Whether you’re a recent graduate looking to understand your total debt or a working professional tracking your progress toward paying off your loans, staying informed about your student loan balances is a crucial aspect of financial well-being. But for something that is so important, it can be surprisingly confusing to locate all your student loan information.
Keep reading to learn how to view your federal student loans, how to use the Federal Student Aid website, where to pay your student loans, and more.
Key Points
• The Federal Student Aid (FSA) website is the official platform to view your federal student loans.
• To log in to the FSA website, you need to create an FSA ID. This ID allows you to securely access your federal student aid information and manage your loans.
• On the FSA website, you can find your loan servicer. Your loan servicer manages your federal student loans.
• Regularly reviewing your loan details helps you stay informed about your financial obligations and ensures you are on track with your repayment plan.
• The FSA website offers various repayment plans, including income-driven plans. Understanding these options can help you choose the best plan for your financial situation.
How to View Federal Student Loans
Student loan holders can view their federal student loans via the Federal Student Aid (FSA), which is run by the Office of the U.S. Department of Education. It offers a convenient option for getting a comprehensive picture of all federal loans.
• The name of your loan service provider and their contact information
Using the Federal Student Aid Website
In order to see your loan information on FSA, borrowers will need to create a new account. Current registrants can log in with their email, phone number, or FSA ID username and password. In addition to student loans, the site also has valuable resources including repayment plans and loan counseling.
Where Do I Pay My Student Loans?
Even though you can obtain all the information about your student loans through the FSA website, that is not actually where you pay your student loans. Once you’re logged in, borrowers should be able to see the name and contact information for their student loan servicer. The student loan servicer is the entity charged with collecting loan payments.
Once you know who your student loan servicer is, you should be able to set up an online account directly with the loan servicer. Some student loan servicers also offer the option to set up automatic bill pay.
If you don’t want to make your payments online, your student loan servicer’s website should also have information about making payments in other ways, like via check or bank transfer.
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How Do I Pay My Student Loans?
The federal government offers a handful of options when it comes to federal student loan repayment. These repayment plans are designed for people with different types of financial situations and priorities — from those who want a straightforward way to pay off their loans in a 10-year period to those looking for income-driven repayment plans.
Here’s a quick rundown of the repayment options offered for federal student loans.
Standard, Extended, and Graduated Repayment Plans
• The Standard Repayment Plan is the default loan repayment plan for federal student loans. Borrowers pay a fixed amount every month within 10 years in order to pay off their loan(s).
• The Extended Repayment Plan is similar to the Standard Repayment Plan but instead of making payments over 10 years, the payments are extended up to 25 years.
• The Graduated Repayment Plan also offers a 10-year repayment option. Under this plan, monthly loan payments start at a lower amount and are then increased every two years for up to 30 years.
If you’re just starting to pay back your student loans after graduation, you’ll likely be automatically assigned to the Standard Repayment Plan. You can change the repayment plan you are enrolled in at any time.
Income-Driven Repayment Plans
There are currently four income-driven repayment plans — Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Under these plans, monthly payments are determined as a percentage of the borrower’s monthly income. Depending on the plan, borrowers have up to 25 years to repay their loans.
Note: SAVE is no longer available for new enrollments, and PAYE, ICR, and SAVE will be eliminated by July 1, 2028. Once these plans are eliminated, borrowers with loans issued before July 1, 2026 will choose between a standard fixed-term plan (10–25 years, based on balance), Income-Based Repayment (IBR), the new Repayment Assistance Plan (also income-based), and Graduated or Extended plans.
For loans issued on or after July 1, 2026, borrowers will only have two repayment options: the Revised Standard Plan or the Repayment Assistance Plan. Graduated and Extended plans will no longer be an option.
Student Loan Consolidation
The federal government may also have options for you to consolidate your student loans into a Direct Consolidation Loan, which would allow you to group all your loans together into a single loan from the government, with an interest rate that’s the weighted average of all your loans’ interest rates, rounded up to the nearest eighth of a percent.
Student Loan Refinancing
In addition to the repayment plans offered by the federal government, you might also consider refinancing your student loans with a private company. Loan refinancing pays off your current federal and private student loans with a new loan from a private lender.
The private lender will review factors like your credit history and income potential to determine your new terms. For some borrowers, student loan refinancing may result in a lower interest rate, lower monthly payments, or even a shorter repayment term — which could mean you spend less money in interest over the life of the loan. Conversely, if you refinance with an extended term, you may pay more interest over the life of the loan.
The Takeaway
Managing your federal student loans effectively starts with knowing the details of your debt. By using the Federal Student Aid (FSA) website and creating an FSA ID, you can easily access and review your loan information, including balances, interest rates, and payment history.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
What is the official platform to view my student loans?
The official platform to view your federal student loans is the Federal Student Aid (FSA) website. This website provides comprehensive information about your loans, including balances, interest rates, and payment history.
What is an FSA ID and why do I need one?
An FSA ID is a username and password that allows you to securely access your federal student aid information on the FSA website. You need an FSA ID to log in and manage your federal student loans, as well as to sign important documents related to your financial aid.
How can I find out who my loan servicer is?
You can find out who your loan servicer is by logging into the FSA website with your FSA ID. Your loan servicer’s contact information will be listed there, and they can provide additional details about your loans and repayment options.
SoFi Student Loan Refinance Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Gamma measures how much an option’s delta changes for every $1 price movement in the underlying security. You might think of delta as an option’s speed, and gamma as its acceleration rate.
Gamma expresses the rate of change of an option’s delta, based on a $1 price movement — or, one-point movement — of the option’s underlying security. Traders, analysts, portfolio managers, and other investment professionals use gamma — along with delta, theta, and vega — to quantify various factors in options markets.
Key Points
• Gamma measures the rate of change in an option’s delta for every $1 movement in the underlying security’s price.
• Delta provides insight into how much an option’s price might move relative to its underlying security.
• Understanding gamma is essential for risk management, as it allows traders to gauge the risk in their options holdings.
• Traders may balance positive and negative gamma in their portfolio to manage the risk of rapid price movements.
• High gamma may make long options more responsive to price movements, potentially amplifying gains, but increases risks for short options near expiration.
What Is Gamma?
Gamma is an important metric for pricing contracts in options trading. Gamma can show traders how much the delta — another metric — will change concurrent with price changes in an option’s underlying security.
An option’s delta measures its price sensitivity, and gamma provides insight into how that sensitivity may change as the underlying asset’s price shifts.
Expressed as a ratio: Gamma quantifies the rate of change in an option’s delta relative to changes in the underlying asset’s price. As an options contract approaches its expiration date, the gamma of an at-the-money option increases; but the gamma of an in-the-money or out-of-the-money option decreases.
Gamma is one of the Greeks of options trading, and can help traders gauge the rate of an option’s price movement relative to how close the underlying security’s price is to the option’s strike price. Put another way, when the price of the underlying asset is closest to the option’s strike price, then gamma is at its highest rate. The further out-of-the-money a security goes, the lower the gamma rate is — sometimes nearly to zero.
Calculating gamma precisely is complex, and it requires sophisticated spreadsheets or financial modeling tools. Analysts usually calculate gamma and the other Greeks in real-time, and publish the results to traders at brokerage firms. However, traders may approximate gamma using a simplified formula.
Gamma Formula
Here is an example of how to calculate the approximate value of gamma. This formula approximates gamma as the difference between two in delta values divided by the change in the underlying security’s price.
Gamma = (Change in Delta) / (Change in Underlying Security’s Price)
Or
Gamma = (D1 – D2) / (P1 – P2)
Where:
• D1 represents the initial delta value.
• D2 represents the final delta value after a price change.
• P1 represents the initial price of the underlying security.
• P2 represents the final price of the underlying security.
Example of Gamma
For example, suppose there is an options contract with a delta of 0.5 and a gamma of 0.1, or 10%. The underlying stock associated with the option is currently trading at $10 per share. If the stock increases to $11, the delta would increase to 0.6; and if the stock price decreases to $9, then the delta would decrease to 0.4.
In other words, for every $1 that the stock moves up or down, the delta changes by .1 (10%). If the delta is 0.5 and the stock price increases by $1, the option’s value would rise by $0.50. As the value of delta changes, analysts use the difference between two delta values to calculate the value of gamma.
How to Interpret Gamma
Gamma is a key risk-management tool. By figuring out the stability of delta, traders can use gamma to gauge the risk in trading options. Gamma can help investors discern what will happen to the value of delta as the underlying security’s price changes.
Based on gamma’s calculated value, investors can see the potential risk involved in their current options holdings; then decide how they want to invest in options contracts. If gamma is positive when the underlying security increases in value in a long call, then delta will become more positive. When the security decreases in value, then delta will become less positive.
In a long put, delta will decrease if the security decreases in value; and delta will increase if the security increases in value.
Traders use a delta hedge strategy to maintain a hedge over a wider security price range with a lower gamma.
💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.
How Traders Use Gamma
Hedging strategies can help professional investors reduce the risk of an asset’s adverse price movements. Gamma can help traders discern which securities to purchase by revealing the options with the most potential to offset losses in their existing portfolio.
Gamma hedging helps traders manage the risk of rapid delta changes by offsetting gamma exposure in their portfolio. This is typically done by holding a combination of options with positive and negative gamma.
If any of the trader’s assets are at risk of making strong negative moves, investors could purchase other options to hedge against that risk, especially when close to options’ expiration dates.
In gamma hedging, investors generally purchase options that oppose the ones they already own in order to create a balanced portfolio. For example, if an investor already holds many call options, they might purchase some put options to hedge against the risk of price drops. Or, an investor might sell some call options at a strike price that’s different from that of their existing options.
Benefits and Risks of Using Gamma
Gamma plays a crucial role in managing options positions, influencing how delta changes in response to price movements. While it can enhance trading strategies, it may also introduce certain risks.
Benefits of Gamma
Gamma in options Greeks is popular among investors in long options. All long options, both calls and puts, have a positive gamma that is usually between 0 and 1, and all short options have a negative gamma between 0 and -1.
Higher gamma means the option is sensitive to movements in the underlying security’s price. For every $1 increase in the underlying asset’s price, a higher gamma suggests that delta will change more significantly, potentially amplifying gains or losses depending on the trade’s direction.
When delta is 0 at the contract’s expiration, gamma is also 0 because the option is worthless if the current market price is better than the option’s strike price. If delta is 1 or -1 then the strike price is better than the market price, so the option is valuable.
Risks of Gamma
While gamma can potentially benefit long options buyers, for short options sellers it can potentially pose risks. For short options, a high gamma near expiration increases the risk of substantial losses if the underlying asset’s price moves sharply, since delta changes rapidly and can result in significant margin requirements or losses.
Another risk of gamma for option sellers is expiration risk. The closer an option gets to its expiration date, the less probable it is that the underlying asset will reach a strike price that is very much in-the-money — or out-of-the-money for option sellers. This probability curve becomes narrower, as does the delta distribution. The more gamma increases, the more theta — the cost of owning an options contract over time — decreases. Theta is a Greek that shows an option’s predicted rate of decline in value over time, until its expiration date.
For options buyers, this can mean greater returns, but for options sellers it can mean greater losses. The closer the expiration date, the more gamma increases for at-the-money options; and the more gamma decreases for options that are in- or out-of-the-money.
How Does Volatility Affect Gamma?
When a security has low volatility, options that are at-the-money have a high gamma and in- or out-of-the-money options have a very low gamma. This is because the options with low volatility have a low time value; their time value increases significantly when the underlying stock price gets closer to the strike price.
If a security has high volatility, gamma is generally similar and stable for all options, because the time value of the options is high. If the options get closer to the strike price, their time value doesn’t change very much, so gamma is low and stable.
Using Gamma Along With Other Options Greeks
Gamma is a key metric in options trading, providing insight into how delta changes as the underlying asset’s price fluctuates. It is one of the five primary Greeks that traders use to manage risk and develop options strategies. Each Greek helps measure different aspects of an option’s behavior, offering a more comprehensive view of market exposure. The Greeks are:
• Gamma (Γ): Measures the rate of change in delta as the underlying security’s price moves. Higher gamma means delta shifts more quickly, increasing both potential gains and risks.
• Delta (Δ): Measures an option’s sensitivity to changes in the underlying asset’s price. Delta helps traders understand how much an option’s price might move relative to its underlying security.
• Theta (θ): Represents time decay, indicating how an option loses value as it nears expiration. A higher theta means the option’s value declines more rapidly over time.
• Vega (ν): Reflects the impact of implied volatility on an option’s price. Higher vega suggests that increased volatility leads to larger option price swings.
• Rho (ρ): Gauges an option’s sensitivity to interest rate changes. Rho is more relevant for long-dated options, as interest rate fluctuations can significantly impact their value.
Understanding gamma alongside the other Greeks allows traders to refine their strategies and manage risk more effectively in the options market.
The Takeaway
Gamma and the Greeks indicators are useful tools in options trading for understanding derivatives and creating options trading strategies. However, trading in derivatives, like options, is primarily for advanced or professional investors.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
A “good” gamma depends on the trading strategy. High gamma is beneficial for short-term traders who want quick delta changes, as it makes options more responsive to price movements. Lower gamma is preferred for longer-term strategies or hedging, as it provides more stability and reduces the need for frequent adjustments.
Should gamma be high or low when trading options?
Whether gamma should be high or low depends on your strategy and risk tolerance. High gamma is ideal for short-term trades or when expecting significant price moves, as it amplifies delta changes and potential gains but also increases risk. Low gamma, common in deep in-the-money or far out-of-the-money options, provides more stability and slower delta changes, making it better suited for longer-term strategies or conservative approaches.
How do you trade options using gamma?
Trading options using gamma helps traders assess delta changes, identify opportunities, and manage risk. High gamma options, often at-the-money and near expiration, allow for rapid delta shifts, benefiting short-term trades. Gamma hedging helps balance exposure by offsetting positive and negative gamma, reducing volatility in a portfolio.
What is the best gamma ratio?
A “good” gamma depends on the trading strategy. High gamma is beneficial for short-term traders who want quick delta changes, as it makes options more responsive to price movements. Lower gamma is preferred for longer-term strategies or hedging, as it provides more stability and reduces the need for frequent adjustments.
What happens to gamma when volatility increases?
When volatility increases, gamma decreases for at-the-money options and stays relatively stable for in- and out-of-the-money options. Higher volatility smooths delta changes, making gamma less sensitive, while lower volatility increases gamma, leading to sharper delta shifts.
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Mark to market (MTM) is an accounting method that measures the current value of a company’s assets and liabilities, rather than their original price. MTM seeks to determine the real value of assets based on what they could be sold for right now, which in turn provides a more accurate estimate of a company’s financial worth.
MTM can be useful when an investor is trying to gauge a company’s financial health or get a valuation estimate ahead of a merger or acquisition. Aside from accounting, MTM also has applications in investing when trading stocks, futures contracts, and mutual funds. For traders and investors, it can be important to understand how this concept works.
Key Points
• The mark-to-market (MTM) accounting method is used to determine the current value of assets and liabilities based on present market conditions.
• MTM is used in business to assess financial health and valuation, as well as in investing for trading stocks, futures contracts, and mutual funds.
• MTM accounting adjusts asset values based on current market conditions to estimate their potential sale value.
• Pros of mark-to-market accounting include accurate valuations for asset liquidation, value investing, and establishing collateral value for loans.
• Cons include potential inaccuracies, volatility skewing valuations, and the risk of devaluing assets in an economic downturn.
What Is Mark to Market (MTM)?
Mark to market is, in simple terms, an accounting method that’s used to calculate the current or fair value of a company’s assets and liabilities. MTM can tell you what an asset is worth based on its fair market value.
Mark-to-market accounting is meant to create an accurate estimate of a company’s financial status and value year over year. This accounting method can tell you whether a company’s assets have increased or declined in value. When liabilities are factored in, MTM can give you an idea of a company’s net worth.
Mark to market is also used to establish the fair market value of certain investments, which has implications for investors, particularly those using margin accounts, where the value of the securities in the account can impact an individual’s ability to trade.
How Mark-to-Market Accounting Works
Mark-to-market accounting works by adjusting the value of assets based on current market conditions. The idea is to determine how much an asset — whether it be a piece of equipment or an investment — could be worth if it were to be sold immediately.
If a company were in a cash crunch, for example, and wanted to sell off some of its assets, mark to market accounting could give an idea of how much capital it might be able to raise. The company would try to determine as accurately as possible what its marketable assets are worth.
In stock trading, MTM is determined for securities by looking at volatility and market performance. Specifically, you’re looking at a security’s current trading price then making adjustments to value based on the trading price at the end of the trading day.
There are other ways mark to market can be used beyond valuing company assets or securities. In insurance, for example, the MTM method is used to calculate the replacement value of personal property. Calculating net worth, an important personal finance ratio, is also a simple form of mark to market accounting.
Mark-to-Market Accounting: Pros and Cons
Mark-to-Market accounting can be useful when evaluating how much a company’s assets are worth or determining value when trading securities. But it’s not an entirely foolproof accounting method.
Mark-to-Market Pros
Mark-to-Market Cons
• Can help establish accurate valuations when companies need to liquidate assets
• Useful for value investors when making investment decisions
• May make it easier for lenders to establish the value of collateral when extending loans
• Valuations are not always 100% accurate since they’re based on current market conditions
• Increased volatility may skew valuations of company assets
• Companies may devalue their assets in an economic downturn, which can result in losses
Pros of Mark-to-Market Accounting
There are a few advantages of mark-to-market accounting:
• MTM can help generate an accurate valuation of company assets. This may be important if a company needs to liquidate assets or it’s attempting to secure financing. Lenders can use the mark to market value of assets to determine whether a company has sufficient collateral to secure a loan.
• MTM can help mitigate risk. If a value investor is looking for new companies to invest in, for example, having an accurate valuation is critical for avoiding value traps. Investors who rely on a fundamental approach can also use mark-to-market value when examining key financial ratios, such as price to earnings (P/E) or return on equity (ROE).
• It may make it easier for lenders to establish the value of collateral when extending loans. Mark to market may provide more accurate guidance in terms of collateral value.
Cons of Mark-to-Market Accounting
There are also some potential disadvantages of using mark-to-market accounting:
• It may not be 100% accurate. Fair market value is determined based on what you expect someone to pay for an asset that you have to sell. That doesn’t necessarily guarantee you would get that amount if you were to sell the asset.
• It can be problematic during periods of increased economic volatility. It may be more difficult to estimate the value of a company’s assets or net worth when the market is experiencing uncertainty or overall momentum is trending toward an economic downturn.
• Companies may inadvertently devalue their assets in a downturn. If the market’s perception of a company, industry, or sector turns negative, it could spur a sell-off of assets. Companies may end up devaluing their assets if they’re liquidating in a panic. This can have a boomerang effect and drive further economic decline, as it did in the 1930s when banks marked down assets following the 1929 stock market crash.
Mark to Market in Investing
In investing, mark to market is used to measure the current value of securities, portfolios or trading accounts. This is often used in instances where investors are trading futures or other securities in margin accounts.
Margin trading involves borrowing money from a brokerage in order to increase purchasing power.
Understanding mark to market is important for meeting margin requirements to continue trading. Investors typically have to deposit cash or have marginable securities of $2,000 or 50% of the securities purchased. The maintenance margin reflects the amount that must be in the margin account at all times to avoid a margin call.
In simple terms, margin calls are requests for more money. FINRA rules require the maintenance margin to be at least 25% of the total value of margin securities. If an investor is subject to a margin call, they’ll have to sell assets or deposit more money to reach their maintenance margin and continue trading.
Futures are derivative financial contracts, in which there’s an agreement to buy or sell a particular security at a specific price on a future date. In futures trading, mark to market is used to price contracts at the end of the trading day. These adjustments affect the cash balance showing in a futures account, which in turn may affect an investor’s ability to meet margin maintenance requirements.
Mark-to-Market Example
Futures markets follow an official daily settlement price that’s established by the exchange. In a futures contract transaction you have a long trader and a short trader. The amount of value gained or lost in the futures contract at the end of the day is reflected in the values of the accounts belonging to the short and long trader.
So, assume a farmer takes a short position in 10 soybean futures contracts to hedge against the possibility of falling commodities prices. Each contract represents 5,000 bushels of soybeans and is priced at $5 each. The farmer’s account balance is $250,000. This account balance will change daily as the mark to market value is recalculated. Here’s what that might look like over a five-day period.
Day
Futures Price
Change in Value
Gain/Loss
Cumulative Gain/Loss
Account Balance
1
$5
$250,000
2
$5.05
+0.05
-2,500
-2,500
$247,500
3
$5.03
-0.02
+1,000
-1,500
$248,500
4
$4.97
-0.06
+3,000
+1,500
$251,500
5
$4.90
-0.07
+3,500
+5,000
$255,000
Since the farmer took a short position, a decline in the value of the futures contract results in a positive gain for their account value. This daily pattern of mark to market will continue until the futures contract expires.
Conversely, the trader who holds a long position in the same contract will see their account balance move in the opposite direction as each new gain or loss is posted.
Mark to Market in Recent History
Mark-to-market accounting can become problematic if an asset’s market value and true value are out of sync. For example, during the financial crisis of 2008-09, mortgage-backed securities (MBS) became a trouble spot for banks.
As the housing market soared, banks raised valuations for mortgage-backed securities. To increase borrowing and sell more loans, credit standards were relaxed. This meant banks were carrying a substantial amount of subprime loans.
As asset prices began to fall, banks couldn’t sell those assets, and under mark-to-market accounting rules they had to be revalued. As a result banks collectively reported around $2 trillion in total mark-to-market losses.
During this time, the U.S. economy would enter one of the worst recessions in recent history.
Can You Mark Assets to Market?
The U.S. Financial Accounting Standards Board (FASB) oversees mark-to-market accounting standards. These standards, along with other accounting and financial reporting rules, apply to corporate entities and nonprofit organizations in the U.S. But it’s possible to use mark-to-market principles when making trades.
If you’re trading futures contracts, for instance, mark-to-market adjustments are made to your cash balance daily, based on the settlement price of the securities you hold. Your cash balance will increase or decrease based on the gains or losses reported for that day.
If the market moves in your favor, your account’s value would increase. But if the market moves against you and your futures contracts drop in value, your cash balance would adjust accordingly. You’d have to pay attention to maintenance margin requirements in order to avoid a margin call.
Which Assets Are Marked to Market?
Generally, the types of assets that are marked to market are ones that are bought and sold for cash relatively quickly — otherwise known as marketable securities. Assets that can be marked to market include stocks, futures, ETFs, and mutual funds. These are assets for which it’s possible to determine a fair market value based on current market conditions.
When measuring the value of tangible and intangible assets, companies may not use the mark-to-market method. In the case of equipment, for example, they may use historical cost accounting which considers the original price paid for an asset and its subsequent depreciation.
Meanwhile, different valuation methods may be necessary to determine the worth of intellectual property or a company’s brand reputation, which are intangible assets.
Mark-to-Market Losses
Mark-to-market losses occur when the value of an asset falls from one day to the next. A mark-to-market loss is unrealized since it only reflects the change in valuation of asset, not any capital losses associated with the sale of an asset for less than its purchase price. The loss happens when the value of the asset or security in question is adjusted to reflect its new market value.
Mark-to-Market Losses During Crises
Mark-to-market losses can be amplified during a financial crisis when it’s difficult to accurately determine the fair market value of an asset or security. When the stock market crashed in 1929, for instance, banks were moved to devalue assets based on mark-to-market accounting rules. Unfortunately, this helped turn what could have been a temporary recession into the Great Depression, one of the most significant economic events in stock market history.
Mark to Market Losses in 2008-09
As noted above, during the 2008 financial crisis mark-to-market accounting practices were a target of criticism as the market for mortgage-backed securities vanished, and the value of those securities took a nosedive — contributing to the Great Recession.
In 2009, however, the FASB changed its stance on market-to-market practices for certain securities, specifically allowing banks greater flexibility in how they valued illiquid assets like mortgage-backed securities.
The Takeaway
Mark to market is, as discussed, an accounting method that’s used to calculate the current or real value of a company’s assets and liabilities. Mark to market is a helpful principle to understand, especially if you’re interested in futures trading.
When trading futures or trading on margin, it’s important to understand how mark-to-market calculations could affect your returns, and your potential to be subject to a margin call. As always, in more complex financial circumstances, it can be beneficial to speak with a financial professional for guidance.
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FAQ
Is mark-to-market accounting legal?
Mark-to-market accounting is a legal accounting practice, and is overseen by the FASB. Though it has been used in the past to cover financial losses, it remains a legal and viable method.
Is mark-to-market accounting still used?
Yes, mark-to-market accounting is still used both by businesses and individuals for investments and personal finance needs. In some sectors of the economy, it may even remain as one of the primary accounting methods.
What are mark-to-market losses?
Mark-to-market losses are losses incurred under mark-to-market accounting, when the value of an asset declines, not when it is sold for less than it was purchased.
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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.
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.
This article is not intended to be legal advice. Please consult an attorney for advice.
Crypto mining and staking are two different ways for a blockchain network to achieve consensus and validate transactions. They use different means to achieve a similar end. While mining uses a consensus mechanism called proof-of-work (PoW), staking uses another consensus mechanism called proof-of-stake (PoS). Crypto mining and staking can also generate rewards for network users or participants, which is why many people are interested in them.
Key Points
• To validate transactions, crypto mining uses specialized hardware to solve complex equations, while staking uses participants’ existing holdings.
• Proof-of-work (PoW) relies on computational power, whereas proof-of-stake (PoS) locks up assets as collateral.
• Mining is resource-intensive and costly; staking is more accessible and environmentally friendly.
• Mining may offer higher rewards, while staking provides passive income with lower barriers to entry.
• Participants may choose mining or staking based on their financial commitment and goals, technical skills, environmental concerns, and risk tolerance.
🛈 While SoFi members will soon be able to buy, sell, and hold a selection of cryptocurrencies, such as Bitcoin and Ethereum, other cryptocurrencies mentioned may not be offered by SoFi.
Introduction to Crypto Mining and Staking
Crypto mining and crypto staking are two different protocols cryptocurrencies may use to validate transactions and reach consensus on network data. Staking involves locking up tokens for a fixed period, while mining requires running specialized hardware.
What Is Crypto Mining?
Crypto mining is a consensus protocol utilized by some blockchain networks. It’s grown into a multi-billion dollar industry, mostly because the mining process can lead to rewards in the form of new coins or cryptocurrency. In effect, mining involves computers solving complex mathematical problems or equations, validating data on the blockchain, and “unlocking” new blocks on the network. Users who participate may be “rewarded” for doing so, and receive cryptocurrency for their efforts.
What Is Crypto Staking?
Crypto staking is a consensus protocol utilized by PoS blockchain networks, serving as an alternative to mining. It involves users pledging or “locking up” their crypto holdings to a network, which may be used to validate data on the blockchain. Users can then earn staking rewards for doing so. In that way, it’s similar to putting money in a savings account and generating interest.
Why Do Both Methods Exist in Blockchain?
Both crypto mining and staking work to the same end: To entice users to participate and validate data on a given blockchain network. They’re simply two different ways to do it. There can be some advantages and disadvantages to both, of course, and those involved in the crypto space would do well to understand each.
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How Crypto Mining Works
Crypto mining is a fairly complex process that doesn’t involve pickaxes or hard hats, but rather, computer processors.
The Proof-of-Work Mechanism Explained
As noted, a proof-of-work consensus mechanism on blockchain networks involves miners solving mathematical equations. Doing so validates transactions on the network, which helps ensure that the information stored on the blocks is accurate and secure. That all requires computational power and resources, which miners supply.
As the data on each block is validated, new blocks are opened up, which also unlocks new cryptocurrency. So, participants who “mine” are forking over their computational resources in hopes of earning some of that new, unearthed crypto.
Essential Mining Hardware and Software
Crypto mining involves using computer processing power, and that can take many forms. In short, though, miners can use CPUs, GPUs, or advanced “mining rigs” called ASICs to mine crypto. In many cases, mining hardware is designed specifically for solving cryptographic equations, and can cost thousands of dollars.
Block Validation, Rewards, and Incentives
Again participating on a blockchain network as a miner involves validating data in hopes of earning a reward. That’s the main incentive for miners. Each blockchain network is different, and on some networks, such as Bitcoin, there are hundreds of thousands of miners at work, meaning that competition for mining rewards is fierce.
Energy Consumption and Environmental Concerns
One concern that’s become front-and-center as it relates to crypto mining is how resource intensive it tends to be. Dedicating computer hardware to solving cryptographic equations requires electricity to run and cool the machines, and in aggregate, can eat up a lot of energy.
That’s drawn the ire of some individuals and groups, who may feel the energy may be better used elsewhere, and who have voiced concerns about how that energy is being generated, and the impacts on the environment.
Popular Cryptocurrencies You Can Mine
There are numerous mineable cryptocurrencies on the market. Bitcoin is the most popular (and the most competitive), but it certainly isn’t the only one.
And as a quick reminder, proof-of-work coins offer miners newly minted tokens as a reward for helping to solve the computational problems involved in processing a block of transactions — though there isn’t necessarily a guarantee that participants will be rewarded for leveraging their computational resources as a part of that process.
Note, too, that different PoW coins can use different mining algorithms. While Bitcoin uses SHA-256, Litecoin and Dogecoin use Scrypt, for example. Moreover, to mine a specific coin, the hardware (be it ASICs or GPUs) must be compatible with the type of algorithm used to mine that coin.
How Crypto Staking Works
Crypto staking has a very different approach to blockchain transaction validation compared to mining. In effect, it involves users pledging their crypto holdings to a blockchain network, basically as collateral, which helps validate the data on that network (similar to mining). Participants may then earn passive rewards, usually expressed as a percentage yield of the coins staked.
The Proof-of-Stake Mechanism Explained
On a proof-of-stake network, participants are referred to as “validators” (or stakers).” Validators “stake” their holdings on the network, and those resources are used by the network to validate and secure the data on the blockchain. It can be a complex, granular, and intricate process when you get down to it, but as mentioned, the aims are the same as mining: Validate data, and generate rewards for participants.
How Staking Pools, Validators, and Exchanges Operate
Participants may combine their holdings for staking purposes to try and increase their odds of being rewarded. This is called a staking pool, and represents the combined efforts of several validators. A single point-person or entity may run these pools, called a pool operator, who can then divvy up any rewards proportionally, too. Pool operators may also charge a fee for their services.
Conversely, becoming an independent staking validator often requires a large sum of tokens, along with keeping a computer up and running constantly. Validators can receive a penalty for not having 24/7 uptime, and starting your own validator node can come with a hefty price tag.
It’s also possible to stake coins through a crypto exchange. This is one of the easiest ways to stake, but these can also involve higher fees or commissions that reduce the amount of the rewards received.
Staking and Reward Distribution
A PoS cryptocurrency generally benefits from having more coins staked to its network. Having a higher staking ratio makes it harder for attackers to gain control of the cryptocurrency, and it can also help promote price stability, since fewer coins may be bought and sold.
But the critical thing to know about crypto staking is that, in general, the more crypto holdings you stake, the higher your chances of being selected to validate transactions and earn a reward.
Depending on the blockchain network, too, there may be different rules as to whether a participant’s pledged holdings can be “unlocked” or “unstaked” at a given time. So, you’ll want to do some research if you’re uncomfortable with the idea of not being able to liquidate your crypto for a period of time, if it’s staked.
Accessibility and Technical Requirements for Staking
A big advantage to staking versus mining is that staking doesn’t really require any equipment or resources, other than some current crypto holdings with which to stake. So, if you don’t have any interest in buying a mining rig or seeing your energy bill increase, staking can be an alternative. And for those with only a smaller amount of crypto to stake, the ability to join a staking pool can also be enticing.
Popular Cryptocurrencies for Staking
There are an increasing number of cryptos on the market that use the proof-of-stake protocol. Ethereum is the biggest and most popular, and Ethereum itself actually switched from a proof-of-work network to a proof-of-stake one in 2022.
Again, stakers can lock up their native PoS blockchain tokens on the platform in exchange for a potential reward. Some popular PoS cryptocurrencies include:
Staking vs Mining: Key Differences and Similarities
There are both similarities and differences between crypto staking and mining.
Comparing Consensus Mechanisms (PoW vs PoS)
As covered, both mining and staking have the same goal, which is to validate and secure blockchain networks. They both incentivize participants to pledge their resources to the network with the prospect of potentially earning rewards. Again, though, the difference comes down to how each consensus mechanism works on a more fundamental level.
In a nutshell: Proof-of-work networks use computational power to solve cryptographic puzzles or equations, validating the data. Proof-of-stake networks ask users to stake their holdings, use those resources to validate the network’s data, and reward some of those stakers.
Hardware, Software, and Resource Requirements
A huge difference between the two consensus protocols is the resources required for participants to actually get involved. Mining requires mining equipment, or, in other words, computational power and resources. Miners need computers, and the energy required to run them.
Stakers don’t; they simply need crypto holdings they’re willing to stake.
Reward Systems and Potential Profitability
The potential profit or rewards of crypto staking versus mining depends on a few things.
Staking could be more profitable for the average user because the only thing required is money. Mining requires specialized hardware, access to cheap electricity, and some technical knowledge.
The value of the coin in question is also important. Users could mine a lot of coins or have a lot of coins staked, but if the coin’s value falls against their local fiat currency, they could still realize losses.
Then there are the barriers to entry. It bears repeating: Many proof-of-stake exchanges or networks allow users to stake tokens in order to earn a relatively small yield. Mining, on the other hand, requires buying the necessary hardware and learning how to use it.
Security Considerations for Each Approach
Proof-of-work networks are frequently noted as being more secure than their counterparts. That’s because they’re relying on decentralized computational power from a number of participants; that makes them more difficult to attack, and the blockchains themselves a bit more secure.
Proof-of-stake network participants, on the other hand, are financially incentivized to maintain the security of the network since bad actors could lose the coins (and money) they have stored in the network.
Plus, as cryptocurrencies become more established, they’re continuing to build security features into the networks.
Accessibility, Scalability, and Barriers to Entry
Proof-of-work networks can be less accessible, given that they require participants to have expensive mining rigs for computational power they’re willing to dedicate to the blockchain. So, in that sense, mining may be less accessible to the average individual, given that there can be up-front costs involved.
Staking, conversely, is comparatively easy to do — you simply need to have some crypto holdings to stake, which can be purchased from an exchange in order to get started. However, the high cost of the more established PoS coins can make them inaccessible to the average staker.
Environmental Impact: Mining vs Staking
As touched on, the crypto space can require substantial resources, which can have an environmental impact. If that’s important to you, specifically, staking may be the way to go.
Mining rigs suck up a lot of electricity, and electricity is generated one way or another (it may be via burning coal, or generated by a wind turbine, for example). That generation may cause pollution[1], and the electricity itself may be used for other things besides mining — which some people may prefer.
As such, staking is seen as a much more environmentally friendly alternative.
Pros and Cons of Crypto Mining and Staking
Both mining and staking have their advantages and disadvantages. Here’s a rundown.
Advantages of Mining
When compared to staking, crypto mining shines in a few key ways. Perhaps most prominently, miners may have the potential to earn higher rewards compared to staking, though the upfront costs of the mining rigs need to be considered in terms of profitability.
Additionally, proof-of-work networks could be more secure in certain cases. In addition, users aren’t required to lock up their holdings as collateral, and miners themselves actually own their equipment, which they may use for other purposes as well.
Disadvantages of Mining
On the other hand, the main drawbacks to crypto mining are that there can be a high barrier to entry for individual miners, given the prohibitive cost of mining equipment. Also, for more established PoW coins, it’s virtually impossible for individuals to compete against the large warehouse mining operations that are now more prevalent, and there is also the environmental impact to consider.
Advantages of Staking
Staking has a clear advantage over mining in that it’s typically much cheaper and easier to do, potentially serving a passive form of crypto income. There’s no equipment required, and it’s a more environmentally-friendly alternative for generating crypto rewards.
In all, staking is a lower-cost alternative in terms of financial costs for participants, and potential costs to society in terms of resource usage.
Disadvantages of Staking
The high costs of established cryptocurrencies, such as Ethereum, can pose a high barrier to entry for those who wish to stake independently. Staking rewards also tend to be lower overall compared to mining, though they may be steadier, with lower operational costs.
Aside from that, some believe that PoS networks could potentially be less secure compared to proof-of-work protocols, given the computational power the latter uses to secure the network. Users also need to lock up their holdings when staking, which means they can’t use them for other purposes, and they could lose value during that time.
Choosing Between Staking and Mining: Key Factors to Evaluate
Making a decision about crypto staking vs. mining comes down to a few important things.
Common Scenarios and User Profiles
Those interested in participating in the mining or staking process might want to ask themselves questions like:
• How much time and money do I want to devote?
• What is my level of technical expertise with crypto and computers?
• Which cryptocurrencies am I interested in, and which network do I want to support?
• Do I want to become my own miner/validator, or have someone else do the heavy lifting?
Those with technical knowledge who want to handle things themselves could consider mining an appealing option. Or, those looking to invest less time and money might simply choose to stake some tokens on an exchange. The potential profit you can fetch from staking vs. mining varies according to a number of factors, including how much an individual is willing to invest upfront, as well as the market price of the token involved.
Assessing Technical Skills and Experience Level
Another thing to consider is how technologically savvy you are when it comes to the crypto space. A mining rig may require some expertise or a certain level of skill to set up and get running; staking, on the other hand, may be as simple as flipping a switch on a crypto app. With that in mind, staking can be much easier for beginners, or those without a wealth of technical knowledge.
Financial Commitment and Operational Costs
Worth mentioning again: Mining requires some financial commitments and ongoing costs in the form of equipment and resource usage. That is, you need to buy stuff to do it, and pay for the energy required to keep your equipment running.
If that sounds like a lot, staking may be the more attractive option, given that equipment and resource requirements are vastly different.
Environmental and Regulatory Considerations
As discussed, mining is much more resource-intensive. If you have concerns about the environmental impact of the crypto space, you might consider staking over mining.
There may also be some differences in how the two methods are viewed by regulators. A lot of things are still being sorted out across the federal agencies involved in regulatory authority, such as the Securities and Exchange Commission (SEC), Department of the Treasury, Federal Reserve, IRS, and others, so that may be something to keep an eye on going forward.[2]
Balancing Risks, Rewards, and Practicality
Taken all together, each individual will need to assess what is practical and reasonable if they’re hoping to generate crypto rewards. There are risks to be aware of when considering any type of cryptocurrency, and each person is going to have different resources available to them, skill sets, risk profiles, personal preferences, and more.
The Takeaway
Crypto mining and crypto staking are both methods utilized by blockchain networks to validate and secure data. They incentivize users to pledge their resources to the network by offering the prospect of a potential reward, but each method is different in some key ways.
To sum it up: Mining is generally more expensive and resource-intensive given the computing power that’s required, but may offer the prospect of bigger rewards. Staking can be a cheaper and easier-to-access alternative, but the rewards may be lower (if more steady). It’s important to always assess the risks involved, too, before deciding whether to stake or mine crypto.
Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.
Join the waitlist now, and be the first to know when crypto is available.
FAQ
Can I switch from mining to staking if I already own cryptocurrency?
Whether you can stake or mine crypto depends wholly on the specific crypto, and which mechanism its respective blockchain network uses to validate and secure itself. So, no, you can’t necessarily switch from one to the other.
Do staking and mining affect the value of the cryptocurrencies involved?
It’s possible that staking or mining could affect the value of crypto over time, as some cryptos have a capped quantity. As more coins or tokens hit the market, it could impact value.
Is it possible to mine or stake all cryptocurrencies?
Cryptocurrencies can either be staked or mined, not both. Though some cryptos may switch consensus mechanisms, as Ethereum did in 2022.
How does the environmental impact of staking compare to mining?
Staking is much more environmentally friendly than mining, as it doesn’t require as much computational power, and thus uses far less resources (energy) to process.
Are there tax implications for mining and staking rewards?
Yes, if you earn rewards as a result of mining or staking, you may generate a tax liability. The IRS considers those rewards to be ordinary income, so you’ll be taxed for those at your ordinary income rate. Conversely, gains you realize from selling, exchanging, or converting crypto are subject to capital gains taxes.
About the author
Brian Nibley
Brian Nibley is a freelance writer, author, and investor who has been covering the cryptocurrency space since 2017. His work has appeared in publications such as MSN Money, Blockworks, Business Insider, Cointelegraph, Finance Magnates, and Newsweek. Read full bio.
CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.
All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.
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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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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Day trading is a short-term, high-risk type of active trading, where investors buy and sell securities within a single trading day, in order to capitalize on rapid price movements. Day traders often rely on specific strategies, as well as technical analysis tools, to take advantage of small fluctuations in highly liquid securities such as stocks, options, and other financial instruments.
Day trading differs in a few ways from the buy-and-hold approach often taken by long-term investors. In addition to its intraday focus, FINRA (the Financial Industry Regulatory Authority) requires that day traders use a margin account — i.e., borrowed funds from a brokerage — which means that only qualified investors can day trade. Investors with cash accounts cannot make day trades.
Owing to the rapid pace and the use of leverage, day trading is considered a high-risk endeavor best suited to more experienced investors.
Key Points
• Day trading involves buying and selling assets within a single trading day to capitalize on price fluctuations.
• Day trading requires the use of a margin account; individuals cannot day trade using cash accounts.
• Day trading strategies include swing trading, momentum trading, and news-based trading; each employ distinct methods to achieve short-term profits.
• Successful day traders prioritize liquidity, volatility, and high trading volumes, enabling rapid execution of trades.
• Risk management is crucial in day trading; investors should only risk capital they can afford to lose and remain disciplined to avoid emotional decision-making.
• Understanding trading costs, tax implications, and regulations is essential for day traders to navigate the complexities of the market and optimize their strategies.
What Is Day Trading?
Day trading refers to the practice of making fast-paced trades within a single day in order to pursue quick returns. The Securities and Exchange Commission (SEC) says that “day traders buy, sell and short-sell stocks throughout the day in the hope that the stocks continue climbing or falling in value for the seconds or minutes they hold the shares, allowing them to lock in quick profits.”
An example of day trading might be:
An investor buys 100 shares of XYZ Company at 10:30am, and sells them at 11:00am.
If an investor buys 100 shares of XYZ Company and then sells them the following day, that’s not considered a day trade.
Experienced day traders typically cultivate a range of strategies they employ, often with the use of technical analysis tools (which help identify price and trend patterns). Because they’re often investing online via certain platforms, day traders may open and close positions within hours or even seconds, in their quest for gains.
How Long-Term Investors Differ From Day Traders
A long-term investor, conversely, may buy a stock because they think that the company will grow its revenue and earnings, creating value for itself and the economy. Long-term investors believe that that growth will ultimately benefit shareholders, whether through share-price appreciation or dividend payouts.
A day trader, who focuses on self-directed investing tactics, is less concerned with whether a company or a security represents “good” or “bad” value. Instead, they are concerned with how price volatility will push an asset like a stock higher in the near-term.
Day trading is a form of active investing, whereby an investor attempts to manage their investments and outperform or “beat” the stock market.
Technical Analysis and Day Trading
Technical analysis includes different methods to identify price patterns and potentially forecast future movements.
While some tools are useful for understanding company fundamentals, technical indicators identify patterns in price and volume data to give traders insights about short-term price movements.
Although technical indicators can help identify price trends and patterns, it’s best to combine different indicators when conducting stock analysis. A general rule of thumb in investing is that past performance never guarantees future results. However, technical analysts believe that, in part because of market psychology, certain market patterns tend to repeat themselves.
What Is Support and Resistance?
Support and resistance are price levels that traders look at when they’re applying technical analysis. “Support” is where the price of an asset tends to stop falling and may turn around; “resistance” is where the price tends to stop climbing, which may signal a downturn.
So, for instance, if an asset falls to a support level, some traders may believe that buyers are likely to swoop in at that point, in anticipation of seeing a profit.
Margin accounts are a type of brokerage account that allows certain qualified investors to borrow money from their broker to purchase securities. The securities in the account act as collateral for the loan. The interest rate on the borrowed money is determined by the brokerage firm.
Trading with this borrowed money — called margin trading — increases an investor’s purchasing power, but comes with much higher risk. If the securities lose value, an investor could be left losing more cash than they originally invested, after the margin loan is repaid, plus interest and any fees.
In the case that the investor’s holdings decline, the brokerage firm might require them to deposit additional cash or securities into their account, or sell the securities to cover the loss. This is known as a margin call. A brokerage firm can deliver a margin call without advance notice and can even decide which of the investor’s holdings are sold.
What Is a Pattern Day Trader?
A pattern day trader is a designation created by FINRA. A brokerage or investing platform will classify investors as pattern day traders if they day trade a security four or more times in five business days, and the number of day trades accounts for more than 6% of their total trading activity for that same five-day period.
Until recently, when an investor was identified as a pattern day trader, they would have to maintain at least $25,000 in their margin account. Otherwise, the account could be restricted per FINRA’s day-trading margin requirement rules.
As of September 2025, however, FINRA decided to amend that rule, removing the $25,000 requirement, and replacing it with the current standard for maintenance margin for intraday exposure ($2,000). This move could make day trading easier for newer and less experienced traders. This rule change is pending SEC approval.
5 Common Day-Trading Strategies
Following are five common types of day trading strategies, some of which can also be applied to slightly longer-term positions of a few days or a week.
1. Momentum Trading
Momentum trading is when traders spot a significant change in price or volume and buy that asset with the intent of riding the trend to an even higher point, in order to reap a gain. Rather than “buy low and sell high,” as the old saying goes, momentum traders look for opportunities that will enable them to buy high and sell higher.
2. Scalp Trading
In scalp trading, or scalping, the goal is to make a significant profit from a series of small gains. Generally, this means taking a large position in a stock or other security, waiting for it to increase in value by a small amount (perhaps a few cents), then quickly selling it.
The success of scalping depends on being able to make a swift exit when the target profit has been reached. Scalp traders might make a few dozen or a few hundred trades in a single day.
3. Swing Trading
Swing trading is a type of stock market trading that attempts to capitalize on short-term price momentum in the market. The swings can be to the upside or to the downside.
Generally, a swing trader uses a mix of fundamental and technical analysis to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, ETFs, and other market instruments that exhibit volatility.
4. News-Based Trading
News-based day trading is very much what it sounds like: a strategy whereby day traders track market-moving news events (e.g., interest-rate changes, economic data) and take positions that may enable them to profit from these short-term price fluctuations.
News-based day trading can also involve watching headlines specific to a certain company or industry — a merger, bankruptcy, or weather event, for example.
Sophisticated news-based traders are often able to anticipate certain price movements before they’re fully priced into the market. But this is a high-risk strategy, as predicting the news, and the market’s reactions to it, can be hard to do.
5. Limit and Market Orders
There are various types of orders that day traders rely to make their strategies as effective as possible.
• A limit order is when an investor sets the price at which they’d like to buy or sell a stock. For example, you only want to buy a stock if it falls below $40 per share, or sell it if the price rises to over $60. A limit order guarantees a particular price but does not guarantee execution.
• With a market order, you are guaranteed execution but not necessarily price. Investors get the next price available at that time. This price may be slightly different than what is quoted, as the price of that underlying security changes while the order goes through.
Best Securities for Day Trading
Day traders can work across asset classes and securities: company stocks, fractional shares, ETFs, bonds, fiat currencies, or commodities like oil and precious metals. They can also trade options or futures — which are different types of derivatives contracts.
The Importance of Liquidity, Volatility, and Volume
When deciding the best securities for day trading, there are some commonalities that certain markets tend to have, including liquidity, volatility, and volume.
Liquidity
Liquidity refers to how quickly an asset can be bought and sold without causing a significant change in its price. In other words, how smoothly can a trader make a trade?
Liquidity is important to day traders because they need to move in and out of positions quickly without having prices move against them. That means prices don’t move higher when day traders are buying, or move down when they’re starting to sell.
Volatility
Market volatility can often be considered a negative thing in investing. However, for day traders, volatility can be essential because they need big price swings to potentially capture profits.
Of course, volatility could mean big losses for day traders too, but a slow-moving market typically doesn’t offer much opportunity for day traders.
Volume
High stock volume may indicate that there is a lot of interest in a security, while low volume can indicate the opposite. Elevated interest means there’s a greater likelihood of more liquidity and volatility — which are, as discussed, two other characteristics that day traders look for.
Understanding Penny Stocks
Penny stocks — shares priced at pennies to up to $5 apiece — are often popular among day traders. However, they can be difficult to trade because many are illiquid. Penny stocks aren’t typically traded on the major exchanges, further increasing potential difficulties with trading. Typically, penny stocks sell in over-the-counter (OTC) markets.
Day Trading Basics — How to Get Started
Before starting to day trade, some investors set aside a dollar amount they’re comfortable investing — and potentially losing. They need to figure out their personal risk tolerance, in other words.
Getting the hang of day trading can take some time, so newbie day traders may want to start with a small handful of stocks. This will be more manageable and give traders time to hone their skills.
Good day traders can benefit from staying informed about events that may cause big price shifts. These can range from economic and geopolitical news to specific company developments.
Here’s also a list of important concepts or terms every prospective day trader should know.
If you’re utilizing day-trading strategies, it’s wise to consider the cost. Many major brokerage firms accommodate day trading, but some charge a fee for each trade. This is called a transaction cost, commission, mark up, mark down, or a trading fee. Some firms also charge various other fees for day trading or trading penny stocks.
Some platforms are specifically designed for day trading, offering low-cost or even zero-cost trades and a variety of features to help traders research and track markets.
2. Freeriding
In a cash account, an investor must pay for the purchase of a security before selling it. Freeriding occurs when an investor buys and then sells a security without allowing the trade to settle. This is not allowed under the Federal Reserve Board’s Regulation T.
In cases where freeriding occurs, a broker may freeze the investor’s account frozen for a 90-day period. During the freeze, an investor is still able to make trades or purchases but must pay for them fully on the date of the trade.
3. Tax Implications of Trader vs Investor
The IRS makes a distinction between a trader and an investor. Generally, an investor is someone who buys and sells securities for personal investment. Certain traders, on the other hand, are considered by the law to be operating a business.
According to the IRS, a trader must meet the following requirements below. If an individual does not meet these guidelines, they are considered an ordinary investor.
• “You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
• Your activity must be substantial; and
• You must carry on the activity with continuity and regularity.”
The tax implications are different for each, in that an investor who meets the requirements for trader tax status can take certain tax deductions, and their gains are taxed as ordinary income (including unrealized gains at the end of the tax year).
The rules here can be complicated, and it may be wise to consult a tax professional.
4. Capital Gains Tax
In order to understand how capital gains rates may apply to you, it’s necessary to know whether the IRS considers you an investor or a trader, as noted above.
For ordinary investors, investments held for over a year are subject to long-term capital gains and those held for under a year fall under short-term rules. While long-term capital gains benefit from a lower tax rate, short-term capital gains are taxed at the same rate as ordinary income. If you’re an ordinary investor making day trades, this may apply to you.
The difference for those with trader tax status is that their gains and losses are not subject to capital gains rules, or rules for the treatment of losses.
A capital loss occurs when an investment loses value. In certain circumstances for ordinary investors, when a capital loss exceeds a capital gain, the difference could potentially be applied as a tax deduction. Some brokerages may also offer automated tax loss harvesting as a way to strategically offset investment profits.
Different rules apply to traders who are deemed to be running a business, however.
5. Wash-Sale Rule
While capital losses can sometimes be taken as a tax deduction, there are certain regulations in place to prevent investors from abusing those benefits. One such regulation is the wash-sale rule, which says that investors cannot benefit from selling a security at a loss and then buy a substantially identical security within the next 30 days.
A wash sale also occurs if you sell a security and then your spouse or a corporation you control buys a substantially identical security within the next 30 days.
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Which Day-Trading Strategy Is Best for Beginners?
There’s no single answer that’s going to be correct for every trader. But investors might want to stick to the simpler strategies. For instance, they could take a try at technical analysis to try and determine which trades may end up being profitable. Or, they could stick with swing trades.
Perhaps the most important thing to keep in mind is that day trading, as mentioned, comes with a much higher exposure to risk than other types of trading.
Best Times to Day Trade
As mentioned, day traders seek high liquidity, volatility and volumes. That’s why when it comes to stocks, the first 15 minutes of the trading day, after the equity market opens at 9:30am, may be one of the active stretches for day traders.
The stock market tends to be more volatile during this time, as traders and investors try to figure out the market’s direction and prices react to company reports or economic data that was released before the opening bell. Volume also tends to pick up before the closing bell at 4pm.
For futures, commodities and currencies trading, markets are open 24 hours so day traders can be active around the clock. However, they may find less liquidity at night when most investors and traders in the U.S. aren’t as active.
Day Trading Risk Management
The SEC issued a stern warning regarding day trading in 2005, and that message still holds value today. They noted that most people do not have the wealth, time, or temperament to be successful in day trading.
If an individual isn’t comfortable with the risks associated with day trading, they shouldn’t delve into the practice. But if someone is curious, here are some steps they can take to manage the risks that stem from day trading:
1. Try not to invest more than you can afford. This is particularly important with options and margin trading. It’s crucial for investors to understand how leverage works in such trading accounts and that they can lose more than they originally invested.
2. Investors and traders often benefit from monitoring volatility. One way to do this is by finding one’s portfolio beta, or the sensitivity to swings in the broader market. Adjusting one’s portfolio so it’s not too sensitive to volatility may be helpful.
3. Day traders often benefit from picking a trading strategy and sticking with it. One struggle many day traders contend with is avoiding getting swept up by the moment and deviating from a plan, only to lock in losses.
4. Don’t let your emotions take the driver’s seat. Fear and greed can dominate investing and sway decisions. But in investing, it can be better to keep a cool head and avoid reactionary behavior.
Is It Difficult to Make Money Day Trading?
While it may feel like it’s easy to make a couple of lucky moves and turn a profit from some trades, it isn’t easy to make money day trading. Again, day trading is high risk, and new traders would do well not to assume they’re going to make any money at all.
There are professional traders out there, but they are experienced, and tend to use professional-grade tools to inform their decisions. New traders shouldn’t expect to emulate a professional trader’s success.
Test your understanding of what you just read.
The Takeaway
Day trading involves making short-term stock trades in an effort to generate returns. It can be lucrative, but is extremely risky, and prospective traders would likely do well to practice and learn some tools of the trade before giving it a shot. They’ll also want to closely consider their risk tolerance, too.
Again, while stock investing can be an important way to build wealth for individuals, it’s crucial however to know that the consequences of risky day trading can be catastrophic. Investors need to be disciplined, cautious and put in the time and effort before delving into day-trading strategies.
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FAQ
What is day trading and how does it differ from other trading strategies?
Day trading involves making short-term trades with stocks or other securities in an effort to make a profit. Other strategies may involve longer-term investments, which are not bought and sold on a daily basis.
Are there any risk-management techniques specific to day-trading strategies?
Traders can do many things that may help limit their risk exposure. These can include using certain strategies they’ve found to be effective; setting up stop-losses or other orders; and diversifying their portfolios.
Are day-trading strategies suitable for all types of markets, such as stocks, forex, or?
Day trading can be done in many asset classes and markets, which can include stocks, forex, and even. But the markets for different securities tend to behave in different ways. Learning the ins and outs of each market is key, in order to apply the best strategy when day trading a certain security.
How much capital is typically required to implement day trading strategies?
Day trading requires the use of a margin account. The initial margin requirement is generally $2,000, with a 50% maintenance margin requirement, but terms can vary according to the broker and depending on the security.
Are there specific timeframes or market conditions that are more favorable for day-trading strategies?
Some favorable times of the day for day traders may be immediately after the markets open, and shortly before they close. There may also be more market action on certain days of the week (Mondays, for instance) which may create favorable conditions for day traders.
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