May
08
2025
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What Is the Wash-Sale Rule?

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on What Is the Wash-Sale Rule?

A wash sale occurs when an investor sells a security at a loss, and buys a very similar security within a 30-day window of the sale (30 days before or after). The wash-sale rule is an Internal Revenue Service (IRS) regulation that states an investor can’t receive tax deduction benefits if they sell an investment for a loss, then purchase the same or a “substantially identical” asset within 30 days before or after the sale.

While investors may find themselves in a position in which it may be beneficial to sell securities to harvest losses, it’s important to understand the wash-sale rule and how it works.

Key Points

•   Selling a security at a loss and repurchasing it within 30 days triggers the wash-sale rule.

•   The wash-sale rule applies to stocks, bonds, mutual funds, and ETFs.

•   Losses from wash sales cannot be used to offset taxable income.

•   The wash-sale rule applies across all accounts, not just one.

•   A wash sale can result in a higher cost basis in the new investment.

Which Investments are Subject to the Wash-Sale Rule?

The wash-sale rule applies to most common investments, including:

•   Stocks

•   Bonds

•   Mutual funds

•   Options

•   Exchange-traded funds (ETFs)

•   Stock futures contracts

Transactions in an individual retirement account (IRA) can also fall under the wash-sale rule. The wash-sale rule does not apply to commodity futures or foreign currency trades. The rule doesn’t apply if an investor sells a security that has increased in value and within 30 days buys an identical security. In that case, they will need to pay capital gains taxes on the proceeds.

What Happens When You Trigger a Wash Sale?

Investors commonly choose to sell assets at a loss as part of their tax or day trading strategy, or they may regret selling an asset while the market was down, and decide to buy back in.

The intent of the wash-sale rule is to prevent investors from abusing the tax benefits of selling at a loss, and claiming artificial losses.

In the event that an investor does trigger a wash sale, they will not be allowed to write off the loss when they do their tax reporting to the IRS. This means the investor won’t receive any tax benefit for selling at a loss. The rule still applies if an investor sells an investment in a taxable account and buys it back in a tax-advantaged account, or if one spouse sells an asset and then the other spouse purchases it that also counts as a wash sale.

It’s important for investors to understand the wash-sale rule so that they account for it in their investment and tax strategy. If investors have specific questions, they might want to ask their tax advisor for help.

Recommended: Investing 101 for Beginners

Avoiding a Wash Sale

Unfortunately, the guidelines regarding what a “substantially identical” security is are not very specific. The easiest way to avoid wash sales is to create a long-term investing strategy involving few asset sales and not trying to time the market. Creating a diversified portfolio is generally a good strategy for investors.

Another important thing to keep in mind is the wash-sale rule applies across an investor’s accounts. As such, investors need to keep track of their sales and purchases across their entire portfolio to try and make sure that the wash-sale rule doesn’t affect any investment choices.

What to Do After Selling an Asset at a Loss

The safest option is to wait more than 30 days to purchase an asset after selling a similar one at a loss. An investor can also invest funds into a different asset — a different enough asset, that is — for 30 days or more and then move the funds back into the original security after the wash sale window has passed.

There are benefits to selling an asset at either a profit or a loss. If an investor sells at a profit, they make money. If they sell at a loss, they can declare it on their taxes to help offset their capital gains or income. If an investor has significant capital gains to report, they may decide to sell an asset that has decreased in value to help lower their tax bill. However, if they hoped to reinvest in an asset later, a wash sale can ruin those plans.

In some cases, simply selling a stock from one corporation and purchasing one from another, different corporation is fine. Even selling a stock and buying a bond from the same company may not trigger a wash sale.

Investing in ETFs or Mutual Funds Instead

If an investor wants to reinvest funds in a similar industry while avoiding a wash sale, one option would be to switch to an ETF or mutual fund. There are ETFs and mutual funds made up of investments in particular industries, but they are often diversified enough that they wouldn’t be considered to be too similar to an individual stock or bond. It’s possible that an investor could sell an individual stock and reinvest the money into a mutual fund or ETF within a similar market segment without violating the wash-sale rule.

However, if an investor wants to sell an ETF and buy another ETF, or switch to a mutual fund, this can be more challenging. It may be difficult to figure out which ETF or mutual fund swaps will count as wash sales, and which won’t.

Wash-Sale Penalties and Benefits

If the IRS decides that a transaction counts as a wash sale, the investor can’t use the loss to reduce their taxable income or offset capital gains on their taxes for that year.

However, there can be an upside to wash sales. Investors can end up with a higher cost basis for their new investment, because the loss from the sale is added to the cost basis of the new purchase. In addition, the holding period of the sold investment is added to the holding period of the new investment.

The benefit of having a higher cost basis is that an investor can choose to sell the new investment at a loss and have a greater loss for tax reporting than they would have. Conversely, if the investment increases in value and the investor sells, they will have a smaller capital gain to report. Having a longer holding period means an investor may be able to pay long-term capital gains taxes on a sale rather than short-term gains, which have a higher rate.

The Takeaway

The wash-sale rule is triggered when an investor sells a security at a loss, but then turns around and buys a similar security within 30 days — either before, or after. It’s a bit of an opaque rule, but there can be consequences for triggering wash sales. That’s why understanding regulations like the wash-sale rule is an important part of being an informed investor.

Part of making solid investing decisions is planning for taxes and understanding what the benefits and downsides may be for any particular transaction. This is just one aspect of tax-efficient investing that investors might want to consider.

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

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹


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.

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.

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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May
07
2025
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How Can Investors Receive Compounding Returns?

By | Growing Wealth, invest, Investing | Comments Off on How Can Investors Receive Compounding Returns?

Compound returns refer to the way investment gains can potentially multiply over time. In this way, compound returns can add to your principal. The larger principal amount would potentially see higher gains — helping you to build your wealth, assuming the gains are reinvested.

Compound returns depend on the investment’s rate of return — meaning how much the investment gains or loses value over time. The effects of compounding returns typically occur over a period of years, because most investments see gains and losses; for gains to compound it takes time.

That’s why people are often encouraged to start investing at an early age, even with small amounts. The longer their money is invested, the more compounding it may see.

Key Points

•   Compounding is a phenomenon where returns on investment principal can accumulate, and thus potentially see even larger gains over time.

•   This is similar to the way compound interest works with some types of bonds.

•   Compound returns are not guaranteed in an investment portfolio. Investing includes the risk of loss.

•   Stocks that pay dividends offer a type of compounding when reinvested in more of the same stock.

•   Types of investments that may see compound returns over time include stocks, certain savings bonds, mutual funds, and exchange-traded funds (ETFs).

What Are Compound Returns?

Returns are the earnings you see on an investment; compound returns are the gains that accumulate on top of those gains, which can accelerate your investment’s growth.

Compound returns can be achieved by any type of asset class that produces returns on both the initial amount–the principal–as well as any profits or returns that are generated after the initial investment. Essentially, the money you put to work is doing additional work automatically for you.

Essentially, the money you put to work is doing additional work automatically for you.

However, in the case where an investor sees a series of losses, that would curtail the compounding process. All investments are subject to the risk of loss.

How Does Compound Interest Work?

Compound interest, on the other hand, refers to interest that accrues on certain types of bonds, which pay a fixed amount of interest in the form of coupon payments, which gets added to the original principal amount.

There isn’t such a thing as compound interest with stocks. But some stocks pay dividends, which can be reinvested in more shares of stock as well — which is also a type of compounding.

The Value of Compound Returns

Here’s a hypothetical example that illustrates the idea of compound returns. (However, be aware that this is only for an investor making profits. In reality, an investor could also experience losses.)

Let’s say an investor buys shares of a stock that costs $1,000. That’s the principal. In the first year, they earn a 10% return. The stock is now worth $1,100. Things start to get interesting in the second year, when the stock increases in value another 10%, bringing the stock’s value to $1,210.

That’s $110 in profit earned in the second year, compared to $100 in the first year. This happened even though the investor did not add any additional money to the investment, and they earned the same rate of return. The investment simply grew over the previous year, creating a larger base from which to earn more.

If the investor were to earn a 10% rate of return the third year, the profit would be even greater than in the previous two years. Working off a larger base — now $1,210 — a 10% return will yield a profit of $121.

But keep in mind that investments like stocks may experience volatility. Take the example from above. Three consecutive years of 10% returns is highly unlikely. In fact, it’s also possible for investors to lose money on their investments, which is the case in almost any asset class.
Recommended: A Beginner’s Guide to Investing in Your 20s

How to Get Compound Returns

With compound returns, the reinvestment of gains may be done automatically or manually.

Here are some examples of investment types that can earn compound returns.

Stocks: First, some stock market basics. There are two ways to make money on a stock. The first is through price appreciation, and the second is through dividend payments, as noted above.

When the value of a stock grows over time, an investor has the potential to see compound returns if those profits are reinvested. With cash dividend payments, compound returns are not automatic — except in the case of a dividend reinvestment plan (DRIP) — as they are paid out in cash, but an investor can add the payouts back in order to potentially earn additional returns.

Mutual funds: Mutual funds are large, pooled portfolios of stocks, bonds, or other securities. For example, a mutual fund could invest in the U.S. stock market by including stocks from a specific index. Over time, the goal is that the mutual fund grows as the underlying investments grow.

Many mutual funds that include dividend-paying stocks give the option of automatic dividend reinvestment plans. This way, the investor can earn compound returns in both ways, on the price appreciation and the dividend payments.

Exchange-traded funds (ETFs): Similar to mutual funds, ETFs are pooled investments, like stocks. As the value of the ETF grows over time, returns will compound. Depending on which bank or institution where the ETF is purchased, it may or may not be possible to automatically reinvest dividends.

Remember, with all investments, a good return on investment is not guaranteed, even profits aren’t. Plus, investments that tend to earn a higher potential return may also come with higher risk.


💡 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.

Which Products Offer Compound Interest?

Some types of accounts earn compound interest. For example:

•  High-yield savings accounts

•  Money market accounts (MMAs)

•  Certificates of Deposit (CDs)

With these types of accounts, the money you deposit typically earns a fixed amount of interest that typically compounds over time.

Test your understanding of what you just read.

The Takeaway

Compound returns can be a powerful way for your money to grow over time. When you invest your money in stocks or other asset classes, you have the potential to earn compound returns (although there is no guarantee, as investments include the risk of loss). And the longer you invest, the more time your returns may have to compound.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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

FAQ

Do stocks compound daily?

No, the value of stocks — the rise and fall of the price per share — changes frequently over time, but it does not compound. Stocks may deliver compound returns in that returns can accumulate, adding to your portfolio’s growth, but there are no guarantees.

What is the average compound interest return?

The average compound interest return depends on the types of savings vehicles you have. Be sure to check, as some accounts offer higher rates than others.

What is the difference between arithmetic and compounding returns?

With arithmetic returns, you take the difference between the ending value of an investment and the beginning value of the investment and divide it by the beginning value. Compound returns depend on the rate of return–meaning how much an investment gains or losses over time.


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.

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.

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.

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

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.

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-Q225-062

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Apr
30
2025
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Adult Children Living at Home: How to Set Rules and Expectations

By | Growing Wealth, Investing, money | Comments Off on Adult Children Living at Home: How to Set Rules and Expectations

Today, it’s not uncommon for adult children to return home or never leave the nest to start with. About one in three 18- to 34-year-olds live with their parents, according to the most recent U.S. Census Bureau data.

Moving back home can be a wise move for grown kids who may be dealing with job uncertainty, earning a low income, and/or be facing a mountain of student loan debt.

And it can wind up being a good deal for parents as well.

Some of the benefits include: opportunities for companionship, the possibility of sharing household expenses, and the ability for adult children to pay down student debt and save money for longer-term financial goals (for instance, buying a house).

But living in the same household again can also bring opportunities for tension and misunderstandings.

That’s why parents who welcome their kids back may want to set a few guidelines. Here are some rules both parents and grown children might want to wrangle before moving back in under one roof.

Key Points

•   Set a timeframe for the living arrangement.

•   Discuss financial contributions and household expenses.

•   Establish clear house rules and behavior expectations.

•   Maintain open communication about goals and concerns.

•   Encourage financial independence through saving and budgeting.

What Is the Timeframe?

When adult children move back home, it’s helpful for both parties to have a timeframe in place, rather than the ’’foreseeable future.”

This may mean talking about why the move is happening. Is it to save money? If so, what is the money being saved for, and at what point should the child move out?

Some parents might find it helpful to set up a trial period, after which they can have a frank conversation about what is and is not working in the arrangement.


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Going Over the Financials

Many misunderstandings from adult children living at home stem from confusion over how much money, if any, they are expected to contribute.

It can be helpful for both parties to consider their expectations before coming together and talking through them. Some issues you may want to think about and then discuss:

•   Will adult children be expected to pay rent? And if so, how much will rent cost? When will it be due? Some parents might want to set a flat rate, while others might consider a percentage of the child’s income, if that income is currently low but expected to rise.

•   Will the child be responsible for a portion of bills, groceries, or other household costs?

•   How will resources be allocated? Is the fridge open for anyone? Can the child use the family car if they need it?

•   How much will bills go up with additional usage? Parents might decide they want their child to pay for any overages, or they might be okay with handling the increase themselves.

Recommended: How to Manage Money Better

Going Over House Rules and Behavior Expectations

Some parents have a “my house, my rules” expectation. But it can sometimes be mutually beneficial if both parties talk about behavior expectations with an attitude of give and take.

Often “unspoken expectations” don’t come up until a problem occurs. Talking through them proactively can make sure that everyone is on the same page.

Some issues parents and adult kids may want to go over:

•   What are expectations for guests? Is it okay for romantic partners to sleep over? Do parents need a heads up before guests come by?

•   What are communication expectations? Should a child inform their parents if they won’t be home by a certain time?

•   What chores are expected? It’s wise to go over whether or not you expect that your child to do some of the supermarket shopping and/or clean any areas of the house beyond their living spaces. It’s perfectly acceptable to have your adult child pitch in on dinner duty, take on cleaning, or otherwise contribute to the house as an adult. Perhaps they pay for their own monthly supermarket costs.

•   What do daily schedules look like? Maybe one family member needs quiet for work meetings. Maybe another needs access to family exercise equipment or the shower in the morning? Talking through routines — from breakfast to bedtime — will set expectations and avoid misunderstandings.

•   What does privacy mean when you’re under the same roof?

Both parties may be concerned about how the new arrangement will affect their lives, and talking through those concerns can help families find solutions that work for everyone.

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Helping Adult Children Achieve Financial Independence

There’s nothing like living together to get financial habits out in the open. This applies to adult children and their parents. But that’s not necessarily a bad thing. By keeping an open dialogue about money, you can help your adult children get on the right financial track (and perhaps move out sooner, rather than later).

Here are some ways you may be able to help adult children work towards financial security.

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Talking Through Financial and Savings Goals

Instead of asking your adult child how much they have saved, or how much credit card debt they have, consider asking them to talk through their short-term financial goals and long-term ones too.

Putting Rent to Work

Some parents who are in a position to do so may want to charge their children rent and then use that money to gift their child a down payment on a home or car, help with tuition, or assist their child in reaching another financial goal.

Or, in lieu of rent, you might request that your child set up an automatic deposit into a savings account that could eventually become a security deposit on a rental or an emergency fund.

Teaching by Example

One way to encourage disclosure about your adult child’s financial picture is to talk through your own.

Talk broadly through your retirement plan, any long-term care plans, or how you hit your own financial goals (such as buying a house). This can help your child start good financial habits and build a positive money mindset.

After all, personal finance is not typically taught formally, and giving your adult child — no matter how old — some insight into the tools and strategies you use can give them ideas for how they can effectively manage their money.

Trying Not to Nitpick

While it can be helpful to talk through your own strategies, it may not be helpful if your child feels like you’re critical of the way they are spending money.

Let’s say your adult child buys a latte every day. Sure, you can point out how much they would potentially save if they put that money into a high-yield savings account instead. But for the sake of the relationship, it may be easier to let certain habits go and focus on what your child is doing to work toward financial goals, such as investing in their company’s 401(k) plan or doing their taxes well in advance of tax day.

The Takeaway

Living under one roof may not always be easy for adult children or parents, but it comes with an opportunity for growth for everyone, as well as a closer relationship as equals.

Part of forging that relationship may involve setting some parameters early on about what is expected from grown children while they are living at home, from how much they may be expected to contribute financially to how often they can use the car.

Letting kids move back home (where they can live more affordably), and having open discussions about money, can help them not only save, but also develop good financial habits.

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FAQ

What are reasonable expectations for an adult child living at home?

Reasonable expectations for an adult child living at home include contributing to household chores, paying a fair share of expenses, and maintaining a respectful and considerate attitude. They should also generally have a clear plan for their future, whether it’s pursuing education, employment, or other goals. Regular communication and setting clear boundaries can help ensure a harmonious living arrangement.

What if my adult child refuses to move out?

If your adult child refuses to move out, it’s a good idea to have an open and honest conversation about their reasons and your concerns. Ideally, you’ll want to set clear expectations and a timeline for moving out, and offer support in finding a place and securing employment. Consider creating a written agreement outlining responsibilities and consequences. If necessary, seek the help of a mediator or counselor to facilitate the discussion.

How to deal with disrespectful adult children living at home?

Dealing with disrespectful adult children generally involves setting firm boundaries and clear consequences. Consider having a calm and direct conversation about the specific behaviors that are unacceptable and the impact they have. Establish rules and consequences, and be consistent in enforcing them. At the same time, you’ll want to offer support and resources to help them become more independent. If the behavior continues, consider seeking family counseling or setting a deadline for them to move out.

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*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.

SOBNK-Q225-044

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Apr
29
2025
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Trade vs Settlement Date: What’s the Difference?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Trade vs Settlement Date: What’s the Difference?

When a trader issues a buy or sell order, that’s the trade date. The settlement date, which is when the security legally changes hands, is generally one day later.

The period of time between the trade date (designated as T) and the settlement date can vary, depending on the security in question. Starting in 2017, that window was two days, or T+2. But in 2024 the SEC made a new rule that most trades should settle within one day, or T+1. Different securities are subject to different rules.

That’s why investors need to know the timing of the actual settlement date, as that’s when they officially own the security, which may impact other trading decisions.

Key Points

  • The trade date is when the investor executes a trade. The settlement date is when the security legally changes hands.
  • Historically, paper trades were common, and the gap between the trade and settlement dates generally took five days, or T+5.
  • In 2017, the time between trade and settlement shifted to T+2, thanks to advances in technology.
  • In May of 2024, the SEC issued a new rule that most trades should settle within one business day (or T+1).
  • Given recent technological developments, some people believe T+0, or real-time settlement, is possible.

What Is a Settlement Date in Investing?

The settlement date in investing refers to the date that an investor takes legal ownership of a given security. It’s the day that a transaction or trade is final, in other words. It’s like buying a car or house — the transaction process may take some time, but it’s not really final until the keys are handed over.

Since 2017, the basic settlement date for a transaction was two business days after the trade date. That changed in May of 2024, when the SEC decided to accelerate the settlement process to one business day.[1]

Types of Settlement Dates

Depending on the type of security involved in a trade or transaction, settlement dates may vary. That said, you can generally expect a settlement date to be one business day following the sale or purchase of a stock, bond, or exchange-traded fund (ETF). This is sometimes referred to as “T+1,” meaning “trade date, plus one day” to settle.

However, some types of securities, like bonds, may require between one and three business days (T+3).

Note that the time to settle is the same whether you’re investing online or through a traditional brokerage.

Trade and Settlement Dates Explained

To recap, the trade date is the day that an investor actually executes a trade from their brokerage account — they decide to buy or sell a security, and go through the necessary steps to make the transaction. That day, say it’s a Tuesday, is the trade date.

Again, if you’re buying stock, it’ll take one business day for everything to settle. So, if you made the trade on Tuesday, the settlement date will probably be on Wednesday (one business day later).

These delays between the trade date and settlement date are built in, and there’s not much you can do to speed it up — it’s more or less how stock exchanges work.

Why Is There a Delay Between Trade and Settlement Dates?

Given modern technology, it seems reasonable to assume that everything should happen instantaneously. But settlement rules go back decades, to the creation of the Securities and Exchange Commission (SEC) in 1934, when all trading happened in person, and on paper.

Back then, a piece of paper representing shares of a security had to be in the possession of traders in order to prove they actually owned the shares of stock. Paper transactions sometimes took as long as five business days after the trade date, or T+5.

Recommended: A Brief History of the Stock Market

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What Is the T+1 Rule?

The T+1 rule refers to the fact that it now takes one day for a trade to settle. For example, if a trade is executed on Tuesday, the settlement date will be Wednesday.

Note that weekends and holidays are excluded from the T+1 rule. That’s because in the U.S., stock exchanges are open from 9:30am to 4:00pm Eastern time Monday through Friday.

Before the T+1 rule took effect in 2024, the general rule for settlement dates was T+2.

What Investors Need to Know About T+1

The T+1 rule in settling applies to trading of stocks, and some mutual funds. Some bonds settle at T+1, T+2, or T+3.

Investors who plan on engaging in cash-account trading need to know about trade vs. settlement dates. Cash accounts are those in which investors trade stocks and ETFs only with money they actually have today.

Meanwhile, margin trading accounts allow investors to trade using borrowed money, or trade “on margin.”

An investor may notice two different numbers describing the cash balance in his or her brokerage account: the “settled” balance, and the “unsettled” balance. Settled cash refers to cash that currently sits in an account. Unsettled refers to cash that an investor is owed but won’t be available for a few days.

Are T+0, or Real-Time Settlement Dates Possible?

Market observers have called for the T+1 rule to be reevaluated, as the settlement process could be accelerated in order to improve trading conditions.

Clearinghouses — which serve as middlemen in financial markets, and ensure the transfer of a security goes through — successfully lobbied for the settlement process to be changed from two days to one. Before that, market volatility prompted greater scrutiny of regulations surrounding clearing and settlement. That included a lot of trading during the meme stock frenzies in 2020 and 2021.

Moving to T+0 (or real-time settlement) would need the approval of the SEC and collaboration with dozens of Wall Street stakeholders. But the real-time transactions made possible in the cryptocurrency market by blockchain technology have escalated chatter about modernizing securities markets.

Potential Violations of the Trade Date vs Settlement Date

Knowing the difference between trade date vs. settlement date can allow investors to avoid potentially costly trading violations.

The consequences of these violations could differ according to which brokerage an investor uses, but the general concept still applies. Violations all have one thing in common: They involve the attempted use of cash or shares that have yet to come under ownership in an investor’s account.

Cash-Liquidation Violation

To buy a security, most brokerages require investors to have enough settled cash in an account to cover the cost. Trying to buy securities with unsettled cash can lead to a cash-liquidation violation, as liquidating a security to pay for another requires settlement of the first transaction before the other can happen.

Let’s look at a hypothetical example: Say Mira wants to buy $1,000 worth of ABC stock. Mira doesn’t have any settled cash in her account, so she raises more than enough by selling $1,200 worth of XYZ stock she has. The next day, she buys the $1,000 worth of ABC she had wanted.

But because the sale of XYZ stock hadn’t settled yet, and Mira didn’t have the cash to cover the buy of ABC stock, a cash-liquidation violation occurred. Investors who face this kind of violation three times in one year can have their accounts restricted for up to 90 days.

Freeriding Violation

Freeriding violations occur when an investor buys stock using funds from a sale of the same stock.

For example, say Jay buys $1,000 of ABC stock on Tuesday. Jay doesn’t pay his brokerage the required amount to cover this order within the one-day settlement period. But then, on Thursday, after the trade would have settled, he tries to sell his shares of ABC stock, since they are now worth $1,100.

This would be a freeriding violation — Jay can’t sell shares he doesn’t yet own.

Incurring just one freeriding violation in a 12-month period can lead to an investor’s account being restricted.

Good-Faith Violation

Good-faith violations happen when an investor buys a security and sells it before the initial purchase has been paid for with settled funds. Only cash or proceeds from the sale of fully paid-for securities can be called “settled funds.”

Selling a position before having paid for it is called a “good-faith violation” because no good-faith effort was made on the part of the investor to deposit funds into the account before the settlement date.

For example, if an investor sells $1,000 worth of ABC stock on Tuesday morning, then buys $1,000 worth of XYZ stock on Tuesday afternoon, they would incur a good-faith violation (unless they had an additional $1,000 in their account that did not come from the unsettled sale of ABC).

With these examples in mind, it’s not hard for active traders to run into problems if they don’t understand cash-account trading rules, all of which derive from trade date vs. settlement date. Having adequate settled cash in an account can help avoid issues like these.

Settlement Date Risks

Given that a lag exists between the trade date and settlement date, there are risks for traders and investors to be aware of — namely, settlement risk, and credit risk.

Settlement Risk

Settlement risk has to do with one of the two parties in a transaction failing to come through on their end of the deal. For example, if someone agrees to buy a stock, but then does not pay for it after ownership has been transferred. In this case, the seller assumes the risk of losing their property and not receiving payment.

This tends to happen when trading on foreign exchanges, where time zones and differing regulations can come into play.

Credit Risk

Credit risk involves potential losses suffered due to a buyer failing to hold up their end of a deal. If a transaction is executed and the buyer’s funds are not transferred before the settlement date, there could be an interruption in the transaction, or it could be canceled altogether.

History of Settlement Dates

The SEC makes the rules regarding how stock markets operate, including trades, and even what a broker does in regard to retail investing. As such, the SEC is tasked with creating the clearance and settlement system — a power it was granted back in the mid-1970s.

Prior to the SEC’s involvement, exchanges and transfers of security ownership were left up to participants, with sellers delivering stock certificates through the mail or even by hand in exchange for payment. That could take a long time, and prices could move a lot, so the SEC came in and set the settlement date at five business days following the trade date.

But as technology has progressed, transactions have been able to execute much faster. In 1993, the SEC changed the settlement date to three business days, and in 2017, it was changed to two days. In 2024, it was officially made T+1.

The Takeaway

The trade date is the day an investor or trader books an order to buy or sell a security, and the settlement date is when the legal exchange of ownership actually happens. For many securities in financial markets, the T+1 rule now applies, meaning the settlement date is usually one business day after the trade date — not including weekends or holidays. An investor therefore will not legally own the security until the settlement date.

While there’s been chatter that the settlement process needs to speed up to real-time settlement, it’s still important for investors and traders to know these rules so they don’t make violations that lead to restricted trading or other penalties.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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FAQ

What’s the difference between trade date and settlement date?

The trade date is when an investor initiates a buy or sell order, and the settlement date is when ownership of the underlying security is actually transferred. That now happens one business day after the trade date (also called T+1), owing to an SEC rule change in 2024.

Is the settlement date the issue date?

Typically, the settlement date and issue date are the same, as the settlement date is when a security actually exchanges hands. But there are times when the two can be different, concerning specific types of securities.

Why does it take one day to settle a trade?

The one-day lag between the trade date and settlement is designed to give a security’s seller time to gather and transfer documentation, and to give brokers time to clear funds needed for settlement.

Article Sources
  1. SEC. SEC Chair Gensler Statement on Upcoming Implementation of T+1 Settlement Cycle.

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.

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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How to Start Investing in Utilities

By | Growing Wealth, invest, Investing | Comments Off on How to Start Investing in Utilities

Investors looking for a value investment that typically provides steady income without much volatility might consider investing in utilities. Utility companies provide essential services that the public uses on a daily basis, such as water and electricity, making them generally stable investments. Investing in utilities is considered to be low risk compared to other types of stocks, since utility companies are regulated entities with few competitors.

Plus, their profits and expenditures are very predictable, so they tend to provide steady performance. Utilities are a constant in modern life — people always need them — so utility companies tend to ride out economic downturns without significant volatility. As a result, utility stocks may provide higher dividends than other fixed-income assets, though they may not offer substantial growth potential.

Key Points

•   Utility stocks have the potential to provide a steady income stream through relatively high dividends.

•   These stocks are characterized by stability, regulation, and limited competition.

•   The essential nature of utilities ensures consistent consumer demand.

•   Utility stocks are often considered a safe haven, offering protection during market downturns.

•   Some utility stocks in emerging markets present opportunities for growth.

What Are Utility Stocks?

The utilities sector includes electricity, gas, water, and waste services. Cable and telephone companies used to be placed in the utilities sector, but now they are within the communications sector due to shifts in technology and competition.

The utilities sector includes companies that generate traditional power as well as alternative and sustainable energy (sometimes called green energy), in addition to companies that transmit and distribute power to homes and businesses. Companies that provide natural gas generally buy it from oil and gas drilling companies and distribute it to customers. Water companies provide clean water to customers and collect and treat dirty water.

There are government regulations protecting utility companies, making it difficult for competitors to enter the market. Regulations also control the prices that utility companies charge for goods and services, making their earnings predictable and creating even more stability in the market.

It’s also extremely expensive to build the infrastructure needed to provide utilities. This allows utility companies to establish themselves in a region and grow steadily over time without significant competition.

Who Should Invest in Utilities Stocks?

Utility stocks are generally considered to be income stocks rather than growth stocks, since they provide consistent dividends but don’t tend to significantly increase in value.

Some people might be tempted to think of utility stocks as similar to bonds, since they provide consistent income and tend to be stable and safe. But they are not the same. One difference is that the yields from utility stocks tend to be higher than those of bonds and other fixed-income investments. These factors make them popular as a safe haven asset, and among retirees and conservative investors.

Choosing Utilities Stocks to Invest In

There are a number of ways to evaluate a stock in a utility company before buying it — here’s what investors might want to consider.

New Utility Companies and Emerging Markets

Since utility stocks have high dividends (making them popular monthly dividend stocks) and tend to be established companies, they don’t have the opportunity for significant growth. But some stocks in emerging markets or those of new utility companies can be an exception. Growth investors tend to gravitate towards these types of utility stocks, use utilities as a safe haven during market downturns, or as a way to diversify.

Companies with Moderate Dividend Payouts

Investors can look at a company’s dividend payout ratio to see how much of its profits it retains and how much it pays out to shareholders. If a company pays out less to shareholders, it may have more potential for growth since it keeps those revenues to invest back into the business and won’t need to borrow as much money.

Undervalued Utility Companies

Technical analysis can help both growth and value investors pick out which utility stocks might be undervalued and those which have the most potential for growth and income.

Utilities with Healthy Credit Ratings

Another tool investors can look at when choosing utility stocks is their credit rating. A higher credit rating means a company will be able to borrow more money, which is important for utility companies that need to continue investing in and maintaining infrastructure. However, too much debt isn’t a good sign, so investors should look at the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and debt-to-total-capital ratios when comparing potential utility stock investments.

Other factors to consider when choosing utility stocks:

•   The region in which the company operates

•   The regulatory market in that region

•   The utility the company provides and its business model

•   The dividend rate

•   The company’s financial performance

Investors who want to gain exposure to a broad cross-section of the market rather than choosing individual stocks might choose to invest in utility ETFs and mutual funds.

Benefits of Investing in Utilities Stocks

There are several reasons investors choose to add utility stocks to their portfolio:

•   They tend to pay out higher dividends than other fixed-income assets and stocks.

•   They are considered safe and stable investments. There will always be a demand for utilities, investors tend to sell off higher-risk investments first, they are under government regulation, and they have few competitors.

•   They tend to have high dividends and stability. Even though they don’t always see significant growth, their high dividends and low volatility make them a popular investment, so they do continue to grow over time.

•   They can be less volatile during economic downturns. Utilities provide essential services, making them a good way to diversify a portfolio.

•   They have little competition. Government regulations create the opportunity for utility companies to essentially become monopolies within their operating region, reducing the ability for competitors to enter the market.

•   Certain utility stocks may provide tax benefits. This can include lower capital gains rates for qualified dividends.



💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Downsides of Investing in Utilities

Although there are many reasons to invest in utilities, like any investment, they come with some downsides:

•   They are riskier than bonds. Since they are still part of the stock market, their values do fluctuate along with market trends. Utility stocks lost about half of their value (not including dividends) in both of the major market downturns in the past decade.

•   They don’t often provide opportunities for significant short-term growth. Here, their stability can be seen as a negative.

•   Rising interest rates can negatively affect utility stocks. That’s because utility companies tend to hold a lot of debt since their businesses require significant capital investment. As interest rates rise, companies have a higher debt burden. Also, when interest rates rise, stock prices tend to decrease, thereby decreasing their amount of equity funding and causing some investors to shift funds into other types of assets.

•   Utility companies are affected by changes in government policy. Regulations can also make it challenging for companies to grow, since they can’t easily increase their prices.

•   Not every utility company has high returns. The best choices for investors are the ones that show visible potential for both growth and high-yield dividends. Since utility infrastructure is expensive to build and maintain, companies need to show that they will be able to continue running and growing while still earning enough profit to pay out dividends.

The Takeaway

Investing in utility stocks can be a good way to diversify a portfolio by adding low-volatility assets that typically have high dividends. The public will always need utilities like water, gas, electric and renewable energy — and that allows utility companies to weather economic downturns relatively well.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

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.


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