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When researching new bank accounts, you may find some that offer sign-up bonuses — or cash rewards for opening an account and depositing some money — and wonder if it’s worthwhile. The answer is: It depends. This can make a bank account seem more attractive because of the quick payout, but it’s important to think about the long-term value of a bank account before opening it.

Are bank bonuses worth it for you? They can be if the bank also offers other features that align with your needs, like a high interest rate, no monthly fees, a large ATM network, and cash back rewards.

But in other cases, they may wind up just being an incentive that leads you into an arrangement that involves, say, high fees and low interest rates.

Read on for a closer look at how bank account bonuses work, their pros and cons, and how to determine if they’re worth it.

What Is a Bank Account Bonus?

A bank account bonus is a reward that customers generally earn for opening a bank account, such as a checking account or savings account, and meeting specific criteria during a set period. That might include setting up direct deposit, funding the account with a set amount of cash, using your new debit card a certain number of times, or meeting a specific spend threshold.

Bank account bonuses can vary in size, with some banks offering $100 and others offering $600 or more.

Banks may offer other types of bonuses, but sign-up bonuses are the most common and are meant to entice you to open a new bank account.

Note: Banks generally offer bonuses during promotional periods that last a set number of months. At the end of that period, they may choose to extend the bonus, end it, or offer a new bonus that could be more (or less) valuable than the preceding one.

How Do Bank Account Bonuses Work?

A traditional sign-up checking account bonus generally requires that you are a new client of the bank — or haven’t had an account with the bank for a set number of years. Each bank will have varying criteria to earn the bonus. Depending on the bank, you might:

•   Simply need to set up and receive qualifying direct deposits

•   Deposit a certain amount of money into the account (say, through an external bank transfer) and keep the account funded for a set number of days

•   Use your debit card a set number of times or for a minimum spend amount in a given timeframe

•   Pay a minimum amount of bills using the account

Evaluation periods for such bonuses may range from a few weeks to several months to an entire year. That means it could take a while to receive the sign-up bonus.

Some banks may also take back the bonus if you close the account too soon after receiving the bonus. That’s why it’s a good idea to read all the fine print for a bank bonus before opening a new account or switching banks.

What Are Some Common Bank Account Bonuses?

Here are some common bank account bonuses to watch for:

•   New account bonus: A sign-up bonus, or new account bonus, is what we generally think of when we hear “bank bonus.” Consumers can earn these bonuses for opening a new account and meeting specific criteria.

•   Referral bonus: Some banks may offer referral bonuses. Get friends and family to sign up for a new account, and you — and maybe your referral — can earn a cash bonus.

•   Cash back bonuses: Though we often think of cash back with rewards credit cards, some banks may pay out cash back with debit cards. You might get a percentage back when you make qualifying purchases.

•   Waived fees: Some bank accounts charge monthly service fees for keeping the account open. Often, these banks offer a way for you to have the fees waived — usually by maintaining a minimum balance, earning direct deposits, or meeting certain spending criteria. While you won’t earn cash, you’ll avoid paying fees; in that way, it’s like a bonus.

And don’t forget: Many banks offer sign-up bonuses on their credit cards as well. These also have their own criteria for earning the bonus that you may want to review before applying.

Pros of Bank Account Bonuses

Bank bonuses can be advantageous for consumers who are looking for a new account. Here are some of the pros:

Many Are Offered for Opening a New Account

Sign-up bonuses are a common form of bank bonus. Because the criteria are built around things you’d commonly do with a new checking account — setting up direct deposit, funding it with cash, using the debit card on everyday purchases — it can be easy to earn the bonus for activities you would’ve done anyway.

Bonuses Can Be Enough to Pay Off Potential Fees

While it’s wise to prioritize a bank account without any monthly fees, big bonuses can offset such fees for several months. And even if you find a bank account with no monthly fees, you may still end up paying:

•   ATM fees

•   Minimum balance fees

•   Overdraft and NSF fees

•   Foreign transaction fees

Such occasional fees might be easier to swallow if you’ve already earned a bonus worth several hundreds of dollars.

Bonuses Can Help You Build Your Savings

If you earn a bonus for opening a new savings account, you can keep that money in your account where it will continue to earn interest. This makes bank account bonuses an easy way to jump-start your savings, whether you’re building an emergency fund or saving for a wedding, house down payment, or vacation.

Recommended: Different Types of Savings Accounts

Cons of Bank Account Bonuses

While it’s hard to imagine how free money could be a bad thing, bank account bonuses may have drawbacks for certain consumers. Here are some considerations as you decide if bank bonuses are worth it.

Bonuses Are Considered Taxable Income

First and foremost, a bank account bonus is never as big as it sounds. Here’s why: because Uncle Sam takes his cut. The IRS considers bank account bonuses earned income, just like any interest you earn on the account.

You Might Pay More in Fees

Sign-up bonuses are meant to entice you to open a new account, but it’s a good idea to consider the account as a whole before moving forward. While a shiny sign-up bonus may offer you money up front, consider how much you’ll spend on fees (or how much you’ll miss out on in interest if it’s a low-interest account).

Once you factor in fees and missed earning opportunities, a bank account offering even a large bonus may not be the best long-term option for you.

There Are Often Many Requirements to Receive the Bonus

Sign-up bonuses often come with specific requirements, such as minimum deposit amounts, minimum on-going balance requirements, and/or direct deposit requirements. If you’ll struggle to meet all the criteria, it probably doesn’t make sense to open the account for the bonus alone.

Is It Worth It to Switch Banks for a Bonus?

So are bank account bonuses worth it? That depends on your needs. If you’re happy with your current bank and like all the features it offers, it may not be worth the hassle to switch.

But if you have other reasons to switch banks right now — like you want a higher interest rate, better mobile app, or fee-free overdraft — it could be worth your time to compare bank bonuses and make the switch.

That said, sign-up bonuses are a one-time benefit. It’s a good idea to weigh other features, like annual percentage yield (APY), monthly fees, mobile banking features, and ATM access, along with new account bonuses when making your decision.

The Takeaway

Bank bonuses can be easy to earn and may offer a great jump-start to your savings. For most consumers, however, it makes sense to consider sign-up bonuses alongside other important banking features, like interest rates and fees, to make a sound financial decision.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How can I qualify for a bank account bonus?

Banks offering sign-up bonuses for new accounts have specific terms and conditions to achieve the bonus. Read the fine print of any bank account bonus program to ensure you understand all the steps you need to take to qualify for the bonus.

What are the different types of bank bonuses?

The most common type of bank bonus is a sign-up bonus, which some banks offer when you open a new account and meet certain criteria during an evaluation period. Some banks may also offer referral bonuses for getting friends and family members to open an account, cash back bonuses when you swipe your debit card, and waived accounts fees for meeting criteria every month (which is similar to a bonus).

Banks might also have unique credit card rewards, like sign-up bonuses and cash back, travel points, or miles with every swipe.

Does SoFi offer a bank account bonus?

SoFi may offer a bank account bonus to new members when they sign up for the SoFi Checking and Savings Account; it may require setting up direct deposit. Check here to see what may be available right now.

Photo credit: iStock/Prostock-Studio

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*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/.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q325-018

Flipping furniture — the process of turning someone’s discarded pieces into beautiful, revitalized treasures — offers many benefits. It’s a unique way to earn extra income, learn new skills, and even send less waste to landfills. But how profitable can flipping furniture be, what tools do you need, and how do you get started? Let’s dive in.

What Is Furniture Flipping?

Though flipping furniture has recently gained popularity on TikTok, it’s been a profitable side hustle for many people much longer. Flipping furniture means taking an old piece of furniture, restoring it, and selling it for a profit. Restoring furniture generally involves cleaning an old piece, sanding or stripping it, then painting or staining it — and maybe installing more chic hardware, like knobs and handles.

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How Do I Get Started Flipping Furniture for a Profit?

To start flipping furniture for a profit, you’ll need to find old pieces of furniture, research methods for restoring them, buy the necessary tools and materials, and perform the actual work.

Your first few attempts at flipping furniture may not be good enough to sell, but the pieces could make great gifts for friends and family. As with any new skill, mastery takes practice.

Once you’ve gotten the hang of flipping furniture, you can begin to look for places to sell your pieces.

Recommended: Best Time to Purchase Furniture

Where Can I Find Furniture to Flip?

To make money flipping furniture, you need to source old furniture cheaply — or (ideally) for free.

You can find free furniture by driving around neighborhoods on trash day. The saying “one man’s trash is another man’s treasure” applies here: If a neighbor has put out an old dresser or end table for trash pickup, you can carry it or throw it in your truck and take it home to restore. Similarly, watch for neighbors who are moving; many dispose of furniture they don’t want to take to a new place.

If you’re willing to spend a little money, it may be easier to find the right pieces. Here are some places where you may be able to buy furniture on a budget:

•   Thrift stores

•   Garage sales and yard sales

•   Estate sales

•   Facebook Marketplace and Craigslist

It’s always wise to thoroughly clean used furniture before starting the restoration process — and ideally before bringing it into your home or workspace.

What Types of Furniture Can I Flip?

Any furniture that you can get your hands on and improve could theoretically make for a good flip, but in general, some of the best furniture items to flip for a profit include:

•   Coffee tables

•   End tables

•   Dining tables

•   Dining chairs*

•   Nightstands

•   Dressers

•   China cabinets

•   Buffets

•   Baby furniture

*Fabric chairs that require reupholstering may take more work than they’re worth and also present more risk (bed bugs and fleas, namely) than all-wood furniture.

What Do I Need to Look For When Flipping Furniture?

Knowing how to flip furniture for a profit comes down to more than being able to strip paint and install handles. To maximize efficiency and profit, you’ll want to know how to spot the right kinds of furniture.

Here are some things to watch for:

•   Heavier items: If a piece of furniture is heavy, don’t let it scare you off. That’s a good sign that it uses real, solid wood. This kind of wood is more durable and thus attractive to buyers. Particleboard pieces, on the other hand, are cheap and tend to fall apart easily; these are likely not worth your time.

•   Transportation ease: If you spot a great piece of furniture that looks a little bulky, measure it before purchasing. You’ve got to be able to transport it to your workspace and to the end customer or your retail space. If you can’t transport the furniture without renting a vehicle, it may not be profitable to flip it.

•   Craftsmanship: Look for dovetail joints in antique furniture. These are a mark of skill by the original furniture maker — not only do dovetail joints last longer than dowel joints, but they’re also more attractive to look at. Visible nails and staples are a sign of lower quality.

•   Easy flip: Some furniture pieces require less work than others. Think about how much work each piece will need. If some just need a light cleaning (or power washing) and a few screws tightened before you can sell them, these pieces may be more profitable than those requiring hours or even days of labor.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How Much Do I Need to Start Flipping Furniture?

You don’t need much money to start flipping furniture for profit. If you’re able to source your first few pieces for free, you’ll just need to purchase basic tools and some paint and stain. Many flippers start with as little as $100.

As you begin to profit off your first furniture flips, you can start to invest in higher-quality pieces, better tools, and maybe even booth space at an antique store or flea market.

What Do I Need to Flip Furniture?

To start flipping furniture, you’ll need a few things, including transportation, a workspace, tools and other materials, and a place to sell the furniture.

Good Transportation

When flipping furniture, you’ll need a reliable mode of transportation that can fit multiple pieces to bring back to your workspace. Trucks and SUVs are great options, but if you turn your side hustle into a full-time gig, you may even want a trailer to transport even more furniture to and from your workspace.

You’ll also need blankets to protect furniture in transit and possibly ways to keep it from moving around too much as it’s transported.

Space to Work on Furniture

If you’re flipping furniture as a hobby or an easy way to make extra money on weekends, you don’t need to rent out a dedicated workshop. Depending on the weather, you could work on furniture flipping in your yard. Basements and garages can also be great places to start your flips — but remember that your space should have adequate ventilation.

If you become more serious about flipping furniture, it might make sense to lease a workspace.

Equipment to Restore Furniture

Each furniture flip may require a different set of tools. In general, the following tools and materials should be in your arsenal:

•   Paint

•   Paintbrushes

•   Painters tape

•   Stain

•   Sealer

•   Paint stripper

•   Sanding materials

•   Rags

•   Drop cloth

•   Sewing kit or sewing machine

•   Staple gun

•   Hammer and nails

•   Drill

•   Screwdrivers and screws

•   Wood glue

•   Steel wool

•   Soap

•   Sponges

Recommended: Common Budgeting Mistakes that People Often Make

A Place to Sell the Finished Product

Knowing how to start flipping furniture for a profit requires more than just knowing where to buy furniture and how to restore it. You also need to know how and where to sell it.

When you’re just starting out, you may find success advertising to friends and family on social media or to neighbors on a neighborhood app like Nextdoor. You can also list the furniture on Facebook Marketplace, Craigslist, and OfferUp.

Pro Tip: If you’re selling online, take good photos. Nice staging can go a long way in making your finished product appear more upscale.

If furniture flipping becomes more lucrative for you, it might make sense to rent booth space at antique stores and flea markets to sell your flips.

Recommended: 39 Passive Income Ideas to Build Wealth

Pros and Cons of Furniture Flipping

Furniture flipping can be a great side gig or second job, but it’s not for everybody. Here are the pros and cons of starting a furniture flipping business:

How Much Can I Resell Furniture For?

How much you can resell furniture for will depend on the type of piece and how much work you’ve done to it. Consider the time and money you put into the piece and the level of transformation it’s undergone.

Though it can vary by piece, you may be able to mark up an item 200% to 400%. For example, if you spent $100 on a table and materials to restore it, you may be able to charge between $200 and $400 for it.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

Is Furniture Flipping Profitable?

Furniture flipping can be profitable. Just remember to keep expenses low, choose pieces strategically, and mark up the end result enough to justify the time and money you put into the project. Flipping furniture may not generate enough revenue for you to quit your day job, but it can be a fun way to make some extra money.

Skills to Learn to Improve Furniture Flipping

With each project, you can learn a new skill or try a new technique. Over time, you’ll have a roster of skills and techniques that allow you to transform furniture in new and exciting ways.

Here are some skills that are worth learning for flipping furniture:

•   Carpentry

•   Upholstering

•   Stripping paint, sanding, and priming

•   Painting and staining

•   Polishing

•   Tiling

You’ll also need to learn basic finance skills to treat your furniture flipping like a real business:

•   Accounting (including what taxes you may have to collect on items you sell)

•   Sales

•   Customer service

The Takeaway

Furniture flipping can be a lucrative side hustle if you’re willing to put in the effort to source good pieces, learn new skills, and do the actual hard work. While flipping furniture may not pay enough to be a full-time job, it can be a rewarding side hustle that allows you to be creative, try new things, help the environment, and put some extra padding in your checking or savings account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How much should I pay for furniture I’m planning to flip?

How much you should pay for a piece of furniture to flip depends on how much you think a person might pay for it fully restored. In general, it’s smart to aim for a 200% to 400% markup. If the cost of the furniture is too high for you to reasonably sell it for even more, it’s probably not a good piece to purchase.

Is flipping furniture always legal?

Flipping furniture is a legal way to make money. Remember that you must pay taxes on all income, so it’s important to track your expenses (save your receipts!) and earnings, then report it on your tax return each tax season.

Where can I sell furniture?

You can sell furniture online using sites and apps like Facebook Marketplace, Craigslist, Nextdoor, and OfferUp. If you have enough furniture to sell, it may make sense to rent a booth at an antique store or flea market.

Photo credit: iStock/ljubaphoto

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*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/.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOBNK-Q325-014

Magic Formula investing is a rules-based investing strategy developed by hedge fund manager and professor Joel Greenblatt. First outlined in his book, The Little Book That Beats the Market, the magic formula investing strategy takes a simplified approach to choosing investments.

Magic Formula Investing draws on principles of value investing to create portfolios that seek to outperform the market. For interested investors, knowing the ins and outs of the strategy before applying it is important.

What Is Magic Formula Investing?

At its core, Greenblatt’s Magic Formula Investing strategy focuses on finding good companies to invest in that are trading at attractive prices. Specifically, this strategy focuses on two things: Stock price, and the cost of capital.

The Magic Formula provides a way to help investors find or pinpoint companies that they deem undervalued by the market, and that may potentially offer a high return on their invested capital. It shares some similarities with value investing, which emphasizes finding the “hidden gems” that trade below their intrinsic value.

Value investors often follow a buy-and-hold strategy, in which securities are purchased with the intent to hold them long-term. The idea is that even though the market may have undervalued a company, it could grow in value over time and result in higher returns once an investor decides to sell.

This strategy utilizes fundamental analysis, which involves looking at things like revenue and earnings, and calculating return on equity to measure a company’s financial health.

The difference between a buy and hold strategy and Magic Formula Investing is that fundamental analysis doesn’t come into play. Instead, the formula relies on Greenblatt’s stock-screening method to identify the most promising stocks to invest in.


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

What Is the Magic Investing Formula?

Screening stocks using the Magic Formula method is based on a rankings system. As developed by Greenblatt, this system uses three distinct criteria to rank companies:

•   Earnings before interest and taxes (EBIT)

•   Earnings per share

•   Return on capital

Earnings Before Interest and Taxes (EBIT)

This is one way to measure a company’s profitability. This figure represents the net income of a company before income tax expense and interest expenses are deducted. To calculate a company’s EBIT, you’d subtract income tax expense and interest expenses from its revenue.

Earnings Per Share (EPS)

EPS is another measure of profitability, though it’s calculated differently than EBIT. With EPS, you divide a company’s net profit by the total number of common shares of stock it has outstanding. This is also a way to measure a company’s value, since EPS can tell you roughly how much money it makes per share of stock. A higher EPS may suggest higher value and a willingness for investors to pay more for shares of a company’s stock.

Return on Capital

Return on capital measures how well a company is able to allocate its capital to investments that are profitable. To figure out this number, you’d subtract dividends from net income, then divide that by the sum total of the company’s debt and equity.

By applying EBIT, EPS, and return on capital, the Magic Formula method is intended to determine quality companies at an attractive price.

How Magic Formula Investing Works

For investors interested in using the Magic Formula to help build a portfolio, there’s a specific sequence of steps to follow that Greenblatt outlines.

1. Set a Market Capitalization Threshold

Market capitalization (commonly known as market cap) represents the current number of shares of stock a company has outstanding multiplied by the price per share. Companies can be categorized as small-cap, mid-cap or large-cap, based on their market capitalization.

Engaging in Magic Formula Investing, an investor will typically start by excluding any companies with a market capitalization below $100 million. But one could set this number higher or lower, depending on personal preferences. Greenblatt advocates setting the threshold at $1 billion (which means large-cap) to help minimize volatility.

2. Exclude Certain Securities

In Magic Formula Investing, an investor next should eliminate several categories of investments. Those include stocks in the financials and utilities sectors, as well as foreign companies and American Depositary Receipts (ADRs). An ADR offers a way to indirectly own foreign companies that aren’t traded on U.S. stock exchanges.

3. Make the Necessary Calculations

Once an investor has narrowed down their list of companies, they can start running the numbers. Specifically, this means calculating:

•   Earnings before interest and taxes (EBIT)

•   Earnings yield (EBIT divided by enterprise value, which is a company’s total value as measured by its market capitalization plus total debt minus its cash assets)

•   Return on capital (EBIT divided by the sum total of net fixed assets and working capital)

4. Create Your Rankings

After doing the above math, an investor can move on to ranking companies according to the Magic Formula — from highest earnings yield and highest return on capital to lowest. From this point on, one would focus on the top 20 to 30 companies when choosing how to invest.

5. Start Building Your Portfolio

Greenblatt suggests buying the stocks that rank in that top 20-30 list on a rolling basis. For instance, an investor may consider buying two to three positions per month for one year, eventually owning 24 to 36 of the top ranking companies. According to Greenblatt’s formula, owning at least 20 different companies will help to maintain diversification.

At the end of the 12-month period, the Magic Formula dictates that investors would sell off the losing stocks and the winners, being mindful of capital gains taxes rules. Then they’d start the cycle over again, using the Magic Formula rules to select a new crop of stocks to invest in.

Holding stocks for a year before selling at a gain or loss is intended to help maximize potential after-tax returns. When you sell stocks at a profit that you’ve held longer than one year you’d be subject to the more favorable long-term capital gains tax rate.


💡 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.

Magic Formula Investing Results

Any time one is considering an investment strategy, it’s important to understand how it works and how it aligns with your goals and risk tolerance. Greenblatt’s approach is intended to help investors choose companies whose performance can potentially beat the market. Magic Formula is considered to be a tool for long-term investors seeking a disciplined, value-oriented strategy and has historically demonstrated strong outperformance of markets such as the S&P 500.

There’s no guarantee, however, that investors will see a positive return utilizing the strategy for any given year and, as with any investing strategy, there is also the risk of seeing losses.

Whether investors can replicate those Magic Formula Investing results for themselves can depend on different variables. For example, an individual portfolio may produce a very different return profile if an investor adjusts the market capitalization threshold up or down. Or if a company has an above-average year for revenue and profits, that could affect how the ranking calculations shake out.

Pros and Cons of Magic Formula Investing

The main idea behind the Magic Formula method is that it may be an option for even beginner investors to use. The idea is that by following the formula, an investor can eliminate some of the noise when making investment decisions.

That includes not giving in to investment biases that could prompt an investor to buy or sell at the wrong time. By focusing on the rankings and sticking with a one-year rolling schedule of buying and then selling, an investor can potentially remove their emotions from the equation. This can help avoid selling off stocks in a panic if the market becomes more volatile.

Downsides of Magic Formula Investing

While this formula can help an investor create a diversified portfolio, it’s still exclusionary in that it doesn’t include investing in foreign companies or companies in the financials and utilities sectors.

Beyond that, there’s no certainty that an investor will see positive results in the form of above-average returns — as noted. Greenblatt himself says that there’s nothing “magical” about the formula and that it shouldn’t be considered a guarantee of investment returns or performance. As with any investing strategy, it isn’t foolproof.

Finally, the Magic Formula Investing strategy is meant to be a long-term one. For investors more interested in seeing quick results versus adopting a buy and hold mindset, day trading might be an option to consider, though it is higher-risk.

The Takeaway

Hedge fund manager and professor Joel Greenblatt devised his Magic Formula Investing strategy as a way to invest in a curated group of good companies with high potential for returns. The system ranks companies according to three criteria: earnings before interest and taxes (EBIT), earnings per share, and return on capital. The system is intended for anyone from first-time investors to more seasoned investors.

But as with any investment strategy, there is no guarantee that the magic formula investing results will be positive every time. There is a potential for both gains and losses.

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FAQ

What is the Magic Formula Investing strategy’s formula?

Magic Formula Investing is a strategy to choose specific stocks, and it utilizes a ranking system, developed by Joel Greenblatt, that uses three distinct criteria to rank companies: Earnings before interest and taxes (EBIT), earnings per share, and return on capital.

What returns does the Magic Formula Investing method supply?

The Magic Formula was designed to help investors outperform the market over a long period of time. But depending on the specifics of an investor’s portfolio, returns can vary wildly, and it’s possible the strategy could lead to losses as well.

What is the “magic” in Magic Formula Investing?

Magic Formula Investing is a stock-screening method used to identify companies that might be undervalued. Unfortunately, there is no magic in the formula or strategy, and there’s no guarantee that it will yield returns for investors.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.