Oct
17
2025
Wash Trading: What Is It? Is It Legal?

Wash Trading: What Is It and How Does It Work?

By | Growing Wealth, invest, Investing | Comments Off on Wash Trading: What Is It and How Does It Work?

Wash trading is an illegal practice in which an investor buys and sells the same or a nearly identical stock or security within a certain period of time. Wash trading is a prohibited activity under the Commodity Exchange Act (CEA) of 1936 and the Securities Exchange Act of 1934.

Wash trading is basically an attempt at market manipulation and a way to portray false market activity. Read on to learn about the implications of wash trading and how it works.

Key Points

•  Wash trading is a prohibited practice in which investors engage in buying and selling the same or similar securities to create the illusion of trading activity.

•  This practice can be a form of market manipulation and a way to portray false market activity.

•  The goal of wash trading is often to influence pricing or trading activity.

•  Wash trading is illegal and may result in penalties from regulatory agencies.

•  A wash sale is different from wash trading. The wash sale rule prohibits an investor from taking a tax deduction on a loss when they purchase the same or substantially identical security within 30 days before or after the sale.

What Is Wash Trading?

Wash trading occurs when an investor buys and sells the same or a similar security investment around the same time. This is also called round-trip trading, since an investor is essentially ending where they began — with shares of the same security in their portfolio.

Wash trades can be used as a form of market manipulation. Investors may buy and sell the same securities in an attempt to influence pricing or trading activity. The goal may be to spur buying activity to send prices up or encourage selling to drive prices down.

Some investors and brokers might work together to influence trading volume, usually for the financial benefit of both sides. The broker, for example, might benefit from collecting commissions from other investors who want to purchase a stock being targeted for wash trading. The investor, on the other hand, may realize gains from the sale of securities through price manipulation.

Wash trading is different from insider trading, which requires the parties involved to have some special knowledge about a security that the general public doesn’t. However, if an investor or broker possesses insider knowledge they could potentially use it to complete wash trades.

How Does Wash Trading Work?

Essentially, a wash trade means an investor is buying and selling shares of the same security at around the same time. But the definition of wash trades goes further and takes the investor’s intent (and that of any broker they may be working with) into account. There are generally two conditions that must be met for a wash trade to exist:

•  Intent. The intent of the parties involved in a wash trade (i.e., the broker or the investor) must be that at least one individual involved in the transaction must have entered into it specifically for that purpose.

•  Result. The result of the transaction must be a wash trade, meaning the same asset was bought and sold at the same time or within a relatively short time span for accounts with the same or common beneficial ownership.

Beneficial ownership means accounts that are owned by the same individual or entity. Trades made between accounts with common beneficial ownership may draw the eye of financial regulators, as they can suggest wash trading activity is at work.

Wash trades don’t necessarily have to involve actual trades, however. They can also happen if investors and traders appear to make a trade on paper without any assets changing hands.

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

Example of a Wash Trade

Here’s a wash trade example:

Say an investor owns 100 shares of a stock and sells those shares at a $5,000 loss on September 1. On September 5, they purchase 100 shares of the same stock, then resell them for a $10,000 gain. This could be considered a wash trade if the investor engaged in the trading activity with the intent to manipulate the market.

Is Wash Trading Illegal?

Yes, wash trading is illegal. The Commodity Exchange Act prohibits wash trading. Prior to the passage of the Act, traders used wash trading to manipulate markets and stock prices. The Commodity Futures Trade Commission (CFTC) also enforces regulations regarding wash trading, including guidelines that bar brokers from profiting from wash trade activity.

It’s important to distinguish between wash trading and a wash sale, which is an IRS rule. The IRS wash sale rule does not allow investors to deduct capital losses on their taxes from sales or trades of stocks or other securities in particular circumstances.

Under the IRS rules, a wash sale occurs when an investor sells or trades stocks at a loss and within 30 days before or after the sale they:

•  Purchase substantially identical stock or securities

•  Acquire substantially identical stock or securities in a fully taxable trade

•  Acquire a contract or option to buy substantially identical stock or securities, or

•  Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

Wash sale rules also apply if an investor sells stock and their spouse or a corporation they control buys substantially identical stock. When a wash sale occurs, an investor is not able to claim a tax deduction for those losses.

Essentially, the IRS wash sale rule is a tax rule. Wash trading is a form of intentional market manipulation.

Difference Between Wash Trading & Market Making

Market making and wash trading are not the same thing. A market maker is a firm or individual that buys or sells securities at publicly quoted prices on-demand, and a market maker provides liquidity and facilitates trades between buyers and sellers. For example, if you’re trading through an online broker you’re using a market maker to complete the sale or purchase of securities.

Market making is not market manipulation. A market maker is, effectively, a middleman between investors and the markets. While they do profit from their role by maintaining spreads on the stocks they cover, this is secondary to fulfilling their purpose of keeping shares and capital moving.

Recommended: What Is a Brokerage Account?

How to Detect & Avoid Wash Trading

The simplest way to avoid wash trading as an investor is to be aware of what constitutes a wash trade. Again, this can mean the intent to manipulate the markets by placing similar trades within a short timeframe.

Investors may notice red flags that may signal wash trading, such as multiple trades that have identical quantities and prices, repeated buying and selling between certain traders, and unusual trading patterns or volumes. Financial institutions and regulators also monitor trading data to identify or help prevent manipulative or abusive trading.

To avoid a wash sale, conversely, an investor could be mindful of the securities they are buying and selling and the timeframe in which those transactions are completed. So selling XYZ stock at a loss, then buying it again 10 days later to sell it for a profit would likely constitute a wash sale if they executed the trade and attempted to deduct the initial loss on their taxes.

It’s also important to understand how the 30-day period works. The 30-day rule extends to the 30 days prior to the sale and 30 days after the sale. So effectively, an investor could avoid the wash sale rule by waiting 61 days to replace assets that they sold in their portfolio.

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

The Takeaway

Wash trading involves selling certain securities and then replacing them in a portfolio with identical or very similar securities within a certain time period. This is typically done with the intent to manipulate the market. Wash trading is illegal.

Wash trading is not to be confused with the wash sale rule. For investors, understanding when the IRS wash sale rule applies can help them comply with tax guidelines. Those who are unclear about it, may wish to consult with a financial or tax professional.

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


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

FAQ

What’s considered wash trading

Wash trading is an illegal practice in which an investor buys and sells the same or a nearly identical security with the intent of falsely implying increased trading activity. It’s a form of market manipulation that could deceive other investors into making trades.

What’s the difference between wash trading and the wash sale rule?

Wash trading is an illegal practice with an intent to manipulate the market. The wash sales rule is a tax rule that says an investor cannot sell stock or securities for a loss and then buy substantially identical shares within 30 days before or after the sale and claim the deduction of the sale on their taxes.

Is a wash sale illegal?

No, a wash sale is not illegal. A wash sale is a tax rule that does not allow investors to claim a tax deduction if they sold a stock for a loss and then bought a substantially similar stock or security within 30 days before or after the sale.

How do day traders avoid wash sales?

To properly follow the IRS wash sales rule, an investor can wait for more than 30 days before or after the sale of a stock or security for a loss — meaning for a total of 61 days — before purchasing one that’s identical or substantially identical and then claiming the deduction for the sale on their taxes.

Photo credit: iStock/mapodile

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This article is not intended to be legal advice. Please consult an attorney for advice.

Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

SOIN-Q325-105

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Oct
17
2025

Best IRA for Young Adults: A 2025 Guide to Choosing Your Retirement Plan

By | invest, Investing, Preparing for Retirement | Comments Off on Best IRA for Young Adults: A 2025 Guide to Choosing Your Retirement Plan

Saving for retirement may be lower on the priority list for young adults as they deal with the right-now reality of paying rent, bills, and student loans. But the truth is, it’s never too soon to start saving for the future. The more time your money has to grow, the better. And saving even small amounts now could make a big difference later.

An individual retirement account (IRA) allows you to save for the future over the long term. It’s one option that could help young adults start investing in their future.

There are different types of IRAs, and each has different requirements and benefits. Read on to learn about different types of IRAs, how much you can contribute, the possible tax advantages, and everything else you need to know about choosing the best IRA for young adults.

Key Points

•   By saving and investing for retirement, a young adult could benefit from compounding returns, which can potentially help the growth of a nest egg over the long term.

•   Traditional IRA contributions may help reduce current taxable income because they are made with pre-tax dollars, and withdrawals are taxed in retirement.

•   Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.

•   A Roth IRA may be an option for young adults in a low tax bracket now who expect to be in a higher tax bracket in retirement.

•   Automating contributions may potentially enhance the growth of retirement savings by making savings a recurring process.

Why Start an IRA in Your 20s and 30s?

When you begin saving and investing in your 20s and 30s, you have more time to build a nest egg. Starting an individual retirement account (IRA) early in adulthood may potentially help you benefit from compounding returns and also give you a tax-advantaged way to help your money grow.

The Power of Compounding Returns

The younger you are when you start investing, the more time you have to take advantage of the power of compounding, which can help your investment grow over time.

With compounding returns, if the money you invest earns a profit, and that profit is then reinvested, you earn money both on your original investment and on the returns. That means your gains could potentially multiply over time. The more time you have to invest, the more time your returns potentially have to compound.

Building a Tax-Advantaged Nest Egg Early

An IRA typically also has tax advantages that may help you build your savings more efficiently. For example, with a traditional IRA, you contribute pre-tax dollars and pay taxes on the distributions in retirement. With a Roth IRA, you contribute after-tax dollars, and your withdrawals in retirement are tax-free. One type of IRA or the other might make the most sense for an investor, or perhaps even a combination of both types.

Understanding the Types of IRAs

There are several types of IRAs, but two of the most common are traditional IRAs and Roth IRAs.

How much you can contribute to either type of IRA each year is determined by the IRS, and the amount generally changes yearly. In 2025, those under age 50 can contribute a maximum of $7,000 annually to a traditional or Roth IRA. (Those 50 and up can contribute an extra $1,000 per year in 2025 in what’s called a catch-up contribution.) An IRA calculator can help you figure out how much you can contribute, depending on the type of IRA you’re interested in, among other factors.

What Is a Roth IRA?

A key difference between Roth and traditional IRAs is how they’re taxed. With a Roth IRA, you contribute after-tax dollars. Your contributions are not tax deductible when you make them. However, your earnings grow tax-free in the account, and you withdraw your money tax-free in retirement.

What Is a Traditional IRA?

With a traditional IRA, you contribute pre-tax dollars. Generally speaking, you take deductions on your contributions upfront, which may lower your taxable income for the year, and then you pay taxes on the distributions when you take them in retirement. Your earnings in the account grow tax-deferred.

What Are SEP and Simple IRAs?

Individuals who are self-employed or own a small business might want to explore a SEP IRA or a SIMPLE IRA.

A SEP IRA is available for freelancers, independent contractors, and small business owners. Contributions are capped at a limit set by the IRS. In 2025, individuals can contribute up to the amount that’s the lesser of $70,000 or 25% of an individual’s compensation. Contributions to a SEP are made with pre-tax dollars and are tax deductible, and withdrawals are taxed in retirement.

A SIMPLE IRA is also an option for those who are self-employed as well as small businesses that have no other retirement savings plan. The tax and withdrawal rules for a SIMPLE IRA are the same as for a SEP IRA. One big difference between them: A SIMPLE IRA allows employees under age 50 to contribute up to $16,500 in 2025 (employers are required to contribute), while a SEP does not allow employee contributions, only employer contributions.

IRA Comparison: Roth vs. Traditional for Young Adults

For those exploring a Roth vs. traditional IRA for a young person, there are a number of different factors to weigh, including taxes, withdrawal rules, and income.

Taxes

An important consideration when looking at which IRA is best for young adults is taxes. For individuals who currently earn a lower income and are in a lower tax bracket, the upfront tax deductions with a traditional IRA may not be as beneficial. A Roth, with its tax-free distributions in retirement, might be worth exploring instead — especially if the individual expects to be in a higher tax bracket in retirement.

Your income also determines how much of your contributions you can deduct with a traditional IRA. Deduction limits depend on your modified adjusted gross income (MAGI), whether you are single or married, your tax filing status, and if you’re covered by a retirement plan at work.

For instance, in 2025, those who are single and not covered by a retirement plan at work can deduct the entire amount they contribute to a traditional IRA. However, if they are covered by a retirement plan from their employer, they can only deduct the full amount if their MAGI is $79,000 or less. If they earn more than $79,000 and less than $89,000, they can take a partial deduction. And if their MAGI is $89,000 or more, they can’t take any deductions.

Individuals who are married filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their traditional IRA contributions. But in 2025, if their spouse is covered by a workplace retirement plan, they can deduct the full amount only if their combined MAGI is $236,000 or less. If their combined MAGI is $246,000 or more, they can’t take a deduction.

And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their traditional IRA contributions only if their combined MAGI is $126,000 or less. If their combined MAGI is $146,000 or more, they can’t take a deduction.

Withdrawals

Another important consideration when choosing an IRA is withdrawals. Both traditional and Roth IRAs have early withdrawal penalties.

There are some differences, however. With a traditional IRA, individuals who take withdrawals before age 59 ½ will generally be subject to a 10% penalty, plus taxes. A Roth IRA typically offers more flexibility: Individuals may withdraw their contributions penalty-free at any time before age 59 ½. However, any earnings can typically only be withdrawn tax- and penalty-free once the individual reaches age 59 ½ and the account has been open for at least five years.

That said, there are exceptions to the IRA withdrawal rules, including:

•   Death or disability of the individual who owns the account

•   Qualified higher education expenses for the account owner, spouse, or a child or grandchild

•   Up to $10,000 for first-time qualified homebuyers to help purchase a home

•   Health insurance premiums paid while an individual is unemployed

•   Unreimbursed medical expenses that are more than 7.5% of an individual’s adjusted gross income

The chart below gives a side-by-side comparison between a traditional and Roth IRA to help you quickly see what the key differences are.

Traditional IRA vs. Roth IRA: Key Differences

Traditional IRA Roth IRA
Contributions Made with pre-tax dollars Made with after-tax dollars
Pay taxes on withdrawals in retirement Yes No
Potential earnings Grow tax-deferred Grow tax-free
Contributions tax deductible Yes, if you meet income requirements No
Early withdrawal penalty May have to pay tax on earnings plus a 10% penalty before age 59 ½ No taxes or penalties on contributions, but earnings are subject to taxes and a 10% penalty before age 59 ½

Who Should Choose a Roth IRA?

How a Roth IRA works is that your MAGI must be below a certain level to qualify. In 2025, single individuals who earn up to $150,000 can contribute the full amount to a Roth. Single filers with a MAGI of $150,000 or more but less than $165,000 can contribute a partial amount, and those who earn $165,000 or more are not eligible to open or contribute to a Roth. For married couples who file jointly, the limit in 2025 is up to $236,000 for a full contribution to a Roth, and between $236,000 to $246,000 for a partial contribution.

Since young adults starting out in their career might be earning less than they will in the future, it could make sense for a young adult to open a Roth now when they may not have to worry about earning too much to qualify. Plus for individuals earning less now and who expect to have a higher income in retirement, taking tax-free withdrawals after age 59 ½ could make financial sense as well.

A Roth IRA calculator can help you determine how much you can contribute annually.

Who Should Choose a Traditional IRA?

With a traditional IRA, you contribute pre-tax dollars. That means you take deductions on your contributions upfront, which may lower your taxable income for the year, and then pay taxes on the distributions when you take them in retirement. If you’re earning more now than you expect your income to be in retirement, a traditional IRA may make sense for your situation.

2025 IRA Contribution & Income Limits at a Glance

The charts below offer a handy comparison on the contribution limits of traditional and Roth IRAs, the income eligibility limits for Roth IRAs, and the traditional IRA tax deduction limits for 2025.

2025 IRA Annual Contribution Limits

Age

 Maximum Annual Contribution (2025)
Under age 50 $7,000
Age 50 and over $8,000 (includes $1,000 “catch-up” contribution)

2025 Roth IRA Income Eligibility Limits

Tax Filing Status

 Can Make Full Contribution

 Can Make Partial Contribution

 Cannot Contribute
Single / Head of Household MAGI up to $150,000 MAGI between $150,000 – $165,000 MAGI of $165,000 or more
Married & Filing Jointly MAGI up to $236,000 MAGI between $236,000 – $246,000 MAGI of $246,000 or more

2025 Traditional IRA Deduction Limits (if Covered by a Workplace Plan)

Tax Filing Status

 Can Take Full Deduction

 Can Take Partial Deduction

 Cannot Take a Deduction
Single / Head of Household MAGI up through $79,000 MAGI between $79,000 – $89,000 MAGI of $89,000 or more
Married Filing Jointly MAGI up through $126,000 MAGI between $126,000 – $146,000 MAGI of $146,000 or more

Which IRA Is Right for You? [Interactive Quiz]

Building a Strong Investment Strategy

As you explore a suitable IRA for young adults, you’ll want to make sure that you’re getting the most out of your investing strategy to help you achieve your financial goals. Here are some ways to do that.

Contributing to a 401(k) and an IRA.

If your employer offers a 401(k), enrolling in it and contributing as much as you can may help you get started. If possible, aim to contribute enough to get the matching contribution, which is, essentially, “free” or extra money that can help you build your savings.

If you don’t have a workplace 401(k) — and even if you do — you might consider opening an IRA as another account to help save for retirement. Contribute as much as you are able to. With an IRA, you typically have more investment options than you do with a 401(k), and you can also choose the type of IRA that could give you potential tax advantages.

Automating your contributions.

With a 401(k), your contributions usually happen automatically. Opening an investment account for an IRA could help you do something similar. Many brokerages allow you to set up automatic repeating deposits in an IRA. This way you don’t have to even think about contributing to your account — it just happens.

Understanding your risk tolerance.

When you’re deciding what assets to invest in, consider your risk tolerance. All investments come with some risk, but some types are riskier than others. In general, assets that potentially offer higher returns (like stocks) come with higher risk.

If a drop in the market is going to send your anxiety level skyrocketing, you may want to make your portfolio a little more conservative. If you’re willing to take risks, you might want to be a bit more aggressive. Either way, try to find an asset allocation that balances your tolerance for risk with the amount of risk you may need to take to help meet your investment goals.

You might even choose to do automated investing to help match your financial aims and risk tolerance.

Diversifying your investments.

Building a diversified portfolio across a range of asset classes — such as stocks, bonds, and cash, for instance — rather than concentrating all of it in one area — may help you offset some investment risk. Just be aware that diversification doesn’t eliminate risk.

Reassessing your portfolio regularly.

Once or twice a year, review the performance of your portfolio to make sure it’s on track to help you get where you want to be in terms of your financial future.

How to Open an IRA in 3 Simple Steps

Opening an IRA is typically a straightforward process. This is what it entails:

1. Choose Your IRA Type (Roth or Traditional)

Explore a traditional IRA vs. A Roth IRA to decide which one is right for you. Be sure to take into consideration your income now and in retirement, the tax situation that makes the most sense for your situation, the contribution level, and early withdrawal rules.

You can open an IRA at any one of a number of financial institutions, including a bank or an online brokerage, among others.

2. Fund Your Account

After you open an IRA, contribute up to the annual limit if you can to help maximize your investments. If you’re not sure how to fund an IRA, you can start with a few basic techniques.

For instance, you could use your tax refund to contribute to an IRA. That way, you won’t be pulling money out of your savings or from the funds you have earmarked to pay your bills. The same is true if you get a raise or bonus at work, or if a relative gives you money for a birthday. Put those dollars into your IRA.

Another way to fund an IRA is to make small monthly contributions to it. You could start with $50 or $100 monthly. You could even set up a vault bank account specifically for money designated to your IRA so that you don’t end up spending it on something else.

3. Choose Your Investments

Once you fund your IRA, you can start investing your money.That means you need to decide what assets to invest in. Consider your time horizon (or how long you have to invest), your goals, and how much risk you are comfortable with.

As mentioned earlier, assets that can potentially provide higher returns like investing in stocks come with higher risk than fixed-income assets like bonds. Figure out an allocation of the different types of assets that will help you reach your goal without keeping you up at night.

Considerations for Young Adults Looking to Start Investing

Young adults who are ready to begin investing should typically aim to get started as soon as possible. Thanks to the power of compounding returns, the longer your money has to compound, the bigger your account balance may be when you reach retirement.

When choosing an IRA, consider the tax advantages of traditional and Roth IRAs to decide which type of account may be most beneficial for your situation. Once you’ve opened an IRA, try to contribute as much as you can afford to each year, up to the annual limit.

Young adults should also think about their financial goals, at what age they plan to retire, and what their tolerance is for risk. Each of these factors can affect how they invest and what kinds of assets they invest in.

The Takeaway

An IRA can be a way for young adults to start saving for retirement. The earlier they begin, the longer their money may have to grow, which can make a big difference over time.

In order to choose the best IRA for young people, weigh the different tax benefits of Roth and traditional IRAs. If you’re leaning toward a Roth IRA, make sure you meet the income limit requirements, and if you’re considering a traditional IRA, check to see if you can deduct your contributions.

Once you’ve chosen the right IRA for you, start contributing to it regularly if you can. And no matter how much you’re able to contribute, remember this: Getting started with retirement savings is one of the most important steps you can take to build a nest egg and help secure your financial future.

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

Help grow your nest egg with a SoFi IRA.

FAQ

What are the different types of IRAs?

There are several types of IRAs. Two of the most popular are traditional and Roth IRAs, which individuals with earned income can open and contribute to. Contributions to traditional IRAs are made with pre-tax dollars and the contributions are generally tax deductible; the money is taxed on withdrawal in retirement. Contributions to Roth IRAs are made with after tax dollars, and the money is withdrawn tax-free in retirement.

Other types of IRAs include SEP IRAs for self-employed individuals and small business owners, and SIMPLE IRAs for small businesses with 100 employees or fewer.

Which IRA is suitable for young adults?

It depends on an individual’s specific situation, but for young adults choosing between a traditional or Roth IRA, a Roth may be a suitable choice for those in a low tax bracket now and who expect to be in a higher tax bracket in retirement. That’s because with a Roth, contributions are made with after tax dollars and distributions are withdrawn tax-free in retirement. With traditional IRAs, contributions are deducted upfront and you pay taxes on distributions when you retire.

Still, it’s important to weigh the different options and benefits to choose the IRA that’s best for you.

Can I have a 401(k) and an IRA at the same time?

Yes, you can have a 401(k) and an IRA at the same time. In fact, this could potentially be a way to increase retirement savings. You may be able to save more for retirement by having both a 401(k) — and contributing enough to get the employer match — and an IRA. Plus, with an IRA, you typically have a wider range of investment options than with a 401(k), and there may be tax advantages. For example, having a traditional 401(k) and a Roth IRA might provide flexibility when it comes to managing taxes now and in retirement.

What is the maximum I can contribute to my IRA in 2025?

The maximum you can contribute to a traditional or Roth IRA in 2025 is $7,000 if you are under age 50. Those ages 50 and up can contribute up to $8,000, including $1,000 in catch-up contributions.

Photo credit: iStock/andresr

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

CalculatorThis retirement calculator is provided for educational purposes only and is based on mathematical principles that do not reflect actual performance of any particular investment, portfolio, or index. It does not guarantee results and should not be considered investment, tax, or legal advice. Investing involves risks, including the loss of principal, and results vary based on a number of factors including market conditions and individual circumstances. Past performance is not indicative of future results.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOIN-Q325-130

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Oct
15
2025
Understanding the Different Types of Mutual Funds

Understanding the Different Types of Mutual Funds

By | Growing Wealth, invest, Investing | Comments Off on Understanding the Different Types of Mutual Funds

A mutual fund is a portfolio or basket of securities (often stocks or bonds) where investors pool their money. Nationally, there are more than 7,000 mutual funds investors can choose from, spanning equity funds, bond funds, growth funds, sector funds, index funds, and more.

Mutual funds are typically actively managed, where a manager or team of professionals decides which securities to buy and sell, although some are passively managed, where the fund simply tracks an index like the S&P 500. The main differences among mutual funds typically come down to their investment objectives and the strategies they use to achieve them.

Key Points

•  Mutual funds pool money from many investors to build a diversified portfolio of securities.

•  Equity funds are higher risk, but have the potential to offer higher long-term growth; bond funds are typically lower risk, but may provide steady income.

•  Money market funds are structured to be highly illiquid and low risk, typically appropriate for short-term investments

•  Index funds passively track market indices, and may offer lower fees and tax efficiency.

•  Balanced funds have a (typically) fixed allocation of stocks and bonds, which may be suitable for moderate risk investors.

How Mutual Funds Work

Mutual funds pool money from many investors to buy a diversified mix of securities, known as a portfolio. These may include:

•  Stocks

•  Bonds

•  Money market instruments

•  Cash or cash equivalents

•  Alternative assets (such as real estate, commodities, or precious metals)

Mutual funds are typically open-end funds, which means shares are continuously issued based on demand, while existing shares are redeemed (or bought back). In contrast, a closed-end fund issues a set number of shares at once during an initial public offering.

You can buy mutual fund shares through a brokerage account, retirement plan, or sometimes directly from the financial group managing the fund. For example, you might hold mutual funds inside a taxable investment account, within an individual retirement account (IRA) with an online brokerage, or as part of your 401(k) at work.

One of the main advantages of mutual funds is the potential for diversification. If one holding underperforms or loses value, the other investments in the fund may help offset those losses, reducing overall portfolio risk.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

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Explore trading funds that include commodities, private credit, real estate, venture capital, and more.

9 Types of Mutual Funds

Before adding mutual funds to your portfolio, it’s important to understand the different types. Some funds aim for growth, while others focus on steady income. Certain mutual funds may carry a higher risk profile than others, though they may offer the potential for higher rewards.

Knowing more about the different mutual fund options can make it easier to choose investments that align with your goals and tolerance for risk.

1. Equity Funds

•   Structure: Typically open-end

•   Risk Level: High

•   Goal: Growth or income

•   Asset Class: Stocks

Equity funds primarily invest in stocks to pursue capital appreciation and potential income from dividends. The types of companies an equity fund invests in will depend on the fund’s objectives.

For example, some equity funds may concentrate on blue-chip companies that tend to offer consistent dividends, while others may lean toward companies that have significant growth potential. Equity funds can also be categorized based on whether they invest in large-cap, mid-cap, or small-cap stocks.

Investing in equity funds can offer the opportunity to earn higher rewards, but they tend to present greater risks. Since the prices of underlying equity investments can fluctuate day to day or even hour to hour, equity funds tend to be more volatile than other types of mutual funds.

2. Bond (Fixed-Income) Funds

•   Structure: Typically open-end; some closed-end

•   Risk Level: Low

•   Goal: Steady income

•   Asset Class: Bonds

Bond funds invest in debt securities, such as government, municipal, or corporate bonds. They give investors a convenient way to access the fixed-income market without buying individual bonds. Some bond funds try to mirror the broad bond market and include short- and long-term bonds from a wide variety of issuers, while other bond funds specialize in certain types of bonds, such as municipal bonds or corporate bonds.

Generally, bond funds tend to be lower risk compared to other types of mutual funds, and bonds issued by the U.S Treasury are backed by the full faith and credit of the U.S. government. However, bonds are not risk-free. Bonds are typically sensitive to interest rate risk (meaning their market value fluctuates inversely with changes in interest rates), as well as credit risk (since a bond’s value is directly tied to the issuer’s ability to repay its debt).

3. Money Market Funds

•   Structure: Open-end

•   Risk Level: Low

•   Goal: Income generation

•   Asset Class: Short-term debt instruments

Money market funds invest in high-quality, short-term debt from governments, banks or corporations. This may include government bonds, municipal bonds, corporate bonds, and certificates of deposit (CDs). Money market funds may also hold cash and cash equivalent securities.

Money market funds can be labeled according to what they invest in. For example, Treasury funds invest in U.S. Treasury securities, while government money market funds can invest in Treasuries as well as other government-backed assets.

In terms of risk, money market funds are considered to be very low risk. That means, however, that money market mutual funds tend to produce lower returns compared to other mutual funds.

It’s also worth noting that money market funds are not the same thing as money market accounts (MMAs). Money market accounts are deposit accounts offered by banks and credit unions. While these accounts can pay interest to savers, they’re more akin to savings accounts than investment vehicles. While money market accounts may be covered by the Federal Deposit Insurance Corporation (FDIC), money market funds may alternatively be insured by the Securities Investor Protection Corporation (SIPC).

4. Index Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Goal: To replicate the performance of an underlying market index

•   Asset Class: Stocks, bonds, or both

Index funds are designed to match the performance of an underlying market index. For example, an index fund may attempt to mirror the returns of the S&P 500 Index or the Russell 2000 Index. The fund does this by investing in some or all of the securities included in that particular index, a process that’s typically automated. Because of this, index funds are considered passively managed, unlike actively managed funds where a manager actively trades to try to exceed a benchmark.

Because index funds need much less hands-on management and don’t require specialized research analysts, they’re generally lower cost than actively managed funds. They’re also considered to be more tax-efficient due to their potentially longer holding periods and less frequent trading, which may result in fewer taxable events. However, an index fund may include both high- and low-performing stocks and bonds. As a result, any returns you earn would be an average of them all.

5. Balanced Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Goal: Provide both growth and income

•   Asset Class: Stocks and bonds

Balanced funds, sometimes referred to as hybrid funds, typically contain a fixed allocation of stocks and bonds for investors interested in both income and capital appreciation. One common example of a balanced fund is a fund that invests 60% of its portfolio in stocks and 40% of its portfolio in bonds.

By holding both growth-oriented equities (stocks) and stability-focused, fixed-income securities (bonds) in one portfolio, these funds aim to provide a middle ground between the high-risk/high-return profile of equity funds and the low-risk/low-return profile of bond funds. Balanced funds automatically maintain their asset allocation and may make sense for moderately conservative, hands-off investors seeking long-term growth potential.

6. Income Funds

•   Structure: Open-end

•   Risk Level: Low to moderate

•   Goal: Provide steady income

•   Asset Class: Bonds, income-generating assets

Income funds are designed with the goal of providing investors with regular income through interest or dividends, rather than focusing mainly on long-term growth. Some income funds focus on bonds, such as government, municipal, or corporate bonds, while others mix equities with bonds to offer a diversified approach to income generation.

Though not risk-free, income funds are generally lower risk than funds that prioritize capital gains. This type of mutual fund can be appealing to investors who value stability and regular cash flow, such as retirees. Income funds may also help balance risk in any investor’s portfolio, especially in uncertain markets.

7. International Funds

•   Structure: Mostly open-end

•   Risk Level: High

•   Goal: Growth or income outside the U.S.

•   Asset Class: Global equities and bonds (excluding U.S. securities)

International mutual funds invest in securities and companies outside of the U.S. This sets them apart from global funds, which can hold a mix of both U.S. and international securities. Some international funds focus on developed economies, while others target emerging markets, which may offer higher growth but come with higher risk.

Adding international funds to a portfolio can increase diversification and access to global opportunities if you’ve primarily invested in U.S. companies or bonds so far. But keep in mind that international funds can carry unique risks, including the risk of currency volatility and changing economic or political environments, especially in emerging markets.

8. Specialty Funds

•   Structure: Open or closed-end

•   Risk Level: Varies

•   Goal: Thematic or sector-specific investing

•   Asset Class: Equities, bonds, alternatives

A specialty fund concentrates on a specific sector, industry, or investment theme, such as technology, health care, or clean energy. They allow investors to target specific opportunities and expand their portfolios beyond traditional stocks or bonds. Specialty funds can offer exposure to assets like real estate, commodities, or even precious metals. You could also use specialty funds to pursue specific investing goals, such as investing with environmental, social, and governance (ESG) principles in mind.

Because of their narrower focus, specialty funds frequently offer less diversification, which means they may come with higher potential risks. This type of mutual fund is generally best suited for investors with a deep understanding of the target market.

💡 Quick Tip: Spreading investments across various securities may help ensure your portfolio is not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

9. Target Date Funds

•   Structure: Typically open-end

•   Risk Level: Declines over time

•   Goal: Retirement planning

•   Asset Class: Mix of stocks, bonds, and short-term investments

Target date funds are mutual funds that adjust their asset allocation automatically so the fund becomes more conservative as the target (typically retirement) date approaches. For example, if you were born in 2000 and plan to retire at 65, you would invest in a 2065 fund. As you get closer to retirement age, your target date fund will gradually become more conservative, increasing its allocations to bonds, cash, or cash equivalents.

Like mutual funds, target date funds are offered by nearly every investment company. In most cases, they’re recognizable by the year in the fund name. If you have a 401(k) at work, you may have access to various target date funds for your portfolio.

While target date funds offer a “set it and forget it” option for retirement planning, they are a one-size-fits-all solution that does not account for an individual’s unique financial situation, risk tolerance, or outside assets. Some investors may prefer a more aggressive or conservative allocation than the one the fund provides.

What’s the Difference Between Mutual Funds and ETFs?

It can be easy to confuse exchange-traded funds (ETFs) with mutual funds, since they have a number of similarities. Both are baskets of securities designed to provide diversification. And both can hold stocks, bonds, or a mix, or follow specific themes or strategies.

However, ETFs and mutual funds differ in several key ways:

•   Trading: ETFs trade throughout the day like stocks, while mutual funds are priced only once daily after the market closes.

•   Liquidity: Because they trade on exchanges throughout the day, ETFs are generally more liquid than traditional mutual funds.

•   Management: Most EFTs are passively managed, while mutual funds are typically actively managed.

•   Cost: Because they are largely passively managed, EFTs often carry lower expenses ratios.

The Takeaway

Mutual funds are among the most accessible and flexible investment options available. With choices ranging from conservative money market funds to aggressive equity and specialty funds, there’s a fund for nearly every type of investor.

The best mutual fund for you depends on your goals, time horizon, and tolerance for risk. Whether you’re seeking steady income, long-term growth, international exposure, or a hand-off retirement plan, understanding the different types of mutual funds can help you build a portfolio that supports your financial future.

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


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

FAQ

What are the four main types of mutual funds?

The four main types of mutual funds are equity funds, debt funds, money market funds, and hybrid funds.

Equity funds invest primarily in stocks and aim for long-term capital growth. Debt funds focus on fixed-income securities like bonds, offering relatively stable returns. Money market funds invest in short-term, low-risk instruments such as Treasury bills. Hybrid funds combine equity and debt securities in varying proportions to balance risk and reward. Each type suits different investor goals, risk tolerances, and time horizons.

What is the 7-5-3-1 rule in SIP?

The 7-5-3-1 rule in SIP (systematic investment plan) is a guideline for disciplined investing. The 7 suggests staying invested for at least seven years to reap the benefits of compounding and market growth. The 5 suggests diversifying your investments across at least five different mutual fund categories to help reduce risk. The 3 is about overcoming three common mental hurdles investors face (disappointment, frustration, and panic). The 1 suggests increasing your SIP amount every year to improve your return potential in the long term.

Which type of mutual fund is best?

The “best” type of mutual fund depends on your goals, risk tolerance, and time horizon. For long-term wealth creation, equity funds often provide the highest growth potential but come with more risk. For those prioritizing stable returns, debt funds or money market funds may be a favorable choice. Investors seeking balance may prefer hybrid funds. The best fund is one that is aligned with your unique financial objectives.

Photo credit: iStock/simonapilolla

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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. This should not be considered a recommendation to participate in IPOs 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 more information on the allocation process please visit IPO Allocation Procedures.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Oct
14
2025
What Are Exotic Options? 11 Types of Exotic Options

What Are Exotic Options? 11 Types of Exotic Options

By | Growing Wealth, invest, Investing | Comments Off on What Are Exotic Options? 11 Types of Exotic Options

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

An option is a financial instrument that gives the buyer the right to purchase or sell an underlying security, such as a stock, during a set time period for an agreed-upon price. They are popular with some investors because they allow the investor to speculate on the price increase or decrease of a stock, without owning the stock itself.

Exotic options are a class of options that allow investors to take advantage of some features of options contracts to pursue other strategies. Exotic options are non-standard, customizable contracts that may trade over the counter (OTC) and differ in pricing from traditional options.

Key Points

•  Exotic options are complex financial instruments that can be customized using non-standard payoffs, expiration dates, and underlying assets.

•  These options help enable sophisticated investors to tailor risk exposure and implement unique strategies.

•  Exotic option strategies may involve higher or lower costs, and can offer more or less flexibility than traditional contracts, depending on the specific structure.

•  Types may include Asian, barrier, basket, Bermuda, and binary options, each with distinct characteristics.

•  Investors may benefit from financial advice when considering exotic options due to their complexity and high degree of risk.

What Is an Exotic Option?

Exotic options are hybrid securities that offer unique and often customizable payment structures, expiration dates, and strike prices. For those features, they may be priced higher or lower than traditional options, depending on the structure. University of California Berkeley professor Mark Rubinstein popularized the term “Exotic Options” in a 1990 paper about contracts.

To understand what makes an exotic option exotic, let’s review a traditional, plain-vanilla options contract and how it works. With a traditional option, the owner can buy or sell the underlying security for an agreed-upon price either before or at the option’s predetermined expiration date. The holder is not, however, obligated to exercise the option, hence the name.

An exotic option typically has all of those features, but with complex variations in the times when the option can be exercised, as well as in the ways investors may calculate the payoff.

Exotic options are typically traded in the over-the-counter (OTC) market, a smaller dealer-broker network. An exotic option may have underlying assets that differ from those offered by traditional options. Those underlying assets may include commodities like oil, corn and natural gas, in addition to stocks, bonds, and foreign currencies.

There are even exotic derivatives that allow for trading on things like the weather. Both institutional and sophisticated retail investors may use customized exotic options to match their own unique risk-management needs.

11 Types of Exotic Options

There are many types of exotic options that investors can purchase for exotic options trading. Here’s a look at some of them:

1. Asian Options

One of the most common forms of exotic options contract, the Asian option is a contract whose payoff to the holder is based on the average price of the underlying asset over one or more periods, rather than solely on the price at exercise. This makes it different from an American option, whose payout depends on the price of the underlying asset when the holder chooses to exercise it, and different from a European option, whose payoff depends on the price of the security at the time of the option’s expiration.

2. Barrier Options

These options may remain effectively dormant until activated (knock-in), or may terminate if a barrier is reached (knock-out), usually when the price of the underlying asset reaches a certain level.

3. Basket Options

Unlike traditional options, which typically have a single underlying asset, basket options contracts depend on the price movements of more than one underlying asset. For holders, the value of a basket option may be tied to the weighted average of the assets underlying the contract.

4. Bermuda Options

The main differentiator of Bermuda options is when the holder can exercise them. An investor can exercise a Bermuda option at its expiration date, and at certain set dates before then. This makes them different from American options, which holders can exercise at any point during the contract, and European options, which can only be exercised at expiration.

5. Binary Options

Sometimes called digital options, binary options are unique because they only provide a payout to the holder if a predetermined event occurs. This all-or-nothing investment may provide a predetermined payout or asset if the agreed-upon event occurs.

6. Chooser Options

With ordinary options contracts, the investor must decide upfront if they’re buying a call (right to buy the underlying security) or put (right to sell the underlying security) option. But with a chooser option, the holder can decide whether they want the option to be a put or call option at a predetermined date between when they buy the chooser option and when the contract expires.

7. Compound Options

These options, often called split-fee options, allow investors to buy an option on an option. Whether or not a compound option may result in a payout depends on the value or outcome of the underlying option. Investors in compound options have to make their decisions based on the expiration dates and strike prices of both the underlying option, as well as the compound option itself.

8. Extendible Options

The main advantage that extendible options offer is that they give an investor the ability to postpone the expiration date of the contract for an agreed-upon period of time. This can mean adding the extra time for an out-of-the-money option to potentially get into the money, a feature that’s priced into the original option contract.

Extendible options can be holder-extendible, meaning the purchaser can choose to extend their options. They can also be writer-extendible, meaning that the issuer has the right to extend the expiration date of the options contracts, if they so choose.

9. Lookback Options

Lookback options differ from most options because they do not necessarily come with a specified exercise price. Instead, depending on type, the strike (floating-strike) or the payoff (fixed-strike) is automatically determined by the most favorable price the underlying asset reached during the contract.

10. Spread Options

Unlike a traditional option, where the payout may reflect the difference between the contract’s strike price and the spot price of the underlying asset when the investor exercises the contract, a spread option may provide a return tied to the price difference between multiple assets.

11. Range Options

For highly volatile assets, some investors choose to use range options, because their payout is based on the size of the difference between the highest and lowest prices at which the underlying asset trades during the life of the range options contract.

Pros and Cons of Exotic Options

There are benefits and drawbacks to using exotic options.

Pros

•   Some exotic options may have lower premiums than comparable American-style options contracts.

•   Investors can potentially select and customize exotic options to fit very complex and precise strategies.

•   With exotic options, investors can potentially fine-tune the risk exposure of their portfolio.

•   Investors can use exotic options to seek opportunities in unique market conditions.

Cons

•   Many exotic options come with higher costs and less flexibility than traditional contracts.

•   There are no exotic options that guarantee a profit.

•   Because of their unique structures, exotic options may react to market moves in unexpected ways.

•   The complex rules mean that exotic options may carry a higher risk of ultimately becoming worthless.



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

The Takeaway

Exotic options are complex financial instruments that allow investors to speculate on the price of an asset without owning that asset itself. Unlike traditional options, exotic options include customizable features that investors could use to pursue a specific options trading strategy.

As many investors may know, trading options — of all types — is relatively advanced and requires a good amount of background knowledge and understanding of intricate financial assets. For that reason, it may be advisable to speak with a financial professional before diving into options trading.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not support non-standard, exotic options trading at this time.

Photo credit: iStock/Pekic

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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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Oct
14
2025
How to Invest and Profit During Inflation

How to Invest During Inflation

By | Growing Wealth, invest, Investing | Comments Off on How to Invest During Inflation

While inflation is commonly associated with the rising cost of consumer goods, inflation also impacts investments like stocks, bonds, real estate, and more.

Just as inflation can reduce a consumer’s purchasing power overall, inflation can also impact the performance of different asset classes — particularly fixed-income assets such as bonds and cash — potentially reducing portfolio returns. It’s important for investors to understand how to invest during inflation, and which assets can provide a buffer against inflationary conditions.

After all, inflation doesn’t have to spell bad news for investors. SoFi’s 2025 investor survey reveals that despite inflation concerns this year, most investors are holding steady or increasing their investment contributions.

Key Points

•   Inflation affects purchasing power, and it can also take a toll on stocks, bonds, and other asset classes, impacting consumers and investors.

•   Inflation can impact the performance of some stocks and bond yields, making it advisable to reconsider some investment choices during inflationary periods.

•   During bouts of inflation, investors may want to consider inflation resistant assets, such as stocks of companies that can raise prices, commodities, TIPS, and I bonds.

•   Inflation doesn’t affect all sectors of the economy in the same way, so investors must consider a range of options when adjusting their portfolios.

•   Long-term investment plans may not need to be drastically changed due to temporary inflation spikes.

What Is Inflation and How Does It Affect Your Investments?

Inflation is defined as a steady rise in prices. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash flows through the economy, demand for goods and services grows, leading many companies to raise prices.

To some degree, inflation is a natural outcome of a growing economy. Historically, economic booms have come with an annual inflation rate of about 1% to 2%, a range that reflects solid consumer sentiment in a growing economy.

An inflation rate of 3%, 4%, 5% or more is associated with an overheated economy.

Conversely, prices fall when demand slides and supply is abundant; the inflation rate tumbles as economic growth wanes.

Key Measures of Inflation

The main barometer of inflation in the United States is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, health care, transportation, food and beverage, and education, among other economic sectors.

The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE), in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

Because investors may have less money to put into the markets when prices rise and their budgets become tighter, inflation may impact the people’s decision to buy stocks online or through a brokerage. Overall, it means there may be less liquidity in the markets. The relationship between investing and inflation may further be affected as interest rates are increased to combat rising prices, potentially affecting business profitability.

Recommended: Stock Market Basics

How Are Investors Responding to Inflation in 2025?

When facing a period of rising prices, deciding how to invest during inflation is top of mind for many investors. But as the 2025 SoFi Investor Insights Survey shows, many investors plan to stay the course. In fact, nearly two-thirds (65%) of respondents said they feel either optimistic or content about their investments over the past year.

A Steady Approach

Despite inflation concerns, most investors are holding steady or increasing their contributions. In fact, even given the potential impact of inflation, only 19% of investors wanted to invest less, while the remaining 82% planned to invest more or maintain their current strategy, including popular investments in 2025.

Donut chart: 46% left investments alone, 36% invested more, and 19% invested less due to inflation.
Source: SoFi 2025 Investor Insights Survey

This speaks to a mindset that can be beneficial when deciding how to invest during inflation or any time, but especially after you start an investing portfolio: It’s important to stick to your strategy — which is based on your financial goals and circumstances — and not make impulsive changes to your investments when there’s a temporary shift in the economy.

Which Investments Might Perform Well During Inflation?

Investing during inflation can be tricky, and it can be helpful to have a defensive investment strategy. It’s important to know that inflation impacts both stock and bond markets, but in different ways.

Inflation and the Stock Market

Inflation can have an indirect impact on stocks, partially reflecting consumer purchasing power. As prices rise, retail investors may have less money to put into the stock market, reducing market growth.

Also, when inflation rises, that puts pressure on investors’ stock market returns to keep up with the inflation rate. For instance, consider a stock portfolio that earns 5% before inflation. If inflation rises at a 6.0% rate, hypothetically, the portfolio may actually lose 1.0% on an inflation-adjusted basis, which can make it difficult to find high inflation investments.

Perhaps more importantly, high inflation may cause the Federal Reserve to raise interest rates to cool down the economy. Higher interest rates also make stock market investments less attractive to investors, as they can get higher returns in lower-risk assets like bonds.

However, some stocks and other assets can perform well in periods of rising prices, which can be a hedge against inflation. When inflation hits the consumer economy, companies often boost the prices of their goods and services to keep profits rolling, as their cost of doing business rises at the same time. In some cases, rising prices contribute to higher revenues, which may help boost a company’s stock price.

That said, rising inflation may raise the risk of an economic slowdown or recession. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth.

Recommended: How Do Interest Rates Impact Stocks?

Inflation and the Bond Market

Inflation may be a drag on bond market performance, as well. Most bonds offer a fixed rate of return, paid in the form of interest or coupon payments. As fixed-income securities offer stable, but fixed, investment returns, rising inflation can eat at those returns, further reducing the purchasing power of bond market investors.

Additionally, the Federal Reserve’s response to inflation — higher interest rates — can lower the price of bonds because there is an inverse relationship between bond yields and bond prices. So, bond investors and bond funds may experience losses because of high interest rates.

What to Consider Investing in During Inflation

Investors can take several steps to help protect their portfolios during periods of high inflation. Choosing how to invest during inflation is like selecting investments at any other time — you’ll need to evaluate the asset itself and how it fits into your overall portfolio strategy both now and in the future.

1. Real Estate and REITs

In some cases, investing in certain types of real property assets and real estate investment trusts (REITs) can be useful during inflationary periods, because this alternative asset class tends to move in the opposite direction of stocks (which may suffer during inflation).

REITs and some types of real estate tend to see higher prices at these times, and thus pay higher dividends or income to investors. REITs are required to pay 90% of their income as dividends.

2. Stocks in Companies With Pricing Power

Investors might consider stocks where the underlying company can boost prices in times of rising inflation. Retail stocks, like big box stores or discount retailers with a global brand and a massive customer base, can be potential investments during high inflation periods. In that scenario, the retailer could raise prices and not only cover the cost of rising inflation but also continue to earn profits in a high inflation period.

Think of a consumer goods manufacturer that already has a healthy portion of the market for certain everyday items, and doesn’t need excess capital as it’s already well-invested in its own business. Companies with low capital needs tend to do better in inflationary periods, as they don’t have to invest more cash into the business to keep up with competitors — they already have a solid market position and the means to produce and market their products.

During periods of inflation, popular investing trends may reflect increased interest in retail or consumer staple stocks.

3. Commodities

Investing in precious metals, oil and gas, and other commodities may also be considered for and an option for inflation hedges. The price growth of many commodities contributes to high inflation. So investors may see returns by investing in commodities during high inflationary periods.

Take the price of oil, natural gas, and gasoline. Businesses and consumers rely highly on oil and gas and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices. That helps make oil — and other commodities — an asset worth considering when inflation is on the move.

4. Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) can be an option to hedge against inflation. By design, TIPS are like most bonds that pay investors a fixed rate twice annually. They’re also protected against inflation as the principal amount of the securities is adjusted for inflation.

5. I Bonds

During periods of high inflation, investors may consider investing in Series I Savings Bonds, commonly known as I Bonds. I Bonds are indexed to inflation like TIPS, but the interest rate paid to investors is adjustable. With an I bond, investors earn both a fixed interest rate and a rate that changes with inflation. The U.S. Treasury sets the inflation-adjusted interest rate on I Bonds twice a year.

General Strategies for Investing in an Inflationary Environment

Aside from considering some of the above investments when investing for inflation, there are some strategies that may also be beneficial to consider.

Stay Focused on Your Long-Term, Diversified Plan

While there are some investing strategies that are exclusively focused on short-term results, most investors plan to invest for the long term — an approach that allows for greater stability over time.

An important tenet of long-term investing is to “buy and hold” investments so they have a chance to grow over the target period of time, weathering the markets’ ups and downs. This approach enables investors to maintain a plan that’s based on their financial values, and which matches their circumstances and helps them reach their goals. It also helps investors avoid making needless changes out of fear or other market reactions.

Another component of a long-term investment strategy is to employ the principles of diversification, which means holding a range of different asset types in your portfolio, in order to help manage risk factors.

Consider Dollar-Cost Averaging to Manage Volatility

Dollar-cost averaging is a strategy that helps manage price volatility, which can be a factor during an inflationary period. With DCA, you pick the securities you want to invest in, and the dollar amount you want to invest on a regular basis (e.g., weekly, monthly, etc.). Typically, people invest the same amount each time, to end up buying more when prices are lower — and less when they’re higher.

Over time, however, the average cost of investments tends to be lower, which may yield potential returns.

Using the DCA method may keep your investment strategy on track — and investors may be less likely to react impulsively or emotionally in response to certain events or headlines, which can increase the risk of loss.

The Takeaway

Investors may want to proceed with caution when inflation rises. It may be tempting to readjust your portfolio because prices are rising. Periods of high inflation usually wane, so throwing a long-term investment plan out the window just because inflation is moving upward may knock you off course to meet your long-term financial goals.

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).

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FAQ

Which investments tend to perform poorly during inflation?

Inflation erodes the value of cash, and as such it can impact a range of securities, including long-term fixed-rate bonds, certain types of stocks, and cash as well as low-interest cash accounts.

Are investors making impulsive decisions in 2025?

The tendency to make impulsive choices can occur at any time. According to SoFi’s 2025 investor survey, however, it does seem that the majority of investors are staying the course.

Is gold a good hedge against inflation?

Some investors believe that gold can be a way to hedge against inflation, because gold has intrinsic (i.e., tangible) value, a limited supply, and the price of gold has been known to rise when inflation-wary investors put more money into this precious metal. That said, the price of gold can fluctuate, and there is always a risk with any investment.

Should I stop investing when inflation is high?

Historically, many long-term investors maintain their established strategy during periods of high inflation. Some investors may consider defensive positions, such as rotating into inflation-protected assets or consumer staples, depending on their risk tolerance.

How can interest rate changes by the Fed affect my investments?

When the Federal Reserve raises or lowers interest rates, that can impact stocks and bonds in different ways. When the Fed lowers rates, that lowers the cost of loans, which can boost company performance and stock prices. Bonds with lower yields may be less appealing. When the Fed raises rates, that increases borrowing costs, which can put a damper on stocks, but raise bond yields.

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Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

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

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.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
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