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Q: What is RSI in Stocks?

The Relative Strength Index is a rate of change or momentum oscillator that tracks stock price movements. You can visualize it as a line graph that moves up or down, based on a stock’s price at any given time.

Q: How Does the RSI Indicator Work?

The Relative Strength Index operates on a range from 0-100. As stock prices fluctuate over time, the index can move up or down accordingly.

Aug

2023

Relative Strength Index (RSI) Explained

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

Relative Strength Index, or RSI, is a momentum indicator used to measure a stock’s price relative to itself and its past performance. Developed by technical analyst J. Welles Wilder, the Relative Strength Index focuses purely on individual stock price movements to identify trading trends for a specific security, based on the speed and direction of those price changes.

RSI allows swing investors to compare the price of something to itself, without factoring in the performance of other stocks or the market as a whole. Investors use RSI to pinpoint positive or negative divergences in price for a security or to determine whether a stock is overbought or oversold.

The RSI indicator is useful in technical analysis, which revolves around finding trends in stock movements to determine optimal entry and exit points. Understanding what the Relative Strength Index measures and how it works is central to a technical trading strategy.

What Is RSI in Stocks?

The Relative Strength Index is a rate of change or momentum oscillator that tracks stock price movements. You can visualize it as a line graph that moves up or down, based on a stock’s price at any given time. The Relative Strength Index operates on a scale from 0-100. Where the RSI indicator is within this range can suggest whether a stock has reached an overbought level or if it’s oversold.

RSI is not the same thing as Relative Strength analysis. When using a Relative Strength Comparison (RSC), you’re comparing two securities or market indexes to one another to measure their relative performance.

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How Does the RSI Indicator Work?

The Relative Strength Index operates on a range from 0-100. As stock prices fluctuate over time, the index can move up or down accordingly. Traders typically use the RSI to track price movements over 14 periods (i.e. trading days), though some may use shorter or longer windows of time.

When the RSI indicator reaches 70 or above, it could mean the underlying asset being measured is overbought. An RSI reading of 30 or below, on the other hand, suggests that the asset is oversold. The length of time a stock remains in overbought or oversold territory depends largely on the strength of the underlying trend that’s driving price movements.

The Relative Strength Index can throw off different patterns, depending on whether stocks are in a bull market or bear market. Investors compare the movements of the RSI indicator with actual price movements to determine whether a defined pricing trend actually exists and, if so, in which direction it might be heading. Analyzing moving averages for the stock can help determine the presence of a clear pricing trend.

Recommended: 5 Bullish Indicators for a Stock

RSI Formula

Here’s what the Relative Strength Index formula looks like:

RSI = 100 – (100 / (1 + RS))

In this formula, RS represents the ratio of the moving average of the tracking period’s gains divided by the absolute value of the moving average of the tracking period’s losses.

Here’s another way you might see the Relative Strength Index formula displayed:

RSI = 100 – [100 / ( 1 + (Average of Upward Price Change / Average of Downward Price Change ) ) ]

The RSI formula assumes that you’re able to follow a stock’s pricing changes over your desired tracking period. More importantly than that, however, is knowing how to make sense of Relative Strength Index calculations, which investors often display via a stock oscillator.

Interpreting RSI Results

Reading the Relative Strength Index isn’t that difficult when you understand how the different ranges work. Depending on where the RSI indicator is for a particular stock or market index, it can tell you whether the market is bullish or bearish. You can also use the RSI, along with other technical analysis indicators, to determine the best time to buy or sell.

Above 70

An RSI reading of 70 or higher could indicate that a stock is overbought and that its price might move back down. This could happen through a reversal of the current price movement trend or as part of a broader correction. It’s not unusual for stocks to have an RSI in this range during bull market environments when prices are rising. If you believe that the stock’s price has reached or is approaching an unsustainable level, an RSI of 70 or higher could suggest it’s time to exit.

Below 30

When a stock’s RSI reading is 30 or below, it typically means that it’s oversold or undervalued by the broader market. This could signal a buying opportunity for value investors but it could also indicate the market is turning bearish. It’s more common to see RSI readings of 30 or below during downtrends when stock prices may be in decline across the board.

40 to 90 Range

During bull markets, it’s not uncommon to see the Relative Strength Index for a stock linger somewhere in the 40 to 90 range. It’s less common to see the RSI dip to 30 or below when prices are steadily moving up. An RSI reading of 40 to 50, roughly the middle of the 0-100 scale can indicate support for an upward trend.

10 to 60 Range

In bear markets, or those filled with fear, uncertainty, and doubt, it’s more common to see the Relative Strength Index hover somewhere in the 10 to 60 range. It’s not unusual for stocks to reach 30 or below when the market is already in a downward trend. The middle point of the RSI can act as a support point, though the range shifts slightly to between 50 and 60.

Common RSI Indicators

Relative Strength Index indicators can help investors spot pricing trends. That includes identifying up and down trends, as well as sideways trends when pricing levels consolidate. The reliability of these indicators often hinges on the current phase of a stock or the market as a whole. When reading RSI indicators, it’s important to understand divergence and swing rejections.

Divergence

A divergence represents a variation or disagreement between the movement of the RSI indicator and the price movements on a stock chart. For example, a bullish divergence means the indicator is making higher lows while the price movement is establishing lower lows. This type of divergence can hint at increasing bullish momentum with a particular stock or the greater market.

A bearish divergence, on the other hand, happens when the indicator is making lower highs while prices are establishing higher highs. This could indicate that investor sentiment is becoming less bullish.

Swing Rejections

A swing rejection is a specific trading technique that involves analyzing RSI movements when pushing above 30 or below 70. Swing rejections can be bullish in nature or bearish.

For example, a bullish swing rejection has four parts or steps:

• RSI is at an oversold level

• RSI moves above 30

• A dip is recorded without rating as oversold

• RSI passes its recent high

Meanwhile, a bearish swing rejection also has four parts or steps:

• RSI reaches an overbought level

• RSI drops below 70

• RSI hits new highs without dropping back to overbought levels

• RSI passes recent lows

Swing rejections make it possible to utilize divergence indicators to spot bullish or bearish trends in their earliest stages.

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Is RSI a Good Indicator to Use?

Yes, in certain circumstances. Relative Strength Index can be a good indicator to use in technical analysis, as it can make it easier to detect when a stock or the broader market is overbought or oversold. Understanding how to interpret RSI and its correlation to price movements could help you spot buy or sell signals and detect bull market or bear market trends.

That said, RSI also has some limitations. For example, the RSI can produce false positives or false negatives when bullish or bearish trends don’t align with the way a stock’s price is moving. Like other technical analysis indicators, it’s not an exact way to gauge the market’s momentum. So if stocks are hovering somewhere in the 40 to 60 range, it may be difficult to decipher whether the mood is bearish or bullish.

When using RSI, it’s helpful to incorporate other technical analysis indicators to create a comprehensive picture of the market. Exponential moving average (EMA), for example, is a type of moving average that uses the weighted average of recent pricing data to draw conclusions about the market.

Traders often use RSI in conjunction with other trend indicators, such as the Moving Average Convergence Divergence, the Stochastic Oscillator, or the Volume-Weighted Average Price.

RSI vs MACD

Moving Average Convergence Divergence (MACD) is a technical analysis indicator that investors may use alongside RSI. This indicator can help them determine when to buy or sell, based on the correlation between two moving averages for the same security.

Specifically, it requires looking at a 12-period moving average and a 26-period moving average. To find the MACD line, you’d subtract the 26-period from the 12-period, resulting in a main line. The next step is creating a trigger line, which is the nine-period exponential moving average of the main line. The interactions between these two lines can generate trading signals.

For example, when prices are strongly trending in a similar direction the main line and trigger line tend to move further apart. When prices are consolidating, the lines move closer together. If the main line crosses the trigger line from below, that can produce a buy signal. If the main line crosses the trigger line from above, that can be construed as a signal to sell.

While RSI and MACD are both trend indicators, there are some differences. Relative Strength Index measures the distance between pricing highs and lows. So you’re looking at the average gain or loss for a security over time, which again usually means 14 periods. The MACD, on the other hand, focuses on the relationship between moving averages for a security. It’s a trend-following signal that, like RSI, can indicate momentum.

RSI vs Stochastic Oscillator

The stochastic oscillator is a momentum indicator for technical analysis that shows where a stock’s closing price is relative to its high/low pricing range over a set period of time. The stochastic oscillator can also be used to track pricing for a market index.

Central to the use of the stochastic oscillator is the idea that as a stock’s price increases, the closing price inches closer to the highest point over time. When the stock’s price decreases, the closing price lands closer to the lowest low. Investors use this indicator to determine entry and exit points when making trades.

However, investors interpret RSI and stochastic oscillator readings differently. For example, with a stochastic oscillator, a reading of 20 or below generally means a stock is oversold, versus the 30 or below range for RSI readings. When used together, Relative Strength Index and stochastic oscillators can help with timing trades to maximize profit potential while minimizing the risk of losses.

Can You Use RSI to Time the Crypto Market?

Stocks are not the only asset class for which investors use the RSI. Investors also use the Relative Strength Index to assess conditions in the crypto markets and whether it’s time to sell or continue to HODL.

Cryptocurrency traders may use RSI to gauge momentum for individual currencies. Again, they’re looking at the highs and lows to get a sense of which way prices are moving at any given time. The RSI indicator can help with choosing when to buy or sell, based on previous price movements.

The same rules apply to crypto that apply to stocks: An RSI reading of 70 or above means overbought while a reading of 30 or below means oversold. Likewise, a reading above 50 signals a bullish trend while a reading below 50 can signal a bearish trend. Investors can also use a bearish divergence or bullish divergence to spot a pullback or an upward push.

As with stocks, however, it’s important to remember that RSI is not 100% accurate.

The Takeaway

RSI can be used to pinpoint positive or negative divergences in price for a stock or to determine whether it’s overbought or oversold. If you’re interested in technical analysis and trending trading, RSI can be a useful metric for making investment decisions.

The RSI is just one tool that you can use to devise a strategy for your portfolio. There are other less technical tools you can use as well when you’re starting to build a portfolio.

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Aug

2023

How Does the Iron Butterfly Spread Work?

What Is an Iron Butterfly Option Strategy?

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

An iron butterfly spread is a type of options trade involving four separate options contracts. It’s a complicated and advanced options trade, meaning that many beginner investors will likely never use it — they may not have even heard of it.

Iron butterfly spreads can be used as a part of a larger options trading strategy, however, so long as investors understand the ins and outs of how it works, and most importantly, the risks involved.

What Is an Iron Butterfly?

An iron butterfly spread, sometimes called an “Iron Fly” or a “Butterfly Spread” is a trade involving four separate options contracts.

As a strategy that earns investors money when stocks or futures prices make moves within a defined range, it’s especially popular with traders who expect a decrease in implied volatility. To succeed with an iron butterfly spread, traders will try to forecast when option prices will likely decline, usually when the broader markets are in a holding pattern, or gradually moving upwards.

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How Does an Iron Butterfly Trade Work?

An Iron Butterfly is a four-legged options spread, since an investor buys four options contracts, two calls and two puts. The call options allow the investor to buy a stock at a given price, and the put options allow the investor to sell a stock at a given price.

In the trade, the calls and puts have three strike prices, but the same expiration date.

In a put or call option, the strike price is the price an investor can sell the underlying security when it is exercised. With a call option, the strike price is the price at which the investor can buy the security. With a put, the strike price is the value at which they can sell the security.

The three strike prices consist of one in the middle, called the options straddle, and two other strike prices, called the strangle, positioned above and below that price. As a trade, the Iron Butterfly has the propensity to deliver profits when the option’s underlying stock hits its expiration date at the middle strike price.

Example of an Iron Butterfly

For the strategy to work, the call and put options that sit on either side of the target stock price should be far enough apart that they can still make money regardless of the unexpected price movement of the stock between the time when the trade is executed, and the expiration of the options.

As an example, you’re an investor with a sense that a stock would reach $50 in the next month, and that it would be at least within a range of $10 above or below the target price. To make an Iron Butterfly trade, you’d buy a call and a put option with a strike price of $50. Then you’d buy a call option ten dollars higher, followed by a put option ten dollars lower than the target price, or saddle price, of $50.

The theory behind the Iron Butterfly strategy is that there’s a high likelihood that the eventual price of the stock targeted in the strategy will trade within a profitable range by the time the strike price of the options arrives.

Pros and Cons of Iron Butterfly Spreads

There is a limit to the maximum profit that an investor can earn by using the Iron Butterfly. That’s because of the cost of the options they have to buy to make money on their bet, as well as the cost of the options they purchase to protect themselves in the event that their hunch is wrong.

In the strategy, the most money the investor can make becomes possible when the underlying stock reaches the stock price at which they’ve purchased the saddle options. But even in this best-case scenario, at least half of the options expire worthless.

While this limited return may seem like a downside, it also comes with limited risk. As long as the stock rises or falls — at the time of the options’ expiration — between the target price and the strike prices of the outlying call and put options, then the trade will not lose money. But the closer it is to the target price, the more money it will make.

The biggest risk in an Iron Butterfly strategy is that the stock trades outside of the strangle, making all of the options worthless.

Recommended: What Is Your Risk Tolerance?

How to Sell out of an Iron Butterfly Spread

The investor will have at least one option that is in the money, and possibly two options that are in the money, when the options expire. They will exercise those options, and make money on the trade.

Traders realize that it’s unrealistic that any given trade will reach its expiration date exactly at the strike price, or straddle price, that they choose. But with a smart spread on the outer range of the call and put options in the trade, the strategy can deliver returns on the capital put at risk that are consistently in the 15-20% range.

What Is the Difference Between Iron Condor and Iron Butterfly?

An Iron Butterfly is similar to another option strategy known as an Iron Condor. The strategies differ in terms of their strike prices and premiums. In an Iron Condor the strike prices are different and in an Iron Butterfly they’re the same. The premiums are higher in an Iron Butterfly than an Iron Condor.

💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

The Takeaway

The Iron Butterfly is a trading strategy that investors use when they believe that a stock price will trade within a specific range. Rather than buying the stock itself, an Iron Butterfly involves purchasing four options based on the investor’s price prediction for a certain security.

Again, trading options is an advanced investment strategy that requires a good amount of background knowledge and market experience. It may not be a good idea for beginning investors to wade into options, or advanced moves like the Iron Butterfly. However, speaking with a financial professional may help get you prepared for trading options.

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Photo credit: iStock/ponla1975

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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.
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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.

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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Aug

2023

Guide to Financial Therapy

By Janet Siroto | Budgeting & Goals, money | Comments Off

Money and your psyche can be deeply intertwined, and that’s where financial therapy can play a role. Financial therapy merges the emotional support of a psychotherapist with the money insights of a financial planner.

Working with a financial therapist can help clients begin to process their underlying feelings about money while optimizing behaviors related to their cash. This can minimize stress and anxiety, while honing plans for earning, spending, and saving more effectively.

Financial therapists can also assist couples in overcoming differences in their money habits and their approaches to cash management. The result? Possibly resolving and lessening money fights while building teamwork.

Read on to learn if this kind of professional counseling could help you, and, if that’s the case, what to expect from financial therapy and where to find a qualified professional.

What Is Financial Therapy?

A basic financial therapy definition is that it’s a practice that combines behavioral therapy with financial coaching. The goal is to help improve an individual’s feelings and behavior around money.

A certified financial therapist (or financial psychologist) can assist with issues such as money stress, overspending, or concerns about debt. But this differs from, say, a financial advisor who is helping you maximize your gain on investments or plan for your child’s future college expenses.

It also differs from financial coaching, which helps establish good money habits. Financial therapy can go deeper psychologically speaking. It can help a person work through childhood trauma related to money as well as money-related disorders.

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How Financial Therapy Works

According to the Financial Therapy Association (FTA) , financial therapy is a process informed by both therapeutic and financial expertise that helps people think, feel, and behave differently with money to improve overall well-being.

The profession sprang out of increasing evidence that money can be intrinsically tied to our hopes, frustrations, and fears, and also have a significant impact on our mental health.

What’s more, money can also have a major impact on our relationships. Indeed, research has shown that fighting about money is one of the top causes of conflict among couples.

And, while it might seem like bad habits and money arguments are things you can simply resolve on your own, the reality is that it’s often not that simple. That’s where financial therapy can help.

• Many financial roadblocks, such as chronic overspending or constantly worrying about money, often aren’t exclusively financial. In many cases, psychological, relational, and behavioral issues are also at play.

• Financial therapy can help patients recognize problematic behaviors, such as compulsive or impulsive shopping. It also aims to help people understand how various relationships and experiences may have led them to develop those behaviors as coping mechanisms or to form unrealistic or unhealthy beliefs.

• Along with offering practical financial advice, a financial therapist can reduce the feelings of shame, anxiety, and fear related to money. It can help people who are struggling to recommit to money goals.

The reasons why financial therapy can help are the same as why traditional psychological therapy can help: It can lead people to understand that they can do something to improve their situation. That, in turn, can instigate changes and healthier behaviors.

Like conventional therapy, the number of sessions needed will vary, depending on the situation. A financial therapy relationship can last from a few months to longer.

Generally, a financial therapist’s work is “done” when you feel your finances are orderly and you have the skills to keep them that way in the future.

Financial Therapists vs. Financial Advisors

Financial advisors are professionals who help manage your money.

They are typically well-informed about their clients’ specific situations and can help with any number of money-related tasks, such as managing investments, brokering the purchase of stocks and funds, or creating a retirement plan.

However, psychological therapy is not why financial advisors are hired, nor is it their area of expertise.

If a person requires real emotional support or needs help breaking bad money habits, a licensed mental health professional, such as a financial therapist, should likely be involved.

A certified financial therapist (someone trained by the FTA) can work with you specifically on the emotional aspects of your relationship with money and provide support that gets to the root of deeper issues.

Due to the interdisciplinary nature of financial therapy, professionals who enroll in FTA education and certification include psychologists, marriage and family therapists, social workers, financial planners, accountants, counselors, and coaches. Some experts recommend being sure that the professional you work with is first and foremost a licensed therapist with a deep understanding of psychology.

Financial Therapists	Financial Advisors
Address psychology relating to money	Advise on managing and investing money
Can be certified by the FTA	Can be certified as CPA, CFP, CFA, and ChFC, among other designations
Focus on behaviors and attitudes	Focus on budgeting and growth

Financial Therapy vs. Other Therapy

If you are having issues related to money (say, losing sleep due to anxiety or arguing with your partner about spending), you might think almost any mental health professional could help.

A financial therapist, however, can be your best bet in this situation. These professionals have special training and expertise related to how money can impact a person’s emotional wellness.

They also are also trained in techniques to help clients overcome issues related to money. In other words, they are laser-focused on the kind of emotional responses and problematic habits that crop up around money.

Do You Need a Financial Therapist?

If you’re considering whether a financial therapist could help you, you may want to think about your general relationship to money.

If you feel you have anxiety about money, or unhealthy behaviors and feelings when it comes to spending, budgeting, saving, or investing, you might benefit from exploring financial therapy.

Often, unhealthy saving, spending, or working habits are a symptom of other negative habits related to mental health (feelings of low self-worth, for instance).

Keep in mind that it’s possible to have an unhealthy relationship with money even if your finances are good on paper.

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Top 4 Reasons People Seek Financial Therapists

Here’s a more specific look at why a person might benefit from financial therapy.

1. Avoiding Money Management

Some people hide from their finances. They don’t budget, don’t know exactly how much they earn, pay bills late (or not at all). Working with a financial therapist could expose the root of this behavior and improve financial management.

2. Money Stress

Many people have anxiety around their money. This could involve worrying about how they will pay off their debt to worrying about going bankrupt, even though they are earning a good salary. Others may feel guilty about spending money or carry a lot of trauma about money from their childhood. A financial therapist can work to explore and resolve these emotions.

3. Fighting About Finances

If you often argue with your partner, friends, or other loved ones about money, you might find that a financial therapist can help you defuse this source of tension. It can help couples deal with what’s known as financial infidelity.

4. Poor Money Habits

Do you tend to “shop til you drop” when bored? Have you spent or gambled away your emergency fund? Do you overwork yourself in an effort to accumulate wealth? Do you tend to hop from one “get rich quick” scheme to another? A financial therapist could help you break these habits and develop new, beneficial ones.

These are some of the scenarios that a financial therapist could help you with.

Finding a Financial Therapist

Like choosing any therapist, you often need to shop around a bit to find the right fit—someone you feel you can relate to, trust, and you also feel understands you.

For those who may not have access to a financial therapy professional in their backyard, many offer services via video conferencing.

You can start your search with the Find A Financial Therapist tool on the FTA website, which features members and lists their credentials and specialties.

Your accountant or financial counselor might also be a good source of referrals.

As with choosing any other financial expert or mental health professional, it’s a good idea to speak with a few potential candidates. In your initial conversations with candidates, you may want to discuss the therapist’s training and specific area of expertise, as well as your needs and situation. This can help you assess how good a match they are.

It can also be a good idea to ask how long they have been providing financial therapy services, what their fees are, as well as if some or all of the fee may be covered by your medical insurance.

The Takeaway

Financial therapy merges financial with emotional support to help people deal with and improve stress, decision-making, and habit-forming related to money.

If you frequently feel stressed and/or overwhelmed when you think about money (or you simply avoid thinking about money as much as possible), you might be able to benefit from at least a few sessions of financial therapy.

While it might seem like hiring a financial therapist is another expense that could complicate an already difficult financial situation, it might be better to view it as an investment in your emotional and financial wellness, one that could help you build financial stability and wealth in the future. It can be an important facet of your overall money management.

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What does a financial therapist do?

A financial therapist combines expertise in psychology and finances to help people improve their attitudes toward money and their habits relating to money. They can help individuals manage such issues as money anxiety, overspending, and financial infidelity.

Is financial therapy the same as financial planning?

Financial therapy and financial planning are not the same thing. Financial therapy can help a person improve their attitude toward money and their behaviors related to money. Financial planning is focused on budgeting, debt management, and growth of wealth.

Can therapy help with finances?

Therapy can help with finances. You might have stress related to money due to childhood trauma centered on finances. Or you might be compulsively overspending or ignoring your money due to emotions about such matters. Financial therapy could help you work through these and other issues.

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SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Aug

2023

Why Would a Company Stop Paying Dividends?

Why Would a Company Cut Its Dividends?

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

When companies reduce the dividends they pay investors, or stop paying them altogether, it can mean different things. Sometimes it’s a result of lower earnings or a shortage of available cash. Other times, a company is uncertain about the future, and wants to keep cash on hand to protect it against unforeseen risks or seize unexpected opportunities.

And sometimes, it’s because the company’s leadership thinks they can offer shareholders more value by investing the cash currently earmarked for dividends back into the business itself.

A Look At How Dividends Work

The reason that a company will offer a dividend in the first place is to reward shareholders. In some cases, companies pay dividends only to preferred stock shareholders, or pay a higher rate to certain classes of shareholders than others.

Most companies offer the regular cash payouts because management believes that paying a dividend is a better use of that capital than any strategic growth opportunities the company would otherwise invest in.

Companies that offer dividends are usually established businesses in mature industries, such as healthcare or utilities. They typically pay out their dividends on a regular schedule, annually, semi-annually, or even monthly.

Investors often rely on dividends, either as part of their investing strategy, or as a source of income. Dividend-paying stocks are especially popular among retirees, who use the income to help cover living expenses. Companies suspending dividends run the risk of alienating a sizable portion of their shareholders.

It’s important for investors to understand why a company in their portfolio has cut its dividend, and to use that information to determine whether that stock still makes sense for their broader investing strategy or whether it might be time to sell the stock. Sometimes when a company cuts its dividend, its stock price will also fall.

💡 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.

Examples of Dividend Cuts

History has provided many examples of companies that reduced, suspended or eliminated their dividends. We’ll start with a recent example, and cite several others from the past few years.

Intel — Dividend Reduction

In early 2023, Intel announced that it was cutting its quarterly dividend by almost two-thirds. That put the company’s dividends at their lowest levels since before the financial crisis in 2007. Intel’s leadership cited slowing business growth and an attempt to reallocate capital as the primary reasons for the dividend reduction.

Meredith Corp. — Dividend Suspension

In April of 2020, media company Meredith Corp, suspended its dividend payments. The move came just over two months after it had announced a dividend hike. The company eliminated its dividend amid widespread reductions in expenditures, including salary cuts after it had seen significant advertising cancellations and delays.

Antero Midstream — Dividend Reduction

In February of 2021, Antero Midstream reduced its dividend by 27%. The company, which builds and operates pipelines, storage facilities and other infrastructure for natural gas, and water handling and treatment, cut the dividend in order to grow.

By cutting its annual dividend from $1.23 a share to just 90 cents, Antero Midstream was able to free up an estimated $65 million to invest in new infrastructure. Unlike some other companies who eliminate or trim their dividend because of business reversals, Antero made the move in response to promising signals about growth opportunities. Even with the cut, the company maintained a 10.3% dividend.

Estee Lauder — Dividend Suspension and Reinstatement

Also in 2020, Estee Lauder announced it would suspend its dividend payments. At the time, the cosmetics giant paid an annual dividend of $1.92. The company projected that as fewer people went out socially during the pandemic at the time, they’d spend less on makeup — a projection proven correct. At the time, the company also announced other spending cuts, suspending stock buybacks and cutting executive pay by as much as 30%.

But as shops, restaurants, and bars began reopening in the first quarter of 2021, makeup sales also rose. As Estee Lauder benefited from higher sales it responded by reinstating its quarterly dividend. In May of 2021, it announced a quarterly dividend of 53 cents per share.

Healthpeak Properties — Dividend Reduction

Healthpeak Properties, a real estate investment trust (REIT) focused on properties related to life sciences, medical offices and senior housing, cut its quarterly dividend payment in February of 2021 from 37 cents per share to 30 cents per share.

At the time, Healthpeak had $1.6 billion in free cash flow. But it had concerns about the future, given the potential of recent pandemic-related mortalities to drive down demand for senior housing. Its net income in 2020, at $413.6 million, was already much lower than the $787 million it had made in dividend payouts in 2020. The dividend reduction freed up an estimated $150 million in cash flow for Healthpeak, which the company intended to use to transition its holdings away from senior housing.

National CineMedia — Dividend Reduction

During the pandemic, people stopped going to the movies. That had a major impact on theater chains, but also on companies like National CineMedia, which sells pre-screening advertising at theaters across the United States.

That’s why the company cut its quarterly dividend from seven cents to five cents per quarter in early March of 2021. At the time of the cut, the company was in solid financial shape, with enough cash to cover its expenses. But even with ample cash, the company trimmed its dividend amid concerns about how long it will take for theaters to return to pre-pandemic normals.

The Walt Disney Company — Dividend Suspension

In May of 2020, The Walt Disney Company announced it would suspend its dividend payments due to the impact of the coronavirus on its theme parks.

The dividend suspension occurred as the company’s earnings had plummeted due to the pandemic. By eliminating its semi-annual dividend, which it had kept at 88 cents a share since 2018, the company saved $1.6 billion of much-needed cash to preserve liquidity.

While Disney has not announced plans to reinstate its dividend, the company’s entry into the video-streaming business with its Disney+ service has many investors looking at the stock as less of an income investment, and more as a long-term growth play.

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

The Takeaway

Companies cut their dividends for many reasons, using the move as a way to preserve cash for future investments or during uncertain times. While investing in dividend stocks can be a smart way to generate income or increase returns on a portfolio, it’s important for investors to understand that dividends are not guaranteed in perpetuity and to consider changes in a company’s dividend payout as one factor in analyzing the value of that stock.

If you want to make dividends an important component in your investing strategy, you’ll need to do a good amount of research. There’s also some luck involved — you never know what might inspire companies to cut dividends.

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/Drazen_

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0723035

Aug

2023

How to Sell Options for Premium

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Many investors are looking to drive returns on their options trading strategies, and selling options for premiums is one way to do that. Option premiums are a sort of fee or initial price an option holder pays in order to trade contracts, and there is room to make a profit utilizing them.

But keep in mind that options trading is an advanced investment strategy, and that it may be over your head, particularly if you’re a new or young investor. That said, options premiums do have profit potential — if you know what you’re doing.

What Is An Option Premium?

An option premium is the price an option buyer pays to purchase options contracts at a fixed rate when the contract term ends. A seller, conversely, receives the payment. In other words, it is the current market price of an option contract, and the amount the seller makes when someone purchases the contract.

When investors buy options contracts, they are purchasing a derivative instrument that gives them the right to trade the underlying asset represented by the contract at a specific price within a predetermined period of time. The premium is the amount that the option writer receives if the contract holder exercises their right to buy or sell the asset.

The premium amount depends on how much time there is left until the option contract expires, the price of the underlying asset, and how volatile or risky it is.

What Is Selling Options Premium?

Many investors are familiar with the process of investing in and trading options, but the other side of the market is to be on the seller side (writing options) and make a profit by selling for a premium.

Selling options is an options trading strategy in which an investor sells a buyer the right to purchase a stock at a predetermined price at some time in the future. The premium amount is collected upfront as a payment for the options seller taking on the risk that the underlying asset will rise or fall in value within the timeframe of the contract. The premium is not refundable.

The options seller can make a profit from the premium. In addition, if the buyer doesn’t exercise their right to trade the asset, when the contract expires the seller still holds the asset as well.

However, option selling also carries some investment risk. If the option ends up “in the money” for the buyer, the option writer could lose money, since they’ll have to sell the stock for less than its market price.

How Is an Options Premium Calculated?

The main factors that affect an option contract price are implied volatility, stock price, time value, and intrinsic value. Options writers receive premiums upfront when a buyer purchases a call or a put.

When an investor looks at options contract prices, they receive a per share quote, but each contract typically represents 100 shares of underlying stock. Investors will decide to either buy call or put options, depending on how they expect the stock’s price to perform in the future.

For example, an investor could decide to purchase a call option. The seller offers it to them for a $4 premium. If the investor purchases one contract which represents 100 shares of that stock, they would pay $400 for it. If the buyer never executes the contract (because the price of the stock is at or below the strike price when the contract expires), the seller’s profit is $400, or the entire premium.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Stock Price

If an investor buys a call option, they are hoping the underlying stock price increases, whereas if they buy a put option they hope it decreases. When the stock price goes up, the call option premium goes up and the put option premium goes down. And vice versa.

Recommended: What Makes Stock Prices Go Up or Down?

Time Value

Time value reflects the expiration date of the option contract. If the option has a longer time left until its expiration date, it has more time to pass the strike price. That makes it more valuable because it gives the investor more time to exercise their right to trade for a profit. The decrease in time value over time is called time decay.

The closer the option gets to expiring, the more the time decay increases. The value of the options contract declines over time due to time decay, which is a risk investors should consider. Options buyers want the stock to quickly move up and down so that the time decay doesn’t affect their profits, whereas options sellers want the premium to decrease, which happens with every day that goes by.

Time value is calculated by subtracting intrinsic value from the premium.

Intrinsic Value

The intrinsic value of options is the difference between the current underlying stock price and the option’s strike price. This difference is referred to as the “moneyness” of the option, where the intrinsic value of the option is how far in the money the option is.

If the price of the underlying asset is higher than the option strike price, a call option is in the money, making it worth more and priced higher. If the stock price is lower than the option contract strike price, this makes a put option in the money and worth more. If an option is out of the money it has no intrinsic value.

Implied Volatility

High premium options often reflect securities with higher volatility. If there is a high level of implied volatility, this means there is a prediction that the underlying asset will have bigger price moves in the future, making the option more expensive.

A low level of implied volatility will make it cheaper. It’s best for investors to purchase options that have steady or increasing volatility, because this can lead to bigger profits and a higher likelihood that the option will reach the investor’s desired price. Those who are selling options prefer to have decreasing volatility, because this lowers the premium and allows them to buy back the option at a lower price.

Other Factors

Other factors that influence premium prices include:

• Current interest rates

• Overall market conditions

• The quality of the underlying asset

• Any dividend rate associated with the underlying asset

• The supply and demand for options associated with the underlying asset

Options Premiums and the Greeks

Certain Greek words are associated with types of risks involved in options trading. Investors can look at each type of risk to figure out which options they want to buy.

• Delta: The sensitivity of an option price to changes in the underlying market

• Gamma: The amount that an option’s delta moves with each point of movement of the underlying market asset

• Theta: That amount that an option price decays over time

• Vega: The amount that underlying market volatility affects the option

• Rho: The amount that interest rate changes affect the option price

💡 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.

The Takeaway

Options are one type of derivatives that give the buyer the right, but not the obligation, to buy or sell an asset. To sell options for a premium, options writers must consider several factors that could determine the future price of that asset. Selling options for premium is potentially a profitable trading strategy.

Note, though, that trading options is risky and advanced. It can be a confusing, muddled section of the financial markets, and it can be very easy for investors to get in over their heads. If you’re interested in trading options, it may be best to speak with a financial professional first.

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/sefa ozel

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0723026

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RSI Formula

Interpreting RSI Results

Above 70

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Common RSI Indicators

Divergence

Swing Rejections

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Example of an Iron Butterfly

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The Takeaway

Guide to Financial Therapy

What Is Financial Therapy?

How Financial Therapy Works

Financial Therapists vs. Financial Advisors

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Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.50% APY on your cash!

Financial Therapy vs. Other Therapy

Do You Need a Financial Therapist?

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1. Avoiding Money Management

2. Money Stress

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Finding a Financial Therapist

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Can therapy help with finances?

Why Would a Company Cut Its Dividends?

A Look At How Dividends Work

Examples of Dividend Cuts

Intel — Dividend Reduction

Meredith Corp. — Dividend Suspension

Antero Midstream — Dividend Reduction

Estee Lauder — Dividend Suspension and Reinstatement

Healthpeak Properties — Dividend Reduction

National CineMedia — Dividend Reduction

The Walt Disney Company — Dividend Suspension

The Takeaway

How to Sell Options for Premium

What Is An Option Premium?

What Is Selling Options Premium?

How Is an Options Premium Calculated?

Stock Price

Time Value

Intrinsic Value

Implied Volatility

Other Factors

Options Premiums and the Greeks

The Takeaway

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