Similarities and Differences Between Initial and Maintenance Margin

Similarities and Differences Between Initial and Maintenance Margin

Initial and maintenance margin are separate margin requirements investors must adhere to when trading on margin. The two requirements are similar in that they are both sums of money that the broker requires the investor to have in their account to open or maintain a position with a margin loan. The main difference between the two is that the initial margin is the amount of money required to open a position, while the maintenance margin is the amount needed to keep a position open.

Investors interested in trading on margin need to understand the similarities and differences between initial and maintenance margin. Moreover, knowing how to calculate maintenance margin may help investors from being subject to a margin call or other adverse outcomes.

What Is Initial Margin?

Initial margin is the minimum amount of cash or collateral an investor must deposit in a margin account in order to buy securities on margin.

Initial Margin Requirements

The initial margin requirement is expressed as a percentage of the total purchase price of a security. The Federal Reserve Board’s Regulation T requires a minimum initial margin of 50% for stock purchases, meaning investors must have cash or collateral to cover at least half of the market value of stocks they buy on margin. However, Regulation T only sets the minimum for margin accounts. Stock exchanges and brokerage firms can set their initial margin requirement higher than 50% based on a stock’s volatility, the state of the markets, or other considerations.

How Initial Margin Works

If you meet the initial margin requirement, your broker will provide you with a margin loan to cover the rest of the trade’s purchase price. For example, if the initial margin requirement is 50% and an investor wants to purchase $6,000 of a stock, then the investor will have to cover an initial margin of $3,000 with cash or other equity and borrow $3,000 from the broker to make the trade.

Investors use margin trading as a way to increase their buying power. In the example above, if the investor bought the same amount of stock in a cash account, then they would need $6,000 in cash to make the trade. But by using a margin, the investor doubles their buying power by using only $3,000 to buy $6,000 worth of stock.

However, using margin involves risk, and may lead to more significant losses than buying stock directly in a cash account. If a trade declines below the threshold, investors will need to bring it back up to effectively pay back the margin loan.

Recommended: Cash Account vs Margin Account: Key Differences

What Is Maintenance Margin?

Maintenance margin is the minimum amount of equity an investor must have in their margin account to keep a position open after making a trade. The margin equity in the account is the value of securities minus the amount of the margin loan borrowed to make the trade. If the account’s equity falls below the maintenance margin, the broker may issue a margin call or close out the investor’s trade.

Maintenance Margin Requirements

Maintenance margin is usually expressed as a percentage of the position’s value. The Financial Industry Regulatory Authority (FINRA), which regulates maintenance requirements, says maintenance margin must be at least 25% of the total market value of the securities bought on margin. However, like initial margin, brokerage firms may have higher maintenance requirements, depending on various factors like market volatility and liquidity.

How Maintenance Margin Works

Suppose an investor purchased $6,000 worth of stock by paying $3,000 in cash and borrowing $3,000 from their broker, and the broker has a 25% maintenance margin requirement. If the market value of the stock drops from $6,000 to $5,000, the investor’s equity will now be $2,000 ($5,000 – $3,000 margin loan) and the maintenance margin will be $1,250 ($5,000 x 25%). In this case, the investor still has enough equity to cover the maintenance margin.

However, if the stock’s value drops to $3,500, the investor will no longer have enough equity to cover the maintenance margin requirement. The investor’s account has $500 in equity ($3,500 – $3,000), while the maintenance margin is $875 ($3,500 x 25%). The broker will likely issue a margin call, requiring the investor to deposit additional funds into the account or sell some assets to increase the equity in the account.

The broker may also sell some of the investor’s holdings without notifying them to bring the account back up to the maintenance margin level.

The purpose of the maintenance margin is to protect the broker in case the value of the securities in the account falls.

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Initial Margin vs Maintenance Margin

Here’s a quick look at how initial margin and maintenance margin stack up:

Initial Margin vs Maintenance Margin
Initial Margin

Maintenance Margin

50% minimum initial margin requirement regulated by the Federal Reserve Board’s Regulation T 25% minimum maintenance margin requirement regulated by FINRA
Initial margin is deposited at the start of a trade Maintenance margin must be maintained throughout the life of a trade

Similarities

Initial margin and maintenance margin are similar in that they are both used as deposits to cover potential losses in a margin account. The two margin requirements are both calculated as a percentage of the value of the account’s assets.

Additionally, both initial margin and maintenance margin can be increased or decreased by an exchange or brokerage firm depending on a stock’s volatility, the financial situation of a client, and other factors.

Differences

The initial margin is the amount of cash or collateral an investor must deposit with a broker when buying or selling an asset on margin. In contrast, the maintenance margin is the minimum amount of equity an investor must maintain in their account to keep the account open and avoid a margin call.

Another difference between the two is that the initial margin is typically higher than the maintenance margin.

Calculating Initial and Maintenance Margin

There are formulas for calculating both initial margin and maintenance margin. Note that the examples below may not include margin figures that are indicative of a typical brokerage firm, or of SoFi.

Initial Margin Calculation

The formula for calculating initial margin is:

Initial margin = initial margin percentage x total purchase price of security

So, if a brokerage firm has an initial margin percentage of 65% and an investor wants to buy $10,000 worth of stock ABC, then the initial margin would equal $6,500:

$6,500 initial margin = 65% initial margin percentage x $10,000 total purchase price

In this scenario, the investor would need to have $6,500 in an account and borrow $3,500 with a margin loan.

Maintenance Margin Calculation

The formula to calculate maintenance margin is:

Maintenance margin = Total value of securities owned on margin x maintenance margin percentage

So, if a brokerage firm has a maintenance margin percentage of 30% and an investor holds $1,000 of stock XYZ (100 shares at $10 per share) in their margin account, then the maintenance margin would equal $300:

$300 = $1,000 x 30% maintenance margin percentage

In this scenario, the investor would need to have $300 in equity in their margin account to avoid being subject to a margin call.

Investing Tips From SoFi

Understanding the nuances of initial and maintenance margin is essential before investors start trading on margin. Utilizing margin can help investors increase their buying power, but it comes with more risk, like the chance for margin calls.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

Why is initial margin higher than maintenance margin?

The initial margin is higher because the Federal Reserve Board’s Regulation T sets a 50% minimum initial margin requirement, while FINRA sets a lower 25% minimum maintenance margin requirement.

How do you calculate maintenance margin?

Maintenance margin is the minimum equity an investor must have in the margin account after making a trade. Maintenance margin is expressed as a percentage of an investor’s total trade. Investors can calculate maintenance margin by multiplying the maintenance margin percentage by the total value of the margin account.


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SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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Performance Charts

5 Bullish Indicators for a Stock

When it comes to figuring out when to buy a stock, there are two main schools of thought: fundamental analysis and technical analysis. Fundamental analysis involves all the material aspects of a company: its sales, revenue, profits, and so on — the day-to-day details of operations. Technical analysis, on the other hand, involves only looking at charts. A stock chart is a visual representation of the price movement of a particular security over time.

Using different mathematical technical indicators, it’s thought that traders can sometimes anticipate future price movements based on previous patterns. And fundamentals need not be at odds with technical analysis — the most successful investors often use both methods.

Below, we’ll look at five common bullish indicators used in technical analysis and discuss how they can be used to determine a reasonable time to buy a stock or ETF.

Key Points

•   Understanding both fundamental and technical analysis is essential for making informed stock purchases, with each offering unique insights into market behavior.

•   The Relative Strength Index (RSI) serves as a momentum indicator to assess whether a stock is overvalued or undervalued, guiding potential buying opportunities.

•   The cup-and-handle pattern is a recognized bullish signal, characterized by a specific price movement that often precedes upward trends in stock prices.

•   A golden cross occurs when a short-term moving average crosses above a long-term moving average, indicating potential bullish momentum and future price increases.

•   Combining multiple technical indicators enhances accuracy in predicting stock movements, as relying on a single indicator can lead to misleading conclusions.

Technical Indicators of a Bull Trend

Before getting into the specifics of technical analysis, it’s important to understand the difference between bullish indicators and bullish patterns.

Indicators represent information generated by a computer based on a dataset. That dataset comes from the price action of a security over a set time period (one hour, one day, one month, six months, one year, etc.).

Patterns, on the other hand, are identified by human eyes when charts take on a certain shape (head and shoulders, cup and handle, etc.). Some traders even program their own computer scripts to try to identify patterns automatically, leading to a kind of hybrid of patterns and indicators.

All of these methods are broadly referred to as technical analysis — the process of using charts to try to predict which way a security will move next. A pattern or indicator that tends to appear when prices are getting ready to move higher is referred to as a bullish one.

Here are five examples of bullish indicators and bullish patterns.

RSI Weakness

The Relative Strength Index (RSI) is a technical indicator that gives investors an idea of how overvalued or undervalued a security might be. This momentum indicator gauges the significance of recent price changes. The higher the RSI, the more likely the stock is overvalued, and the lower the RSI, the more likely the stock is undervalued.

The RSI is represented by a simple line graph that goes up and down between two extremes (also known as an oscillator). When the line dips below a certain level, it can indicate potential undervaluation. Meanwhile, when it rises above a certain level, it can indicate — you guessed it — overvaluation.

RSI values range from 0 to 100 but rarely fall below 20 or go higher than 80. Between 30 and 60 is a shaded area sometimes referred to as the “paint” area. An RSI within this range can still provide some insight, but it is not as reliable an indicator as an RSI that has extended to more extreme levels.

An RSI of 50 is considered neutral, whereas an RSI of 30 and lower is considered undervalued (bullish). Meanwhile, an RSI of 70 and above is considered overvalued (bearish). In other words, the lower the RSI, the more of a bullish indicator it could be.

Cup-and-Handle Pattern

The cup-and-handle pattern is among the most bullish patterns known to stock traders. There are two main parts, as the name implies: a cup and a handle.

The cup is formed when a stock moves downward, then sideways, and then upward. Once the cup has been formed, the handle can be formed by a period of slow decline. This kind of price action leads to a chart with one part resembling the bottom half of a circle (cup) followed by a slanted line at the top edge (handle).

The pattern has a long list of nuances. Many lengthy articles have been dedicated to the cup-and-handle pattern alone. Here are quick notes about identifying the pattern:

•   Ideally, the cup should be about 30% deep (having declined about 30% from its start to its lowest point).

•   The handle should form over a period of at least five days to several weeks.

•   Trading volume should surge when the handle finishes forming, at which point traders will often seek to enter into a position.

•   Conversely, an inverted cup and handle can be a sell signal. This pattern has the same shape, only it appears upside down, with the handle slanting up and the top half of a circle forming the cup.

Moving Average Golden Cross

Moving averages (MA) are another common technical indicator. A moving average is the mean of a stock’s daily closing price for a certain number of trading days. Moving averages smooth out the trend of a stock’s price and highlight any moves above or below the trend.

A moving average is denoted by a line that overlays on a price chart. While these averages don’t contain a whole lot of information in and of themselves, sometimes key averages interacting with one another can serve as major buy or sell signals.

The 50-day MA and the 200-day MA are of particular importance when they cross paths. Most of the time, the 200-day MA will be higher than the 50-day MA. But when the 50-day crosses above the 200-day, the move can be seen as a bullish indicator signifying a trend toward upward price movement.

This indicator is known as the “golden cross,” and it is regarded as relatively rare and reliable. Prices often, but not always, move up after a golden cross happens.

Golden crosses can occur with moving averages of time frames shorter than 50 or 200 days as well, but longer time frames carry more weight.

Bollinger Bands Width

Bollinger Bands combine a simple moving average with an additional metric — a measure of price extending one standard deviation above or below the average.

When Bollinger Bands get very close together, it often indicates that a trend change lies on the immediate horizon. That means the price might be likely to break out either higher or lower in the near future in most cases.

While this indicator is a little vaguer than the others, combining it with a few other bits of information can sometimes make it a bullish indicator.

For example, an investor might choose to look at Bollinger Bands alongside one of the other indicators mentioned here. If the RSI for a particular stock were at 40 at the same time that Bollinger Bands were close together, that might give an investor further assurance that an upward move could be on the horizon.

Piercing Pattern

The piercing pattern is simpler than most others. It marks the possibility of a short-term reversal from downward price action to upward price action based on only two days of trading.

The pattern occurs when the first day opens near its high point, closes near the low, and has an average or larger-than-average price range. Then the second day begins trading with a gap down, opening near the low and closing near the high. The close ought to form a candlestick covering at least half of the length of the first day’s red candlestick.

A piercing pattern rarely appears in perfect form. As with other patterns, the closer to perfection the setup looks, the more likely it is to be accurate. When bullish patterns like this one coincide with other bullish indicators, like a low reading on the RSI, the potential for price gains becomes strengthened.

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Other Technical Analysis Factors to Consider

It’s important to remember that technical indicators should be used together when possible. Looking at only one indicator may not always give as accurate a picture of which direction price action will head next.

Another concern is time frame. These indicators and patterns need to be looked at over a sufficient amount of time to prove effective — the longer the better, in general. Looking at price movements on a daily chart might lead to one impression, but zooming out and looking at six months or a year might result in a different (and often more accurate) assessment for the simple reason that there is more data included.

Finally, when thinking about bullish patterns and indicators, realize that most investors have access to the same public knowledge. When a bullish development occurs, millions of stock traders use technical analysis to try to identify the pattern at more or less the same time. This can lead the charts to become self-fulfilling, as everyone can buy at the same bullish point or sell at the same bearish point, regardless of anything else happening.

The Takeaway

Technical analysis, which involves only looking at stock charts, is one of the two main schools of thought when it comes to figuring out when to buy a stock. Investors using this form of analysis may look at both bullish indicators and bullish patterns to determine when it appears that prices are preparing to move higher. There are a number of these patterns and indicators investors might look at — from RSI weakness to piercing pattern — though it’s generally best to use technical indicators together and also take time frame into consideration.

If you think you’ve found the next good pick, it might be time to try SoFi Invest. Trade stocks and ETFs with no commission fees. SoFi Invest offers both active and automated investing. Whether you’re an experienced investor trading big-time shares or have never owned stocks before, SoFi® has everything needed to help you start investing.

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SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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How to Invest and Profit During Inflation

How to Invest During Inflation

Inflation occurs when there is a widespread rise in the prices of goods and services. The inflation rate, or the rate at which prices increase, rose, in recent years, at its fastest pace in 40 years before falling during 2024. That has an impact on both consumers and investors. High inflation makes common goods like groceries, gasoline, and rent more expensive for consumers, meaning paychecks might not go as far if wages don’t rise along with prices.

For investors, high inflation may also affect the financial markets. It’s possible that rising inflation could impact the markets, as consumers have less money to spend, and the Federal Reserve may step in to check rising inflation by making loans and credit more expensive with higher interest rates. What’s an investor do when inflation is on the upswing? Often, it means adjusting investment portfolios to protect assets against rising prices and an uncertain economy.

Key Points

•   Inflation affects purchasing power, which may affect financial markets, impacting consumers and investors.

•   High inflation can lead to increased interest rates, affecting stock and bond market performance.

•   During bouts of inflation, investors may want to consider stocks of companies that can raise prices, consumer goods stocks, commodities, TIPS, and I Bonds during inflation.

•   Inflation can reduce stock market growth and bond returns, making it crucial to adjust portfolios.

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



Inflation Basics, Explained

Inflation is primarily defined as a continuing rise in prices. Some inflation is okay and natural — historically, economic booms have come with an annual inflation rate of about 1% to 2%, a range that reflects solid consumer sentiment amidst a growing economy. An inflation rate of 5% or more can be a different story, with higher rates associated with an overheated economy.

Inflation rates often correlate to economic growth, which is sometimes good for consumers. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash flows through the economy, demand for goods and services grows, leading food and services producers to raise prices. That triggers a rise in inflation, with the inflation rate growing even more as demand for goods and services outpaces supply.

Recommended: Is Inflation a Good or Bad Thing for Consumers?

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

The main barometer of inflation in the United States is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, healthcare, transportation, food and beverage, and education, among other economic sectors. The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE), in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

Investing & Inflation: How Are They Related?

Inflation may affect the stock market, and investors may have less money to put into the markets when prices rise and their budgets become tighter. Overall, it means there may be less liquidity in the markets. The relationship between investing and inflation may further be affected as interest rates are increased to combat rising prices, potentially affecting business profitability.

Inflation’s Impact on Stock and Bond Investments

Investing during inflation can be tricky. It’s important to know that inflation impacts both stock and bond markets, but in different ways.

Inflation and the Stock Market

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

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

Recommended: How Do Interest Rates Impact Stocks?

Also, when inflation rises, that puts pressure on investors’ stock market returns to keep up with the inflation rate. For instance, consider a stock portfolio that earns 5% before inflation. If inflation rises at a 6.0% rate, the portfolio may actually lose 1.0% on an inflation-adjusted basis – hypothetically speaking, of course.

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

Overall, rising inflation may raise the investment risk of an economic slowdown or recession. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth, thus reducing company earnings which leads to sliding equity prices.

Inflation and the Bond Market

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

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

Recommended: How Does the Bond Market Work?

What to Consider Investing in During Inflation

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

1. Retail Stocks

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

2. Consumer Goods Stocks

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

3. Commodities

Investing in precious metals, oil and gas, gold, and other commodities can also be good inflation hedges. The price growth of many commodities contributes to high inflation. So investors may see returns by investing in commodities during high inflationary periods. Take the price of oil, natural gas, and gasoline. Businesses and consumers rely highly on oil and gas and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices. That makes oil — and other commodities — a good portfolio component when inflation is on the move.

Recommended: Commodities Trading Guide for Beginners

4. Treasury Inflation-Protected Securities (TIPS)

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

5. I Bonds

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

The Takeaway

Investors should proceed with caution when inflation rises. It may be tempting to readjust your portfolio because prices are rising. However, massive changes to a well-planned portfolio may do more harm than good, especially if you are investing with a long time horizon. Periods of high inflation usually wane, so throwing a long-term investment plan out the window just because inflation is moving upward may knock you off course to meet your long-term financial goals.

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

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.


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SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Required Minimum Distribution (RMD) Rules for 401(k)s

When you turn 73, the IRS requires you to start withdrawing money from your 401(k) each year. These withdrawals are called required minimum distributions (or RMDs), and those who don’t take them face potential financial penalties.

The 401(k) RMD rules also apply to other tax-deferred accounts, including traditional IRAs, SIMPLE and SEP IRAs. Roth accounts don’t have RMDs for the account holder.

What’s important to know, as it relates to RMDs from 401(k)s, is that there can be tax consequences if you don’t take them when they’re required — and there are also tax implications from the withdrawals themselves.

Key Points

•   The IRS mandates that individuals must begin withdrawing funds from their 401(k) accounts as required minimum distributions (RMDs) starting at age 73.

•   RMD amounts are determined using IRS life expectancy tables, and failing to withdraw the required amount can result in a 50% penalty on the missed distribution.

•   Although RMDs generally apply to various tax-deferred accounts, Roth IRAs do not require distributions while the owner is alive.

•   Individuals can delay their first RMD until April 1 of the year following their 73rd birthday, but this may lead to higher taxes due to two distributions in one year.

•   Inheriting a 401(k) requires RMDs as well, with specific rules differing for spouses versus non-spouses, including timelines for withdrawals.

What Is an RMD?

While many 401(k) participants know about the early withdrawal penalties for 401(k) accounts, fewer people know about the requirement to make minimum withdrawals once you reach a certain age. Again, these are called required minimum distributions (or RMDs), and they apply to most tax-deferred accounts.

The “required distribution” amount is based on specific IRS calculations (more on that below). If you don’t take the required distribution amount (aka withdrawal) each year you could face another requirement: to pay a penalty of 50% of the withdrawal you didn’t take. However, if you withdraw more than the required minimum each year, no penalty applies.

All RMDs from tax-deferred accounts, like 401(k) plans, are taxed as ordinary income. This is one reason why understanding the amount — and the timing — of RMDs can make a big difference to your retirement income.

What Age Do You Have to Start RMDs?

Prior to 2019, the age at which 401(k) participants had to start taking RMDs was 70½. Under the SECURE Act that was raised to age 72. But the rules have changed again, and the required age to start RMDs from a 401(k) is now 73 — for those who turn 72 after December 31, 2022.

However for those who turned 72 in the year 2022, at that point age 72 was still technically the starting point for RMDs.

But if you turn 72 in 2023, you must wait until you turn 73 (in 2024) to take your first RMD.

In 2033, the age to start taking RMDs will be increased again, to age 75.

How Your First Required Distribution Is Different

There is a slight variation in the rule for your first RMD: You actually have until April 1 of the year after you turn 72 to take that first withdrawal. For example, say you turned 72 in 2022. you would have until April 1, 2023 to take your first RMD.

But you would also have to take the normal RMD for 2023 by December 31 of the same year, too — thus, potentially taking two withdrawals in one year.

Since you must pay ordinary income tax on the money you withdraw from your 401(k), just like other tax-deferred accounts, you may want to plan for the impact of two taxable withdrawals within one calendar year if you go that route.

Why Do Required Minimum Distributions Exist?

Remember: All the money people set aside in defined contribution plans like traditional IRAs, SEP IRAa, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans, and so on, is deposited pre-tax. That’s why these accounts are typically called tax-deferred: the tax you owe is deferred until you retire.

So, requiring people to take a minimum withdrawal amount each year is a way to ensure that people eventually pay tax on the money they saved.

How Are RMDs Calculated?

It can get a bit tricky, but 401(k) RMDs are calculated by dividing the account balance in your 401(k) by what is called a “life expectancy factor,” which is basically a type of actuarial table created by the IRS. You can find these tables in Publication 590-B from the IRS.

If you’re married, there are two different tables to be aware of. If you are the original account owner, and if your spouse is up to 10 years younger than you, or is not your sole beneficiary, you’d consult the IRS Uniform Lifetime Table.

If your spouse is the primary beneficiary, and is more than 10 years younger, you’d consult the IRS Joint and Last Survivor table. Here, the RMD might be lower.

How does the life expectancy factor work?

As a simple example, let’s say a 75-year-old has a life expectancy factor of 24.6, according to the IRS. If that person has a portfolio valued at $500,000, they’d have to take an RMD of $20,325 ($500,000/24.6) from their account that year.

RMDs can be withdrawn in one sum or numerous smaller payments over the course of a year, as long as they add up to the total amount of your RMD requirement for that calendar year.

RMD Rules for 401(k) Plans

So just to recap, here are the basic RMD rules for 401(k) plans. Because these rules are complicated and exceptions may apply, it may be wise to consult with a professional.

Exceptions to Required Distributions

There aren’t many exceptions to 401(k) RMDs. In fact, there’s really only one.

If you’re working for the company sponsoring your 401(k) when you turn 73 years old (as of 2023), and you don’t own more than 5% of the firm, you may be able to skirt RMDs. That is, so long as you keep working for the company, and as long as your plan allows you to do so — not all will.

This only applies to 401(k)s. So if you’re weighing your options as it relates to a 401(a) vs 401(k), for instance, you’ll find they’re limited.

At What Age Do RMDs Start?

As mentioned, you must take your first RMD the same year you turn age 73, with the new rules being applied for 2023 under the SECURE ACT 2.0. Again: for your first RMD only, you are allowed to delay the withdrawal until April 1 of the year after you turn 73.

This has pros and cons, however, because the second RMD would be due on December 31 of that year as well. For tax purposes, you might want to take your first RMD the same year you turn 73, to avoid the potentially higher tax bill from taking two withdrawals in the same calendar year.

What Are RMD Deadlines?

Aside from the April 1 deadline available only for your first RMD, the regular deadline for your annual RMD is December 31 of each year. That means that by that date, you must withdraw the required amount, either in a lump sum or in smaller increments over the course of the year.

Calculating the Correct Amount of Your RMD

Also as discussed, the amount of your RMD is determined by tables created by the IRS based on your life expectancy, the age of your spouse, marital status, and your spouse’s age.

You’re not limited to the amount of your RMD, by the way. You can withdraw more than the RMD amount at any point. These rules are simply to insure minimum withdrawals are met. Also keep in mind that if you withdraw more than the RMD one year, it does not change the RMD requirement for the next year.

Penalties

The basic penalty, if you miss or forget to take your required minimum distribution from your 401(k), is 50% of the amount you were supposed to withdraw.

For example, let’s say you were supposed to withdraw a total of $10,500 in a certain year, but you didn’t; in that case you could potentially get hit with a 50% penalty, or $5,250. But let’s say you’ve taken withdrawals all year, but you miscalculated and only withdrew $7,300 total.

Then you would owe a 50% penalty on the difference between the amount you withdrew and the actual RMD amount: $10,500 – $7,300 = $3,200 x .50 = $1,600

How Did COVID Change RMD Rules?

The pandemic ushered in some RMD rule changes for a time, and it may be easy to get mixed up given those changes. But you should know that things are more or less back to “normal” now (as of 2021) as it relates to RMD rules, so you’ll need to plan accordingly.

As for that rule change: There was a suspension of all RMDs in 2020 owing to COVID. Here’s what happened, and what it meant for RMDs at the time:

•   First, in 2019 the SECURE Act changed the required age for RMDs from 70½ to 72, to start in 2020.

•   But when the pandemic hit in early 2020, RMDs were suspended entirely for that year under the CARES Act. So, even if you turned 72 in the year 2020 — the then-new qualifying age for RMDs that year — RMDs were waived.

Again, as of early 2021, required minimum distributions were restored. So here’s how it works now, taking into account the 2020 suspension and the new age for RMDs.

•   If you were taking RMDs regularly before the 2020 suspension, you needed to resume taking your annual RMD by December 31, 2021.

•   If you were eligible for your first RMD in 2019 and you’d planned to take your first RMD by April 2020, but didn’t because of the waiver, you should have taken that RMD by December 31, 2021.

•   If you turned 72 in 2020, and were supposed to take an RMD for the first time, then you could have had until April 1, 2022 to take that first withdrawal. (But you could have taken that first withdrawal in 2021, to avoid the tax burden of taking two withdrawals in 2022.)

RMDs When You Have Multiple Accounts

If you have multiple accounts — e.g. a 401(k) and two IRAs — you would have to calculate the RMD for each of the accounts to arrive at the total amount you’re required to withdraw that year. But you would not have to take that amount out of each account. You can decide which account is more advantageous and take your entire RMD from that account, or divide it among your accounts by taking smaller withdrawals over the course of the year.

What Other Accounts Have RMDs?

While we’re focusing on 401(k) RMDs, there are numerous other types of accounts that require them as well. As of 2023, RMD rules apply to all employer-sponsored retirement accounts, according to the IRS — a list that includes IRAs (SEP IRAs, SIMPLE IRAs, and others), but not Roth IRAs while the owner is alive (more on that in a minute).

So, if you have an employer-sponsored retirement account, know that the IRA withdrawal rules are more or less the same as the rules for a 401(k) RMD.

Allocating Your RMDs

Individuals can also decide how they want their RMD allocated. For example, some people take a proportional approach to RMD distribution. This means a person with 30% of assets in short-term bonds might choose to have 30% of their RMD come from those investments.

Deciding how to allocate an RMD gives an investor some flexibility over their finances. For example, it might be possible to manage the potential tax you’d owe by mapping out your RMDs — or other considerations.

Do Roth 401(k)s Have RMDs?

Yes, Roth 401(k) plans do have required minimum distributions, and this is an important distinction between Roth 401(k)s and Roth IRAs. Even though the funds you contribute to a Roth 401(k) are already taxed, you are still required to take RMDs, following the same life expectancy factor charts provided by the IRS for traditional 401(k)s and IRAs.

The big difference being: You don’t owe taxes on the RMDs from a Roth 401(k). You deposit after-tax dollars, and withdrawals are still tax free as they are with an ordinary Roth IRA account.

If you have a Roth IRA, however, you don’t have to take any RMDs, but if you bequeath a Roth it’s another story. Since the rules surrounding inherited IRAs can be quite complicated, it’s wise to get advice from a professional.

Can You Delay Taking an RMD From Your 401(k)?

As noted above, there is some flexibility with your first RMD, in that you can delay your first RMD until April 1 of the following year. Just remember that your second RMD would be due by December 31 of that year as well, so you’d be taking two taxable withdrawals in the same year.

Also, if you are still employed by the sponsor of your 401(k) (or other employer plan) when you turn 73, you can delay taking RMDs until you leave that job or retire.

RMD Requirements for Inherited 401(k) Accounts

Don’t assume that RMDs are only for people in or near retirement. RMDs are usually required for those who inherit 401(k)s as well. The rules here can get quite complicated, depending on whether you are the surviving spouse inheriting a 401(k), or a non-spouse. In most cases, the surviving spouse is the legal beneficiary of a 401(k) unless a waiver was signed.

Inheriting a 401(k) From Your Spouse

If you’re the spouse inheriting a 401(k), you can rollover the funds into your own existing 401(k), or you can rollover the funds into what’s known as an “inherited IRA” — the IRA account is not inherited, but it holds the inherited funds from the 401(k). You can also continue contributing to the account.

Then you would take RMDs from these accounts when you turned 73, based on the IRS tables that apply to you.

Recommended: What Is a Rollover IRA vs. a Traditional IRA?

Inheriting a 401(k) From a Non-Spouse

If you inherit a 401(k) from someone who was not your spouse, you cannot rollover the funds into your own IRA.

You would have to take RMDs starting Dec. 31 of the year after the account holder died. And you would be required to withdraw all the money from the account within five or 10 years, depending on when the account holder passed away.

The five-year rule comes into play if the person died in 2019 or before; the 10-year rule applies if they died in 2020 or later.

Other Restrictions on Inherited 401(k) Accounts

Bear in mind that the company which sponsored the 401(k) may have restrictions on how inherited funds must be handled. In some cases, you may be able to keep 401(k) funds in the account, or you might be required to withdraw all funds within a certain time period.

In addition, state laws governing the inheritance of 401(k) assets can come into play.

As such, if you’ve inherited a 401(k), it’s probably best to consult a professional who can help you sort out your individual situation.

How to Avoid RMDs on 401(k)s

While a 401(k) grows tax-free during the course of an investor’s working years, the RMDs withdrawal is taxed at their current income tax rate. One way to offset that tax liability is for an investor to consider converting a 401(k) into a Roth IRA in the years preceding mandatory RMDs. Roth IRAs are not subject to RMD rules.

What Is a Roth Conversion?

A Roth conversion can be done at any point during an investor’s life, and can be done with all of the 401(k) funds or a portion of it.

Because a 401(k) invests pre-tax dollars and a Roth IRA invests after-tax dollars, you would need to pay taxes right away on any 401(k) funds you converted to a Roth. But the good news is, upon withdrawing the money after retirement, you don’t have to pay any additional taxes on those withdrawals. And any withdrawals are at your discretion because there are no required distributions.

Paying your tax bill now rather than in the future can make sense for investors who anticipate being in a higher tax bracket during their retirement years than they are currently.

The Backdoor Roth Option

Converting a 401(k) can also be a way for high earners to take advantage of a Roth. Traditional Roth accounts have an income cap. To contribute the maximum to a Roth IRA in 2023, your modified adjusted gross income (MAGI) must be less than $138,000 if you’re single, less than $228,000 if you’re married filing jointly, with phaseouts if your income is higher. But those income rules don’t apply to Roth conversions (thus they’re sometimes called the “backdoor Roth” option).

Once the conversion occurs and a Roth IRA account is opened, an investor needs to follow Roth rules: In general, withdrawals can be taken after an account owner has had the account for five years and the owner is older than 59 ½, barring outside circumstances such as death, disability, or first home purchase.

What Should an Investor Do With Their RMDs?

How you use your RMD funds depends on your financial goals. Fortunately, there are no requirements around how you spend or invest these funds (with the possible exception that you cannot take an RMD and redeposit it in the same account).

•   Some people may use their RMDs for living expenses in their retirement years. If you plan to use your RMD for income, it’s also smart to consider the tax consequences of that choice in light of other income sources like Social Security.

•   Other people may use their 401(k) RMDs to fund a brokerage account and continue investing. While you can’t take an RMD and redeposit it, it’s possible to directly transfer your RMD into a taxable account. You will still owe taxes on the RMD, but you could stay invested in the securities in the previous portfolio.

Reinvesting RMDs might provide a growth vehicle for retirement income. For example, some investors may look to securities that provide a dividend, so they can create cash flow as well as maintain investments.

•   Investors also may use part of their RMD to donate to charity. If the funds are directly transferred from the IRA to the charity (instead of writing out a check yourself), the donation will be excluded from taxable income.

While there is no right way to manage RMDs, coming up with a plan can help insure that your money continues to work for you, long after it’s out of your original 401(k) account.

The Takeaway

Investors facing required minimum distributions from their 401(k) accounts may want to fully understand what the law requires, figure out a game plan, and act accordingly. While there are a lot of things to consider and rules to reference, ignoring 401(k) RMDs can result in sizable penalties.

Even if you’re not quite at the age to take RMDs, you may want to think ahead so that you have a plan for withdrawing your assets that makes sense for you and your loved ones. It can help to walk through the many different requirements and options you have as an account holder, or if you think you might inherit a 401(k).

As always, coming up with a financial plan depends on knowing one’s options and exploring next steps to find the best fit for your money. If you’re opening a retirement account such as an IRA or Roth IRA, you can do so at a brokerage, bank, mutual fund house, or other financial services company, like SoFi Invest®.

Help grow your nest egg with a SoFi IRA.

FAQ

Is my 401(k) subject to RMDs?

Yes, with very few exceptions, 401(k)s are subject to RMDs after its owner reaches age 73, as of 2023. What those RMDs are, exactly, varies depending on several factors.

How to calculate your RMD for your 401(k)?

It’s not an easy calculation, but RMDs are basically calculated by dividing the owner’s account balance by their life expectancy factor, which is determined by the IRS. That will give you the amount you must withdraw each year, or face a penalty.

Can you avoid an RMD on your 401(k)?

You can, if you’re willing to convert your traditional 401(k) account to a Roth IRA. Roth IRAs do not require RMDs, but you will owe taxes on the funds you convert.


SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What Is After-Hours Trading?

After-hour trading is stock trading that occurs after the normal close of the trading session. Ordinarily, stock trading begins at 9:30 am ET and ends at 4 pm ET, Monday through Friday. The after-hours trading period begins following the close of regular trading at 4 pm and ends at 8 pm.

Trading after hours may appeal to investors who have limited time to trade during the day or want to take advantage of overnight market movements. If you’re new to trading stocks or even if you know some of the investing basics, aftermarket trading can still be a confusing concept to understand. Understanding what happens with the stock market after hours can help answer those questions.

Why Is Access to After-Hours Trading Important?

After-hours trading allows investors to respond to news and events that occur after regular stock market hours. This can be important because it will enable investors to take advantage of opportunities that may not be available during regular trading hours.

For example, if a company announces a significant acquisition after the markets have closed, investors who can trade after-hours will be able to buy shares of the company before the news is reflected in the stock price during regular trading hours. Knowing regular and after-market hours, among other things regarding stock market basics, can help investors become more knowledgeable in their trading strategy, too.

Market Hours Schedule

Stock exchanges operate on a regular schedule during which investors can buy and sell securities. The New York Stock Exchange (NYSE) and Nasdaq are open between 9:30 am and 4 pm ET. Most stock trading occurs during these normal business hours.

After-hours trading does not follow this schedule, however.

How Does After-Hours Trading Work?

After-hours trading is what it sounds like: buying and selling stocks after the stock market has closed. However, unlike standard hours trading, after-hours trading is conducted through computerized trading systems called electronic communications networks (ECNs). Traders generally access ECNs through their preferred brokerage.

After-hours trading generally lasts four hours, from 4-8pm ET on weekdays. However, the precise time of after-hours trading depends on the specific brokerage that an investor uses.

Pre-Market Trading

Pre-Market trading occurs from 4-9:30 am ET on weekdays. After-hours and pre-market trading is sometimes called “extended-hours trading.”

Some online brokerages take after-hours trading a step further and offer 24/7 stock trading. This allows investors to make trades during the gap between after-hours trading and pre-market trading. The advantage of 24/7 trading is that investors are not bound by the regular market hours schedule for making trades.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.


*Probability of Member receiving $1,000 is a probability of 0.028%.

Potential Advantages of After-Hours Trading

After-hours trading provides investors with several advantages over regular trading alone.

Convenience

One of the benefits of trading later in the day is convenience. If you’re busy with other pursuits during business hours or live in a different time zone, this might be a more optimal time to buy and sell stocks.

Leveraging New Information

Another potential advantage is the opportunity to take action based on new information, such as a company’s earnings report or a major news event, without having to wait for the market to reopen.

Potential for Cheaper Prices

Investors can sometimes find lower prices for individual stocks or exchange-traded funds (ETFs) during after-hours trading. This may reflect lower competition since fewer people are trading, but it’s far from guaranteeing you’ll get better prices.

Cons of After-Hours Trading

Buying and selling stocks outside regular trading hours come with risks and disadvantages.

Fewer Transactions Happen After-Hours

There are fewer transactions happening after-hours than while the stock market is open, which can affect the market’s liquidity.

Since there are fewer people buying and selling stocks, finding someone who wants to trade at the price you have in mind can be challenging. Likewise, getting a hold of a stock you want can be hard when trading volume is low. The trade will be canceled if there is no counterparty available for a trade you want.

Prices Are More Volatile

Another drawback is that prices are more volatile after-hours. Although it’s normal for the stock market to fluctuate, you tend to see much wider swings in price after-hours than during the typical trading day.

This is partly a result of lower liquidity: Since fewer people are participating in the market, trades may significantly affect a stock’s price due to wider bid-ask spreads.

Stock price volatility can also result from many people reacting quickly to major news or announcements. A company’s share price can climb in response to a news event after-hours and then fall dramatically as soon as markets open. Prices adjust after more information becomes available, or investors get the chance to digest it more thoroughly. And with major ups and downs, of course, comes greater risk and potential for losses.

Best Prices May Differ

Another thing to consider is that you might not be able to confirm the best available price during after-hours trading. During regular hours, brokerages must offer the best possible price at that time. However, this doesn’t extend into after-hours, and the share price you see in one place may differ from the one you see in another.

After-Hours Trading vs Standard Trading

Here’s a quick breakdown of the differences between after-hours trading and standard trading:

After-Hours Trading

Standard Trading

Trading occurs between 4-8 pm ET Trading occurs between 9:30 am and 4 pm ET
Trades conducted through ECNs Trades conducted through stock exchanges and market makers
Trades may not be completed due to low volume and liquidity Trades are generally executed quickly because of large trading volume and liquidity
Only certain stocks and ETFs available for trading A wide range of assets, like stocks, ETFs, mutual funds, and options, are available for trading

Is After-Hours Trading the Same Thing as Late-Day Trading?

Investors should be aware that after-hours trading differs from late-day trading. Late-day trading is an illegal practice in which mutual fund managers allow hedge funds to record some trades made after-hours as having happened right before closing during regular hours.

Late-day trading pushes up the mutual fund’s net asset value, which summarizes how much the fund is worth at the end of the trading day. When the net asset value (NAV) increases the following day to reflect those late-day trades, the hedge funds can sell the shares they bought at a higher price.

After-hours trading itself is considered ethical and is legal.

Recommended: What Is Market Manipulation?

Access to Features When Trading After-Hours

After-hours trading typically only allows limit orders. Limit orders generally protect investors from unexpectedly bad prices, which are more likely to occur during after-hours trading than standard trading.

Stop, stop-limit, or orders with special instructions are not usually accepted. Moreover, orders are typically only good for the after-hours trading session in which they’re placed; if a trade is not executed during the session, it is usually canceled.

Additionally, only certain stocks and ETFs are available for after-hours trading. Trading bonds, mutual funds, and options are not allowed during after-hours.

Is It Bad to Trade After Hours?

Trading stocks after hours is neither bad nor good. But whether it makes sense for you to engage in after-hour trading can depend on your risk tolerance and investment goals.

As mentioned, the stock market after hours can be more volatile than regular trading hours. You could expose yourself to greater risk by trading stocks after the closing bell. Increased volatility can also make it more difficult to gauge how likely limit orders are to be executed.

Pricing risk could also cause you to pay more for securities after hours than during the regular trading day. In that scenario, you’d get less value for your investment dollars. So it’s important to consider how much of your time you’re willing to devote to watching the after-hours market and how much risk you’re willing to accept.

Does After-Hours Trading Affect Opening Price?

After-hours trading can affect a stock’s opening price. Buying and selling activity can influence a stock’s price during normal market hours. The same is true for aftermarket trading.

A stock could close at one price point during regular trading hours but have a different open price once the new trading day begins. Whether this price difference is negligible or significant depends on how much trading activity occurred after hours and what motivated the activity.

For example, price fluctuations between the regular day’s closing and the next day’s opening could be more substantial if investors get wind overnight that a company is planning a merger or has a scandal brewing. Likewise, if a company’s earnings miss expectations or the Federal Reserve makes an announcement about interest rates, those things could affect stock pricing after hours.

Recommended: What Determines Stock Price?

Is After-Hours Trading a Good Indicator of Market Sentiment?

After-hours trading activity could help investors gauge where the market will start on the next trading day. But it’s important to remember that this is a short-term prediction at best, as pricing can change at a moment’s notice.

Investor attitudes and behaviors can quickly shift the market’s momentum and stock prices along with it. Again, something as simple as the release of an earnings report or the announcement of an acquisition could affect a stock’s price. So rather than focusing on aftermarket trading as a sole indicator of what a stock may do next, it’s important to look at the bigger picture.

If you’re primarily a day trader, learning some technical analysis basics can help you become more attuned to market trends and how to interpret them when making investment decisions.

Recommended: Day Trading Strategies

The Takeaway

If you are a hands-on investor and want to experiment, exploring after-hours trading may be an additional way to make trades. However, for most investors who don’t actively manage their investments and want to minimize risk, there may be better strategies than after-hours trading. Instead, they may want to feel confident that they’re investing their money with less risk, building wealth for long-term financial goals.

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


For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

When does after-hours trading for SoFi start?

SoFi offers extended-hours trading, where investors can place limit orders during after-hours starting at 4 pm.

When does after-hours trading for SoFi end?

SoFi offers extended-hours trading, where investors can place limit orders after-hours ending at 8 pm.

What are the benefits of trading after-hours?

Some benefits of trading after-hours include the convenience of trading when the markets are closed and having the opportunity to make trades right after an important news event breaks.


SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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