NBBO — the National Best Bid and Offer — is a quote available marketwide that represents the tightest composite spread for a security, e.g., the highest bid price and the lowest ask price for that security trading on various exchanges.
The NBBO is a regulation put in place by the Securities and Exchange Commission (SEC) that requires brokers who are working on behalf of clients to execute a trade at the best available ask price, and the best available bid price.
Brokers must guarantee at least the NBBO to their clients at the time of a trade, per SEC rules.
Key Points
• The National Best Bid and Offer (NBBO) is a marketwide quote for the highest bid price and the lowest ask price for a security across exchanges.
• The SEC enacted the NBBO regulation to ensure brokers execute trades for clients at the best available bid and ask prices (the bid-ask spread).
• The bid-ask spread is the difference between the price an investor is willing to buy (bid) and the price a seller is willing to sell (ask).
• Securities Information Processors (SIPs) continuously process bid and ask prices to calculate and update the NBBO.
• There can be a slight lag in real-time data due to the high volume of transactions, which the SEC addresses with intermarket sweep orders (ISO).
How Does “Bid vs Ask” Work in the Stock Market
In order to understand NBBO, investors need to understand the bid-ask price of a security, such as a stock. This is also known as the spread (two of many terms investors and traders should know). If an investor is “bidding,” they’re looking to buy. If they’re “asking,” they’re looking to sell. It may be helpful to think of it in terms of an “asking price,” as seen in real estate.
The average investor or trader will typically see the bid or ask price when looking at prices for different securities. Most of the bid-ask action takes place behind the scenes, and it’s happening fast, landing on an average price. These are the prices represented by stock quotes.
That price is the value at which brokers or traders are required to guarantee to their customers when executing orders. NBBO requires brokers to act in the best interest of their clients.
The National Best Bid and Offer (NBBO) is effectively a consolidated quote of the highest available bid and the lowest available ask price of a security across all exchanges. NBBO was created by the SEC to help ensure that brokers offer customers the best publicly available bid and ask prices when investors buy stocks online or through a traditional brokerage.
NBBO Example
Let’s run through a quick example of how the NBBO might work in the real world.
Let’s suppose that a broker has a few clients that want to buy stock:
• Buyer 1 puts in an order to the broker to buy shares of Company X at $10
• Buyer 2 puts in an order to the broker to buy shares of Company X at $10.50
• Buyer 3 puts in an order to the broker to buy shares of Company X at $11
Remember, these are “bids” — the price at which each client is willing to purchase a share of Company X.
On the other side of the equation, we have another broker with two clients that want to sell their shares of Company X, but only if the price reaches a certain level:
• Client 1 wants to sell their shares of Company X if the price hits $12
• Client 2 wants to sell their shares of Company X if the price hits $14
In this example, the NBBO for Company X is $11/$12. Why? Because these are the best bid vs. ask prices that were available to the brokers at the time. This is, on a very basic level, how calculating the NBBO for a given security might work.
Because the NBBO is updated constantly through the day with offers for stocks from a number of exchanges and market players, things need to move fast.
Most of the heavy lifting in NBBO calculations is done by Securities Information Processors (SIPs). SIPs connect the markets, processing bid and ask prices and trades into a single data feed. They were created by the SEC as a part of the Regulation National Market System (NMS).
There are two SIPS in the U.S.: The Consolidated Tape Association (CTA) , which works with the New York Stock Exchange, and the Unlisted Trading Privileges (UTP) , which works with stocks listed on the Nasdaq exchange.
The SIPS crunch all of the numbers and data to keep prices (NBBO) updated throughout the day. They’re incredibly important for traders, investors, brokers, and anyone else working in or adjacent to the markets.
Is NBBO Pricing Up to Date?
The NBBO system may not reflect the most up-to-date pricing data. Bid, ask, and transaction data is changing every millisecond. For high-frequency traders that are making fast and furious moves on the market, these small price fluctuations can cost them.
To make up for this lag time, the SEC allows trading via intermarket sweep orders (ISO), letting an investor send orders to multiple exchanges in order to execute a trade, regardless of whether a price is the best nationwide.
The Takeaway
NBBO represents the crunching of the numbers between the bid-ask spread of a security, and it’s the price you’ll see listed on a financial news network or stock quote.
The NBBO adds some legal protection for investors, effectively forcing brokers to execute trades at the best possible price for their clients.
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FAQ
What does NBBO mean in trading?
The National Best Bid and Offer (NBBO) is a marketwide quote for the highest bid price and the lowest ask price available for a security, across exchanges. That means it’s a composite or consolidated quote that ensures investors are getting the best available price for a security.
What is Level 2?
Level 2 is a subscription-based service offered by Nasdaq that gives traders access to live trading data from the exchange, including bid-ask spreads and order sizes from market makers. Level 2 offers more in-depth information about pricing than NBBO, which is part of a Level 1 trading screen.
What is the advantage of NBBO?
First and foremost, NBBO helps protect investors, by ensuring the tightest spreads for securities prices. As such, NBBO also promotes market transparency and competition.
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This article is not intended to be legal advice. Please consult an attorney for advice.
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.
Volatility skew describes how implied volatility varies across at-the-money (ATM), in-the-money (ITM), and out-of-the-money (OTM) options with the same underlying asset. It can reflect market sentiment and anticipation of upward or downward price movement.
Volatility skew most commonly refers to vertical skews, which compare options with the same expiration date but different strike prices. However, there are also horizontal skews, or time skews, which look at options with the same strike price, but varying expiration dates.
Learn more about how volatility skew works, why it matters to options traders, and how it relates to strategies like puts, calls, and spreads.
Key Points
• Volatility skew refers to the variation in implied volatility between at-the-money, in-the-money, and out-of-the-money options for the same asset.
• Investors can use volatility skew as an indicator to decide on buying or selling options contracts based on market sentiment and price movements.
• Horizontal skew examines options with varying strike prices and the same expiration date, while vertical skew examines those with varying expirations and the same strike price.
• Measuring volatility skew involves plotting implied volatility against strike prices or expiration dates, allowing traders to identify potential market trends and opportunities.
• Trading based on volatility skew can be risky, especially with complex strategies like vertical (strike-based) or calendar (expiration or horizontal) spreads, making it more suitable for experienced investors.
What Is Volatility Skew?
Volatility skew, also known as option skew, is an options trading concept that reflects the difference in implied volatility across in-the-money options, at-the-money options, and out-of-the-money options. These differences can appear across strike prices (vertical skew) or across expiration dates (horizontal skew).
The more common of these is the vertical skew, which investors may use to understand market sentiment. With vertical skews, implied volatility is compared across options contracts for the same underlying asset with the same expiration date but different strike prices. The strike prices may reflect varying levels of implied volatility, each of which can be plotted on a graph.
Volatility skewness refers to the slope of the implied volatility on that graph, which may help inform traders about potential market expectations. A balanced U-shaped curve is called a “volatility smile,” while an unbalanced downward curve is called a “volatility smirk.” Both of these may suggest a market expectation of upcoming price movements.
What Is Implied Volatility (IV)?
Implied volatility, denoted by the sigma symbol (σ), is an estimate of the volatility a given asset may experience between now and the contract’s expiration date. It’s basically the level of uncertainty that investors have about an underlying stock and how much they believe the stock’s price may fluctuate in either direction.
The volatility of an underlying asset changes constantly. The more the price of the asset changes, the more volatility it has. But implied volatility doesn’t necessarily follow the same pattern, because it depends on how investors view the asset and whether they believe it will have volatility. Implied volatility is usually shown using standard deviations and percentages over a particular period of time.
Option pricing assumes that options for the same asset that have the same expiration share the same level of implied volatility. In the Black-Scholes model, strike price is an input, but the assumption is that volatility remains constant across strikes. But investors are often willing to overpay for stock options when they think there is more volatility to the downside than the upside.
Different types of options contracts have different levels of implied volatility, and it’s important for traders to understand this when determining their options trading strategy.
💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.
What Does Volatility Skew Mean for Investors?
Implied volatility depends on supply and demand dynamics as well as investor sentiment about the options. The volatility skew may help investors better understand the market and decide whether to buy or sell particular contracts. It’s an important indicator for investors who trade options.
Stocks that are decreasing in price tend to have more implied volatility on the downside. If there is higher implied volatility in the underlying asset, the price of an option can increase, resulting in a downside equity skew.
If a skew has higher implied volatility, this can indicate that options premiums will be higher. So investors can look at volatility skews to find low- and high-priced contracts when evaluating whether to buy or sell.
There are, again, two types of volatility skew. Vertical skew shows the variation in implied volatility across options contracts that have different strike prices and the same expiration date. This is more commonly used by retail traders. Horizontal skew shows the difference in implied volatility across expiration dates for options contracts that have the same strike price.
How Do You Measure Volatility Skew?
Investors measure volatility skew by plotting implied volatility values across strike prices or expiration dates. For example, with a vertical skew, a trader could look at a list of bid/ask prices for options contracts for a particular asset that expire on the same date. They often take the midpoint of the bid/ask option prices to estimate implied volatility (especially in liquid markets) and chart those values out.
The tilt of the skew can shift over time based on changing market sentiment. Observing these changes may help investors identify potential market trends to inform skew-related strategies. For instance, if the stock price increases significantly, traders might view it as overbought and anticipate a potential pullback. This can shift the skew, steepening its curve and reflecting increased demand for at-the-money or downside put options.
There are five factors that influence the price of options:
• Underlying stock or asset market price
• Strike price
• Time to expiry
• Interest rate
• Implied volatility
Investors can calculate the volatility at different strike prices and graph those out to see the volatility skew.
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How Do You Trade With Volatility Skew?
As mentioned above, the two types of volatility skew are horizontal and vertical. These can both be used in options trading.
Vertical Skew
Investors tend to use vertical skew to try to determine market expectations and sentiment, and it is more commonly referenced than horizontal skew. Also referred to as volatility skew and option skew, vertical skew, as mentioned earlier, looks at the variation in implied volatility across strike prices for options that have the same expiration date.
Two common skew patterns that may indicate upcoming price movements are, as noted above, the smile and the smirk:
• Volatility Smile: Implied volatility is higher for both ITM and OTM than ATM, creating a U-shaped curve.
• Volatility Smirk: Implied volatility is higher for OTM puts than OTM calls, often reflecting demand for downside protection.
Using vertical skew, traders may find opportunities to trade debit spreads and credit spreads, evaluating which strike prices may offer favorable entry points.
For example, a trader might find a stock they believe will increase in value before its option contract expires. So they may want to use a bull put spread to buy in hopes of profiting bull put spread for a net credit, expressing a moderately bullish or neutral view, to profit from a price rise while limiting downside. They will have many strikes to choose from, so they can use vertical skew to identify potentially mispriced contracts based on relative implied volatility. The trader can identify a strike with favorable pricing, wait for the underlying to move or implied volatility to increase, and potentially sell the spread for a profit.
Horizontal Skew
There are many factors that drive changes in horizontal skew, such as product announcements, earnings reports, and global events. For instance, if traders are uncertain about the short-term future of a stock because of an upcoming earnings report, the implied volatility may increase and the horizontal skew may flatten.
Traders look for opportunities by using calendar spreads to look at the differences between option expiration implied volatility. Where there is implied volatility in a horizontal skew, there may be inefficient pricing that traders can take advantage of.
If the implied volatility is higher than expected in the front month, the option contract may be priced higher, which is referred to as positive horizontal skew.
On the other hand, if the implied volatility of the back month is higher than expected, this is known as negative horizontal skew or “reverse calendar spread.” In this situation, traders would sell the back month and buy the front month because they may profit if the price of the underlying asset increases before the back month contract expires.
For example, a trader might look at the market for a stock and find that there is a horizontal skew in the option calls, meaning traders are putting in buy and sell orders with the prediction that it’s more likely the stock will increase a lot in the long term than in the short term.
If the trader doesn’t think the current market predictions are correct, they might use a reverse calendar call spread, similar to shorting a stock and predicting it may decline. If the price of the stock plummets, both the long- and short-term contracts may lose value, and the trader could buy them back at a lower price than they sold them for.
In this case, the trader could also potentially profit if the implied volatility of the options decreases. They chose to sell when the implied volatility was high during the front month, so if the implied volatility decreases, they may be able to buy back at a lower price.
Although this has the potential to be a profitable way to trade, it also comes with high risk of potential loss because it’s a short call that requires significant margin. Stock exchanges require traders to have significant funds in their account if they want to place this type of trade.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
The Takeaway
Options trading is popular with many investors, and volatility skew is one way for options traders to gauge market sentiment and assess relative pricing across strike prices or expirations. Traders might look at either horizontal or vertical skew to help determine an options strategy that aligns with their broader strategy.
However, options trading is risky. It’s generally more appropriate for experienced investors than for beginners. While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.
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 volatility skew is the difference in implied volatility across options with the same expiration date but different strike prices. Volatility skews reflect investor sentiment and demand for downside or upside protection. Traders may watch for steep or unusual skews as signals of potential market movement.
How to trade the market when volatility spikes?
When volatility spikes, options premiums often rise. Some traders may consider selling options to potentially capture high premiums, while others might use spreads or protective puts. These strategies can be risky and may not suit all experience levels.
How can I trade volatility?
Traders may attempt to trade volatility through options strategies that respond to implied volatility changes. These include straddles, strangles, and calendar spreads. The goal isn’t to predict direction but to benefit from volatility shifts. This approach may carry significant risk.
What is skewness in trading?
In options trading, skewness refers to the curve shape of implied volatility across strike prices. A balanced shape is called a volatility smile, while an unbalanced one is a volatility smirk. Skewness helps traders identify where the market is pricing in greater uncertainty.
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
Asset allocation is the practice of investing across different asset classes in a portfolio in order to balance the different potential risks and rewards. Asset allocation is closely tied to portfolio diversification, which means spreading one’s money across both asset classes and investment options within those classes. In a general sense, asset allocation is like taking the age-old advice of not putting all your eggs in one basket. An investor can’t avoid risk entirely, but diversifying their investments may help mitigate the risk that one asset class poses.
The three main asset classes are typically stocks, bonds, and cash, but some investors also allocate money into real estate, a range of commodities, private-equity or hedge funds, as well as cryptocurrencies. Determining what kind of asset allocation makes the most sense for you depends on personal goals, time horizon, and risk tolerance.
Key Points
• Asset allocation involves distributing investments across various asset classes to help balance risks and rewards.
• Financial goals, risk tolerance, and time horizon shape an asset allocation strategy.
• Short-term goals generally require lower risk investments, while long-term goals can handle higher risk.
• The 100 Rule suggests subtracting your age from 100 to determine stock allocation, though some recommend using 110 or even 120.
• Regular portfolio rebalancing is essential to maintain alignment with financial goals and risk tolerance.
Common Assets
Some of the most common assets you can invest in are stocks, bonds, and cash equivalents.
• Stocks:Stocks can be volatile, with the market going up and down, but they may also offer a higher return than bonds over the long run.
• Bonds:Bonds, such as Treasuries or municipal bonds, can be viewed as lower risk because they’re backed by government entities, but they also offer lower returns. There are higher-yield corporate bonds, which have greater returns and risk, but also tend to be less volatile than stocks.
• Cash orcash equivalents: This includes money in savings accounts or money market accounts, as well as certificates of deposit or Treasury bills. Obviously, the returns on these are very low but they’re also very secure. The biggest concern with cash investments is if inflation outpaces the return, then you technically could be losing money (e.g., future purchasing power).
What Factors Determine Your Asset Allocation?
There are three basic factors that will affect your asset allocation: Your goals, your risk tolerance, and your time horizon.
• Goals. Your goals may be short term, such as starting a business, or saving for a down payment on a house in the next year or two. Or they may be long term, like planning ahead for that child’s education or saving for your retirement.
• Risk tolerance. Your risk tolerance is how much volatility you can tolerate. Risk tolerance is your willingness to handle potential investment losses against gains, and may be difficult to zero in on. If you take on more risk than you’re comfortable with, and the market starts to drop, you might panic and sell investments at an inopportune time.
• Time horizon. Finally, your time horizon is the amount of time you have to invest before you need to achieve your goal. This factor can help you determine how much risk you’re comfortable with and influence your portfolio allocation. For example, if you have a long horizon, there is more time to ride out the ups and downs in the market, and as a result, your risk tolerance may be higher.
You can see how these three factors come together to determine your asset allocation. If you have a short-term financial goal and will need to access your money relatively quickly — for example, if you’re about to buy that house you’ve been saving for — your risk tolerance will likely be lower, as you don’t want a market downturn to take a bite out of your investments just when you need to cash them out.
On the other hand, if you have a greater tolerance for risk — and if you think you may need more money for a down payment several years down the road — you may choose a more aggressive allocation in the hope of seeing more growth.
What’s an Effective Asset Allocation Strategy?
The best asset allocation to meet your financial goals depends on a number of factors, most importantly your timeframe and your risk tolerance. For example, if you’re very far away from retirement, then you may be able to handle more risk in your retirement portfolio. But if you’re investing for your teenage kids’ college education, then that’s potentially a shorter time frame and you may not want to take as many risks.
Your risk tolerance may also affect how you react to ups and downs in the market. That’s something to keep in mind.
Also, if you’re someone who worries about every blip in your investment portfolio, then you may want to consider less risky investments. No investment is without risk, but you can spread the risk out across different assets and asset classes. In general, higher-risk investments may offer higher returns, but it’s never guaranteed and most investors will benefit from having a longer time horizon.
The 100 Rule
A common rule of thumb is known as The 100 Rule: Subtract your age from 100 and that’s the percentage of your portfolio that should be invested in stocks. For example, if you’re 25, then the 100 rule would suggest that 75% of your portfolio be in stocks and 25% in safer investments, like bonds, Treasurys, cash or money market accounts.
Target date funds are funds that more or less follow this style of rule — automatically adjusting the make-up of stocks vs. bonds as you near your target retirement date.
However, there are some caveats to this rule of thumb — people are living longer, every person’s situation may be different, and this is really only an asset allocation suggestion for retirement, not other financial goals you might have. Some financial advisors have even adjusted it to “The 110 or 120 Rule” because of increases in life expectancy.
What Is Risk Tolerance-Based Asset Allocation?
Risk tolerance–based asset allocation involves shaping your portfolio based on the level of risk you’re most comfortable with. For example, if you fit into the aggressive investor risk tolerance profile, that means you may commit a larger share of your portfolio to stocks and other higher-risk investments.
On the other hand, you may have a smaller asset allocation to stocks if you lean more toward the conservative end of the spectrum. The style of investor you are will likely shift throughout your lifetime. As discussed above, different life stages bring new concerns and priorities to mind, and this will naturally change how you view your asset allocation.
One thing that’s important to understand when basing asset allocation on risk tolerance is how that aligns with your risk capacity. Your risk capacity is the amount of risk you must take to achieve your investment goals. This is important to understand for choosing assets based on risk tolerance to find the right portfolio allocation.
If you have a low risk tolerance, but a higher risk capacity is required to achieve the investment goals you’ve set, then you may be at risk of falling short of those goals.
Meanwhile, having a higher risk tolerance but a lower risk capacity could result in taking on more risk than you need to in order to achieve your investment goals. Finding the right balance between the two is key when using a risk tolerance based asset allocation strategy.
How to Rebalance Asset Allocation
The other factor to consider is when to rebalance your portfolio in order to stay in line with your asset allocation goals. Over time, the different assets in your portfolio have different returns, so the amount you have invested in each changes — one stock might have high enough returns that it grows and makes up a significant portion of your stock investments.
If, for example, you’re aiming for 70% in stocks and 30% in bonds, but your stock investments grow faster until they make up 80% of your portfolio, then it might be time to rebalance. Rebalancing just means adjusting your investments to return to your desired portfolio make-up and asset allocation.
There are many rebalancing strategies, but you can choose to rebalance at set times – monthly, quarterly, or annually — or when an asset changes a certain amount from your desired allocation (for example, if any one asset is more than 5% off your target make-up).
In order to rebalance, you simply sell the investments that are more than their target and buy the ones that have fallen under their target until each is back to the weight you want.
The Takeaway
The effect of asset allocation has been studied over the years and while the findings varied, one thing has remained constant: how you allocate your money to different assets is vitally important in determining what kind of returns you see.
However, it’s more than just diversifying within each asset class; it’s also about diversifying your entire investment portfolio across asset classes and styles. In general, for instance, stocks are considered riskier than bonds, though there are also different kinds of bonds with different risk levels.
There are many different kinds of funds with different asset allocation, and a fund doesn’t guarantee diversification, especially if it’s a fund that invests in just one sector or market. That’s why it’s important to understand what you want out of your portfolio and find an asset allocation to meet your goals, which may require professional help.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
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FAQ
How often should I review and rebalance my asset allocation?
You can review and rebalance your portfolio and asset allocation at any time, but you may want to set regular check-ins, whether they’re quarterly, biannually, or annually. One general rule to consider is rebalancing your portfolio whenever an asset allocation changes by 5% or more.
What factors should I consider when determining my asset allocation?
There are three main factors that will affect your asset allocation. First are your goals and whether they’re short term like saving for a house, or long term like retirement. Second is your risk tolerance. Risk tolerance is important because you’ll want to take on only as much risk as you can live with. Otherwise, you might panic during a market downturn and sell investments at a loss. The third factor to consider for asset allocation is your time horizon, or the amount of time you have to invest to achieve your goals.
How can I assess my risk tolerance and align it with my asset allocation strategy?
With risk tolerance–based asset allocation, you shape your portfolio based on the level of risk you’re most comfortable with. That said, the type of investor you are will likely change through the decades. Different life stages come with new priorities, and those will influence how you view your asset allocation.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Timing the market, as it relates to trading and investing, requires a whole lot of luck. In effect, it means waiting for ideal market conditions, and then making a move to try and capitalize on the best market outcome. But nobody can predict the future, and it’s a high-risk strategy.
When seeing stock market charts and business news headlines, it can be tempting to imagine striking it rich by timing investments perfectly. In reality, figuring out when to buy or sell stocks is extremely difficult. Both professional and at-home investors may make serious mistakes when trying to time their market entrance or exit.
Key Points
• Timing the market is highly complex and unpredictable, influenced by various global and local factors.
• Most investors, including professionals, fail to beat the market consistently.
• Emotional investing, driven by fear or greed, often leads to poor financial decisions.
• A diversified buy-and-hold strategy is generally more effective for long-term wealth building.
• Starting to invest early may allow for more time to save and invest.
Why Timing the Stock Market Doesn’t Work
Waiting to start investing could cost an individual thousands of dollars over their lifetime. It’s also important to know that by leaving money in a checking or savings account, a person may not be protecting their money from inflation risk. That’s because the value of that cash in a checking or savings account erodes if the prices of goods and services increase.
Meanwhile, stock market timing is incredibly complex. Stock prices can be influenced by global macroeconomic events, political events in a country, developments in specific industries or companies, as well as the sentiment of investors as a collective.
Even professional investors struggle to “beat the market,” which often means trying to outperform a benchmark stock index. In fact, most investors can’t beat the market, and are likely better off sticking to index investing.
Fear and Greed in Investing
When investing, it’s also important not to let two key emotions — fear and greed — drive decisions. That means if the stock market is plummeting, investors may be fearful, but they can’t let those feelings push them toward a decision to sell. That could cause them to “lock in” losses. There’s even a Fear and Greed Index that investors sometimes use to make contrarian decisions.
Take for instance what happened during the 2008 financial crisis. After Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, the stock market entered a tumultuous stretch. The S&P 500 finally bottomed on March 9, 2009. However, the index eventually regained all its losses in the course of roughly the next four years. Investors who had hung on likely may have recovered their losses.
Meanwhile, greed can cause investors to make poor decisions as well. For instance, during the dotcom bubble, investors bought into many newly public Internet companies without always doing the research. Some of these stocks weren’t even turning a profit, making their businesses vulnerable to going belly up. Ultimately, many at-home investors suffered losses when the dot-com bubble burst.
Of course there are no guarantees when it comes to investing. There’s always risk and volatility involved. However, one of the most tried and true methods for building wealth has been a buy-and-hold strategy when it comes to stock investing.
Why It May Be a Good Idea to Invest Immediately
One of the most important predictors of your returns is the length of time you’ve invested in the stock market. While it’s difficult to predict what the market will do in the near future, an investor can get a better sense over the long term.
When an investor lets their money grow, it has the chance to weather short-term ups and downs and grow over time. On average, the S&P 500, often used as a market benchmark, has grown about 7% per year after adjusting for inflation. That doesn’t mean a person can predict what will happen this year, or even in the next 10 years, but looking at long term trends can give them a better sense of market dynamics.
An individual might put off investing because they want to pay off all debts first or achieve other goals, like buying a house. In some cases, that might be true, like paying off high-interest credit cards or saving for a short-term goal, such as a three to six-month emergency fund.
But once a person has an emergency fund and is out of credit card debt, they should consider investing, even if they have a mortgage or student loan debt. Even if they’re only investing for retirement, it’s a good idea to start as soon as possible.
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Consider Investing as Early as Possible
The younger you are when you invest, the better the chances are that you’ll reach your financial goals. For example, imagine Person A invests $200 a month in a retirement account starting at age 25.
Person B invests the same amount starting at age 35. They both continue to add $200 a month to their account. When they both retire at age 65, Person A will have almost twice as much as Person B: $306,689, compared to $167,550, assuming a 6% rate of return, 2% inflation rate, and 15% tax rate.
That’s true even though Person A only contributed 33% more to her account. This is the power of how compound returns may help investors see cumulative gains on their investments over time, helping them build long-term wealth.
Percentage of Retail Investors in Stock Market
As mentioned, after the 2008 financial crisis, many people were reluctant to invest in the stock market. But in recent years, that’s changed. Retail investor participation in the U.S. stock market increased considerably in 2020 and 2021, for a variety of reasons.
As of 2025, retail inventors comprise about a quarter of all total trading volume in the stock market. That may change in the future, too, as younger investors — with quicker, easier access to investing tools, in many cases — look at getting into the markets.
The Takeaway
Timing the market is difficult, if not impossible, and involves trying to “time” trading or investing moves to coincide with an increase or decrease in the stock market. Nobody can tell what the future holds, so it’s generally hard to accurately pick the right investments at the right time. That’s not to say that some investors don’t get it right from time to time, but as an overall strategy, it’s likely not advisable.
If an individual is skittish about investing, their anxiety makes sense in light of the dramatic market ups and downs many have witnessed in the past two decades. But trying to time the market doesn’t work. Instead, investing in a diversified portfolio can be a good step toward building individual wealth.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
What does it mean to try and beat the market?
Generally, trying to “beat the market” means an investor is attempting to outperform a market index, such as the S&P 500.
How many retail investors are in the market?
Retail investors comprise around a quarter, or 25%, of overall investors in the market.
Why is it a bad idea to try and time the market?
It may be a bad idea to try and time the market because nobody knows what’s going to happen in the future, and what the ramifications could be on the market. Accordingly, it’s risky to try and time the market.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.
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.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
While there are plenty of benefits to going public, there are also some downsides to being listed on a major stock exchange. Public companies must abide by strict government compliance and corporate government statutes and answer to shareholders and regulatory bodies. Plus they’re subject to the whims of the broader stock market on a regular basis.
So, public companies can opt to go private and delist from a public stock exchange. What happens when a public company goes private? Here’s what you need to know about that process.
Key Points
• When a company transitions from public to private, it is delisted from stock exchanges and its shares are no longer publicly traded.
• This change means the company is exempt from the Sarbanes-Oxley Act and other stringent public compliance requirements.
• Going private can reduce financial and pricing stability due to decreased liquidity and fewer financing options.
• The process involves a buyout through a tender offer, often funded by private equity and requiring shareholder approval.
• Privatization allows for more autonomous control over business decisions and operations by reducing public and governmental scrutiny.
What Is Going Private?
When a company goes from public to private, the company is delisted from a stock exchange and its shareholders can no longer trade their shares in a public market. It also means that a private company no longer has to abide by the Sarbanes-Oxley Act of 2002. That legislation required publicly-traded companies to accommodate expansive and costly regulatory requirements, especially in the compliance risk management and financial reporting areas. (The legislation was created by lawmakers to help protect investors from fraudulent financial practices by corporations.)
Going private may also mean less pricing and financial stability, as private company shares typically have less liquidity than a public company traded on a stock exchange. That can leave a private company with fewer financing options to fund operations.
Going private also changes the way a company operates. Without public shareholders to satisfy, the company’s founders or owners can control both the firm’s business decisions and any shares of private stock. Private companies can consolidate power among one or a few owners. That can lead to quicker business decisions and a clear path to take advantage of new business opportunities.
By definition, a private company, or a company that has been “privatized”, may be owned by an individual or a group of individuals (i.e., a consortium) that also has a specific number of shareholders.
Unlike traditional stocks, investors in a private company do not purchase shares through a stock broker or through an online investment platform. Instead, investors purchase private equity shares from the company itself or from existing shareholders.
What Is Privatization?
Privatization is the opposite of an initial public offering. It’s the process by which a company goes from being a publicly traded company to being a private one. A private company may still offer shares of stock, but those shares aren’t available on public market exchanges. There’s no need to satisfy public shareholders and the company has less governmental oversight into its governance and documents.
(Note that privatization is also a term used to describe when a public or government organization switches to ownership by a private, non-governmental group.)
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What Happens if You Own Shares of a Company That Goes Private?
If shareholders approve a tender offer to take a public company private, they’ll each receive a payment for the number of shares that they’re giving up. Typically, private investors pay a premium that exceeds the current share price and shareholders receive that money in exchange for giving up ownership in the company.
This is the opposite of IPO investing, in which the public buys stock in a newly listed company, and private owners have a chance to cash out.
Likely the biggest reason why a company would choose to go private are the costs associated with being a public company (largely to accommodate regulatory demands from local, state, and federal governments).
Those costs may include the following potential corporate budget challenges:
• The legal, accounting, and compliance costs needed to accommodate company financial filings and associated corporate governance oversight obligations.
• The costs needed to pay compliance, investor relations, and other staffing needs – or the hiring of third-party specialty firms to handle these obligations.
• The costs associated with paying strict attention to company share price – a public company always has to keep its eye on maximizing its stock performance and on keeping shareholders satisfied with the firm’s stock performance.
In addition, going private enables companies to free up management and staff to turn their attention to firm financial growth, instead of regulatory and compliance issues or shareholder concerns. Some public companies struggle to invest for the long-term because they’re worried about meeting short-term targets to keep their stock price up.
Going private also enables companies to keep critical financial and operational data away out of the public record — and the hands of competitors. Privatization could also help companies avoid lawsuits from shareholders and curb some litigation risk.
How to Take a Company Private
Typically, companies that go private work with either a private-equity group or a private-equity firm pooling funds to “buy out” a public company’s entire amount of publicly-traded stock. This typically requires a group of investors since, in most cases, it takes an enormous amount of financial capital to buy out a company with hundreds of millions (or even billions) of dollars linked to its publicly-traded stock.
Often a consortium of private equity investors gets help financing with a privatization campaign from an investment bank or other large financial institution. The fund usually comes in the form of a massive loan — with interest — that the consortium can use to buy out a public company’s shares.
With the funding needed to close the deal on hand, the private equity consortium makes a tender offer to purchase all outstanding shares in the public company, which existing shareholders vote on. If approved, existing shareholders sell their stock to the private investors who become the new owners of the company.
The goal is that the private investors will take the gains accrued through stronger company revenues and rejuvenated stock, to pay down the investment banking loan, pay off any investment banking fees accrued, and begin managing the income and capital gains garnered from their investment in the company. While this can take some time, the process of going private is much less intensive than the IPO process.
Company executives, meanwhile, can focus on growing the company. In many instances, newly-minted private companies may roll out a new business plan and prospectus that firm executives can share with potential shareholders, hopefully bringing more capital into the company. Sometimes private owners will plan to IPO the business again in the future.
💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.
Pros and Cons of Going Private
Taking a company private has both benefits and drawbacks for the company.
The Pros
In addition to lower costs, there are several other advantages to delisting a company.
• Establishing privacy. When a company goes public, it relinquishes the right to keep the company private. By taking a company private, it makes it easier to operate outside of the public eye.
• Fewer shareholders. Public companies don’t have to deal with external company sources that may make life difficult for company executives and may result in a loss of operational independence. Once a company goes private, the founders or new owners retain full control over the business and have the last word on all company decisions.
• A private company doesn’t have to deal with financial regulators. A private company doesn’t need to file financial disclosures with the U.S. Securities and Exchange Commission and other government regulatory bodies. While a private company may have to file an annual report with the state where it operates, the information is limited and financial information remains private.
The Cons
There are some disadvantages to taking a company private.
• Capital funding challenges. When a company goes private, it loses the ability to raise funds through the publicly-traded financial markets, which can be an easy and efficient way to boost company revenues. Yet by privatizing the company, publicly-funded capital is no longer an option. Such companies may have to borrow funds from a bank or private lender, or sell stock based on a state’s specific regulatory requirements.
• The owner may have more legal liability. Private companies, especially sole proprietorships or general partnerships, aren’t protected from legal actions or creditors. If a private company is successfully sued in court, the court can garnish the business owner’s personal assets if necessary.
• More powerful shareholders. While there are not as many shareholders at a private company, new owners, such as venture capitalists or private equity funds, may have strong feelings about the operational business decisions, and as owners, they may have more power over seeing their wishes carried out.
The Takeaway
Going private can be an advantage for companies that want more control at the executive level, and no longer want their shares listed on a public exchange. However, taking a company private may impact the company’s bottom line as corporate financing options thin out when public shareholders can no longer buy the company’s stock.
If a company you own stock in goes private, you will no longer own shares in that company or be able to buy them through a traditional broker. For investors, having different types of assets in an investment portfolio may be helpful in case something happens to or changes with one of them.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
Is it good for a public company to go private?
Going private can have benefits for a public company, including lower costs related to legal, accounting, and compliance obligations, as well as costs associated with maximizing stock performance and keeping shareholders happy. In addition, going private may allow a company’s staff to focus more fully on financial growth, and keep critical company data out of the public record (and the hands of competitors).
However, there are potential drawbacks as well. For instance, a company may face capital funding challenges once it goes private since it can no longer raise funds through publicly-traded financial markets.
What happens to my private shares when a company goes public?
Once a company goes public (typically done through a process called an IPO, or initial public offering), your private shares become public shares, and they become worth the public trading price of the shares.
How long does it take for a public company to be private?
How long it takes for a public company to become private depends on the time it takes to complete the steps involved. For instance, the company has to buy out all of its publicly-traded stock; it usually works with a group of private investors to do this since the process is costly. Once they have the founding secured, a tender offer is made to purchase all outstanding shares in the public company, which the existing shareholders vote on. If that is approved, the shareholders sell their stock to the owners of the company. How long all this takes generally depends on the company and the specific situation.
Photo credit: iStock/Olezzo
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.
