What is Altcoin Season? Why Does It Happen?

2021 has been a heady time for cryptocurrency. Led by Bitcoin, the whole sector has seen huge rises in prices and tremendous volatility along the way. There’s been a massive development of decentralized finance (DeFi) technology applications and cryptocurrency ecosystems that allow people to trade and lend their tokens without the support of a traditional financial institution.

With all this activity and volatility, some have wondered what it will mean for the cryptocurrency ecosystem. Will Bitcoin continue to dominate and soar? Will other coins rise up to take the top spot in the field? Insiders have already coined a phrase for the possibility of Bitcoin stalling out and other cryptocurrency products and token rising in value. It’s known as “altcoin season.”

Altcoins: What Are They?

Basically, altcoins are cryptocurrencies that aren’t Bitcoin or Ethereum. In fact, Bitcoin is so dominant in the field that even Ethereum is sometimes referred to as an altcoin.

Bitcoin is the big kahuna of cryptocurrency, the one that started it all, the one that’s traded the most every day, the one that’s gotten the most backing from mainstream financial institutions, and, of course, the one that’s worth the most ($885,497,080,149 as of December 17, 2021). Ethereum is similar: a long track record, a variety of projects and systems built on top of it, substantial trading volume, and a high overall value (worth $459,827,737,310 as of December 17, 2021).

Altcoins are just about everything else. Sometimes they’re tokens built on top of Ethereum for DeFi projects, sometimes they’re offered in an “initial coin offering” for use with a specific product, sometimes they’re spun up by developers because they think there’s something wrong or missing in the current crypto ecosystem. This could be variants or forks of mainstream coins (like Litecoin (LTC) or Bitcoin Cash), or a whole new type of coin with a specific usage (stablecoins like Tether or USDC), or tokens for use in a specific ecosystem, like XRP for use in Ripple.

When Does “Altcoin Season” Happen?

Altcoin season happens when there’s steady outperformance of tokens and coins that aren’t Bitcoin.

There’s no promise or guarantee that every runup in Bitcoin will turn into a downturn later or that altcoins will start outperforming the original crypto. In fact, it’s not uncommon for all cryptos to rise together, as excitement about the sector grows and new money goes into all sorts of coins looking for profits.

There are a number of theories for why altcoin season could potentially happen. One popular one is that Bitcoin investors will pocket their gains from a surging Bitcoin, maybe by selling some of it, and then move those gains into other cryptocurrencies.

They might do this for one of two reasons:

1.    To realize gains. This might happen if the value of Bitcoin owned by an investor has gone up relative to the dollar or other fiat currencies or cryptocurrencies, and they want to spend some of those gains on things that can’t be bought with crypto itself.

2.    Expectations of future growth change. After a large runup of Bitcoin, an investor’s projected future growth or value of an asset might change compared to the price of investing. So, with inflated Bitcoin values, it’s possible that altcoins could be a better investment going forward. And if enough investors and traders make that decision, they will be.

How Do You Know If It’s Altcoin Season?

You can’t determine altcoin season just by looking at the price of altcoins or Bitcoin or any other cryptocurrency in isolation.

Looking at their “market cap”, or the total value of all the circulating tokens, can be a better indicator of what’s going on with investor valuation of cryptocurrencies. This is because price isn’t just determined by investor interest or disinterest, but also by the number of outstanding coins.

How Are Altcoins Doing Relative to Bitcoin?

To tell if we are in altcoin season, we have to look at two things. The first is Bitcoin’s “dominance” vis a vis the rest of the crypto market as well as the performance of altcoins relative to Bitcoin.

At the time of writing in December 2021, according to CoinMarketCap, Bitcoin’s dominance is 41% of the total market. Near the beginning of this year, it stood at 70%. Bitcoin’s highest dominance was 96% in late 2013, Bitcoin’s lowest dominance was early 2018, when it stood at around 33%. Its lowest this year is around 40%, which it hit in May of this year.

Bitcoin has fallen in value by almost 40%, giving a chance for altcoins to gain value in comparison. But we can also compare Bitcoin market value to that of altcoins:

•   Bitcoin’s market value has grown from $176 billion to $885 billion.

•   XRP, the cryptocurrency associated with Ripple, has had its market cap grow from $9 billion to just under $38 billion.

•   Cardano (ADA), whose token is called ADA, has grown from about $3 billion to $41 billion.

•   Litecoin, a Bitcoin alternative founded in 2011 and thus one of the oldest altcoins, has grown from around $3 billion to $10 billion.

•   Ethereum (ETH), the least alt of the altcoins, the most well established of all non-Bitcoin tokens, has grown from $29 billion to $459 billion.

Whether altcoin season is happening at all — and if so, whether it will continue — still remains to be seen.

The Takeaway

Altcoin season describes a time period when altcoins steadily outperform Bitcoin. There are a few ways to try to determine altcoin season, but it remains impossible to predict. Basically, you’ll know it when you’re in it.

Interested in crypto? With SoFi Invest®, you can trade cryptocurrency online from a selection of more than two dozen coins – from Bitcoin and Ethereum to altcoins like Chainlink, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Prostock-Studio


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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Source: sofi.com

What Is Fibonacci Retracement in Crypto Trading?

A retracement level is the price at which a stock or cryptocurrency tends to see a reversal in its trend. Fibonacci retracement is a popular tool in technical analysis that helps determine support and resistance levels on a price chart.

What Are Fibonacci Retracement Levels?

Fibonacci numbers are a series where each number equals the sum of the two previous numbers. The most basic series is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 etc.

When it comes to technical analysis, investors use Fibonacci Replacement Levels, expressed as percentages, to analyze how much of a previous move a price has retraced. The most important Fibonacci Retracement levels are: 23.6% 38.2%, 50% and 61.8%.

Some analysts refer to 61.8% as “the golden ratio,” since it equals the division of one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The other Retracement levels reflect other calculations: Dividing one number by the number three places to its right equals 23.6%. For example: 8/34 = 0.2352. Bitcoin traders often use 78.6%, which is the square root of 0.618,

Some prefer the 0.618 and 0.382 levels because these are the retracement levels analysts believe are most likely to generate a trend reversal. These levels are considered inflection points where fear and greed can alter price action. When an asset is trending upward but loses momentum, it’s possible that a pullback to the 0.618 price level could result in a bounce upward, for example.

How Does Fibonacci Retracement Work and What Does it Do?

There are several theories as to why the fibonacci retracement works. Some of these include:

•   Fibonacci price levels reflect the effects of extreme fear and greed in the market. To use this to their advantage, traders might buy when people are panicking and sell when others are getting greedy.

•   Fibonacci patterns are often observed in nature as well as in mathematics. For example: fruits and vegetables. If one would look at the center of a sunflower, spiral patterns could appear to curve left and right. Counting these spirals, the total often is a Fibonacci number. If one could divide the spirals into those pointed left and right, then two consecutive Fibonacci numbers could be obtained. Therefore, it’s thought that these patterns may be important in financial markets as well.

•   The law of numbers: If a greater percentage of people practice Fibonacci crypto trading, then the likelihood of its accuracy increases.

At its core, a Fibonacci retracement is a mathematical measurement of a particular pattern. When it comes to Fibonacci in crypto, traders try to apply these patterns to price action to predict future price movements.

Who Created Fibonacci Retracements?

While traders commonly use Fibonacci in crypto today, the number sequences pre-date the invention of cryptocurrency by many centuries. Fibonacci numbers are based on the key numbers studied by mathematician Leonardo Fibonacci (or Leonardo of Pisa) in the 13th century, although Indian mathematicians had identified them previously. He was a medieval Italian mathematician famous for his “Book of the Abacus”, the first European work on Indian and Arabian mathematics, which introduced Hindu-Arabic numerals to Europe.

Formula

In an uptrend or bullish market, the formulas for calculating Fibonacci retracement and extension levels are:

UR = High price – ((High price – Low price) * percentage) in an uptrend market; where UR is uptrend retracement.

UE = High price + ((High price – Low price) * percentage) in an uptrend market; where UE is an uptrend extension.

For example: A stock price range of $10 – $20, could depict a swing low to swing high.

Uptrend Retracement (UR) = $20 – (($20 – $10) * 0.618)) = $13.82 (utilizing 0.618 retracement)

Uptrend Extension (UE) = $20 + (($20 – $10) * 0.618)) = $26.18 (utilizing 0.618 retracement)

If a stock pulls back $13.82 could be a level that the stock bounces back to reach higher levels than its swing high price, e.g. $20. In an uptrend, the general idea is to take profits on a long trade at a Fibonacci price extension Level ~ $26.18.

What Does a Fibonacci Retracement do?

Markets don’t go straight up or down. There are pauses and corrections along the way. To buy stocks in an uptrend, one would look to get the best price possible.

Some traders use Fibonacci Retracement to determine how much a stock could pull back before continuing higher. Traders can use these retracement levels to find optimal prices at which to enter a trade.

A swing high happens when a security’s price reaches a peak before a decline. A swing high forms when the highest price reached is greater than a given number of highs around it.

Swing low is the opposite of swing high. It refers to the lowest price within a timeframe, usually fewer than 20 trading periods. A swing low occurs when a lowest price is lower than any other surrounding prices in a given period of time.

Support and Resistance

Support is the price level that acts as a floor, preventing the price from being pushed lower, while resistance is the high level that the price reaches over time. Analysts often illustrate these as horizontal lines on a graph.

A support or resistance level can also represent a pivot point, or point from which prices have a tendency to reverse if they bounce (in the case of support) or retreat (in the case of resistance) from that level.

Learn more: Support and Resistance: What Is It? How To Use It for Trading

Limitations of Fibonacci Retracement

Fibonacci retracements in crypto or other markets may be slightly predictive. But over relying on them can be counterproductive for reasons such as:

•   Fibonacci retracements, like any other indicators, could be used effectively only if investors understand it completely. It could end up being risky if not used properly.

•   There are no guarantees that prices will end up at that point, and retrace as the theory indicates.

•   Fibonacci retracement sequences are often close to each other, therefore it may be tough to accurately predict future price movements.

•   Using technical analysis tools like Fibonacci retracements can give investors tunnel vision, where they only see price action through this one indicator. Assuming that any single indicator is always correct can be problematic.

A Fibonacci retracement in crypto trading could wind up being even less predictive than in other financial markets due to the extreme volatility that cryptocurrencies often experience.

Fibonacci Retracements and Bitcoin

Fibonacci retracements can also be used for trading cryptos such as Bitcoin (BTC), similarly to how they’re used in stocks. In this case, one would use the levels 23.6%, 38.2%, 50%, 61.8% and 78.6% to determine where the cryptocurrency price would reverse.

Crypto prices are very volatile, and leverage trading is common. Leverage is the use of borrowed funds to increase the trading position, beyond what would be available from the cash balance alone. Therefore, it can be important to have some reference as to when the price could reverse, to not incur major losses.

Using the Fibonacci Retracement Tool to Trade Cryptocurrencies

In order to get started with a Fibonacci Retracement Tool, a trader could find a completed trend for a crypto, say, Bitcoin, which could either be an uptrend or downtrend.

Below are some steps on how to use Fibonacci retracement tool:

1.    Determine the direction of the market. Is it an uptrend or downtrend?

2.    For an uptrend, determine the two most extreme points (bottom and top) on the Bitcoin price chart. Attach the Fibonacci retracement tool on the bottom and drag it to the right, all the way to the top.

3.    For a downtrend, the extreme points are top and bottom and the retracement tool could be dragged from the top to the bottom.

4.    For an uptrend or downtrend, one could monitor the potential support levels: 0.236, 0.382, 0.5 and 0.618.

Recommended: Crypto Technical Analysis: What It Is & How to Do One

Fibonacci Retracement Example for Bitcoin

In December 2017, Bitcoin fell from $13,112 to around $10,800, within a short timeframe. After that, it rallied up to $12k twice, but did not break above that level until 2021. That indicates a bearish pattern, as it couldn’t break above its previous high. In technical analysis it is called a double top.

On the Fibonacci tool, the $12k resistance point coincided with the 50% level of retracement. When the price could not reach this level, it started to fall again. In this scenario, traders using Fibonacci Retracement might consider this a good time to exit a long position or establish a short position. A short trade is based on the speculation that the price of Bitcoin is going to fall.

By February, 2018, the trade materialized as Bitcoin continued its downtrend falling all the way to $9,270. The short trade would have worked and traders could have realized a profit from using the crypto Fibonacci Retracement tool, although those who managed to HODL for years after that would have made even more.

FAQ

Does Fibonacci retracement work with crypto?

While the Fibonacci retracement tool is traditionally used for analyzing stocks or trading currencies in the forex market, some analysts believe it is also helpful in determining a crypto trading strategy.

How accurate is fibonacci retracement?

In crypto, Fibonacci retracement levels are often fairly accurate, although no indicator is perfect and they are best used in combination with other research. The accuracy levels increase with longer timeframes. For example, a 50% retracement on a weekly chart is a more important technical level than a 50% retracement on a five-minute chart.

What are the advantages of using fibonacci retracement?

Here are some benefits of using Fibonacci Retracement.

•   Trend prediction. With the correct setting and levels, it can often predict the price reversals of bitcoin at early levels, with a high probability.

•   Flexibility. Fibonacci Retracement works for assets of any market and any timeframe. One must note that longer time frames could result in a more accurate signal.

•   Fair assessment of market psychology. Fibonacci levels are built on both a mathematical algorithm and the psychology of the majority, which is a fair assessment of market sentiment.

The Takeaway

The Fibonacci Retracement tool can help identify hidden levels of support and resistance so that analysts can better time their trades. Analysts believe this tool is more effective when utilized with types of cryptocurrency that have higher market-capitalization, like Bitcoin and Ethereum, because they have more established trends over extended time frames.They consider it less effective on cryptocurrencies with a smaller market capitalization.

Whether you use Fibonacci Retracement or other methods to create your cryptocurrency trading strategy, a great way to get started is by opening a brokerage account on the SoFi Invest investment app. You can use it to trade more than a dozen different coins, including Bitcoin, Ethereum, Litecoin, Cardano, and Dogecoin.

Photo credit: iStock/HAKINMHAN


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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Source: sofi.com

Average Directional Index (ADX) Explained

The Average Directional Movement Index, or ADX, is an indicator used in technical analysis to help determine the strength of a pricing trend. The indicator was developed by Welles Wilder as part of his Directional Movement System for commodity trading. Since then it has been used for other tradeable investments such as stocks, exchange-traded funds (ETFs), and foreign currency.

The ADX can help investors understand when to buy and sell positions. Here’s a closer look at what ADX is, how to calculate it, and the role it plays in making investment decisions.

What is ADX?

ADX shows an average of price range values that indicate expansion or contraction of prices over time — typically a period of 14 days, but, in some cases it may be calculated for shorter or longer periods as well. Shorter periods may respond quicker to pricing movements but may also have more false signals. Longer periods tend to generate fewer false signals but may cause the indicator to lag the market.

The Average Directional Index is part of Wilder’s Directional Movement System, which attempts to measure the strength of pricing trends in both the positive and negative directions, by using DMI+ and DMI- indicators. The DMI+ indicates positive directional movement, and the DMI- indicates negative directional movement. ADX is calculated as the sum of the differences between DMI+ and DMI- over time. These three indicators are often charted together.

ADX Formula

Calculating the Average Directional Index on your own is a bit complex; it requires a series of calculations to be carried out in a specific order. Luckily, you probably won’t ever have to do it yourself — instead take a look at advanced chart settings for publicly available stock charts on websites like the Wall Street Journal . There is often an option to add an ADX or DMI overlay to the chart.

For those who are curious, here’s a look at the formulas required to calculate ADX:

+DI = (Smoothed +DM/ATR) X 100

-DI = (Smoothed -DM/ATR) X 100

DX= (|+DI – -DI|/|+DI + -DI|) X 100

ADX = ((Prior ADX X 13) + Current ADX))/14

Assumptions:

DM = Direction Movement

ATR = Average True Range

+DM = Current High – Previous High

-DM = Previous Low – Current Low

Smoothed +/- DM = ∑14 t=1DM – ((∑14 t=1DM)/14) + CDM

CDM = Current DM

How to Interpret ADX Results

It’s possible that prices within a given market could be moving up or down within a given range without ever developing into a trend. The ADX is used first and foremost to determine whether or not an up or down trend exists in a market at all.

According to Wilder’s calculations, when ADX is above 25, it indicates a strong trend; when ADX is below 20, that indicates there is no trend.

Generally, analysts conclude that between 20 and 25 represents a bit of a gray area in which some say that a developing trend is possible. It’s also possible that prices are simply ranging back and forth rather than trending.

For those who follow ADX, an ADX between 25 and 50 may represent a moderate strength trend. A result of 50 to 100 indicates trends that are increasingly strong.

How to Read an ADX Chart

Identifying the direction of trends is relatively easy when looking at an ADX chart. A line that’s moving in the upward direction indicates a strengthening trend, while a line moving in the downward direction indicates weakening. The steeper the slope of the line, the stronger the trend.

When ADX turns down, it may be an indicator that a trend is ending, which could be an opportunity for investors to consider whether they want to continue holding a position. If ADX has been low for a period of time and begins to rise by four or five points, it may be a bullish indicator that investors should consider buying to take advantage of a potentially burgeoning trend.

Using ADX, +DMI, and -DMI in tandem can generate crossover signals that can help signal opportunities to buy or sell. For example, the +DMI line crossing above the -DMI line is a potential signal to buy when ADX is above 20.

Investors tend to use ADX in conjunction with other technical analysis indicators such as moving averages to help them analyze price movements.

ADX can be used as a momentum indicator that can signal potential reversals in trends. For example, if ADX and market price are moving in an upward trajectory together, that can indicate that prices are strongly trending higher. However, if ADX declines but prices continue to rise, it may be an indicator that the market is losing momentum and prices will turn down soon.

ADX Comparisons

ADX is related to some other indicators. Here’s a breakdown of similarities and differences.

ADX vs DMI

Like ADX, DMI can be used as an indicator to help determine if the price of a security is trending and how strong that trend is. DMI does not take the direction of the trend into account.

DMI can be positive or negative. Positive DMI, or +DMI, is the difference between a stock’s high price today and its high yesterday. Values from the previous 14 days are then added up.

Negative DMI, of -DMI is the difference between a stock’s low from today and its low price from yesterday. A sum is then taken for these values for the previous 14 days.

ADX is calculated as the sum of the difference between positive and negative DMI over time.

ADX vs the Aroon Indicator

The Aroon Indicator is made up of two indicators, the Aroon-Up and the Aroon-Down. Aroon-up reflects the number of days since the last 25-day high, while Aroon-Down represents the number of days since the 25-day low.

The Aroon Indicator is similar in many ways to ADX. It’s used to identify the beginning of a trend or changes to trends, and determine whether a trend exists or if prices are just fluctuating within a range. It can also help investors determine the strength of a trend.

Higher Aroon values indicate a trend, while low values represent a weakening or nonexistent trend.

Pros and Cons of Using ADX

Like any indicator, the ADX has benefits and limitations. Here’s a look at some of the pros and cons:

Pros Cons
Helps identify whether a trend exists or if prices are simply fluctuating within a given range. False trading signals can occur, for example when crossovers are happening too frequently, which can result in confusion as trades quickly shift direction.
Can indicate shifts in trends to help investors make buy and sell decisions.
When used in conjunction with +DMI and -DMI, investors can examine crossover signals to make buy and sell decisions.

The Takeaway

When using technical analysis to decide when to buy and sell investments, individuals may make use of a wide range of research and analytic tools, such as ADX, DMI, the Aroon Indicator, and other trend indicators.

For investors who prefer this type of hand-on approach, a SoFi Invest® brokerage account offers active investing. For others, who may prefer a more hands-off approach, SoFi Invest offers automated investing accounts — an automatically managed portfolio based on their risk tolerance and goals.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Pekic


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SOIN1221542

Source: sofi.com

What Is the Coupon Rate of a Bond?

A coupon rate is the nominal interest rate or yield associated with a fixed-income security. A bond coupon rate represents the annual interest rate paid on a bond by the issuer, as determined by the bond’s face value. Issuers typically pay bond coupon rates on a semiannual basis.

The coupon rate of a bond can tell an investor how much interest they can expect to collect on a yearly basis via coupon payments. The bond coupon rate is not the same as the bond yield, which investors use to estimate the total rate of return.

Investment-quality bonds can help with diversification in a portfolio while providing a consistent stream of interest income. Understanding coupon rate and what it means is important when choosing bonds in which to invest.

What Is Coupon Rate?

Coupon rate is a predetermined percentage of interest, typically paid out twice per year. Investors often use the term “coupon rate” when discussing fixed-income securities, including bonds and notes.

Bonds represent a debt, wherein the bond issuer agrees to periodically pay interest to investors who purchase the bonds in exchange for the temporary use of their capital. Investors can buy individual bonds, bond funds or bond options, which are similar to stock options.

The coupon rates for their bonds reflect on the bond’s par or face value at issuance. This means the rate won’t change for the maturity of the bond. The coupon interest rate tells you what percentage of the bond’s face value you’ll receive yearly. Coupon rates are typically lower for investment-grade bonds and higher for junk bonds, due to their higher risk.

So, assume you purchase a bond with a face value of $1,000. The bond has a coupon rate of 4%. This means that for each year you hold the bond until maturity, you’d receive $40, regardless of what you paid for the bond.

Coupon Rate Formula

The bond coupon rate formula is fairly simple and it looks like this:

Bond coupon rate = Total annual coupon payment/Face or par value of the bond x 100

To apply the coupon rate formula you’d need to know the face or par value of the issued securities and the total interest payment. To find the annual coupon payment, you’d multiply the amount of interest paid by the number of periodic payments made for the year. You’d then divide that by the par value and divide the result by 100.

How to Calculate Coupon Rate (Example)

Say you have a bond with a face value of $1,000. That bond pays $25 in interest to you twice per year. To find the annual coupon payment you’d simply multiply $25 by two to get $50. You’d then divide the $50 annual coupon payment by the $1,000 par value of the bond and multiply by 100 to find that your bond has a coupon rate of 5%.

How Does Coupon Rate Affect Bond Price?

Bond prices can move up or down based on its coupon rate, relative to movements in interest rates. When interest rates are higher than the bond’s coupon rate, that bond’s price may fall in order to offset a less attractive yield. If interest rates drop below the bond’s coupon rate, the bond’s price may rise if it becomes a more attractive investment opportunity.

When comparing coupon rates and bond prices, it’s important to understand the relationship between the bond’s face value and what it trades for on the secondary market. If a bond is trading at a price above its face value, that means it’s trading at a premium to par. Conversely, if a bond is trading at a price below its face value, that means it’s trading at a discount to par.

An investor who purchases a bond with the intent to hold it until it reaches maturity does not need to worry about bond price movements. Their end goal is to collect the annual interest payments and recover their principal on the assigned maturity date, making it a relatively safe investment as long as the issuer fulfills their obligation.

Investors looking to buy bonds and resell them before they mature, however, may pay attention to which way bond prices are moving relative to the coupon rate to determine whether selling would yield a profit or loss.

Coupon Rate Comparisons

Coupon rate tells investors how much interest a bond will pay yearly until maturity. But there are other metrics for evaluating bonds, including yield to maturity and interest rates. Understanding the differences in what they measure matters when determining whether bond investments are a good fit and what rate of return to expect.

Coupon Rate vs Yield to Maturity

Yield to maturity or current yield reflects the interest rate earned by an investor who purchases a bond at market price and holds on to it until it reaches maturity. A bond’s maturity date represents the date at which the bond issuer agrees to repay the investor’s principal investment. Longer maturity dates may present greater risk, as they leave more room for the bond issuer to run into complications that could make it difficult to repay the principal.

When evaluating yield to maturity of a bond, you’re looking at the discount rate at which the sum of all future cash flows is equal to the price of the bond. Yield to maturity can be quoted as an annual rate that’s different from the bond coupon rate. In figuring yield to maturity, there’s an assumption that the bond issuer will make coupon and principal payments to investors on time.

The coupon rate is the annual interest earned while yield to maturity reflects the total rate of return produced by the bond when all interest and principal payments are made.

Yield-to-Maturity Formula

To find yield to maturity for a single bond, you’d apply this formula:

Yield to maturity = [Annual Interest + (FV-Price)/Maturity] / [(FV+Price)/2]

So you’d subtract the bond’s current market price from its face value, divide that number by the maturity term and add in the annual interest. You’d then divide that figure by half of the bond’s face value plus its price.

Coupon Rate vs Interest Rate

Interest rates can influence coupon rates. The coupon rate of a bond is the rate of interest paid annually, based on the bond’s face value. Again, the issuer – typically a company or government entity – determines the bond coupon rate at issuance and it does not change.

An interest rate, meanwhile, represents the rate a lender charges a borrower. Individual lenders determine interest rates, often based on movements in an underlying benchmark rate. When discussing bond coupon rates and interest rates, it’s typically in the context of changes to the federal funds rate. This is the rate at which commercial banks lend to one another overnight.

Movements in the federal funds rate can influence interest rates, including coupon rates. When interest rates rise, based on changes to the federal funds rate, that can cause bond prices to fall. When interest rates decline, based on changes to the federal funds rate, bond prices typically rise.

Zero-Coupon Bond Alternative

Some bonds, called zero-coupon bonds, don’t pay interest at all during the life of the bond. The upside of choosing zero bonds is that by forgoing annual interest payments, it’s possible to purchase the bonds at a deep discount to par value. This means that when the bond matures, the issuer pays the investor more than the purchase price.

Zero coupon bonds typically have longer maturity dates, which may make them suitable when investing for long-term goals. This type of bond may experience more price fluctuations compared to other types of bonds sold on the secondary market. Investors may still have to pay taxes on the imputed interest generated by the bond, though it’s possible to avoid that by investing in zero coupon municipal bonds or other tax-exempt zero coupon bond options.

The Takeaway

Investing in bonds can help you create a well-rounded portfolio alongside stocks, exchange-traded funds (ETFs) and other securities. As you get closer to retirement, bonds can be an important part of your income and risk management strategy, whether you’re investing through an IRA, a 401(k), or a brokerage account.

The sooner you get started with investing the better, as the power of time and compounding interest are both on your side. A great way to get started is by opening an online brokerage account on the SoFi Invest investment app, which allows you to begin building a portfolio with ease via your phone.

Photo credit: iStock/Inside Creative House


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Source: sofi.com

Blockchain Consensus Algorithms: Different Types and How They Work

What Are Blockchain Consensus Algorithms?

A crypto consensus mechanism forms the foundation of any blockchain. In 2009, Satoshi Nakamoto invented Bitcoin’s proof-of-work consensus algorithm to secure the Bitcoin network. Since then, several alternative consensus algorithms have been proposed.

The basic idea of achieving consensus on a blockchain is to create a way that everyone can agree that certain transactions are valid. That way, no one can cheat the system by creating fake transactions with money they don’t have, and the same funds can’t be sent twice.

Part of the reason Bitcoin was such a transformative technological innovation is that the proof-of-work method of achieving crypto consensus was the first-ever practical solution to the “double spend problem.”

With previous versions of electronic currency, one of the biggest hurdles programmers struggled to overcome was how to create a scarce digital asset that people couldn’t replicate and that couldn’t be spent more than once without everyone knowing.

Thanks in no small part to consensus algorithms, cryptocurrencies and the blockchain technology that powers them have overcome this problem.

Recommended: Crypto 101: What is Cryptocurrency?

What Is a Consensus Mechanism?

In a system run by one central authority (say, a bank), preventing double spending is simple. One entity manages the ledger of transactions, making sure everything runs smoothly. If Alice wants to give a dollar to Bob, the central manager subtracts a dollar from Alice’s account and adds that dollar to Bob’s account. Payment rails like banks and PayPal use this type of consensus mechanism.

With cryptocurrencies, however, there is no single entity in charge of the system, because it is a decentralized network by design. That makes keeping a record of the ledger of transactions — or, establishing a consensus mechanism — more difficult.

Recommended: What Is Distributed Ledger Technology (DLT)?

Consider Bitcoin, as an example. Instead of a single central server, many thousands of people around the globe run the Bitcoin software. The servers they run are called “nodes.” The nodes must somehow come to the same conclusion regarding what transactions have occurred on the network, or to “achieve consensus.” All the nodes need to be on the same page for the network to function.

How Does a Consensus Algorithm Work?

The way a crypto consensus mechanism works varies depending on the algorithm. But all have the same end goal: to achieve consensus on the network. This requires all nodes to agree on which transactions are valid and which are not. Consensus must be maintained from block to block in an orderly and secure fashion if things are to continue running smoothly.

Many of the potential cyberattacks that target blockchains involve disrupting the process of new block generation in some way. For this reason, it’s important that crypto consensus be achieved in a way that makes it difficult for bad actors to intervene.

Types of Consensus Algorithms

There have been many attempts to improve upon proof-of-work (PoW) algorithms. Proof of stake (PoS) might be the most popular of these, as many of the top cryptocurrencies by market cap today are PoS coins. Other crypto consensus methods like proof of burn or proof of capacity are less well-known and haven’t been tried as much.

Proof of Work

While there are now many different consensus algorithms, proof of work is still the most commonly used. To date, this method has shown itself to be reliable and secure.

Miners are the people who run computers that maintain the network by solving complex mathematical problems. The miner that first solves the problem gets to add the next block of transactions to the blockchain and also earns the new coins minted along with that block (the block reward). This is the process by which a verifiable history of transactions on the blockchain gets created.

PoW has shown to be a strong and secure method of achieving consensus. It would require so much computational power to overtake a large PoW network that any would-be hackers would be incentivized to become honest participants in the network instead. In other words, it’s easier and more rewarding to just mine for coins than it is to make any attempts at attacking the network.

Some of the downsides of PoW are that the process takes a lot of energy, it may not scale well, and it can trend toward centralization due to the high costs of new equipment — not everyone will be able to afford to mine. The main benefit of PoW is that it has the longest track record and has proven to be the most secure consensus algorithm. To date, there has never been a successful attempt at disrupting Bitcoin’s block production.

Proof of Stake

Proof of stake is a popular consensus mechanism that can be used by blockchains to verify their transaction history. While miners in PoW networks perform energy-intensive work to mine blocks, validators in PoS commit stakes of tokens to validate blocks.

With PoS, validators take the place of miners. They verify transactions by staking crypto on the network, which involves locking up a certain amount of coins for a set period of time, during which the coins will be unusable. Validators have a chance at being randomly selected to find the next block.

Other validators then “attest” that they also believe the block to be valid. Once enough validators have attested to a block’s validity, the block is then added to the chain. All validators involved in the process receive part of the block reward.

One of the big differences between PoS and PoW is that PoW requires miners to expend energy in the form of electricity to find blocks. PoS requires validators to stake their crypto, or in other words, to deposit money. For this reason, proof of stake is praised for being a less energy-intensive consensus mechanism than proof of work.

On the other hand, a disadvantage of PoS is that it favors the wealthiest token holders (who can stake more tokens) and trends toward centralization.

Proof of Burn

Proof-of-burn (PoB) algorithms employ the process of “burning” tokens to achieve crypto consensus. Burning coins involves sending them to an address from which they can never be recovered. Once sent to a burn address, coins are lost forever.

On a PoB network, people mine crypto by burning coins. The more coins burnt, the greater the reward.

An advantage of PoB is that it takes very little energy. A disadvantage is the question of how supply and demand will play out on such a blockchain. Burning existing coins to receive a reward of new coins seems counterintuitive. A delicate balance would have to be maintained for the system to work long-term.

What is the Bitcoin Consensus?

Bitcoin uses the proof-of-work consensus mechanism. Miners must contribute computing power and electricity to mine what remains of the 21 million bitcoins. Bitcoin mining involves processing transactions for the network, work for which miners are compensated with newly minted coins (the block reward). As of December 2021, each block rewards miners with a total of 6.25 BTC.

What is the Ethereum Consensus?

The Ethereum network also uses proof of work, although developers have been planning a move to proof of stake for some time. This change seems to be delayed each time it approaches, so there’s no telling when exactly it might happen.

The Takeaway

Consensus needs to be reached for a crypto network to know which transactions are valid. Otherwise, anyone could spend the same funds twice or make fake transactions using funds they don’t own.

While there are a number of other ways of achieving consensus, proof of work and proof of stake are the most well-known and widely used for now.

Interested in investing in crypto? With SoFi Invest®, you can trade cryptocurrency from a selection of more than two dozen coins including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

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SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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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Source: sofi.com

What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401k?

A money purchase pension plan or MPPP is an employer-sponsored retirement plan that requires employers to contribute money on behalf of employees each year. The plan itself defines the amount the employer must contribute. Employees may also have the option to make contributions from their pay.

Money purchase pension plans have some similarities to more commonly used retirement plans such as 401(k)s, pension plans, and corporate profit sharing plans. If you have access to a MPPP plan at work, it’s important to understand how it works and where it might fit into your overall retirement strategy.

What Is a Money Purchase Pension Plan?

Money purchase pension plans are a type of defined contribution plan. That means they don’t guarantee a set benefit amount at retirement. Instead, these retirement plans allow employers and/or employees to contribute money up to annual contribution limits.

Like other retirement accounts, participants can make withdrawals when they reach their retirement age. In the meantime, the account value can increase or decrease based on investment gains or losses.

Money purchase pension plans require the employer to make predetermined fixed contributions to the plan on behalf of all eligible employees. The company must make these contributions on an annual basis as long as the plan is maintained.

Contributions to a money purchase plan grow on a tax-deferred basis. Employees do not have to make contributions to the plan, but it may allow them to do so. The IRS does allow for loans from money purchase plans but it does not permit in-service withdrawals.

What Are the Money Purchase Pension Plan Contribution Limits?

Each money purchase plan determines its own contribution limits are, though they can’t exceed maximum limits set by the IRS. For example, an employer’s plan may specify that they must contribute 5% or 10% of each employee’s pay into that employee’s MPPP plan account.

Annual money purchase plan contribution limits are similar to SEP IRA contribution limits. For 2022, the maximum contribution allowed is the lesser of:

•   25% of the employee’s compensation, OR

•   $61,000

The IRS routinely adjusts the contribution limits for money purchase pension plans and other qualified retirement accounts based on inflation. The amount of money an employee will have in their money purchase plan upon retirement depends on the amount that their employer contributed on their behalf, the amount the employee contributed, and how their investments performed during their working years. Your account balance may be one factor in determining when you’re able to retire.

Rules for money purchase plan distributions are the same as other qualified plans, in that you can begin withdrawing money penalty-free starting at age 59 ½. If you take out money before that, you may owe an early withdrawal penalty of 10.

Like a pension plan, money purchase pension plans must offer the option to receive distributions as a lifetime annuity. Money purchase plans can also offer other distribution options, including a lump sum. Participants do not pay taxes on their accounts until they begin making withdrawals.

The Pros and Cons of Money Purchase Pension Plans

Money purchase pension plans have some benefits, but there are also some drawbacks that participants should keep in mind.

Pros of Money Purchase Plans

Here are some of the advantages for employees and employers who have a money purchase plan.

•   Tax benefits. For employers, contributions made on behalf of their workers are tax deductible. Contributions grow tax-free for employees, allowing them to put off taxes on investment growth until they begin withdrawing the money.

•   Loan access. Employees may be able to take loans against their account balances if the plan permits it.

•   Potential for large balances. Given the relatively high contribution limits, employees may be able to accumulate account balances higher than they would with a 401(k) retirement plan, depending on their pay and the percentage their employer contributes on their behalf.

•   Reliable income in retirement. When employees retire and begin drawing down their account, the regular monthly payments through a lifetime annuity can help with budgeting and planning.

Disadvantages of Money Purchase Pension Plan

Most of the disadvantages associated with money purchase pension plans impact employers rather than employees.

•   Expensive to maintain. The administrative and overhead costs of maintaining a money purchase plan can be higher than those associated with other types of defined contribution plans.

•   Heavy financial burden. Since contributions in a money purchase plan are required (unlike the optional employer contributions to a 401(k)) a company could run into issues in years when cash flow is lower.

•   Employees may not be able to contribute. Depending on the terms of a plan, employees may not be able to make contributions to the plan. However, if the employer offers both a money purchase plan and a 401(k), they could still defer part of their salary for retirement.

Money Purchase Pension Plan vs 401(k)

The main differences between a pension vs. 401(k) have to do with their funding and the way the distributions work. In a money purchase plan, the employer provides the funding with optional employee contribution.

With a 401(k), employees fund accounts with elective salary deferrals and option employer contributions. For both types of plans, the employer may implement a vesting schedule that determines when the employee can keep all of the employer’s contributions if they leave the company. Employee contributions always vest immediately.

The total annual contribution limits (including both employer and employee contributions) for these defined contribution plans are the same, at $61,000 for 2022. But 401(k) plans allow for catch-up contributions made by employees aged 50 or older. For 2022, the total employee contribution limit is $20,500 with an extra catch-up contribution of $6,500.

Both plans may or may not allow for loans, and it’s possible to roll amounts held in a money purchase pension plan or a 401(k) over into a new qualified plan or an Individual Retirement Account (IRA) if you change jobs or retire.

Recommended: IRA vs 401(k)–What’s the Difference?

Employees may also be able to take hardship withdrawals from a 401(k) if they meet certain conditions, but the IRS does not allow hardship withdrawals from a money purchase pension plan.

MPPP Plan 401(k) Plan
Funded by Employer contributions, with employee contributions optional Employee salary deferrals, with employer matching contributions optional
Tax status Contributions are tax-deductible for employers, growth is tax-deferred for employees Contributions are tax-deductible for employers and employees, growth is tax-deferred for employees
Contribution limits (2022) Lesser of 25% of employee’s pay or $61,000 $61,000, with catch-up contributions of $6,500 for employees 50 or older
Catch-up contributions allowed No Yes, for employers 50 and older
Loans permitted Yes, if the plan allows Yes, if the plan allows
Hardship withdrawals No Yes, if the plan allows
Vesting Determined by the employer Determined by the employer

The Takeaway

Money purchase pension plans are a valuable tool for employees to reach their retirement goals. They’re similar to 401(k)s, but there are some important differences.

Whether you save for retirement in a money purchase pension plan, a 401(k) or another type of account the most important thing is to get started. If you don’t have access to a money purchase pension plan or similar plan at work there are other options you can pursue, such as opening an IRA online through the SoFi Invest brokerage platform. The sooner you begin saving for retirement, the more time your money will have to grow through the power of compounding interest.

FAQ

Here are answers to some additional questions you may have about money pension purchase plans.

What is a pension money purchase scheme?

A money purchase pension plan or money purchase plan is a defined contribution plan that allows employers to save money on behalf of their employees. These plans are similar to profit-sharing plans and companies may offer them alongside a 401(k) plan as part of an employee’s retirement benefits package.

Can I cash in my money purchase pension?

You can cash in a money purchase pension at retirement in place of receiving lifetime annuity payments. Otherwise, you can start taking Early withdrawals from a money purchase pension plan are typically not permitted and if you do take money early, taxes and penalties may apply.

Is final salary pension for life?

A final salary pension is a defined benefit plan. Unlike a defined contribution plan, defined benefit plans do pay out a set amount of money at retirement, typically based on your earnings and number of years of service. Final salary pensions can be paid as a lump sum or as a lifetime annuity, meaning you get paid for the remainder of your life.

Photo credit: iStock/ferrantraite


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Source: sofi.com

What Are Junk Bonds?

Junk bonds are a type of corporate bond that carry a higher degree of risk and generally have lower credit ratings. Bond issuers are more likely to default, making junk bonds speculative investments.

So why would investors buy a junk bond? For one simple reason: They have the potential to produce bigger returns compared to other bond options.

Junk bonds aren’t necessarily right for every investor, because they are so risky. Understanding how junk bonds work can help you decide if they belong in your investment portfolio.

How Do Junk Bonds Work?

Bonds are a form of debt. When a corporation or government entity issues a bond, they’re doing so for the purposes of raising capital. Investors buy the bonds, providing the capital and in return, they expect to get paid that money back along with interest.

There’s an implied agreement between the investor and the bond issuer that the latter will make interest payments on time, but in addition, bonds can be secured or unsecured. Treasury bonds, for example, are unsecured bonds that are backed by the full faith and credit of the U.S. government.

Junk bonds, also referred to as high-yield bonds, represent a category of bonds that fall below investment-grade. In simple terms, this means there’s a greater risk that the bond issuer could default or fail to follow through on their promise to repay investors. Whether a bond is considered to be investment-grade or not depends on its credit ratings.

Recommended: How Do Corporate Bonds Work?

Credit Ratings and Junk Bonds

Bond credit ratings are issued by a number of organizations. These agencies determine which bonds are considered to be investment-grade and which are non-investment grade or speculative-grade.

In the United States, the majority of bond credit ratings are issued by three agencies, on an ABCD scale:

•   Moody’s Investors Services

•   Standard & Poor’s Global Ratings

•   Fitch Ratings

Bonds with a rating of BBB or higher (Baa on the Moody’s scale) are categorized as investment-grade. This means that in the eyes of the rating agency, default risk is low or in other words, investors are reasonably likely to get their money back from the bond issuer.

When bonds fall below the BBB rating range (Ba for Moody’s), they’re considered to be junk bonds. The further the rating drops, the riskier and more speculative the bond becomes. Here’s how junk bond credit ratings compare.

Moody’s S&P Ratings Fitch Ratings
High Risk Ba or B BB or B BB or B
Highest Risk Caa, Ca or C CCC, CC or C CCC
In Default C D DDD, DD or D

Why Do Investors Like Junk Bonds?

The riskier an investment is, the more potential it has to deliver higher returns. That lies at the heart of why some investors might prefer junk bonds over investment-grade bonds. Junk bonds can have varying maturities like other types of bonds. Typically, these are longer term bonds, with maturities lasting in the five- to 10-year range.

Investing in junk bonds could yield returns on the same level as stocks but with less volatility. That’s because you’re getting the promise of a fixed interest payment, rather than depending on which way the market swings on any given day to determine returns. If the bond issuer undergoes a financial turnaround and its credit rating improves, that can reduce the level of risk associated with its bonds.

Junk bonds can be attractive to investors in low interest rate environments as well. That’s because unlike other bonds, they’re less sensitive to interest-rate movements. Bond issuers may be highly motivated to raise capital so they can offer higher rates to attract investors. Investor risk may also be reduced when the economy is growing, since that can be conducive to improvements in the financial health of bond issuers.

Examples of Junk Bonds

Companies that issue junk bonds tend to be newer companies or established ones that may be struggling financially following bankruptcy. But it might surprise you to learn that some top brands fall into the junk bond category. Here are a few companies that have junk bond ratings:

•   Ford (NYSE:F) Pandemic-related losses in 2020 caused Ford to lose its investment-grade status. In November 2021, the company announced it would repurchase $5 billion in junk bonds in an effort to restructure its balance sheet and improve its credit rating.

•   Tesla (NASDAQ:TSLA) Tesla is a fast-growing but still relatively young company, which has earned it a solid junk rating. That, however, didn’t stop it from becoming the first junk company to earn a $1 trillion valuation in October 2021.

•   Coinbase (NASDAQ:COIN) Coinbase is one of the leading cryptocurrency exchanges but because of the speculative and high-risk nature of crypto trading, it has yet to move beyond a junk bond rating. In September 2021, the company issued $2 billion worth of junk bonds.

•   Netflix (NASDAQ:NFLX) This streaming service used junk bonds as a way to finance original television shows and movies. As the company starts moving away from a negative cash-flow model and towards positive cash flow, their bond value is improving — and likely to eventually lose “junk bond” status.

•   Delta Airlines (​NYSE: DAL) In March 2021, the airline was demoted to “junk bond” status thanks largely to Covid-induced struggles that slammed the travel industry. While it rebounded somewhat in Q3, this is just another example of how surprisingly well-known companies can land in the junk bond category.

Advantages and Disadvantages of Junk Bonds

Investing in junk bonds has both pros and cons, just like other investments.

On the advantages side, investors have potential to earn higher yields from junk bonds than other types of bonds. There’s less volatility to contend with compared to stocks, and fixed interest payments could provide a steady source of income. Depending on the credit rating of the bond issuer, it’s possible that a junk bond could actually be less risky compared to a stock.

On the other hand, junk bond investing is speculative, so an investor has to be willing to accept the possibility of losses — specifically, default risk and the likelihood of the bond issuer missing an interest payment. In the worst-case scenario, the company could go bankrupt, meaning an investor may not get their initial investment back, much less the interest. One also has to consider the time component, since junk bonds are not designed to be held for the shorter term.

Junk Bond Advantages Junk Bond Disadvantages
Investors could earn interest rates above what investment-grade bonds are paying. Default risk is typically higher with junk bonds vs. investment-grade bonds.
Compared to stocks, junk bonds are less susceptible to volatility and may be less risky overall. If the bond issuer goes bankrupt, the investment could end up being a total loss.
Fixed interest payments may provide a consistent stream of income for investors. They’re not suited to short-term investing given the duration of junk bonds and pricing fluctuations.

How to Invest in Junk Bonds

If you’d like to invest in junk bonds, opening a brokerage account is a good place to start. If you already have an investment account, you can move on to purchasing junk bonds. There are a few different ways you can do this:

•   Purchase individual junk bonds, if your brokerage offers them.

•   Buy a junk bond mutual fund.

•   Invest in a junk bond exchange-traded fund (ETF).

Buying individual junk bonds can be risky, as it concentrates investment dollars in a single security. Higher minimum investments may limit the number of junk bonds an investor is able to purchase.

Investing in junk bond funds or ETFs instead may make it easier to spread out your investment dollars while spreading out risk. Junk bond funds and ETFs can offer exposure to a basket of junk securities which can help with diversification and risk management.

When comparing junk bond funds or ETFs, consider the underlying credit ratings for each security that’s represented. This can tell you whether the fund mostly holds high risk, higher risk or in default bond offerings. Also consider the expense ratios involved and the maturity terms so you’re choosing a fund that fits both your budget and timeline for investing.

Are Junk Bonds a Good Investment?

Should you buy junk bonds? The answer depends largely on your personal risk tolerance. Junk bonds may be a good investment for investors who are comfortable taking more risk for a shot at higher returns. On the other hand, you may choose to steer clear of them if you’re looking for fixed-income investments that are on the safer side.

What’s important to consider before investing is the entire makeup of your portfolio as a whole and your financial goals. If you’re interested in junk bonds, think about how much of your portfolio you’re comfortable dedicating to them and how that could affect your overall risk profile.

The Takeaway

Investing in bonds can add a fixed-income element to an investor’s portfolio, which may be helpful for diversification. Alongside stocks, bonds may help you devise a more well-rounded investment strategy as you work toward your financial goals.

If you’re ready to start investing, consider opening an investment account with SoFi Invest® today. With SoFi, you can choose between DIY or automated investing to help fuel your personal financial journey.

Find out how to get started with SoFi Invest.

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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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Source: sofi.com

How to Pay for Emergency Home Repairs, So You Can Move on ASAP

A home’s mechanical systems, exterior features, and large appliances don’t last forever. Even with regular maintenance, sometimes an expensive-to-fix item will fail. So figuring out how to pay for emergency home repairs is something homeowners may want to think about before that emergency happens.

How Much Do Common Home Repairs Cost?

From roof to foundation, there are a lot of things in and on a home that might need to be repaired, and some of those things might be emergency home repairs at some point.

Roof

A home’s roof has a certain life expectancy, generally based on the material used. A roof made of asphalt shingles might last from 15 to 20 years, while a concrete or clay-tiled roof could last for more than 50 years.

Regular roof inspections are a good way to identify any minor problems, which may typically cost from $150 to $400. Minor repairs might include:

•   Gutter cleaning.

•   Patching leaks.

•   Replacing shingles.

•   Repairing flashing.

Major issues found during a roof inspection might cost up to $7,000. These could include:

•   Substantial water damage.

•   Chimney repair.

•   Sagging or shrinking roof.

•   Environmental issues, such as mold.

Replacing a roof, a major expense, may be necessary at some point in the life of a home. For an average-sized home, a completely new roof can cost $8,000 or more.

Foundation

Foundation issues can show up as cracks in a home’s walls, floors that are not level, gaps around windows, or doors that don’t close properly. Fixing these symptoms of a foundation issue won’t fix the underlying problem, but fixing the foundation at the earliest sign of the symptoms may mean a less costly foundation repair.

Hiring a structural engineer can be a good first step if there appear to be major foundation problems, as they won’t be trying to sell a product to fix any potential problems, so will likely be unbiased. A structural inspection can range from $300 to $600.

•   Cracks in a foundation that don’t affect the structure are minor repairs, but are best not ignored, lest they lead to major issues. Potential cost: between $250 and $800.

•   A leaking foundation might be the cause of those cracks. Waterproofing a foundation, which may involve excavating around the foundation, installing tile drains, filling cracks, and then coating the structure with a sealant, can cost anywhere from $2,000 to $7,000.

•   A house with a settling or sinking foundation may have flooring that is warped or sloping, doors and windows that don’t open and close properly, or even exterior cracks, or other apparent issues. The cost generally depends on the type of repair. Raising a house using piers can cost between $1,000 and $3,000, while mudjacking might be between $500 and $1,300.

Water Damage

Water damage in a basement might be due to flooding from a storm or broken water line, for example, and is best fixed quickly so mold doesn’t grow and become another issue to take care of. In addition to being an unpleasant sight, standing water can cause structural or electrical issues in a home. Extraction of the water is generally the first step in this type of repair, followed by any necessary structural repairs.

•   For simple fixes, such as cleaning up after an overflowing toilet, the cost might be around $150.

•   To extract gray water, which is water from bathtubs, sinks, or washing machines, extraction and related repairs can cost $3,000 on average.

•   Water that contains fecal matter from sewage backups is called black water. This is the costliest type of repair because it poses a significant health hazard. The cost to extract black water and make related repairs can be as high as $20,000.

Mold

If the above water issues are not fixed in a timely manner, mold can grow on the surfaces, requiring additional necessary repairs. In addition to damaging any surface mold grows on, it’s also a serious health hazard, potentially causing allergic reactions, asthma attacks, and skin irritation. Mold remediation costs average between $1,500 and $3,000.

Pests and Rodents

Pests and rodents in a home can be more than just annoying. Infestations might cause major damage to a home if left untreated. One-time pest control costs around $250 to $350 on average. Ongoing services — sometimes monthly, quarterly, or annual recurring treatments — may cost from $50 to $400, depending on the frequency.

•   Damp areas can attract pests, such as cockroaches. The average cost for getting rid of them is $150 to $400, and it might take more than one visit to completely eradicate them.

•   Attics can be inviting spaces to rodents like mice, rats, or squirrels, or other animals such as raccoons or bats. Damage might be to woodwork, insulation, or wiring and cost between $150 and $400 to repair.

HVAC

A home’s heating, ventilation, and air conditioning (HVAC) systems control the regulation and movement of air throughout the building. Like other components in a home, it’s wise to have a HVAC system inspected regularly to catch any problems before they become serious. A standard tune-up for an HVAC system might start at $99, with any potential repairs added to that. Some companies might offer ongoing maintenance plans, which could be a cost saver over time.

•   Furnace repairs might be for a blower, ignitor, flame sensor, heat exchanger, circuit board, or valve. The cost can vary depending on the part and whether it can be repaired or if it needs to be replaced, and the labor charge for doing the repair. Simple repairs may be as little as $100, while more extensive part replacements can be as much as $1,500.

•   Like furnaces, air conditioners have a lot of individual parts, any of which might need to be repaired or replaced at some point. Capacitor replacement is a common air conditioning cost, and can range between $90 and $475. One of the more expensive costs is an air compressor replacement, which can be between $1,350 and $2,300. Costs will vary by model of the air conditioner and servicer.

Electrical

Electrical issues in a house can vary from minor repairs, such as replacing an outlet, to wiring overhauls that may require professional help.

•   Hiring an electrician to replace a home’s outlets can cost around $100 to $250. For someone who is confident in their DIY skills, this relatively simple job can be done for about $5 per outlet.

•   Replacing a circuit breaker or the entire electrical panel is something homeowners might leave to a professional. Costs will depend on the number of breakers being replaced or, in the case of replacing the electrical panel, how many amps. Circuit breaker replacement might cost about $50 per breaker. Panel replacement or upgrade can be anywhere from $1,000 to $4,000.

•   Rewiring a home can be quite expensive and include other repairs, such as plaster or drywall repair. To rewire an entire home, a homeowner might expect to pay between $3,000 and $8,000.

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Ways To Finance an Emergency Home Repair

Even with regular inspections and maintenance, sometimes emergency home repairs are necessary. Paying for these repairs might involve using a variety of sources, depending on what is available and a person’s individual financial circumstances.

Homeowners Insurance

Homeowners insurance may be the first source most homeowners look to when needing to pay for emergency home repairs. The policy will stipulate what is covered, how much the company will pay, and any amount the homeowner might be responsible for, such as a deductible. Some things a typical homeowners insurance policy might cover are costs to repair or rebuild after a disaster, replacement of personal belongings that were destroyed because of a disaster, or the costs of alternative housing while repairs are being made or a house is being rebuilt.

Emergency Fund

If there is a sufficient amount in an emergency fund, paying for an emergency home repair with cash on hand is an option that won’t incur interest. How much to save in a home repair emergency fund will depend on the home’s size, age, and value. Older or more expensive homes might mean higher repair costs.

A typical recommendation is to save between one and four percent of a home’s value in a home repair emergency fund. For a typical American home valued at just over $300,000, this means having between $3,000 and $12,000 saved for emergency home repairs. This is certainly a goal to work toward, but even $1,000 in savings can be helpful.

Home Equity

Homeowners who have built up equity in their home may choose to use that equity to pay for emergency home repairs. Using this type of financing, however, does come with some risk because the home is used as collateral. If the borrower defaults, the lender may seize the home as a way to repay the debt. There are two types of loans that are based on a home’s equity: home equity loans and home equity lines of credit (HELOCs).

A home equity loan is a fixed-rate, lump-sum loan. It has a set repayment term, and the borrower makes regular, fixed payments consisting of principal and interest.

A HELOC also uses the equity a homeowner has built up, but the borrower does not receive a lump sum, instead accessing the loan funds as needed until the loan term ends. Funds can be borrowed, repaid, and borrowed again, up to the limits of the loan. HELOCs are variable-rate loans and consist of two periods: a draw period and a repayment period. The draw period is the time during which money can be borrowed, and might be 10 years. The repayment period is the time during which the loan is repaid and might last for 20 years. The combination of the two would make this example a 30-year HELOC.

Assistance Programs

If emergency home repairs are required, but the homeowner can’t afford to pay for them, assistance programs might be an option to look into.

•   Government loan or grant assistance. The U.S. Departments of Housing and Urban Development (HUD) , Agriculture (USDA) , and Veterans Affairs (VA) offer grants and loans to eligible homeowners for home repairs and improvements.

•   Disaster relief . HUD offers several programs for homeowners affected by federally declared disaster areas. HUD partners with other federal and state agencies to provide relief in the form of mortgage assistance, relocation, food distribution, and other types of disaster relief.

•   Community Assistance Programs. Funding assistance may be able to be found by looking at local sources, such as county or city governments or charities. A good place to start a search is through HUD’s state listings .

Credit Card

Using a credit card to finance emergency home repairs might be the first option some people think about. It can certainly be a quick way to pay for such repairs. There are pros and cons to using a credit card for this purpose.

If the credit card is a zero-percent-interest card — and the balance can be paid in full before the promotional period ends — this can be a way to pay for an emergency home repair without paying interest.

Credit cards are more likely to have high interest rates, though, which can add a significant amount to the account balance if not paid off quickly. Credit cards also come with borrowing limits. A major emergency home repair might max out this limit or even exceed it. Using all available credit can potentially have a negative effect on a borrower’s credit score.

Should I Get a Home Repair Loan?

Another option to pay for emergency home repairs might be a home repair loan, which is a type of personal loan.

•   An unsecured personal loan does not use collateral, like a home equity loan or HELOC, so the borrower is not risking losing their home if they can’t repay the loan. The potential loan value is also not limited by the amount of equity in the home.

•   An unsecured personal loan may be funded more quickly than a home equity loan or HELOC. Because there is no collateral to determine a value for, this cuts out a potentially time-consuming step included in secured loans.

•   Personal loans can be used for a variety of reasons, not just emergency home repairs. If there are expected repairs, planned repairs, or home renovations that might make a home more livable, an unsecured loan can be a good option.

Awarded Best Personal Loan of 2021 by Forbes.
Low, fixed rates starting at 4.99% APR with Autopay.

The Takeaway

It’s probably safe to say that nobody likes to think about emergencies. But it’s wise to be prepared in the event that one arises. If a personal loan is the option that works best for your financial situation, a SoFi Personal Loan might be one to consider.

Unsecured personal loans from SoFi have competitive interest rates, no fees, and terms that can work for a variety of budgets and financial needs.

Find your rate in just one minute.


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Source: sofi.com