Aug
01
2023
Guide to Reading an S-1 Statement

Guide to Reading an S-1 Statement

By | Growing Wealth, invest, Investing | Comments Off on Guide to Reading an S-1 Statement

An S-1 statement is a type of registration form that companies, hoping to go public, need to file with regulators in order to issue stocks on public exchanges. It’s an important document, and one that is combed through by many prospective investors prior to an IPO.

For investors who may be interested in IPO investing, learning the ins and outs of an S-1 statement is paramount.

What Is an S-1 Form?

An S-1 statement is the registration form companies must file with the Securities Exchange Commission (SEC) to issue new securities. As such, it’s a necessary document for any company preparing for an initial public offering (IPO) to list on a national exchange, such as the Nasdaq or the New York Stock Exchange.

The form serves as an introduction for companies hoping to raise money from the investing public, in which they essentially lay out their business plan. That includes explaining its current business model, its place in the current competitive landscape, as well as introducing managers and sharing a short prospectus for the stock itself. The form also includes the company’s methodology for formulating the stock price, and disclosures about how the company expects its IPO to impact the stocks of any existing public companies.

Thoroughly reading an S-1 is a great way for investors to research a company directly, rather than gathering information from third-party sources.

Recommended: What Is an IPO? Everything Investors Need to Know


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Where Can You Find S-1 Filings?

The S-1 form, like all SEC forms, is publicly available. You can typically find it by going to the “investor relations” section of a company’s Web site, or by searching on the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.

The EDGAR system is free and publicly available. It allows you to search by company, or even by form type. So, for example, you could look for all the S-1 registrations for a given period.


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

How to Read An S-1: Section Breakdown

There are several different sections of the S-1 form that contain helpful information for analyzing a stock.

The Box

The beginning of the form consists of a section often called “The Box,” which summarizes the major highlights of the document. The Box usually includes the following information about the company:

• Background information

• Industry information

• Competitive strengths

• Business strategies

• Risks

• Financial data

• Description of securities it plans to sell in its IPO

The box is where the company will try to tell its life story, its plan for the future, and why it is a worthwhile investment. It is, in some ways, a pitch to prospective investors. As such, it can be surprisingly non-technical, without some of the financial and legal jargon that can make financial statements so difficult to read.

Management’s Discussion & Analysis (MD&A)

This is where the company explains and offers context around the financial statements that appear in other sections of the S-1 registration.

This usually includes operating performance metrics, as well as how different business segments performed. This is also where management often elaborates on some of the risk factors that affect or will affect the company. Sometimes, a company will also use the MD&A as a place to share their long-term outlook.

Selected Consolidated Financial Data

This is the section where you’ll get to the numbers that matter, where the company shares a condensed statement of its income, balance sheet and cash flow.

Those statements present a quarter-by-quarter illustration of the company’s financials over the previous two years, showing its growth, capital expenditures, and other trends in the business. While those numbers may well tell a story on their own, they may be worth perusing with the commentary and background of the MD&A in mind.

Recommended: Using Fundamental Analysis to Choose Stocks

Description of Capital Stock & Underwriting

While the other sections tell you what the company is, what it does, and how it’s doing, this one gets to the main point of the S-1 – what the company is selling, namely, its stock.

This section is where investors can dig in to understand the security that will be making its debut. It includes details of shareholder rights, such as its voting and conversion rights. It also lists the investment banks that the company has hired to sell its IPO shares to large investors.

Description of Capital Stock & Underwriting even gives a preview of the IPO itself, disclosing the stock’s offering price, the number of shares the company plans to sell, and the total proceeds that the company hopes to raise in the IPO.

Recommended: How Are IPO Prices Set?

Executive Compensation

This is the section that discloses how much senior management makes in salary and other compensation, and can give investors a sense of the net worth and motivation of the leadership.

Related Party Transactions

This is where investors get a glimpse into who the company is working with. It’s a chance to connect the dots, and see who’s backing the company. The Related Party section is where a company has to disclose any transaction with a private equity firm, or a family member.

The Footnotes

Seasoned investors are also close readers of the footnotes of an S-1. This is where the most interesting little details are sometimes buried.

The Takeaway

Filing an S-1 is a key part of the IPO process. Reading an SEC S-1 filing can help investors understand what to expect about an IPO. Every company approaches their S-1 registration differently. Each company will provide different degrees of disclosure, and they will use the format of the S-1 to present that information in the way they believe will benefit them.

Reading through the document can feel like a chore, but if you’re at all interested in IPO investing, it’s a worthwhile investment of time. If you feel like you’re in over your head, though, you may want to speak with a financial professional to try and get caught up.

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

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

Photo credit: iStock/insta_photos

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.

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

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

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

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Aug
01
2023
What Are Trading Index Options?

What Are Index Options?

By | Growing Wealth, invest, Investing | Comments Off on What Are Index Options?

While stock options derive their value from the performance of a single stock, index options are derivatives of an index. Indexes can have a narrow focus on a specific market sector or they can contain a broader mix of stocks. They’re listed on U.S. option exchanges and regulated by the Securities and Exchange Commission (SEC).

Like stock options, the prices of index options fluctuate according to factors like the value of the underlying security, volatility, time left until expiration, strike price, and interest rates. Unlike stock options, there is no underlying asset with index options, they’re simply bets on the direction that an index will move.

What Is An Index Call Option?

An index call option is a financial derivative that represents a bullish bet on the underlying index. An investor who buys an option of this kind believes that the index in question will rise in value. If the index appreciates, so too will the call option.

Before getting too far into the weeds when it comes to trading index options, it may be a good idea to make sure you have a solid understanding of what it means to trade options in a broader sense. It can be a confusing segment of the financial market.


💡 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.

What Is An Index Put Option?

An index put option is a bearish bet on the underlying index. An investor who buys this derivative believes that its underlying index will decline in value.

Differences Between Index Options and Stock Options

In addition to the existence of an underlying security, there are several key differences between trading index options and trading stock options. It’s important for investors to understand these differences.

Trading Hours

Broad-based indexes stop trading at 4:15 PM Eastern Time while stock options and narrow-based index options end their trading fifteen minutes earlier, at 4:00 PM ET. When significant news drops after the market closes, this could impact the prices of narrow-based index options and stock options.

Broad-based indexes are less likely to be affected, however, because they tend to include more sectors in their baskets of securities.

Recommended: When Is the Stock Market Closed?

Settlement Date and Style

While stock options use the American-style of exercise, meaning options holders can exercise at any point leading up to expiration, most index options have European-style exercise (with some exceptions). That means the trader can’t exercise the option until their expiration date. However, traders can still close out their index option positions by buying or selling throughout the life of the contract.

As for settlement date, stock index options usually have their last trading day on the Thursday before the third Friday of the month, with determination of the settlement value coming on Friday. Stock options, by contrast, have their last trading day on the third Friday of the month, with settlement being determined on Saturday.

Settlement Method

When settling stock options, the underlying stock changes hands upon the exercise of the contract. However, traders of index options settle their contracts in cash.

That’s because of the number of securities involved. For example, an investor exercising a call option based on the S&P 500 would have to buy shares of all the stocks in that index.

What Are Options Trading Levels?

Some options trading strategies are simple and come with relatively low investment risk. But there are other ways to use options that can get rather complicated and come with substantial risk.

To make sure that investors are aware of the bets they are making and the risks involved, brokerages have something called options trading levels. Brokerages have enacted these levels to protect themselves from liability if new investors lose large amounts of money in a short period when trading options they don’t understand.

If a brokerage believes an investor faces a low risk of potentially blowing up their whole account through complex options trading, they’ll assign that investor a higher options trading level. Higher options levels open up a user’s account to additional investment strategies, enabling them to trade different types of options.

Most brokerages have four or five trading levels. Reaching all but the highest level usually involves little more than answering some questions and taking a quiz to test an investor’s knowledge.

Options Trading Level 1

This is the lowest level and most often only allows a user to trade the simplest options like covered calls and protective puts. A covered call is when an investor writes an out-of-the-money call option on stocks they own, and a protective put is when an investor buys put options against stocks they own.

These strategies require the trader to hold shares of the underlying stock, making these trades less risky than many others. There is also only one option leg to worry about, which makes executing the trade much simpler in practice.

Options Trading Level 2

Level 2 comes with the right to buy calls and puts. The difference between level 2 and level 1 is that traders at level 2 can make directional bets. Most new traders begin their accounts at this level.

Options Trading Level 3

At level 3, more complex strategies start to come into play. This level usually brings with it the ability to trade debit spreads. Though complicated to execute, debit spreads still limit risk since the trader’s loss is limited to the cash paid to buy the necessary options.

Options Trading Level 4

Level 4 provides traders the ability to trade credit spreads, and is sometimes included in level 3 (in which case the brokerage would have only 4 levels). A credit spread works like a debit spread, although the trader will receive a premium.

Calculating potential losses becomes more complicated at this level. It is here that novice traders can wind up accidentally exposing themselves to tremendous risk.

Options Trading Level 5

Level 5 brings with it the highest risk, allowing traders to write call options and put options without owning shares of the underlying stock. These trades expose investors to potentially unlimited losses and should be avoided by all but the most experienced options traders.

The most important requirement of level 5 is that an investor keeps adequate cash as margin in their account. That way, if an options trade moves against the investor, the broker can take cash to cover the losses created by the bad trade.

Recommended: What Are Naked Options?

What Happens to Index Options On Expiry?

Most index options have European-style exercise, meaning traders can only execute them upon expiration. Investors should conduct the appropriate research to learn which type of exercise their index options have before making a trade.

Upon expiration, the Options Clearing Corporation (OCC) assigns the option to one or more Clearing Members who have short positions in the same options. The Clearing Members then assign the option to one of their customers.

The index option writer must then pay the settlement amount in cash. Settlement usually occurs on the business day following the exercise.


💡 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.

How To Trade Index Options

Trading index options may be one type of investment to consider as part of a diversified portfolio. For the most part, trading index options works like trading any other option. The big difference is that the underlying security will be an index, rather than stock.

Here are a few basic steps that investors can follow to begin trading index options.

•   Get your brokerage account authorized for options trading

•   Get familiar with how the options chains look in your brokerage account

•   Study different option trading strategies and pick one appropriate for your level of expertise

•   Enter an option trade using the trading screens of your account

•   Monitor your option trades and make a plan for closing out positions to either lock in profits or cut losses.

The Takeaway

Index options are similar to stock options, in some ways, in that they are financial derivatives. They are rooted in indexes, though, which are focused on a segment or portion of the overall market. Trading options and index options, though, is a high-level activity, and may not be for all investors.

Index investing with index options could appeal to investors looking to hedge their portfolios with different types of investments. If an investor holds a lot of positions within a particular index, or perhaps an index fund or other low-fee ETFs, put options for that index could serve as a hedge, for example.

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

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

Photo credit: iStock/kate_sept2004

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.

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

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Aug
01
2023
woman on laptop on couch

What You Need to Know About SPACs Before You Invest

By | Growing Wealth, invest, Investing | Comments Off on What You Need to Know About SPACs Before You Invest

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

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

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

What Is a SPAC?

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

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


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

SPACs and Acquisitions

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

Here’s a step-by step:

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

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

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

Recommended: What Happens to a Stock During a Merger?

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

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

How Do I Invest in SPACs?

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

5 Things to Know Before Investing in SPACs

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

1. Failure to Find Target

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


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

2. Investor Dilution

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

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

3. Poor Performance

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

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

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

4. Big Names Can Cloud Investor Judgment

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

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

5. Uncertain Future

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

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

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

The Takeaway

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

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


SoFi Invest®

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

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

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

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

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

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Aug
01
2023
woman graduate with diploma

Gift Aid vs Self Help Aid For College

By | Going to College, Student Loans, student_loan | Comments Off on Gift Aid vs Self Help Aid For College

College tuition can be costly whether you are seeking an undergraduate and graduate degree, attending an out-of-state public university, or taking classes at a private university.

If you do not have adequate savings to pay for classes, room and board, food, travel and other necessities, then you may be considering how to pay for college.

The costs of attending college continue to rise each year for both public and private colleges and universities. In 2023, average annual tuition and fees came to $9,377 at public in-state colleges, and $38,768 at private universities. Obtaining financial aid is one way students can afford to attend college.

One common type of financial aid is called gift aid and typically comes in the form of federal and state grants and a wide range of scholarships that are given by private donors, foundations, non-profit organizations and even the universities themselves.

These grants and scholarships do not have to be paid back, which is helpful for students who are on a tight budget or are considering obtaining a graduate degree.

Another type of aid is called self help aid and usually comes in a form of work study programs and student loans. Some work study programs are sponsored by the federal government and they provide part-time jobs for students who need help paying their tuition. These jobs can be either on the campus of the college or university or off campus nearby.

Self help aid also includes federal student loans which have to be paid back after a student graduates.

There are advantages and disadvantages of both gift aid and self help aid. Undergraduate and graduate students may only qualify for one type of aid, depending on their financial circumstances, where they are obtaining their college degree or other factors.

What Are The Pros and Cons of Gift Aid?

Grants and scholarships are considered gift aid. One common form of grants are called Pell grants. These are grants provided by the federal government and Pell grants are given to undergraduate students who have demonstrated financial need.

The maximum federal Pell grant award is $7,395 for the 2023-24 academic year with amounts changing annually.

The main drawback of gift aid is that you may not know what amount you will receive and you may need to supplement paying for college by seeking more scholarships and grants or getting a part-time job.

If you received a Pell grant the previous academic year, there is no guarantee that you will receive it again for the next academic year.

There are thousands of scholarships that are available to students who are obtaining various degrees. There are a variety of scholarship databases where students can search to find scholarships.

The amount of money that you can receive from scholarships can range a couple thousand dollars to larger amounts that will cover the majority of your tuition and other costs.

Scholarships may require that you reapply annually and there is no guarantee that you will receive a scholarship again the following academic year.

What Are The Pros and Cons of Self Help Aid?

Self help aid includes both work study programs and federal and private student loans.

Work Study Program

Federal work study programs are available for both undergraduate and graduate students to help them pay for tuition and other educational costs. The program’s jobs are related to the student’s course of study and also include community service work.

Both full-time or part-time students may qualify for part-time employment while they are enrolled at their university or college and it is available to undergraduate and graduate and professional students who demonstrate financial aid.

The work study programs are operated by a college and university financial aid office and you will receive at least the federal minimum wage. These jobs are available both on-campus and off-campus which can be beneficial for students who do not have other means of transportation.

Students who work off campus typically work for a nonprofit organization or a public agency and the goal of the job is geared to be in the public interest. The number of jobs is limited, so students should apply early to ensure that they have a position for the following academic year.

Federal and Private Student Loans

Another type of self-help aid are federal and private student loans. Federal student loans are based upon the financial need of a student and their family. They are either subsidized or unsubsidized direct loans and may offer lower interest rates than private loans. One drawback is that the federal government will limit how much money you can borrow.

Undergraduate students may qualify for subsidized loans that are given based on their financial need. One benefit is that the federal government will pay the interest on these loans while you are attending school or at least taking classes half-time, during your grace period or when you have deferred the loan.

Both undergraduate and graduate students may qualify for unsubsidized loans and they are not based on financial need. These loans accrue interest while students are taking classes, during the loan’s grace period, or when you have deferred the loan.

Private student loans can be used to help make up the gap in what is needed to pay the remainder of tuition or living expenses. While both federal and private student loans may help students pay for their tuition; they must be repaid once a student graduates.

If you do not complete your course study and do not receive a degree, the student loans still have to be repaid.

Federal student loans have protections that private student loans do not offer. Students who have received federal student loans can seek several options after graduation to repay their loans including income-driven repayment programs.

Federal student loans also offer borrowers’ the ability to put loans in forbearance or deferment, allowing them to temporarily pause payments in certain situations.

Some borrowers will choose to refinance student loans into new private student loans. But this option means that you lose the protection of the federal repayment plans. Private student loans have both fixed and variable interest rates.

Fixed interest rates are beneficial for people who want to know the exact amount of their loans each month helping them to budget more easily. The interest rate on variable student loans are sometimes lower than fixed rates but that means your payment amounts can fluctuate from month to month.

Shopping around can help you find the best private student loan that fits your financial needs and the amount that you can repay each month.

Qualifying For Gift Aid or Self Help Aid?

Qualifying for either gift aid or self help aid might depend on your financial circumstances. Students may want to apply early for grants, scholarships, work-study programs and student loans.

The first step in applying for federal aid, such as the Pell Grant, work study, and federal student loans is completing a FAFSA®, or Free Application for Federal Student Aid. This application must be completed every year.

Some states and colleges may have their own FAFSA deadlines , so double check to avoid missing any. Missing a deadline can mean forgoing some financial aid.

While some gift aid such as scholarships are given to students based on merit, grades or other accomplishments, grants, work study programs and student loans are typically based on your financial needs and the cost of tuition at your university.

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Jul
28
2023
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What Is Payment for Order Flow?

By | invest, Investing | Comments Off on What Is Payment for Order Flow?

What Is Payment for Order Flow (PFOF)?

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

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

How Does Payment for Order Flow Work?

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

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

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

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

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

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

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

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

Why Is PFOF Controversial?

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

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

What Are Market Makers?

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

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

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

PFOF in the Options Market

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

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

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

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

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

Criticism of Payment for Order Flow

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

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

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

Defenders of Payment For Order Flow

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

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

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

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

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

The Takeaway

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

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

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

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

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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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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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