volatility by the standard deviation of returns compared with a broader market index or past returns.

Pros

• Standard deviation mathematically captures the volatility of a stock’s movements, i.e. how far the price moves from the mean.

• It provides technicians with an estimate for expected price movements.

• It can be used to measure expected risk and return.

Cons

• It does not provide precise buy and sell signals.

• It must be used in conjunction with other indicators.

The Takeaway

Technical analysis tools use past price and volume data to help traders identify price trends and make buy and sell decisions. It’s important to know that technical analysis does not use fundamentals to assess the underlying companies, their industries, or any macroeconomic trends that might drive their success or failure. Rather, technical analysis solely analyzes the movement and volume inherent in a stock’s performance.

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).

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

FAQ

What is the most popular technical indicator for stocks?

Traders typically combine technical indicators, so it’s difficult to point to one as being a top choice. That said, many traders use the moving average indicators in combination with others to gauge price trends.

What is the most accurate indicator of the stock market?

There is no single indicator that can anticipate overall stock market performance. In fact, it’s an important factor to keep in mind when using technical indicators: For every successful price prediction or winning trade, there are countless others that don’t pan out. There are no crystal balls.

Which indicator gives buy and sell signals?

Different traders favor different indicators when looking for signals about how to place a trade. That said, the stochastic oscillator is relatively clear-cut in that it can help traders identify buy and sell opportunities based on price closes and trends within a certain range.

Photo credit: iStock/staticnak1983

SoFi Invest®

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

May

2024

What Are Meme Stocks? Guide to Meme Stock Investing

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

Shares of GameStop, as well as other similarly meme-driven stocks such as AMC, Koss BlackBerry, and Koss Corp., spiked in mid-May after the reappearance of “Roaring Kitty” on social media.

A post on the X platform by Keith Gill (known as Roaring Kitty) of a popular gaming meme signifying “things are getting serious” is believed to have reignited the meme stock phenomenon that had boosted GameStop shares more than 1,000% back in 2021. At the time, online investors rallied together to create a massive short squeeze that befuddled traditional investors and made headlines across the globe.

Meme stocks are stocks that go viral on social media platforms and quickly increase in price. Meme stocks have gotten a lot of attention in recent years, especially since the pandemic.

What is a meme stock exactly? Read on to find out more about meme stock investing.

Key Points

• Meme stocks are shares of companies that gain popularity through social media, leading to viral status and rapid price increases.

• These stocks are heavily influenced by retail investors’ sentiments rather than the company’s fundamental value.

• The volatility of meme stocks is high, making them a risky investment choice.

• Trading in meme stocks surged during the pandemic, with platforms like Reddit driving significant price swings.

• Meme stock movements can lead to substantial market impacts, including short squeezes that can negatively impact institutional investors.

What Is a Meme Stock?

Meme stocks are company stocks that have gone viral due to popularity among retail investors on social-media platforms.

In a traditional buy-and-hold strategy, investors seek stocks whose shares appear undervalued relative to the company’s fundamental worth or growth potential. In contrast, prices of meme stocks are closely tied to sentiment and chatter among day traders on the Internet, rather than the value of the underlying business. Meme stocks can be extremely volatile and risky.

Common Meme Stock Terminology

Meme stocks have a specific terminology that those who invest in them use. These are a few of the common terms:

Apes: These are members of the meme stock community

Diamond hands: This refers to hanging onto a stock, even if it suffers losses, because the investor thinks the price will go back up.

Hold the line: This is about standing your ground with meme stocks and holding onto them, despite volatility.

Tendies: Profits made in meme stock. The word is a play on chicken tenders.

To the moon: The belief that the stock will rise sky high.

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

Background on Meme Stocks

In the past, before the pandemic, when it came to institutional investors vs. retail ones, the former were thought to hold clout in markets. After all, the top 10 largest institutional investors at that time made up 43% of the average public company’s ownership, according to data from the Organisation for Economic Cooperation and Development.

But in 2021, small investors showed they could be a force to be reckoned with, coordinating trades on Internet platforms like Reddit, Twitter, YouTube, or Discord to fuel big price swings. These investors also helped drive moves in different types of cryptocurrencies as well as SPACs, or special purpose acquisition companies.

In January 2021, Investors on the Reddit forum “r/wallstreetbets” banded together and triggered a short squeeze in GameStop Corp., a popular short among hedge funds. When an investor or trader is shorting a stock, it means they’re wagering that the price of the shares will fall. A short squeeze refers to rapid price gains in a stock, as traders exit their bearish positions at a loss en masse.

Retail investors succeeded in triggering a short squeeze and losses for hedge funds, who then turned to trying to monitor social-media forums in order to spot the next meme stock.

However, controversy ensued when some brokerage firms halted trading in some meme stocks, citing an inability to post collateral at clearinghouses. Such moves led to angry retail investors and day traders and congressional hearings that looked into brokerage practices such as payment for order flow.

Recommended: A Guide to Wallstreetbets Terminology

How Does a Stock Become a Meme?

A stock becomes a meme when it goes viral. It may become popular on online platforms like Reddit, Twitter, and YouTube. A meme stock can gain a following in discussion groups in these platforms, and the online communities can fuel price swings in the stock.

Examples of Meme Stocks

The first major meme stock example was GameStop Corp., as mentioned above. Investors on the Reddit forum “r/wallstreetbets” banded together. They triggered a short squeeze, which drove up the price of the stock. In January 2021, GameStop stock went as high as $120.75 at one point.

May 2024 saw a surge of interest in the stock once again, when Roaring Kitty (a key figure in the original short squeeze) returned to social media after a three year absence.

Other meme stocks have included AMC Entertainment Holdings, Inc., a movie theater chain; Blackberry Limited, the smartphone maker; and Bed, Bath and Beyond, Inc.

Pros and Cons of Trading Meme Stocks

Benefits of Trading Meme Stocks

1. Rise of Retail Trader: Retail investors have shown they need to be taken more seriously by the rest of the market.

2. Younger Investors: Given the hyper-online ways in which meme stocks come about, younger investors have learned more about investing and trading through these social-media fads. Still, it’s unclear whether meme stocks will help engender healthy long-term financial planning habits for beginner investors in their 20s.

Risks of Trading Meme Stocks

1. Lack of Fundamentals: Meme stocks tend to go viral not because of the performance or potential of the underlying business, but because of the sometimes irrational enthusiasm of retail investors and day traders. That puts meme-stock investors at greater risk of downward share performance, if the fundamentals of the business disappoint when the economy or markets dip.

2. High Volatility: Studies have shown that passive, diversified investments tend to outperform active trading over the long term. The volatility of meme stocks means that investors are at greater risk of locking in losses or seeing their portfolios underperform in the near term. Take for instance, when trading was halted on GameStop, investors potentially couldn’t execute sell orders.

3. Potential Stock Dilution: In some cases, meme-stock companies have tried to take advantage of higher valuations by issuing new shares. In such examples, it’s important that investors understand stock dilution, which occurs when the number of outstanding shares increases and every shareholder ends up owning a less significant piece.

How to Trade Meme Stocks

Single-name stocks are also not the only ways investors can get exposure to meme stocks. Options trading in meme stocks tend to be liquid, often allowing investors to buy and sell calls and puts easily.

If an investor doesn’t want to research or follow specific meme stocks, another way to get exposure to the phenomenon is by buying an exchange-traded fund (ETF) that holds companies popular on brokerage platforms.

In addition, here are some precautions that investors can take when trading meme stocks:

1. Diversify Your Portfolio: Rather than just holding meme stocks in their portfolios, investors may benefit from also getting exposure to more broad-based ETFs, blue-chip stocks, or dividend-paying companies. Such stocks tend to post more muted price moves, which may help offset the volatility of meme stocks.

2. Set Stop-Loss Orders: Investors can pre-set orders so that a meme stock automatically gets sold if it hits a certain price. A stop-loss order can be used to lock-in profits, so if the shares rise, or to limit losses, if the stock’s price falls.

The Takeaway

In 2021 during Covid-19, the proliferation of zero-commission brokerage accounts and stay-at-home orders led to an individual-investor surge.

Sometimes, individual traders target companies with high short interest to turn into meme stocks. Certain meme stocks like GameStop and AMC capture news headlines by posting rapid, colossal gains, but once the trading frenzy subsides, many meme stocks also plummet. Investors may want to consider other, less risky investments for their portfolio.

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

FAQ

What is a meme stock rally?

A meme stock rally is when a meme stock that became popular through social media skyrockets in price.

What is a meme stock ETF?

Meme stock ETFs are exchange-traded funds based around meme stocks. ETF meme holdings are made up of primarily meme stocks.

What investment strategy should you use for meme stocks?

Investing in meme stocks can be extremely risky. If you do decide to invest in them, you may benefit from also having other assets, such as ETFs or blue-chip stocks, in your portfolio to help diversify it. That may help offset the volatility of meme stocks.

Photo credit: iStock/RgStudio

SoFi Invest®

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

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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.

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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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.

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

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.
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May

2024

Short Squeezes Explained

By Colin Dodds | Financial Independence, Growing Wealth, invest, Investing | Comments Off

After three years of relative inaction, shares of GameStop, the video game retailer, surged in May 2024 after an influential trader posted to social media for the first time in several years. Roaring Kitty, the online moniker of Keith Gill, whose own posts about GameStop helped inspire the meme-stock movement of 2021, posted an image of a man leaning forward, a popular meme among gamers signifying “things are getting serious.”

Since then, the retailer’s stock price has rallied, renewing interest in GameStop as well as a number of other so-called “meme stocks,” including AMC, Koss Corp., and BlackBerry. Gill’s profile initially rose in 2021 in the midst of day traders organizing on Reddit to “squeeze” GameStop short sellers.

A short squeeze is an orchestrated effort to drive up shares of a stock that’s being shorted. In this highly risky maneuver, short sellers are essentially forced to try to exit their bearish position quickly in order to minimize losses amidst the dramatic surge in the share price. Read on to learn everything you need to know about short squeezes.

Key Points

• A short squeeze may occur when short sellers rapidly close their positions, which can help drive up a stock’s price.

• This typically follows a sudden increase in a stock’s price, prompting a rush among those shorting the stock to “cover” or close their position.

• Short sellers buying back shares to close their positions further drives up the stock price.

• Benefits of investing in REITs include tax advantages, tangibility of assets, and relative liquidity compared to owning physical properties.

• Short selling poses extreme risks, with the potential for dramatic — and potentially unlimited — osses.

What Is a Short Squeeze?

As mentioned, a short squeeze is an event in the market that involves short sellers having to quickly close out their positions. Because these investors have to actually buy back shares they’ve lent out, this may drive dramatic gains in the share price.

There are many investors, both retail and institutional, who use short selling to bet that a given stock will go down over a fixed period of time. But short selling is incredibly risky as stock prices have historically tended to drift upward. And timing a bearish position can also be picky. Even if an investor has good reason to believe that a company’s shares will fall, it could be some time before they actually do.

What Causes Short Squeezes?

To understand how short squeezes occur, we first have to understand how shorting a stock works. To sell a stock short, an investor must first borrow the shares. They then consequently sell in the open market. At an agreed-upon time, the investor will buy back the shares in order to return them to the original lender.

If the stock goes down between the time they borrow the stock and when they return it the investor makes money. That’s because they pocket the difference between what they sold the stock for and what they purchased it for when it came time to return it.

And if those short investors borrow a stock that goes up instead of down, they lose money.

Example of Short Selling

Let’s look at a hypothetical case of a short sale. Let’s say an investor borrows a stock that’s trading at $10 with an agreement to pay back the shares in 90 days.

The investor then sells the stock for $10. Then 90 days later, if the stock is trading at $5, they can buy back the number of shares they borrowed and return them to the lender, capturing the $5 per share profit (often minus interest and fees).

Example of Short Squeeze

Now, let’s use this example to look at a short squeeze. Let’s say the investor borrows the stock again that’s trading at $10 with an agreement to pay back the shares in 90 days.

This time however, the share price shoots up to $15. The investor still has to buy the shares they borrowed and return them to the lender. But other investors are also trying to cover their shorts as well, so there’s a shortage of shares in the market to buy back.

The shortage causes the stock’s price to jump even higher to $20, which in turn triggers other short sellers to close their positions. They have to now also purchase back shares, and hence a buying frenzy and short squeeze occurs.

Theoretically, there’s no limit to how much money short sellers can lose. When an investor is long a stock but wrong, the share prices can only go down as low as $0. But when an investor is short and wrong, the share prices can go infinitely higher, making it possible losses can be limitless for the short-selling investor.

Recommended: How Low Can a Stock Go?

Famous Short Squeezes

One famous example of a short squeeze was that of GameStop, which first occurred in 2021, when electronics retailer GameStop saw its shares jump more than 1,000% in a few weeks as a wide range of investors looked to take advantage of the high number of short sellers in the stock. This was perhaps one of the most well-known “meme stock phenomena” that overtook the market that year, but it wasn’t the only one. Shares of AMC, Bed Bath & Beyond, Koss Corp., and other company’s stocks spiked upward during the meme-stock frenzy that year.

Another example occurred in 2008, when automaker Volkswagen briefly became the world’s most valuable stock by market cap when it became known that Porsche was increasing its stake in its fellow German carmaker.

What’s a Long Squeeze?

By contrast, a long squeeze is when short sellers drive down the price of a stock or asset until the bullish investors begin to sell their positions in response, driving the price lower still. It can be helpful to review short positions vs long positions to get a deeper understanding of a long squeeze.

What Was the MOASS?

The “MOASS” is an acronym for the “Mother of all short squeezes.” And it’s more or less exactly what it sounds like: A monstrous short squeeze event in the market.

The short squeeze involving GameStop shares in 2021 is perhaps the best and most recent example of a MOASS, though companies such as AMC and Koss Corp., mentioned above, experienced similar phenomena at the time. Many institutional investors had shorted GameStop stock, anticipating that its value would fall, but groups of day traders worked together to drive up demand of the stock, and its value. This “squeezed” the short sellers, and caused many big firms to lose significant amounts of money on their positions.

How to Trade a Short Squeeze

Given the chance for dramatic returns, many investors have taken an interest in getting in on the winning side of a short squeeze.

To invest in a short squeeze, traders start by surveying the markets for stocks that have garnered substantial interest from short sellers. This factor is often called “short interest,” and as a metric, it represents the number of a company’s shares that have been sold short, but not yet returned to the lender. Traders know that the short sellers of all those shares will have to buy back shares — at any price — to return them to the lender.

There are two ways to understand short interest. One is short interest percentage, which shows how many of a company’s overall shares are currently shorted. A higher number means that more short sellers will be bidding up the stock to buy it back. The second metric is short interest ratio, which shows how much short sellers are responsible for a stock’s daily trading volume. A higher ratio means it’s likely that short sellers will help drive up the stock’s price once it starts to rise.

Another key metric has to do with when the short sellers will have to deliver those shares to the lender. It’s known as “days to cover,” and it’s the ratio comparing the total short-selling interest in a stock with the average daily shares that trade. As a metric, it gives traders a sense of how long until short sellers buy back the stocks they borrowed for their short positions.

Stocks with a high short-interest number and a high days-to-cover number are vulnerable to a short squeeze. Once these traders find stocks that seem like short-squeeze candidates, they buy the stocks outright, and watch those key metrics, along with the news, to decide when to sell. Short squeezes can make a stock shoot up, but those returns often evaporate quickly.

Short Squeezes vs Naked Shorts

As discussed, shorting typically involves borrowing shares to create tenable positions. Naked shorts, often involving naked options, are a type of short selling, but it involves not borrowing, or otherwise securing possession of, shares before making a trade or taking a short position. This leaves the trader “naked” in the event that a trade goes south.

Risks of a Short Squeeze

While short squeeze investments can produce eye-popping returns in the short term, they come with real risks for individual investors, and institutions.

Risks for Investors

For investors, perhaps the biggest risk of a short squeeze is that they’ll get caught on the wrong side of one, and lose some money. Obviously, that’s a risk for institutions as well, but individual investors likely don’t have as many resources on hand to try and recover.

Similarly, investors may misread the room — that is, not quite understand what’s happening in the market, and misjudge their position. They’ll also need to be vigilant in watching their positions to make sure they change those positions at the right time.

Risks for Institutions

Most of the risks involved with short squeezes for individual investors hold true for institutions, too.

For instance, the risks involved with stocks themselves include the fact that stocks with a high short-interest number may be undervalued or misunderstood, or they may simply be failing businesses. And if there is no good news, or market interest, they may continue to sink.

At the same time, the price increases caused by short squeezes are short-lived. Once the short-sellers have paid back their lenders, the market runs out of buyers who will pay any price for that stock. And the share prices often fall as quickly as they rose. The danger to traders in a short squeeze is that they’ll get in too late and stay in too long and lose money.

Long-term investors may try their hands at winning a short-squeeze trade here and there. But it requires deep research, constant monitoring and the ability to move in and out of a stock quickly — something that institutions may have access to more so than individuals.

Investing With SoFi

A short squeeze is a market event in which investors inadvertently bid up the price of a heavily shorted stock, while trying to get out of their bearish positions. In order to buy the stocks that investors borrow to sell short, those investors must buy the stock at ever-increasing values.

Short squeezes involving short positions and financial derivatives are relatively high-level concepts and may involve a skilled hand in navigating. For that reason, it may be worth discussing them, and their risks, with a financial professional.

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FAQ

Are short squeezes legal?

Short squeezes are a natural occurrence in the stock market, but market manipulation is illegal. As the SEC says, “abusive short sale practices are illegal,” and that may play into short squeezes. As such, it’s a gray area.

What is the biggest short squeeze of all time?

While the Volkswagen short squeeze in 2008 was one of the largest of all time, the 2021 short squeezes of GameStop, along with AMC, Koss, and others, were, perhaps, some of the most dramatic and notable short squeezes in history.

How high can a short squeeze go?

Theoretically, there is no limit on how high a stock can go, and accordingly, how high a short squeeze can go.

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May

2024

Pivot Point: What It Is and How to Use It in Trading

By Brian Nibley | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Pivot points are technical indicators that average the intraday high, low, and closing price from the previous trading period. Based on the price movements the following day, traders can use the pivot point to identify support and resistance levels.

If the price moves above the primary pivot point, it may signal a bullish trend; if it moves below the pivot point, it may indicate a bearish trend. Thus, pivot points can help inform a decision to buy or sell stocks.

When used alongside other common technical indicators, identifying pivot points can be part of an effective trading strategy. Pivot points are regarded as being important indicators for day traders.

What Is a Pivot Point?

Pivot points got their start during the time when traders gathered on the floor of stock exchanges. Calculating a pivot point using yesterday’s data gave these traders a price level to watch for throughout the day.

While other technical indicators, such as oscillators or moving averages, fluctuate constantly throughout the day, the pivot point remains static.

Analysts consider the main or primary pivot point to be the most important. This point indicates the price at which bullish and bearish forces tend to break one way or the other — that is, the price where sentiment tends to pivot from.

Pivot point calculations are considered leading indicators, and are often used in tandem with other common technical indicators. Today, traders around the world use pivot points, particularly in the forex and equity markets.

Two Ways to Use Pivot Points

But there are different ways to use pivot points. One way is to use the pivot point to help identify the trend. Again, when prices move above the pivot point, this could be considered bullish; prices falling below the pivot point could be considered bearish.

Traders can also use pivot points to set entry and exit points for trades. All things being equal, a trader might want to set a stop loss order around the support level, the price at which a downtrend generally turns around, or a limit order to buy shares if the price goes above a resistance level, generally the upper limit of the price range.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Calculate Pivot Points

The PP is vital for the pivot point formula as a whole. It’s essential for traders to exercise caution when calculating the pivot-point level; because if this calculation is done incorrectly, the other levels will not be accurate.

The formula for calculating the PP is:

Pivot Point (PP) = (Daily High + Daily Low + Close) Divided by 3

To make the calculations for pivot points, it’s necessary to have a chart from the previous trading day. This is where you can get the values for the daily low, daily high, and closing prices. The resulting calculations are only relevant for the current day.

Recommended: How to Know When to Buy Stocks

What Are Resistance and Support Levels in Pivot Points?

Traders track price patterns in order to decide when to enter and exit trades. This may require using more than one support or resistance level in order to ascertain a trend. Support refers to the lower end of the price, where the price generally stops falling and turns around. Resistance is the upper end, where the price generally stops rising and begins to dip.

The numerals R1, R2, R3 and S1, S2, S3 refer to the resistance (R) and support (S) levels used to calculate pivot points. These six numbers combined with the primary pivot-point (PP) level form the seven metrics needed to determine pivot points.

• Resistance 1 (R1): First pivot level above the PP

• Resistance 2 (R2): First pivot level above R1, or second pivot level above PP

• Resistance 3 (R3): First pivot level above R2, or third pivot level above the PP

• Support 1 (S1): First pivot level below the PP

• Support 2 (S2): First pivot level below the S1, or the second below the PP

• Support 3 (S3): First pivot level below the S2, or the third below the PP

Pivot Point Formulas

All the formulas for R1-R3 and S1-S3 include the basic PP level value. Once the PP has been calculated, you can move on to calculating R1, R2, S1, and S2:

R1 = (PP x 2) – Daily Low
R2 = PP + (Daily High – Daily Low)
S1 = (PP x 2) – Daily High
S2 = PP – (Daily High – Daily Low)

At this point, there are only two more levels to calculate: R3 and S3:

R3 = Daily High + 2 x (PP – Daily Low)
S3 = Daily Low – 2 x (Daily High – PP)

How Are Weekly Pivot Points Calculated?

Pivot points are most commonly used for intraday charting. But you can chart the same data for a week, if you needed to. You just use the values from the prior week, instead of day, as the basis for calculations that would apply to the current week.

Types of Pivot Points

There are at least four types of pivot points, including the standard ones. Their variations make some changes or additions to the basic pivot-point calculations to bring additional insight to the price action.

Standard Pivot Points

These are the most basic pivot points. Standard pivot points begin with the primary pivot point, which is the average of the high, low, and closing prices from a previous trading period. The support and resistance levels can be calculated from there, as noted above.

Fibonacci Pivot Points

Fibonacci projections — named after a well-known mathematical sequence — help identify support and resistance levels. The percentage levels that follow represent potential areas of a trend change. Most commonly, these percentage levels are 23.6%, 38.2%, 50.0%, 61.8%, and 78.6%.

Technical analysts believe that when an asset falls to one of these levels, the price might stall or reverse. Fibonacci projections work well in conjunction with pivot points because both aim to identify levels of support and resistance in an asset’s price.

Woodie’s Pivot Point

The Woodie’s pivot point places a greater emphasis on the closing price of a security. The calculation varies only slightly from the standard formula for pivot points.

Demark Pivot Points

Demark pivot points create a different relationship between the open and close price points, using the numeral X to calculate support and resistance, and to emphasize recent price action.

How Might Traders Interpret Pivot Points?

A trader might read a pivot point as they would any other level of support or resistance. Traders generally believe that when prices break out beyond a support or resistance level, there’s a good chance that the trend will continue for some time.

• When prices fall beneath support, this could indicate bearish sentiment, and the decline could continue.

• When prices rise above resistance, this could indicate bullish sentiment, and the rise could continue.

• Pivot points can also be used to draw trend lines in attempts to recognize bigger technical patterns.

The Takeaway

The pivot-point indicator is a key tool in technical stock analysis. This pricing technique is best used along with other indicators on short, intraday trading time frames. This indicator is thought to render a good estimate as to where prices could “pivot” in one direction or another.

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FAQ

How are weekly pivot points calculated?

Pivot points can be applied to any time frame, simply by adjusting the period. To calculate a weekly pivot point you can use the values from the prior week, instead of day, as the basis for calculations that would apply to the current week.

How accurate are pivot points?

While no technical analysis tool is guaranteed, pivot points are generally considered among the more accurate in terms of helping traders gauge support and resistance levels, and market trends overall.

Do professional traders use pivot points?

Professional traders do use pivot points, but usually in combination with other types of technical analysis — depending on the trade they want to make.

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Choosing Your Retirement Date: Here’s What You Should Know

The Importance of Your Retirement Date

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7 Technical Indicators for Stock Trading

How Do Stock Technical Indicators Work?

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Overlay Indicators

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Reasons to Use Stock Market Indicators

7 Stock Indicators for Technical Analysis

1. Moving Averages (MA)

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3. Relative Strength Index (RSI)

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What Are Meme Stocks? Guide to Meme Stock Investing

What Is a Meme Stock?

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Short Squeezes Explained

What Is a Short Squeeze?

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What Causes Short Squeezes?

Example of Short Selling

Example of Short Squeeze

Famous Short Squeezes

What’s a Long Squeeze?

What Was the MOASS?

How to Trade a Short Squeeze

Short Squeezes vs Naked Shorts

Risks of a Short Squeeze

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