Growing Wealth Archives

Jul

2025

What Diagonal Spreads Are & How They Work

What Is a Diagonal Spread and How Does It Work?

By Paulina Likos | Growing Wealth, invest, Investing | Comments Off

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.

Table of Contents

Diagonal Spreads Defined
How Diagonal Spreads Work
Diagonal Spread Examples
Types of Diagonal Spreads
Risks of Diagonal Spreads
FAQ

A diagonal spread is an options trading strategy involving both a long and short position on the same stock, with different strike prices and different expiration dates. It’s a combination of a vertical spread and a calendar spread.

Using this strategy may allow the trader to realize gains early if the stock moves in a direction that’s in their favor. The trader makes two options trades simultaneously — either call options or put options — to take both a bullish and bearish position on the same underlying asset.

Key Points

• Diagonal spreads combine long and short positions on the same stock, using different strike prices and expiration dates.

• This strategy allows early profit if the stock moves favorably.

• Traders may use a long put diagonal spread by buying a longer-term put and selling a shorter-term to express a bearish outlook while offsetting cost through time decay.

• Traders may use a short put diagonal spread by selling a longer-term put and buying a shorter-term put to express a bullish outlook and potentially profit if both options expire worthless.

• Risks include overpaying for the spread and being exposed to market volatility.

Diagonal Spreads Defined

Diagonal spreads are a two-step options trading strategy considered to be an advanced trading tactic. It’s a combination of a calendar spread and a long or short call or put spread. These positions have different expirations and different strikes which spread out diagonally, hence the name of the strategy.

A calendar spread typically involves a trader buying a contract with a longer expiration date while going short on an option with a near-term expiration date with the same strike price. But if two different strike prices are used, this is a diagonal spread.

A diagonal spread is essentially a calendar spread, also referred to as a horizontal spread or a time spread, combined with a vertical spread, because different strike prices are involved.

How Diagonal Spreads Work

A long put diagonal spread involves purchasing a put for some time in the future while selling a put in the short-term. Purchasing an option with a later expiration tends to be more expensive due to its higher time value. On the other hand, the options trader sells the nearer term option with the goal of lowering the cost of the other option. Traders usually use diagonal spreads when they have conviction about a stock’s direction while trying to manage the effects of time decay by collecting near-term premium that decays faster than the longer-term option loses value.

A diagonal bull spread becomes a valuable trade when the price of the stock increases, while a diagonal bear spread increases in value when the stock price decreases.

Diagonal spreads require an in-depth understanding of volatility and timing.

Setting Up a Diagonal Spread

When traders are bullish on a stock, they generally use call options vs. using put options when they’re bearish on a stock.

The most common way to set up a diagonal spread is to buy a back month option (i.e., with more days to expiration) that is in the money. Then, the trader sells a front month (near-term) option contract with a strike price that is out of the money in order to reduce the net cost of the trade and express a directional view.

Setting up a diagonal spread in this manner would constitute a debit spread, which may allow the trader to define their maximum risk upfront while maintaining profit potential if the trade moves in their favor. Some traders may also use credit spread structures depending on their outlook and positioning.

Maximum Loss

When a stock’s price rises, the maximum loss is equal to the premium paid when buying a call. If the stock falls, the maximum loss is the difference between the strike prices adjusted by the option premium paid or received, assuming the long leg remains in place and the short leg is not assigned early.

Maximum Profit

It can be difficult to anticipate what the maximum gain may be since traders can’t know what the back-month option will be trading at when the front-month option expires due to changing volatility expectations. In a long diagonal spread, the stock price must be near the short strike at the time the short option expires for a trade to go in the buyer’s favor — whether using calls or puts.

The max profit potential for a short diagonal call spread is typically limited to the net credit received minus commissions. If the stock price falls below the short call’s strike price, the value of the spread will be close to zero and the credit received may represent a profit.

On the other hand, the max profit scenario of a short diagonal put spread is when the stock price rises above the strike price of the sold higher strike put option, as the value of the spread nears zero and the credit received may represent a profit.

Breakeven Point

The breakeven point can’t be calculated precisely, but it can be estimated. The breakeven price at expiration for a long call is typically below the strike price of the short call. During expiration of a long call, the breakeven point is the stock price at which the premium of the short call is the net credit received for the spread.

Traders cannot predict what the breakeven stock price will be because it depends on market volatility, which can impact the price of the short call.

Diagonal Spread Examples

In one example, a trader is bullish on ABC stock, currently priced at $300. If the front month is January and the back month is February, the trader may want to purchase a $298 strike call with February expiry, which is in the money. Then the trader could sell a $302 strike call with January expiry, which would be out of the money. This would give the trader a four-point wide diagonal spread, with a potential to profit if the stock price approaches the $302 short strike by January expiration and the short call expires worthless while the long call retains value.

In another scenario, a trader is bearish on XYZ stock at a current market price of $129. To set up a diagonal spread, the trader could buy a $132 February put, which would be several dollars in the money. Next, the trader could sell a $126 January put, which would be a few dollars out of the money. This trade would be a six-point wide diagonal spread.

Types of Diagonal Spreads

There are different types of diagonal spread strategies traders can use to pursue their market outlook. Here are several diagonal spreads traders may consider:

1. Long Call Diagonal Spreads

To execute on a long call diagonal spread, traders must buy an in-the-money call option with a longer-term expiration date and then sell an out-of-the-money (OTM) call option with a nearer-term expiration date. Traders can use this advanced options strategy if they are mildly bullish on a stock in the near-term and very bullish in the longer-term. An ideal setup for a long call diagonal spread is during times of low volatility, as sharp price swings can reduce its effectiveness and may even lead to losses if the stock moves beyond both strikes.

2. Long Put Diagonal Spreads

To execute on a long put diagonal spread, traders must buy an in-the-money put option with a longer-term expiration date and then sell an out-of-the-money put option with a nearer-term expiration date that has an out the money strike. Traders typically use long put diagonal spreads to mimic a synthetic covered put position, and to express a bearish outlook on the underlying asset.

3. Short Call Diagonal Spreads

A short call diagonal spread is when traders sell a long-term call with a lower strike price and buy a shorter-term call with a higher strike price. A trader may benefit from a short call option when the price of the underlying asset falls, thus making this a bearish strategy.

4. Short Put Diagonal Spreads

A short put diagonal spread involves selling a longer-term put with a higher strike price and buying a shorter-term put with a lower strike price. This is a bullish strategy, as the trader may benefit if the underlying asset goes up in price, making both options expire worthless and netting the seller the net credit earned at the beginning of the trade.

5. Double Diagonal Spread

A double diagonal spread is when a trader buys a longer-term straddle and sells a shorter-term strangle, a trade that may benefit from time decay and an increase in volatility. Traders setting up a double diagonal are long the middle strike calls and puts, which expire further in the future, and short out-of-the-money call and put options with sooner expiries. The ideal outcome for double diagonals is for the stock to stay between the two OTM strike prices as they approach expiration.

Risks of Diagonal Spreads

The primary risk traders have in diagonal spreads is overpaying to enter the position, which can limit profitability. The maximum risk is capped at the initial debt paid to enter the position. If traders pay too much for their diagonal spreads they may remain unprofitable.

Market volatility can be used to the trader’s advantage when using diagonal spreads, although it can also pose a risk to such trades. Depending on the level of volatility, it can substantially change the price of the option and impact the trader’s profit potential. Diagonal spreads are an advanced trading strategy so traders who are experienced in dealing with volatility may be better positioned to incorporate diagonal spreads in their investment strategy.

The Takeaway

Setting up a diagonal spread correctly is an important part of the profit potential of the strategy, otherwise traders are at risk of losing money. This advanced options trading strategy requires traders to make both long and short trades, either with calls or puts, that have different expiration dates and strike prices. Traders should know these option trades are lined up diagonally from one another in terms of expiration and strike.

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.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is a diagonal spread?

A diagonal spread is an options strategy that combines long and short positions with different strike prices and expiration dates. It blends elements of both calendar and vertical spreads.

What are the risks of diagonal spreads?

Risks include overpaying for the spread, sensitivity to volatility changes, and inaccurate market timing. These factors may reduce potential profits or increase potential losses if the trade moves against expectations, though losses are typically limited to the net debit paid to enter the position.

What is the difference between a bull call spread and a diagonal spread?

A bull call spread uses two call options with the same expiration but different strike prices. A diagonal spread also uses different strikes, but the contracts expire on different dates.

What is the difference between a calendar spread and a diagonal spread?

A calendar spread uses options with the same strike price and different expiration dates. A diagonal spread changes both the expiration date and the strike price, adding a directional element.

Photo credit: iStock/percds

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

SOIN-Q225-069

Jul

2025

Interest Rate Options, Explained

By Kenny Zhu | Growing Wealth, invest, Investing, Terminology | Comments Off

Table of Contents

What Are Interest Rate Options?
How Interest Rate Options Work
Interest Rate Option Example
FAQ

Interest rate options are derivatives that let traders speculate on or hedge against interest rate fluctuations. These contracts are tied to benchmarks like U.S. Treasuries or Eurodollars, and are primarily used by institutions that manage rate exposure. These options are structured as calls and puts, and can be used to express a view on how yields might change over time.

This guide breaks down how interest rate options work, including key terms, common use cases, and the potential risks involved.

Key Points

• Interest rate options are financial instruments for speculating on or hedging against interest rate movements.

• These options are structured as calls and puts, linked to benchmarks such as U.S. Treasuries.

• Buyers of calls may potentially profit when interest rates rise, while the buyers of puts may benefit from falling rates.

• Interest rate options are settled in cash, with the maximum loss for the buyer limited to the premium paid.

• Trading these options involves significant market and interest rate risks, especially if the buyer misjudges rate direction, timing, or volatility.

What Are Interest Rate Options?

Interest rate options enable investors to hedge, speculate on, or otherwise help manage their exposure to interest rates. These financial derivatives are available as both puts and calls, and are traded on major options exchanges. They can also be used to secure exposure to a specific interest rate level over a set time frame. Interest rate options offer buyers the right to profit from a known rate level at expiration, often as a hedge against rising or falling yields. This cap may help secure more predictable outcomes in a volatile rate environment.

Interest rates in the U.S. fluctuate continuously, with the Federal Reserve being a key driver, among other factors. To mitigate the risk that interest rate fluctuations could erode portfolio value, and to potentially benefit from rate changes, professional money managers turn to interest rate options as a source for managing exposure.

Interest rate options are sold on major options exchanges as standardized puts and calls — the two primary types of option contracts. Similar to puts and calls on equity securities, interest rate options represent directional bets on the value of an underlying asset.

The value of interest rate options is tied to yields on interest-rate-linked assets, typically Eurodollars and U.S. Treasuries of various maturities. These options are cash-settled and typically do not involve the delivery of a bond. Instead, buyers receive a payout if the reference rate moves in their favor.

Buyers of interest rate options can gain exposure to a specific interest rate over a defined term. Treasury maturities are standardized terms commonly sold on the CME Group exchanges. These products are used primarily by institutional investors and sophisticated traders managing large portfolios or interest rate exposure. Professional money managers may use puts or calls at any given maturity to express their views on future rate movements or the volatility of borrowing costs over time.

For example, a fund manager concerned about rising borrowing costs could purchase a call option tied to the 5-year Treasury as a hedge. If rates rise, the option gains value. This could potentially offset higher financing expenses or losses elsewhere in the manager’s portfolio.

How Interest Rate Options Work

Interest rate options afford the buyer the right to receive payment based on the spread between the yield of the underlying security on the expiration date and the original strike rate of the option, net of fees.

Interest rate options in the United States feature “European-style” options exercise terms, which means they can only be exercised on the expiration date.

This contrasts with equity options, which more often contain “American-style” exercise terms. That means they can be exercised at any time before and on the expiration date.

Buyers of interest rate options pay a premium — the price of the options contract — to acquire the right to receive a cash settlement if interest rates move in their favor. Options pricing can be complex, and to profit on a trade, the buyer needs interest rates to move in their favor enough to cover the cost of the option’s premium.

In the event that interest rates don’t move in the option holder’s favor enough to overcome the strike rate, the option will expire worthless, and the option holder incurs the total loss of their premium.

We’ll cover how this dynamic plays out with respect to both interest rate calls and puts.

How Do Interest Rate Call Options Work

Buyers of interest rate call options seek to benefit from rising interest rates. Should the yield on the underlying security close above its strike rate on the expiration date, the owner of an interest rate call option will receive a cash payout. This payout will be the difference between the option value at maturity and its strike.

Note that interest rate options are cash-settled. Unlike equity options, no exercise is required. If the rate is higher than the strike rate, the holder is paid the difference.

Interest rate call options, much like equity call options, give the buyer potential upside exposure to rising yields. They can also offer a way to effectively “lock in” an interest rate level for potential payout calculation, which benefits the buyer if rates rise above the strike.

Holders of interest rate call options bear the risk that the option might expire out-of-the-money should interest rates remain beneath the strike by the expiration date. In this case, the maximum loss the owner of an interest rate call option can expect is limited to the premium paid.

How Do Interest Rate Put Options Work

In contrast, buyers of interest rate put options seek to benefit from falling interest rates. Interest rate puts give the put holder the right to receive payment based on the difference between the strike rate and the yield on the underlying security at expiration. Since the payout depends on the yield falling below the strike rate, the buyer effectively locks in the right to receive a higher interest rate (rather than pay a lower one) for a fixed period, compared to market rates at expiration. In this case, the strike rate is typically the maximum gain that a put holder may receive.

Holders of interest rate put options bear the risk that the put option might expire worthless (out-of-the-money) if interest rates rise above the strike by the expiration date. In this case, the maximum loss the buyer of an interest rate put option will incur is limited to the premium paid.

What Are the Risks of Trading Interest Rate Options?

Trading interest rate options may involve significant risk, particularly for any trader who either, 1) lacks understanding of the basic drivers of options valuation and interest rates, or 2) doesn’t know how to structure their options trade properly to manage risk exposure. The leverage associated with options trades can result in significant losses if not managed carefully. Since these contracts define a rate level at the outset, traders risk loss if actual market rates move unexpectedly in the opposite direction.

Traders must manage a range of key risks and may want to consider different strategies for trading options, when it comes to buying interest rate puts and calls. Risks related to interest rate options include “market risk,” or the risk of price movements driven by macroeconomic factors that affect financial markets. It also includes “interest rate risk,” or the possibility that changes in interest rates could erode the value of fixed-income holdings, especially when those shifts are abrupt or unexpected. Traders may also face losses if they misjudge rate direction, timing, volatility, or fail to anticipate how quickly investors might adjust their outlook based on new interest rate information.

Interest Rate Option Example

For example, an investor seeking to hedge their portfolio against rising interest rates may choose to buy an interest rate call option on a 10-year Treasury bond, expiring in two months at a strike of $50.00.

Strikes on interest rate options reflect a rate that’s multiplied by 10 and expressed in dollar terms to standardize pricing. Therefore a 5.0% rate converts to a strike price of $50.

If the option’s premium is quoted at $0.50, then buying a single interest rate call option would cost the buyer a $50 total premium, as each interest rate option affords the buyer exposure to 100 shares of the underlying interest rate.

If yields rise for the next 2 months until the option expires, the underlying might be worth $55 by the time it’s exercised.

In this instance, you can calculate your net profit using the following equation:

(Reference Rate at Expiry – Strike Rate) x 100 – Premium Paid = Profit

($55 – $50) X 100 ) – $50 = Profit

$5 X 100 – $50 = Profit

$500 – $50 = $450 Net Profit

Remember that each option contract grants exposure to 100 units of the underlying interest rate, while options premiums are quoted for a single unit of the underlying. Remember also to use the full contract premium and apply a multiplier of 100 when calculating net profit.

The Takeaway

Interest rate options may appeal to investors who understand the underlying drivers of these securities. They provide direct exposure to interest rates, on a leveraged basis, at a relatively competitive cost.

When employed strategically, interest rate options may allow investors to profit from changes in interest rates or help mitigate their downside in a volatile rate environment.

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not offer interest rate options trading at this time.

FAQ

What are interest rate future options?

Interest rate future options are futures contracts tied to an underlying interest-bearing security. The buyer purchases the right to receive the interest rate payment in the contract, while the seller agrees to pay it.

These options allow both parties to lock in the price on an interest-bearing security, for future delivery, which offers both parties some level of price certainty within a specific timeframe.

What is an interest rate swaption?

Interest rate swaptions represent the right, but not the obligation, to enter into an interest rate swap on an agreed-upon date.

In exchange for the contract premium, the buyer of an interest rate swaption can choose whether to be a fixed-rate payer (payer swaption), or fixed-rate receiver (receiver swaption) on the underlying swap, with the counterparty taking the variable rate side of the transaction.

Unlike standard interest rate options, swaptions are over-the-counter products, allowing for more customized terms across expiration, exercise style, and notional amount.

What is interest rate risk?

Interest rate risk is the exposure of an investment to fluctuations in prevailing rates. Rates can change daily, based on economic growth, monetary policies set by central banks, or investor sentiment.

If interest rates rise, that shift may reduce the value of bonds and other fixed-income assets. Conversely, if rates fall, the value of outstanding fixed-income securities often rises. This kind of exposure defines interest rate risk.

Photo credit: iStock/LaylaBird

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

SOIN-Q225-072

Jul

2025

Should You Use Your 401(k) as a First-Time Home Buyer?

By Austin Kilham | Growing Wealth, Investing, Preparing for Retirement | Comments Off

Table of Contents

Can You Use a 401(k) to Buy a House?
How a 401(k) Loan Works
How a 401(k) Hardship Withdrawal Works
Pros and Cons of Using a 401(k) to Buy a House
What Are the Rules & Penalties for Using 401(k) Funds to Buy a House?
What Are the Alternatives to Using a 401(k) to Buy a House?
How Using a 401(k) for a Home Purchase Affects Retirement Savings
FAQ

There are two options if you want to use your 401(k) to buy a house and not incur a penalty: a 401(k) loan or a hardship withdrawal. These options come with many rules and restrictions — and given the potential risk to your retirement savings, it’s wise to consider some alternatives.

Among the requirements: If you borrow money from your 401(k) to buy a primary residence, you’d have to pay back that loan with interest. If you take what’s known as a hardship withdrawal for a down payment on your principal residence, you have to meet the strict IRS criteria for “immediate and heavy financial need” for doing so.

You won’t owe tax on a 401(k) loan, but it generally must be repaid within five years. A hardship withdrawal (if you qualify) still requires that you pay income tax on the withdrawal. In addition, every workplace plan is different and may have different rules.

Before you consider using your 401k to buy a home, which could permanently reduce your retirement savings, explore alternatives like withdrawing funds from a traditional or Roth IRA, seeking help from a Down Payment Assistance Program (DAP), or seeing if you qualify for other types of home loans.

Key Points

• Many 401(k) plans allow employees to withdraw funds, but an early withdrawal, i.e., before age 59 ½ , comes with a 10% penalty (on top of income tax).

• If your plan allows it, you may avoid the 10% penalty by taking a 401(k) loan or a hardship withdrawal (assuming you meet strict IRS requirements).

• You don’t have to repay a hardship withdrawal, but you will owe income tax on the amount you withdraw.

• Taking out a 401(k) loan may be easier than borrowing from a bank, but the loan typically must be repaid within five years, or you could owe tax and a penalty.

• Before using your 401(k) to help buy a house, consider the serious impact it might have on your retirement savings.

Can You Use a 401(k) to Buy a House?

A 401(k) is generally a type of employer-sponsored retirement plan, which you may be able to manage through the plan sponsor’s website (similar to investing online).

If your employer plan allows it, you can use your 401(k) to help buy a house, and it won’t be seen as an early 401(k) withdrawal with a 10% penalty. Here’s what you need to know.

2 Ways to Use Your 401(k) to Buy a House

There are only two ways you can use a 401(k) to buy a house, penalty free. Note that the following rules generally apply to other employer-sponsored plans as well, like a 403(b) or 457(b). But all retirement plans have different rules, so be sure to check the terms.

• 401(k) loan. If your plan allows you to borrow from your 401(k) to buy a house, you’ll avoid the 10% early withdrawal penalty, and you won’t owe tax on the loan. But you must repay the loan to yourself, plus interest.

• Hardship withdrawal. If you’re under 59 ½, you may be able to take out a hardship withdrawal without incurring a 10% penalty, but only if you meet specific IRS requirements for “an immediate and heavy financial need.”

There are several conditions that qualify as a hardship, one of them is for the purchase of a primary residence, but not a second home.

You’ll owe income tax on a hardship withdrawal, regardless of the circumstances.

How Much of Your 401(k) Can Be Used for a Home Purchase?

The amount you can take out of a 401(k) depends on the method you use.

• 401(k) loan. You can generally borrow up to 50% of your vested balance, up to $50,000, whichever amount is less. If 50% of your vested balance is less than $10,000, you may be able to borrow up to $10,000.

Note that after you open an IRA, the rules for taking a withdrawal from these individual retirement accounts are different. You cannot take a loan from an IRA, for example. But you may be able to take an early withdrawal for a first-time home purchase, which is discussed below.

• Hardship withdrawal. The limits on hardship withdrawals can be determined by your specific plan, but these withdrawals are generally limited to the amount needed to cover the financial hardship in question, plus the necessary taxes.

Depending on plan rules, a hardship withdrawal may include your elective contributions (savings) as well as earnings on those deposits. But in some cases you’re not allowed to withdraw earnings.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

How a 401(k) Loan Works

It’s possible to take a loan from an existing 401(k), and in some ways this option may seem easier. Chiefly, borrowing from a 401(k) doesn’t come with the same level of credit scrutiny as taking out a conventional bank loan, and interest rates can be favorable as well.

Your employer generally sets the rules for 401(k) loans, but you typically must pay back the loan, with interest, within five years. If a person leaves their job before the loan is repaid, the balance owed could be deducted from the remainder of their 401(k) funds.

You don’t owe any income tax on a 401(k) loan. But you pay yourself interest to help offset the loss of investment growth, since the funds are no longer invested in the market. (Although having a 401(k) is different than a self-directed brokerage account, because it’s typically tax deferred, you do invest your savings in different investment options.)

You can take out a 401(k) loan for a few different reasons (e.g., qualified educational expenses, medical expenses), depending on your plan’s policies. Those using a loan to purchase a residence may have more than five years to pay back the loan.

How a 401(k) Hardship Withdrawal Works

While it’s possible to withdraw funds from your 401(k) and most other employer-sponsored plans at any time, if you do so before age 59 ½ it’s considered an early withdrawal. And though you’d owe income tax on any 401(k) withdrawal, in the case of an early withdrawal, you’d also face a 10% penalty.

There are some exceptions to the 10% penalty, one of which is for a hardship withdrawal.

In the case of an “immediate and heavy financial need,” the IRS may permit a 401(k) hardship withdrawal under specific circumstances — including for the purchase of a primary residence. Hardship withdrawals do not cover mortgage payments, but using a 401(k) for a down payment may be allowed.

Generally, the allowable amount of the hardship withdrawal is determined by the circumstances, plus applicable taxes.

The IRS has strict rules about qualifying for a hardship withdrawal. If you don’t meet them, the funds you withdraw will be subject to income tax and a 10% early withdrawal penalty. And unlike a 401(k) loan, you can’t repay the amount you withdraw, so you permanently lose that chunk of your nest egg.

Pros and Cons of Using a 401(k) to Buy a House

Here are the pros and cons of using a hardship withdrawal or a 401(k) loan, at a glance:

Pros of Using a Hardship Withdrawal	Cons of Using a Hardship Withdrawal
If you qualify, a hardship withdrawal can provide quick access to funds for a home purchase in an emergency, without a penalty.	A hardship withdrawal cannot be repaid, so the money you withdraw permanently depletes your nest egg.
A hardship withdrawal isn’t a loan, so it doesn’t have to be repaid.	You owe ordinary income tax on the amount of the withdrawal.
	If you don’t qualify for a hardship withdrawal, and you’re under 59 ½, it’s considered an early withdrawal and would be subject to income tax and a 10% penalty.
Pros of Using a 401(k) Loan	Cons of Using a 401(k) Loan
When using a 401(k) loan, individuals repay themselves, so they don’t owe interest to a bank or other institution.	Because the loan lowers your account balance, your nest egg sees less growth.
You don’t pay a penalty or tax on a 401(k) loan, as long as you repay the loan as required.	You must repay the loan with interest, typically within five years, or you’ll owe tax and penalties.
You don’t have to meet any credit requirements, and interest rates on 401(k) loans may be lower than for conventional loans.	If a person leaves their job before the loan is repaid, the balance owed could be deducted from the remainder of their 401(k) funds. For those under 59 ½, the amount of the offset would also be considered a distribution and the borrower would likely owe taxes and a 10% penalty.
If you miss payments or default on a 401(k) loan, it will not impact your credit score.	In some cases, your plan may not permit you to continue contributing to your 401(k) during the time that you’re repaying the loan — which can dramatically impact your retirement savings over time.

What Are the Rules & Penalties for Using 401(k) Funds to Buy a House?

Here’s a side-by-side look at some key differences between taking out a 401(k) loan versus taking a hardship withdrawal from a 401(k). Bear in mind that all employer-sponsored plans have their own rules, so be sure to understand the terms.

401(k) loans	401(k) withdrawals
• May or may not be allowed by the 401(k) plan. • Relatively easy to obtain, no credit score required, versus conventional loans. • Qualified loans are penalty free and tax free, unless the borrower defaults or leaves their job before repaying the loan. • You must repay the loan with interest within a specified period. The interest is also considered tax deferred until you retire. • If the borrower doesn’t repay the loan on time, the loan is treated as a regular distribution (a.k.a. withdrawal), and subject to taxes and an early withdrawal penalty of 10%. • The maximum loan amount is 50% of the vested account balance, or $50,000, whichever is less. (If the vested account balance is less than $10,000, the maximum loan amount is $10,000.)	• May or may not be allowed by the 401(k) plan. • Funds are relatively easy to access, assuming you meet the IRS standards for a hardship withdrawal. • If you meet IRS criteria, you may avoid the 10% penalty normally incurred by an early withdrawal. • You will owe income tax on the amount of the withdrawal. • Withdrawals cannot be repaid, so your account is permanently depleted. • With a hardship withdrawal, you can withdraw only enough to cover the immediate expense (e.g., a down payment, not mortgage payments), plus taxes to cover the withdrawal.

401(k) loans

401(k) withdrawals

• May or may not be allowed by the 401(k) plan.

• Relatively easy to obtain, no credit score required, versus conventional loans.

• Qualified loans are penalty free and tax free, unless the borrower defaults or leaves their job before repaying the loan.

• You must repay the loan with interest within a specified period. The interest is also considered tax deferred until you retire.

• If the borrower doesn’t repay the loan on time, the loan is treated as a regular distribution (a.k.a. withdrawal), and subject to taxes and an early withdrawal penalty of 10%.

• The maximum loan amount is 50% of the vested account balance, or $50,000, whichever is less. (If the vested account balance is less than $10,000, the maximum loan amount is $10,000.)

• May or may not be allowed by the 401(k) plan.

• Funds are relatively easy to access, assuming you meet the IRS standards for a hardship withdrawal.

• If you meet IRS criteria, you may avoid the 10% penalty normally incurred by an early withdrawal.

• You will owe income tax on the amount of the withdrawal.

• Withdrawals cannot be repaid, so your account is permanently depleted.

• With a hardship withdrawal, you can withdraw only enough to cover the immediate expense (e.g., a down payment, not mortgage payments), plus taxes to cover the withdrawal.

What Are the Alternatives to Using a 401(k) to Buy a House?

For some homebuyers, there may be other, more attractive options for securing a down payment instead of taking money out of a 401(k) to buy a house, depending on their situation. Here are a few of the alternatives.

Withdrawing Money From a Traditional or Roth IRA

Using a traditional or a Roth IRA to help buy a first home can be an alternative to borrowing from a 401(k) that might be beneficial for some home buyers, because you may be able to avoid the 10% penalty.

If you’re at least 59 ½, you can take a withdrawal from a traditional or Roth IRA without incurring a penalty. You will owe tax on money from a traditional IRA account, but not from a Roth IRA, as long as you’ve had the account for five years.

If you’re under 59 ½, you could face a 10% early withdrawal penalty. One exception is that a first-time home buyer can borrow up to $10,000 from an IRA without incurring a penalty. But the tax treatment differs according to the type of IRA.

• Traditional IRA. A withdrawal for a first-time home purchase may be penalty free, but you will owe tax on the amount you withdraw.

• Roth IRA. Contributions (i.e., deposits) can be withdrawn at any time, tax free. But earnings on contributions can only be withdrawn without a penalty starting at age 59 ½ or older, as long as you’ve held the Roth account for at least five years (a.k.a. the Roth five-year rule).

After the account has been open for five years, Roth IRA account holders who are buying their first home are allowed to withdraw up to $10,000 with no taxes or penalties. The $10,000 is a lifetime limit for a first-time home purchase, for both a traditional and a Roth IRA.

IRA funds can be used to help with the purchase of a first home not only for the account holders themselves, but for their children, parents, or grandchildren.

One important requirement to note is that time is of the essence when using an IRA to purchase a first home: The funds have to be used within 120 days of the withdrawal.

Low- and No-Down-Payment Home Loans

There are certain low- and no-down-payment home loans that homebuyers may qualify for that they can use instead of using a 401(k) for a first time home purchase. This could allow them to secure the down payment for a first home without tapping into their retirement savings.

• FHA loans are insured by the Federal Housing Administration and allow home buyers to borrow with few requirements. Home buyers with a credit score lower than 580 qualify for a government loan with 10% down, and those with credit scores higher than 580 can get a loan with as little as 3.5% down.

• Conventional 97 loans are Fannie Mae-backed mortgages that allow a loan-to-value ratio of up to 97% of the cost of the loan. In other words, the home buyer could purchase a house for $400,000 and borrow up to $388,000, leaving only a down payment requirement of 3%, or $12,000, to purchase the house.

• VA loans are available for U.S. veterans, active duty members, and surviving spouses, and they require no down payment or monthly mortgage insurance payment. They’re provided by private lenders and banks and guaranteed by the United States Department of Veterans Affairs.

• USDA loans are a type of home buyer assistance program offered by the U.S. Department of Agriculture to buy or possibly build a home in designated rural areas with an up-front guarantee fee and annual fee. Borrowers who qualify for USDA loans require no down payment and receive a fixed interest rate for the lifetime of the loan. Eligibility requirements are based on income, and vary by region.

Other Types of Down Payment Assistance

For home buyers who are ineligible for no-down payment loans, there are a few more alternatives instead of using 401(k) funds:

• Down Payment Assistance (DAP) programs offer eligible borrowers financial assistance in paying the required down payment and closing costs associated with purchasing a home. They come in the form of grants and second mortgages, are available nationwide, can be interest-free, and sometimes have lower rates than the initial mortgage loan.

• Certain mortgage lenders provide financial assistance by offering credits to cover all or some of the closing costs and down payment.

• Gifted money from friends or family members can be used to cover a down payment or closing costs on certain home loans. As the recipient of the gift, you won’t owe taxes on the gift; the giver may have to pay a gift tax if the amount exceeds $19,000 for 2025.

Using Gift Funds for a Down Payment

By and large there are no restrictions on using gift funds — money given to you as a gift, not a loan — for a down payment on a home. The use of gift funds as part of a home buyer’s down payment has become more common, in fact. Nearly 40% of borrowers included some gift money as part of their downpayment, according to a 2023 survey by Zillow.

Gifts are allowed when applying for a conventional mortgage, as well as for Fannie Mae and FHA loans. In some cases, you may be required to provide a gift letter that documents that the money is a gift and not a loan. Again, the recipient generally doesn’t owe federal tax on a monetary gift, but the giver may owe a gift tax, depending on the amount.

How Using a 401(k) for a Home Purchase Affects Retirement Savings

Using your 401(k) money for anything but retirement has a very real down side, which is that it reduces the amount of money in your retirement account, even if that’s temporary, as it is with a 401(k) loan. As a result, you also lose out on any potential growth from your retirement investments.

With a 401(k) loan, you repay the amount of the loan with interest (and if you don’t you’ll owe taxes and penalties). Even so, you’ve depleted your account for a period of time, and, depending on the rules of your particular plan, you could be prohibited from making any contributions while you repay the loan.

The impact of a hardship withdrawal can be even more severe, because you’re not allowed to repay the amount you withdrew. So you lose a chunk of your savings, and you forgo the growth on that amount as well. In addition, some employer-sponsored plans may prohibit you from making contributions after taking a hardship withdrawal.

Impact on Long-Term Investment Growth

In other words, while there’s no 10% tax penalty for taking out a 401(k) loan or a hardship withdrawal, you do face a potential missed opportunity in that the amount you take out of the account is no longer invested in the market.

Thus, you lose out on any potential long-term investment growth — which can significantly cut into your potential retirement savings, when you think of the money you’re not earning, perhaps for many years.

The Takeaway

Generally speaking, a 401(k) can be used to buy a principal residence, either by taking out a 401(k) loan and repaying it with interest, or by making a 401(k) withdrawal (which is subject to income tax and a 10% withdrawal fee for people under age 59 ½).

If you meet the IRS criteria for a hardship withdrawal, though, you may avoid the 10% penalty, if your plan allows this option.

However, using a 401(k) for a home purchase is usually not advisable. Both qualified loans and hardship withdrawals have some potential drawbacks, including owing taxes and a penalty in some cases, and the potential to lose out on market growth on your savings. Fortunately, there are less risky options, as noted above. Making these choices depends on your financial situation and your goals, as well as your stomach for risk — especially where your future security is concerned.

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

What are the downsides of using a 401(k) to buy a house?

The main drawback of using funds from your 401(k), or any retirement account, is the potential loss of savings and investment earnings on that savings, which could substantially reduce your retirement nest egg.

When can you withdraw from a 401(k) without penalty?

If your plan permits a 401(k) loan, or if you qualify for a hardship withdrawal from your 401(k), you won’t be on the hook for a 10% penalty. But you would have to repay the loan with interest, and you would owe tax on the money taken for a hardship withdrawal.

Can you withdraw money from a 401(k) for a second house?

While it’s technically possible to withdraw money from a 401(k) for a second home, you would owe taxes and a 10% penalty on the amount you withdrew, so it’s not advisable.

How much can you take out of an individual IRA to buy a home?

You can withdraw up to $10,000 from an IRA for the purchase of a first home, but you would owe tax on that money (although you might avoid a 10% penalty).

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

SOIN-Q225-095

Jul

2025

What Is the Spot Market & How Does It Work?

By Brian Nibley | Growing Wealth, invest, Investing, Terminology | Comments Off

A spot market is a market where buyers meet sellers and make an immediate exchange. In other words, delivery takes place at the same time payment is made. That can include stock exchanges, currency markets, or commodity markets.

But often when discussing spot markets, we’re talking about commodities. Commodity markets are somewhat different from the markets for stocks, bonds, mutual funds, and ETFs, all of which trade exclusively through brokerages. Because they represent a physical good, commodities have an additional market — the spot market. This market represents a place where the actual commodity gets bought and sold right away.

Key Points

Spot markets involve instant trades and immediate delivery.
Spot prices reflect real-time supply and demand.
Spot markets are less susceptible to manipulation.
OTC and centralized exchanges facilitate spot trades.
Futures markets are speculative, while spot markets are organic.

Spot Markets Definition

If you’re trying to define the spot markets, it may be helpful to think of it as a public financial market, and one on which assets or commodities are bought and sold. They’re also bought and sold for immediate, or quick, delivery. That is, the asset being traded changes hands on the spot.

Prices quoted on spot markets are called the spot price, accordingly.

One example of a spot market is a coin shop where an individual investor goes to buy a gold or silver coin. The prices would be determined by supply and demand. The goods would be delivered upon receipt of payment.

Understanding Spot Markets

Spot markets aren’t all that difficult to understand from a theoretical standpoint. There can be a spot market for just about anything, though they’re often discussed in relation to commodities (perhaps coffee, corn, or construction materials), and specific things like precious metals.

But again, an important part of spot market transactions is that trades take place on the spot — immediately.

Which Types of Assets Can Be Found on Spot Markets?

As noted, all sorts of assets can be found on spot markets. That ranges from food items or other consumables, construction materials, precious metals, and more. If you were, for instance, interested in investing in agriculture from the sense you wanted to trade contracts for oranges or bananas, you could likely do so on the spot market.

Some financial instruments may also be traded on spot markets, such as Treasuries or bonds.

How Spot Market Trades Are Made

In a broad sense, spot market trades occur like trades in any other market. Buyers and sellers come together, a price is determined by supply and demand, and trades are executed — usually digitally, like most things these days. In fact, a spot market may and often does operate like the stock market.

As noted, stock markets are also, in fact, spot markets, with financial securities trading hands instantly (in most cases).

What Does the Spot Price Mean?

As mentioned, the spot price simply refers to the price at which a commodity can be bought or sold in real time, or “on the spot.” This is the price an individual investor will pay for something if they want it right now without having to wait until some future date.

Because of this dynamic, spot markets are thought to reflect genuine supply and demand to a high degree.

The interplay of real supply and demand leads to constantly fluctuating spot prices. When supply tightens or demand rises, prices tend to go up, and when supply increases or demand falls, prices tend to go down.

The Significance of a Spot Market

The spot market of any asset holds special significance in terms of price discovery. It’s thought to be a more honest assessment of economic reality.

The reason is that spot markets tend to be more reliant on real buyers and sellers, and therefore should more accurately reflect current supply and demand than futures markets (which are based on speculation and can be manipulated, as recent legal cases have shown. More on this later.)

Types of Spot Markets

There’s only one type of spot market — the type where delivery of an asset takes place right away. There are two ways this can happen, however. The delivery can take place through a centralized exchange, or the trade can happen over the counter.

Over-the-counter

Over-the counter, or OTC trades, are negotiated between two parties, like the example of buying coins at a coin shop.

Market Exchanges

There are different spot markets for different commodities, and some of them work slightly differently than others.

The spot market for oil, for example, also has buyers and sellers, but a barrel of oil can’t be bought at a local shop. The same goes for some industrial metals like steel and aluminum, which are bought and sold in much higher quantities than silver and gold.

Agricultural commodities like soy, wheat, and corn also have spot markets as well as futures markets.

Spot Market vs Futures Market

One instance that makes clear the difference between a spot market and a futures market is the price of precious metals.

Gold, silver, platinum, and palladium all have their own spot markets and futures markets. When investors check the price of gold on a mainstream financial news network, they are likely going to see the COMEX futures price.

COMEX is short for the Commodity Exchange Inc., a division of the New York Mercantile Exchange. As the largest metals futures market in the world, COMEX handles most related futures contracts.

These contracts are speculatory in nature — traders are making bets on what the price of a commodity will be at some point. Contracts can be bought and sold for specific prices on specific dates.

Most of the contracts are never delivered upon, meaning they don’t involve delivery of the actual underlying commodity, such as gold or silver. Instead, what gets exchanged is a contract or agreement allowing for the potential delivery of a certain amount of metal for a certain price on a certain date.

For the most part, futures trading only has two purposes: hedging bets and speculating for profits. Sophisticated traders sometimes use futures to hedge their bets, meaning they purchase futures that will wind up minimizing their losses in another bet if it doesn’t go their way. And investors of all experience levels can use futures to try to profit from future price action of an asset. Predicting the exact price of something in the future can be difficult and carries high risk.

The spot market works in a different manner entirely. There are no contracts to buy or sell and no future prices to consider. The market is simply determined by what one party is willing to purchase something for.

Spot Market vs Futures Market
Spot Market	Futures Market
No contracts to buy or sell	Contracts are bought and sold outlining future prices
Trades occur instantly	Trades may never actually occur at all
Non-speculative	Speculative by nature

Another important concept to understand is contango and backwardation, which are ways to characterize the state of futures markets based on the relationship between spot and future prices. Some background knowledge on those concepts can help guide your investing strategy.

Note, too, that some investors may be confused by the concepts of margin trading and futures contracts. Margin and futures are two different concepts, and don’t necessarily overlap.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Example of a Spot Market

Consider the spot and futures markets for precious metals.

Precious-metal prices that investors see on financial news networks will most often be the current futures price as determined by COMEX. This market price is easy to quote. It’s the sum of all futures trading happening on one central exchange or just a few central exchanges.

The spot market is more difficult to pin down. In this case, the spot market could be generally referred to as the average price that a person would be willing to pay for a single ounce of gold or silver, not including any premiums charged by sellers.

Sometimes there is a difference between prices in the futures market and spot market. The difference is referred to as the “spread.” Under ordinary circumstances, the difference will be modest. During times of uncertainty, though, the spread can become extreme.

Futures Market Manipulation

As for trying to define what spot price means, it’s important to include one final note on futures markets. This will illustrate a key difference between the two markets.

Recent high-profile cases brought by government enforcement agencies like the Securities and Exchange Commission and Commodities and Futures Trading Commission highlight the susceptibility of futures markets to manipulation.

Some large financial institutions have been convicted of engaging in practices that artificially influence the price of futures contracts. Again, we can turn to the precious-metals markets for an example.

During the third quarter of 2020, JP Morgan was fined $920 million for “spoofing” trades and market manipulation in the precious metals and U.S. Treasury futures markets. Spoofing involves creating large numbers of buy or sell orders with no intention of fulfilling the orders.^[1]

Because order book information is publicly available, traders can see these orders, and may act on the perception that big buying or selling pressure is coming down the pike. If many sell orders are on the books, traders may sell, hoping to get ahead of the trade before prices fall. If many buy orders are on the books, traders may buy, thinking the price is going to rise soon.

Cases like this show that futures markets can be heavily influenced by market participants with the means to do so.

Spot markets, on the other hand, are much more organic and more difficult to manipulate.

3 Tips for Spot Market Investing

For those interested in trying their hand in the spot market, here are a few things to keep in mind.

1. Know What’s Going On

Often, prices in the spot market can change or be volatile in relation to the news or other current events. For that reason, it’s important that investors know what’s happening in the world, and use that to assess what’s happening with prices for a given asset or commodity.

2. Keep Your Emotions in Check

Emotional investing or trading is a good way to get yourself into financial trouble, be it in the spot market, or any other type of trading or investing. You’d likely do well to keep your emotions in check when trading or investing on the spot market, as a result.

3. Understand the Market

It’s also a good idea to do some homework and make a solid attempt at trying to understand the market you’re trading in. There may be jargon to learn, terms to understand, price discovery mechanisms that could otherwise be foreign to even a seasoned investor — do your best to do your due diligence.

The Takeaway

Spot markets are where commodities are traded, instantly. There are numerous types of spot markets, and there are numerous types of commodities that might be traded on them. Investors would be wise to know the basics of how they work, and come armed with a bit of background knowledge about the given commodity they’re trading, in order to reach their goals.

Spot market trading can be a part of an overall trading strategy, but again, investors should know the ropes a bit before getting in over their heads. It may be a good idea to speak with a financial professional before investing.

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 is spot market vs a futures market?

Trades on a spot market occur instantly, on the spot. Trades in the futures market involve contracts for commodities with prices outlined for some time in the future — if they occur at all.

What does spot market mean?

The term spot market refers to a financial market where assets or commodities are bought and sold by traders. The trades occur on the spot, or instantly, for immediate delivery.

What is the difference between spot market and forward market?

Forward markets involve trading of futures contracts, or transactions that take place at some point in the future, whereas spot market trades occur instantly, often for cash.

Article Sources

Commodity Trading Futures Commission. CFTC Orders JPMorgan to Pay Record $920 Million for Spoofing and Manipulation.

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SOIN-Q225-116

Jul

2025

What Determines a Stock Price?

By Laurel Tincher | Growing Wealth, invest, Investing, Terminology | Comments Off

Although investor sentiment plays into a stock’s price in the form of demand vs. supply, there are numerous factors that influence investor outlook. These include a company’s fundamentals, its performance history, as well as economic or geopolitical news that may impact not only that company but an entire sector.

These elements in turn can influence whether investors believe a stock will go up or down.

For investors interested in buying stock, it’s important to understand the various ingredients that can determine stock price, even though what influences a stock’s price per share can change at a moment’s notice.

Key Points

Investor sentiment, as expressed through supply and demand, is the main driver of a stock’s price.
Depending on what’s going on in the news, in the markets, as well as larger economic trends, investors may be bullish or bearish on a company or sector.
Thus, investor behavior determines stock price, based on a host of external factors, including company fundamentals.
In order to invest in stocks, investors must understand the key factors that determine stock price — which can vary from company to company, sector to sector.
Owing to market complexity, as well as ever-changing investor sentiment, there is no way to predict price movements with 100% accuracy.

7 Factors That Determine Stock Price

Beyond the basic principles of supply and demand, there are other factors that contribute to changes in stock prices. Those include investor behavior, the news cycle, company fundamentals, and more.

1. Investor Behavior

A current stock price is based on investors’ beliefs about the future success of a company. Hypothetically, if investors have reason to believe that a company will be successful in the future, they may invest in the company, causing the price of shares to increase. This is an important aspect of stock trading basics.

Similarly, if the outlook for a company is negative, investors may sell off the shares they own, causing the price to decrease.

Basically, if a few million people think that Company X is going to be successful in the near future, and that shares of Company X will see price appreciation that could lead them to buy the stock, increasing demand, which could drive up the price per share.

Emotions such as fear, panic, anxiety, greed, and hope can have a significant impact on investor behavior. This is the basis of the field of behavioral finance and understanding investor sentiment.^[1] There are many different ways investors try to predict the future success of companies.

2. Company News and Data

Stock price predictions can be made based on reading stock charts and making calculations, as well as looking at news stories, fundamental analysis like reading over company earnings and reports, and other information.

News about changes in management, production, company or industry scandals, and other stories can influence investors’ view of a company, and cause share prices to change quickly.

3. World Events

Beyond news and outlooks specifically related to companies, global factors can also influence investor behavior. For instance, a presidential election, a pandemic, political unrest, or signs of a recession can create panic in the market, influencing investors to sell off stock shares in order to avoid losses, or put their money into safer investments.

Usually there is some up or down price movement in stock prices, and some stocks are more volatile than others. It’s rare for prices to completely remain static. It’s also rare for prices to drastically increase or decrease suddenly, but this is what happens during a market crash.

A market crash can happen when many investors begin to sell, creating a snowball effect where more and more investors pull their money out of the stock market. At that point, the market could plummet, resulting in losses that wouldn’t have occurred if people hadn’t sold.

4. Stock Buybacks

Another factor that can affect stock price is company buybacks of stocks. Companies will sometimes buy back their own stock from investors, thereby reducing the supply of shares available to the public. They do this in an attempt to increase stock prices.

If companies issue more shares of stock, they are increasing the supply, which can cause the price to decrease.

5. Primary and Secondary Markets

When some companies first start selling stock to the public, they hold an IPO, or initial public offering. At the time of the IPO, an initial share price is set and investors can begin to buy the stock at that price, which is considered a primary market.

After the IPO ends, the stock gets listed on stock exchanges (or secondary markets) and the price starts to fluctuate as shares get bought and sold — and supply and demand begin to play a role in share price.

When companies don’t have an IPO, their shares get bought and sold privately, in which case share price is determined between the buyer and seller.

6. Stock Valuation

The valuation of a stock is made by looking at the company’s past and projected earnings, large trades made by institutional investors, overall market trends of the S&P 500, and ratios and calculations made by analysts.

Four ratios and calculations that are used to determine the valuation of a stock are price-to-earnings (P/E) ratio, price-to-book (P/B ratio), price-to-earnings-to-growth (PEG) ratio, and dividend yield. These calculations can help investors figure out whether a stock is currently undervalued or overvalued.

7. Bid and Ask Price

A share price ultimately gets determined through the bid, ask, and sale price on stock exchanges. The bid price is the maximum amount an investor will pay for shares of a stock, while the ask price is the lowest price a seller will accept. When the two prices match up, a sale is made, and that price sets the new price per share of the stock. Ultimately it gets down to what someone is willing to pay and if a stock owner is willing to sell to them at that price.

What someone is willing to pay or sell for is determined by psychological and market factors, as discussed. If a buyer thinks the stock is undervalued at the asking price, they will buy, and vice versa. Generally the difference between the bid and ask price isn’t very large, but if a stock’s trading volume isn’t particularly large, it can be.

Companies that are a similar size or have a similar valuation can have very different share prices because the number of shares each company issues can differ greatly.

Because of different company market caps and numbers of liquid shares, the share price doesn’t reveal much about the actual value of the company, and one can’t use share prices to compare companies. However, the share price does reflect what investors currently think the stock of a company is worth.

How to Handle Changes in Stock Price

Attempting to time the market is extremely challenging because there’s no way to reliably predict market movements. For example, an investor could sell at what they think is the peak of the market, only to watch the price continue to rise.

Historically, the stock market has continued to rise over the long term, despite plenty of ups and downs along the way. Although past trends are never a guarantee of future outcomes, it’s likely that investors with a longer time horizon, who are willing to hold onto their stocks throughout up and down cycles, may eventually see positive returns.

That said, market volatility can provide opportunities to invest when the stock market is down, or sell at higher prices, especially if they were already considering buying or selling a stock.

The Takeaway

Ultimately, supply and demand drive stock prices — which is informed by market conditions, world events, and investor behavior, among other influences. Although there is no way to look into the future to predict share prices, investors tend to look at past performance, charts, and market trends to attempt to predict price movements. In general, it’s best not to try and time the market, but to focus on building a solid long-term portfolio that will grow over time.

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

FAQ

What are three things that determine a stock’s price?

Broadly speaking, the three main factors that drive a stock’s price are economic/market conditions, company performance, and investor sentiment. These three factors are interdependent, with one influencing the other.

Who or what controls the price of a stock?

There isn’t one sole entity that influences the price of a stock, and owing to the interplay of factors in the stock market, there is no single source of control over a stock’s price.

What makes the price of a stock go up?

There is no way to predict whether a stock’s price will rise or fall, but generally speaking investor demand is what ultimately drives up the price of a given company. But there are numerous factors that play into investor demand.

Article Sources

Cadaret Grant. Behavioral finance: Six principles that fuel your clients’ fears.

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

SOIN-Q225-020

What Is a Diagonal Spread and How Does It Work?

Diagonal Spreads Defined

How Diagonal Spreads Work

Setting Up a Diagonal Spread

Maximum Loss

Maximum Profit

Breakeven Point

Diagonal Spread Examples

Types of Diagonal Spreads

1. Long Call Diagonal Spreads

2. Long Put Diagonal Spreads

3. Short Call Diagonal Spreads

4. Short Put Diagonal Spreads

5. Double Diagonal Spread

Risks of Diagonal Spreads

The Takeaway

FAQ

What is a diagonal spread?

What are the risks of diagonal spreads?

What is the difference between a bull call spread and a diagonal spread?

What is the difference between a calendar spread and a diagonal spread?

Interest Rate Options, Explained

What Are Interest Rate Options?

How Interest Rate Options Work

How Do Interest Rate Call Options Work

How Do Interest Rate Put Options Work

What Are the Risks of Trading Interest Rate Options?

Interest Rate Option Example

The Takeaway

FAQ

What are interest rate future options?

What is an interest rate swaption?

What is interest rate risk?

Should You Use Your 401(k) as a First-Time Home Buyer?

Can You Use a 401(k) to Buy a House?

2 Ways to Use Your 401(k) to Buy a House

How Much of Your 401(k) Can Be Used for a Home Purchase?

First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.

How a 401(k) Loan Works

How a 401(k) Hardship Withdrawal Works

Pros and Cons of Using a 401(k) to Buy a House

What Are the Rules & Penalties for Using 401(k) Funds to Buy a House?

What Are the Alternatives to Using a 401(k) to Buy a House?

Withdrawing Money From a Traditional or Roth IRA

Low- and No-Down-Payment Home Loans

Other Types of Down Payment Assistance

Using Gift Funds for a Down Payment

How Using a 401(k) for a Home Purchase Affects Retirement Savings

Impact on Long-Term Investment Growth

The Takeaway

FAQ

What are the downsides of using a 401(k) to buy a house?

When can you withdraw from a 401(k) without penalty?

Can you withdraw money from a 401(k) for a second house?

How much can you take out of an individual IRA to buy a home?

What Is the Spot Market & How Does It Work?

Spot Markets Definition

Understanding Spot Markets

Which Types of Assets Can Be Found on Spot Markets?

How Spot Market Trades Are Made

What Does the Spot Price Mean?

The Significance of a Spot Market

Types of Spot Markets

Over-the-counter

Market Exchanges

Spot Market vs Futures Market

Example of a Spot Market

Futures Market Manipulation

3 Tips for Spot Market Investing

1. Know What’s Going On

2. Keep Your Emotions in Check

3. Understand the Market

The Takeaway

FAQ

What is spot market vs a futures market?

What does spot market mean?

What is the difference between spot market and forward market?

What Determines a Stock Price?

7 Factors That Determine Stock Price

1. Investor Behavior

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Student Loan
Refinancing

Personal
Loans

Online
Investments