Growing Wealth Archives

Q: Is it illegal to buy stock in a company you work for?

No. Buying stock in a company you work for is not necessarily an incidence of insider trading — unless you used confidential, nonpublic information to time the purchase of the shares and gain accordingly.

May

2025

Everything You Need to Know About Insider Trading

Everything You Ever Wanted to Know About Insider Trading

By Brian O'Connell | 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.

Insider trading — the practice of using confidential, nonpublic (or “insider”) information to the investor’s own advantage — can be a criminal offense.

Trading specialists have defined the term “confidential information” as material information about an investment that is not available to other investors. That insider knowledge can tilt the playing field in favor of the recipient, leading to an imbalanced trading landscape that investment industry regulators rigorously attempt to keep fair and balanced.

That said, there are some types of insider transactions that fall within the boundaries of the law.

Key Points

• Insider trading refers to the illegal practice of buying and/or selling shares of a public company, using nonpublic information about the company that’s material to its performance.

• The most egregious examples of insider trading involve stealing or illegally obtaining sensitive company information.

• If discovered, insider trading may provoke severe penalties, including fines or time in prison.

• That said, some investors may be privy to “inside” information that is legal to use when making trades, as long as they follow SEC rules.

• When investors file the requisite reports with the SEC about potential insider trades, these may be considered legal.

History of U.S. Insider Trading Laws

Insider trading rules and regulations in the U.S. date back to the early 1900s, when the U.S. Supreme Court ruled against a corporate executive who bought company stock based on insider information. The ruling, based on common law statutes long used by the United Kingdom, laid the path for Congress to pass a law prohibiting sales security fraud (the 1933 Securities Act of 1933) that was further solidified by the Securities Exchange Act of 1934.

Those laws not only prohibited profiting from the sale of securities tied to insider information, they also largely blocked quick turnaround trading profits by an investor who owned more than 10% of a company stock.

Fast forward to 1984, when Congress passed the Trading Sanctions Act, and subsequently the passage of the Securities Fraud Enforcement Act of 1988. These set financial penalties of three times the amount of income accumulated from insider trading, further clarifying the definition and rules surrounding insider trading.

Examples of Insider Trading

The practice of insider trading can manifest in myriad ways. Broadly, anyone who steals, misappropriates, or otherwise gathers confidential data or nonpublic information, and uses it to profit on changes in a company’s stock price, might be investigated for insider trading.

Here are some common examples:

• A company executive, employee, or board member who trades a corporation’s stock after being made aware of a particular business development — like the sale of the firm, positive or negative earnings numbers, a company scandal or significant data breach — could be construed by regulators as insider trading.

• Any associates — like friends, family, or co-workers — of company executives, employees, or board members, who also trade on private information not available to the investing public, may be targeted for insider trading.

• Executives and staffers of any company that provides products or services to another company, and who obtain information about a significant corporate move that would likely sway the firm’s stock price, could be trading on “inside” news.

• Local, city, state, or federal government managers and employees who may come across sensitive, private information about a company that’s not available publicly, and use that knowledge to profit from a change in the company’s stock price, could be involved with insider trading.

The above examples are among the most egregious insider trading scenarios, and are also more likely to become an enforcement priority for government regulators.

Is Insider Trading Ever Legal?

Most investors who buy stocks online or through a brokerage don’t need to worry about insider trading rules. In addition, there are scenarios where what is technically considered “insider trading” is in fact legal under federal regulatory statutes.

For instance, anyone employed by a company could fall under the definition of an insider trader. But as long as all stock transactions involving the company are registered with the U.S. Securities and Exchange Commission in advance, an employee stock transaction may be considered legal.

That’s the case whether a rank-and-file employee buys 100 shares of company stock or if the chief executive officer buys back shares of the firm’s stock — even if that more high-profile trading activity significantly swings the company’s share price.

Who Enforces Insider Trading Rules?

Insider trading enforcement measures operate under the larger umbrella of the U.S. government.

How Insider Trading Is Investigated

Insider trading investigations usually start on the firm level before the SEC gets involved. Self-regulating industry organizations like the Financial Industry Regulatory Authority (FINRA) or the National Association of Financial Planners (NAPF), for example, may also come across illegal trading practices and pass the lead on to federal authorities.

It’s also not uncommon for insider trading practices to be revealed by government agencies other than the SEC. For example, the FBI may run into insider trading activity while pursuing a completely separate investigation, and pass on the tip to the SEC.

When the U.S. Securities and Exchange Commission (SEC) investigates potential insider trading cases, they do so using multiple investigatory methods:

Surveillance. The SEC has multiple surveillance tools to root out insider trading violations. Tracking big variations in a company’s trading history (especially around key dates like earnings calls, changes in executive leadership, and when a company buys another firm or is bought out itself) is a common way for federal regulators to uncover insider trading.

Tipsters. Investors aware of insider information, especially those who lose money on insider trades, often provide valuable leads and tips on insider trading occurrences. This often occurs in the equity options market, where trade values increase significantly with each transaction, and where stock prices can especially be vulnerable to big price swings after suspicious trading activity in the options trading marketplace.

If, for example, a trader with inside information uses it to buy company stock or to buy an option call for profit, the party on the other side of the trade, who may stand to lose significant cash on the trade, may alert the SEC that profiteering via inside information may be taking place. In that scenario, the SEC will likely appoint an investigator to follow up on the tip and see if insider trading did occur.

Company whistleblowers. Another common alert that insider trading is occurring comes from company whistleblowers who speak up when company employees or managers with unique access to company trading patterns seem to be benefitting from those price swings.

What Happens in an Insider Trading Investigation

When federal regulators are made aware of securities fraud from insider trading, they may launch an investigation run by the SEC’s Division of Enforcement. In that investigation:

• Witnesses are contacted and interviewed.

• Trading records are reviewed, with a close eye on trading patterns around the time of potential insider trading activity.

• Phone and computer records are subpoenaed, and if needed, wiretaps are used to gain information from potential insider trading targets.

• Once the investigation is complete, the investigation team presents its findings to an SEC review board, which can decide on a fine and other penalties (like suspension of trading privileges and cease-and-desist orders) or opt to take its case to federal court.

• After the court hears the case and decides on the merits, any party accused of insider trading is expected to abide by the court ruling and the case is ended.

Penalties for Insider Trading

An individual convicted of insider trading can face both a prison sentence and civil and criminal fines — up to 20 years and as much as $5 million. Additionally, civil penalties may include fines of up to three times the profit gained, or loss avoided, as a result of the insider trading violation.

Companies that commit insider trading can face civil and criminal fines. The maximum fine for an entity whose securities are publicly traded that has been found guilty of insider trading is $25 million.

The Takeaway

Insider trading — executing a trade based on knowledge that has not been made public — is a serious offense and can lead to severe punishment, including jail time and heavy fines.

That’s all for good reason, as restrictions on insider trading help ensure a balanced financial trading market environment — one that accommodates fair trading opportunities for all market participants.

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FAQ

What is an example of insider trading?

If a company executive or employee at a pharmaceutical company learns of an upcoming drug approval and buys shares based on that information, that could be insider trading.

Is it illegal to buy stock in a company you work for?

No. buying stock in a company you work for is not necessarily an incidence of insider trading — unless you used confidential, nonpublic information to time the purchase of the shares and gain accordingly.

How do people get caught for insider trading?

The SEC and companies themselves may use a combination of surveillance and data analysis, especially watching trades around news headlines, to catch insider traders.

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.

SOIN-Q225-041

May

2025

ETF Tax Efficiency: Advantages Over Mutual Funds

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Exchange-traded funds, or ETFs, are popular investment vehicles, and while they may generate returns for investors, they can also offer certain tax advantages. That’s particularly true when comparing ETFs to other, similar investment types, such as mutual funds.

That does not, however, mean that there are some critical things to know about tax efficiency and ETFs. There are a lot of factors and variables to take into consideration when devising your investment strategy, so it’s worth knowing the details about what makes an ETF advantageous, in some cases, for tax reasons over mutual funds.

Key Points

• ETFs may offer tax advantages over mutual funds by reducing capital gains and minimizing taxable events.

• ETFs use ‘creation units’ to trade large blocks of shares, enhancing tax efficiency.

• Dividends and high trading costs in actively managed ETFs may offset some tax benefits.

• Actively managed ETFs tend to have higher trading costs due to the frequent trading needed to meet investment goals.

• ETFs generally have fewer capital gains, lower fees, and less frequent trading, making them more tax-efficient.

ETFs & Mutual Funds: How They Differ

When it comes to understanding ETFs vs mutual funds, it’s often best to start with a simple explanation for each.

Both mutual funds and ETFs invest in a group or “basket” of underlying stocks, bonds, commodities, and other financial assets, on behalf of fund shareholders. But ETFs trade on a daily basis, much like stocks and bonds. Mutual funds do not.

Mutual funds offer investors a menu of various share classes where they can invest their money. Given the wider selection of assets available, a mutual fund investor may see more fund fees to compensate for that expanded menu. Given their low trading structure, ETF fees are usually lower than those of mutual funds, often resulting in a lower expense ratio.

ETF Tax Advantages Over Mutual Funds

Tax-wise, the IRS treats ETFs and mutual funds the same. When an investor who owns either fund type sells securities that have appreciated in value, it creates a capital gain — or capital appreciation on the investment — which is taxable under U.S. law. The same is true if they’re selling at a loss as well — selling the asset triggers a taxable event.

ETF fund managers make trades for a variety of reasons. For example, an asset can be bought and sold for strategic reasons (i.e., to properly allocate assets or to avoid “style drift” when a fund slides away from its target strategy). Trades also must be made upon shareholder redemptions — when they redeem some or all of the assets they’ve invested in the fund.

The more trades made by ETF fund managers, the more taxable events occur. Consequently, for fund managers and investors, the goal is to find ways to keep those taxes from accumulating.

An ETF’s structure can help curb the negative impact of taxes in the following ways.

Lower Capital Gains Impact

Since the IRS considers capital gains a taxable event, a major goal with any fund investment is to reduce the impact of capital gain payouts to shareholders at year-end.

ETFs typically accumulate fewer capital gains than mutual funds. When a mutual fund has to redeem assets back to shareholders, it must sell assets to create the money needed to pay out those redemptions, resulting in capital gains. But when an ETF shareholder wants to sell shares, they can easily do so by trading the ETF to another investor, just like a stock transaction. That, in turn, creates no capital gains impact for the ETF, and adds a major tax advantage for ETF investors.

Index Tracking Tax Benefits

Since many ETFs are structured to track a particular index, trades are made only when there are changes in the underlying index (like when the S&P 500 or the Russell 2000 index experience significant fluctuations that require some ETF stabilization). Fewer transactions generally means lower taxes.

The Use of “Creation Units”

ETFs are built to trade differently than mutual funds. With ETFs, fund managers can leverage so-called “creation units” — blocks of shares — to buy and sell fund securities. These units enable fund managers to buy or sell assets collectively, instead of individually. That means fewer trades and fewer taxable trade execution events.

Downsides of ETFs and Taxes

Though ETF tax efficiency is generally better than that of mutual funds, that doesn’t mean ETFs come with no tax risks. There are a few taxable events that bear watching for investors.

Distributions and Dividends

Just like any investment vehicle, ETFs can come with regular distributions and dividends, which are usually taxable.

Increased Trade Activity on Actively Managed Funds

Though most ETFs simply follow an investment index, there are some actively managed ETFs. With actively managed funds, more trades are made, which may lead directly to a more onerous tax bill.

Trading Costs

Since ETFs are traded like stocks, the fees that come with buying and selling ETF assets usually trigger trading costs that are akin to trading stocks, and those fees can be high. Historically, brokerage trading fees are among the highest fees in the investment industry, which isn’t great news for ETF investors. Even if investors do save on taxes, those savings can potentially be mitigated or even wiped out by high ETF trading costs.

The Takeaway

Exchange-traded funds offer ample potential tax benefits to savings-minded investors, especially in key areas like capital gains, expense ratios, redemptions, and trading frequency. That does not mean there aren’t potential downsides, however, that could include taxable dividends or distributions, higher potential trading costs, and more.

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 are the advantages of ETFs over mutual funds?

While similar, ETFs tend to have lower associated fees than mutual funds, and depending on their structure, ETFs may also yield specific tax advantages, too.

What are the differences between ETFs and mutual funds?

What are some potential tax-related disadvantages of ETFs compared to mutual funds?

Potential tax-related disadvantages of ETFs, as they relate to mutual funds, can include taxable distributions and dividends, higher tax liabilities related to more trading activity, and potentially, higher trading costs.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOIN-Q225-036

May

2025

Understanding Inverse ETFs

By Colin Dodds | Growing Wealth, invest, Investing, Terminology | Comments Off

An inverse ETF, or short ETF, is a portfolio of securities that allows investors to make a bet that either the broader markets or a particular asset class or market sector will go down in the short term.

There are a wide range of inverse ETFs to choose from. There are dozens that are traded on U.S. markets. They allow investors to make short-term investments in the likelihood that the price of a given asset will go down. Investors can use inverse ETFs to seek returns when there are price dips in equities, fixed-income securities, and certain commodities. They do reset daily, however, and generally, investors may not want to hold onto them longer than a day.

Key Points

• An inverse ETF is a portfolio of securities designed to profit from market declines.

• Inverse ETFs trade on exchanges, similar to stocks.

• These ETFs use futures contracts to attempt to achieve the opposite result of an underlying index or benchmark.

• Leveraged inverse ETFs offer the potential for amplified returns, but also come with substantial risk.

• Investors use inverse ETFs to hedge against market drops or bet on short-term declines, but they do reset daily, adding another dimension of risk to a portfolio.

How Does an Inverse ETF Work?

To understand inverse ETFs, an investor first needs to know about Exchange Traded Funds (ETFs). An ETF is a portfolio of stocks, bonds, or other securities that trades on an exchange, like a stock. Its share price fluctuates throughout the day, as investors buy and sell shares of the fund.

As with regular ETFs, investors can buy and sell inverse ETFs throughout the day. Unlike the way ETFs work, however, inverse ETFs are designed not to invest in a given index, but to deliver the opposite result. If the index goes down, the inverse ETF should go up, and vice versa.

Leveraged & inverse ETPs (like ETNs) may be good for short-term trading. If you’re holding them long-term, watch for unexpected market changes and tracking errors. As noted, they reset daily, so there are risks involved with holding them longer than that.

What Do Inverse ETFs Invest In?

Inverse ETFs, or short ETFs, use complex trading strategies, involving a heavy use of futures contracts, to deliver the opposite result of the markets. Futures contracts are essentially agreements to buy or sell a given asset at a given date and price, regardless of the market price at the time. Using futures contracts, an investor can bet that a given asset, like a stock, will go up or down, without actually owning that asset.

Put simply, investors who think the price of a given stock will go down may buy a futures contract that allows them to sell a stock at a higher price than they think it will trade at by the expiration of the contract. If the price of that stock does go down, they can buy it on the open market cheaply and sell it to the other person or institution at the agreed-upon higher price, and pocket the difference.

An inverse ETF does that with a group of stocks, every trading day. The largest inverse ETFs aim to deliver the opposite returns of major stock indexes, like the Nasdaq or the S&P 500. For example, if the S&P 500 goes down 1% on a given day, then a corresponding inverse ETF could be designed to go up 1% that day.

Leveraged Inverse ETFs

There are other inverse ETFs that take the formula one step further, using leverage. That means they buy the futures contracts in their portfolios partially with borrowed money. That gives them the ability to offer outsized returns — two and three times the opposite of the day’s return — but it also exposes them to sizable single-day losses, and larger losses over time.

For example, on that same hypothetical day when the S&P 500 goes down 1%, the corresponding inverse ETF could be designed to go up by 2%.

Who Invests in Inverse ETFs?

An inverse ETF might seem like a good choice for an investor who is generally pessimistic about the prospects for the broader markets over the next few months or years. But that’s not necessarily the case.

Inverse ETFs only invest in one-day futures contracts. The futures contracts they invest in expire at the end of the trading day, locking in the ETFs’ gains and losses.

With an inverse ETF, it’s not enough to be right about the general direction of a given market, asset class, or sector. The performance of inverse ETFs isn’t the exact opposite of the index it tracks over longer periods of time. So, the investor has to be correct on the right days, as well.

Inverse ETFs get a lot of attention in the media during market swoons, when they post eye-popping returns. But most financial professionals probably don’t recommend them as long-term investments. They’re generally best for sophisticated investors with a high tolerance for risk.

What Are the Risks of Inverse ETFs?

Investors who purchase inverse ETFs take on risks that are common to all investors, and also some that are unique to this specific investment vehicle.

• Loss: If an investor buys an inverse ETF and the index that it tracks goes up, then the investor will lose money. If the given index goes up by 1% that day, then the fund offering the inverse of that index will go down by 1%; with a leveraged ETF, it could even go down by 2% or 3%.

• Fees: While most ETFs have very low management fees, inverse ETFs may have higher fees, which may take a bite out of returns over time. (It’s worth noting that the management fee can be typically lower than the time and expense of shorting the stocks directly.)

• Taxes: Inverse ETFs may be less tax efficient than other types of ETFs due to the fact that they reset daily. There could also be other tax-related issues to be aware of, so it may be a good idea to speak with a tax professional to learn more.

The risks are significant enough that, in 2019, the Securities and Exchange Commission proposed new regulations about inverse ETFs, requiring companies that manage leveraged and inverse ETFs to specifically make sure customers understood those risks. The regulation was not approved, which means the onus is still very much on investors to understand the risk.

Additionally, in 2022, regulators released a notice to investors about the risks of holding on to inverse and leveraged ETFs for longer than a day, saying that doing so could result in substantial and sudden losses.

The Takeaway

Inverse ETFs are designed as a tool to allow investors to bet against the market, or specific asset classes. While they come with unique risks, inverse ETFs may help investors seek returns on a given day during market dips, giving them the chance to short the market with one trade. These ETFs go up as the index goes down, offering an opportunity to generate returns when the market is trending down.

The trick: choosing the right inverse ETF on the right day, in order to gain rather than lose. The funds are risky, but can be popular among investors who want to hedge their exposure to a given asset class or market sector, and investors who believe that a given market is due for a big drop.

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

How does an inverse ETF work?

Inverse ETFs utilize complex trading strategies to deliver the opposite results of the markets. So, if an ETF attempts to mirror the results of the market, an inverse ETF attempts to do the opposite, and can be used as a shorting mechanism.

How often do inverse ETFs reset?

Inverse ETFs reset daily, and as such, are meant to be a short-term trading tool. Holding on to inverse ETFs for longer than a day can introduce significant risk to a portfolio.

What are the risks of inverse ETFs?

The primary risks associated with inverse ETFs are the risks of losses, and more complex tax implications. There may also be management fees that investors should be aware of.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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.

SOIN-Q225-012

May

2025

What Is the Difference Between EBIT and EBITDA?

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology | Comments Off

EBIT and EBITDA are two common ways to calculate a company’s profits, and investors may come across both terms when reviewing a company’s financial statements. Though they appear similar, they can present two very different views of a company’s income and expenses.

If you’re an investor or you own a business, it’s important to understand the difference between EBIT and EBITDA and know why the distinction matters.

Key Points

• EBIT measures operating income, excluding interest and taxes, focusing on core business profitability.

• EBITDA includes depreciation and amortization, providing a clearer view of cash flow and operational profitability.

• EBITDA aids in company valuation and comparison by excluding non-cash expenses, including depreciation and amortization.

• EBIT and EBITDA are not considered part of the Generally Accepted Accounting Principles (GAAP), with critics suggesting some companies may overstate financial stability.

• Thorough research is crucial before investing to avoid inaccurate assessments of companies’ health. Though there are provisions that exist to protect against misuse.

What Is EBIT?

EBIT stands for “earnings before interest and taxes,” and is a way to measure a company’s operating income. Here’s a look at what each of those components means:

• Earnings: This is the net income of a company over a specified period of time, such as a quarter or fiscal year.

• Interest: This refers to interest payments made to any liabilities owed by the company, including loans or lines of credit.

• Taxes: This refers to any taxes a company must pay under federal and state laws.

Here is the formula for calculating EBIT:

EBIT = Net income + Interest + Taxes

The EBIT calculation assumes you know a company’s net income. To determine net income, you would use this formula:

Net income = Revenue – Cost of Goods Sold – Expenses

In this formula, revenue means the total amount of income generated by goods or services the company sells. Cost of goods sold refers to the cost of making or acquiring any goods the company sells, including labor or raw materials. Expenses include operating costs such as rent, utilities or payroll.

EBIT should not be confused with EBT, or earnings before tax. Earnings before tax is used to measure profits with taxes factored in, but not any interest payments the company owes. You may use this metric to evaluate companies that are subject to different taxation rules at the state level.

You can find EBIT listed on a company’s income or profit and loss statement alongside other important financial ratios, such as earnings per share (EPS).

Is Depreciation Included in EBIT?

The short answer is no, depreciation is not included in the context of the EBIT formula. But you will see depreciation factored in when calculating EBITDA.

What EBIT Tells Investors

Knowing the EBIT for a company can tell you how financially healthy that company is based on its business operations. Specifically, EBIT can tell you things like:

• How much operating income a company needs to stay in business

• What level of earnings a company generates

• How efficiently the company uses earnings when debt obligations aren’t factored in

EBIT can be useful in determining how well a company manages business operations before external factors like debt and taxes come into play. It can also help to create a framework for evaluating whether certain actions, such as a stock buyback, are a true sign that a company is struggling financially.

You can also use EBIT to determine interest coverage ratio. This ratio can tell you how easily a company is able to pay interest on outstanding debt obligations. To find the interest coverage ratio, you’d divide a company’s earnings before interest and taxes by any interest paid toward debt for the specific time period you’re measuring. As an investor, this ratio can give you insight into how well a company is able to keep up with its current debts and any debts it may take on down the line.

What Is EBITDA?

EBITDA is another acronym you may see on financial statements that stands for “earnings before interest, taxes, depreciation, and amortization.” In terms of the first three terms, the breakdown is exactly the same as for EBIT. Plus there are two new additions:

• Depreciation: This term is used to refer to the decline in an asset’s value over time due to things like regular use, wear and tear or becoming obsolete.

• Amortization: This term also applies to a decline in value but instead of a tangible asset, it can be used for intangible assets. Amortization can also be referred to in the context of borrowing. For example, a business loan amortization schedule would show how the balance declines over time as payments are made.

The only difference between EBITDA and EBIT, then, is that EBITDA adds depreciation and amortization back in.

The EBITDA formula looks like this:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Alternately, you can substitute this formula instead:

EBITDA = Operating Profit + Depreciation + Amortization

In this formula, operating profit is the same thing as EBIT. To calculate EBITDA, you’d first need to calculate earnings before interest and taxes.

You should be able to find all the information you need to calculate EBITDA on a company’s income statement, though you may also need a cash flow statement for an accurate calculation.

💡 Recommended: NOPAT vs EBITDA

EBIT vs EBITDA: Which Is Better?

While EBIT allows you to gauge a company’s health based on its operations, EBITDA offers a clearer snapshot of a company’s net cash flow and how money is moving in or out of the business.

Calculating the earnings before interest, taxes, depreciation, and amortization can offer a fuller picture of a company’s financial health in terms of how operational decision-making affects profitability. It can also be useful when calculating valuations for different companies and/or comparing a business to its competitors.

While EBIT and EBITDA can be a starting point for choosing where to put your money, it’s also helpful to consider other fundamental ratios such as earnings per share or price-to-earnings ratio. Active traders who are interested in benefiting from market momentum, may consider technical analysis indicators instead.

Drawbacks of EBIT vs EBITDA

While EBIT and EBITDA can be useful, there are some potential issues to be aware of. Chiefly, neither formula is considered part of Generally Accepted Accounting Principles (GAAP). This is a uniform set of standards that’s designed to encourage transparency and accuracy in accounting for corporations, governments and other entities.

In other words, EBIT and EBITDA don’t have any official seal of approval from an accounting authority. That means companies could potentially manipulate the numbers in their favor, if they choose to.

The better a company looks on paper, the easier it may be to attract investors or qualify for financing. Companies that are struggling behind the scenes may use inflated numbers or leave out critical information when calculating EBIT or EBITDA to appear more financially stable than they are.

Note, too, that the SEC requires listed companies that report EBITDA data to show their work – that is, show how the numbers were calculated from net income, etc. That can help protect investors from potentially misleading data.

Investors who choose to put money into a company because they accepted EBIT or EBITDA calculations at face value. It’s important to dig deeper when deciding where to invest, such as by reviewing a company’s financial statements, as these calculations may not provide a full picture of a company’s financial situation.

The Takeaway

EBIT, or earnings before interest and tax, and EBITDA, or earnings before interest, tax, depreciation and amortization, are two ways to assess the financial health of a company. To recap, EBIT measures operating income, and EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.”

Also be aware that these calculations are not considered to be a part of the Generally Accepted Accounting Principles, so critics note that some companies may inflate numbers to present a rosy outlook to investors. As always, it’s a good idea to research a company from a variety of different angles before investing in it.

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 EBIT?

EBIT stands for “earnings before interest and taxes,” and is a way to measure a company’s operating income. It focuses on a company’s core profitability.

What is EBITDA?

EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” With more information in the mix, it can tell investors a bit more about a company’s profitability.

What is the difference between EBITDA and EBIT?

The only difference between EBITDA and EBIT, then, is that EBITDA adds depreciation and amortization back into the calculation, and as such, EBITDA may tell investors in a bit more detail about a company’s full financial picture.

About the author

Rebecca Lake

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

Photo credit: iStock/Vertigo3d

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

SOIN-Q225-052

May

2025

How Much Does It Cost to Replace Windows?

By Austin Kilham | Growing Wealth, Home Ownership, mortgage | Comments Off

Replacing windows can range tremendously in price, with basic, standard-size windows costing just $100 or so to expansive, custom bay windows that can run $7,000 or more. Having quality windows can not only make your home look better, it can boost energy efficiency, too. Here, learn more about this important home improvement project and the usual costs.

Key Points

• Window replacement costs range from $100 to $1,000 for standard windows and up to several thousand for custom windows.

• Factors for repair or replacement include condition, energy efficiency, noise, and aesthetics.

• Replacing all windows at once can save money through bulk discounts and reduce labor costs as well.

• Spring and fall are ideal for window replacement due to better weather and material performance.

• Window types include single-hung, double-hung, bay, arched, and sliding, with options for dual-pane, triple-pane, and low-e glass.

How Much Do Windows Cost?

A standard new window, installed, can cost anywhere from $500 to $1,000, according to Home Depot. Those prices, however, can go much higher if you are shopping for something special, such as a bay or casement window, wood vs. vinyl windows, or a custom size.

Window frames are commonly made of wood, vinyl, metal, or fiberglass.

• Of those, vinyl windows are the most popular choice. The average cost of a double-hung, double-pane vinyl window, is around $600 in 2025. Installation, according to HomeGuide, can add another $300 to the cost.

Vinyl windows typically last for 30 years, don’t need to be painted, and are easy to clean. Compared with their cheaper cousin, aluminum, vinyl windows excel when it comes to insulation and improving energy efficiency, and they will not rust.

• Fiberglass and fiberglass-composite windows are stronger than vinyl. Like vinyl, they offer a high degree of energy efficiency, and with both types of window, there are options to enhance the energy efficiency. Expect to pay $600 to $2,000 for one fiberglass window, installed.

• Wood windows can lend a classic look. Expect to pay more — around $875 to $1,875 in 2025, including installation, according to This Old House. Custom sizes and styles can cost significantly more. Wood windows tend to be harder to maintain than vinyl windows, given that the paint can peel or the wood can start to rot if it gets wet.

When Should I Replace My Windows?

If you’re thinking about replacing your windows, consider these questions. First, do your windows show any damage? Are they drafty, or have you noticed an increase in your electrical bills in the winter when the heat is on, or in the summer when the air conditioning is on?

Is there frequent moisture buildup, or condensation, on the outside of the glass, or is moisture trapped between layers of glazing, signaling leaky seals? Can you hear too much noise outside? Are you ready for a new look?

If the answer to any of these questions is yes, it may be time to consider replacing your windows. Or if you are on a smaller budget, consider repairing them.

If you’re buying a new home, an inspection will be a part of your mortgage process. It’s best to have the windows inspected, and if there are major issues, try to negotiate for their replacement before you close on the house.

Can I Repair Old Windows?

If your windows are in pretty good shape, it may make sense to repair or update them rather than replace them. Doing so can be a cost-effective way to help you save money on energy costs and reduce drafts and moisture in your home.

• Check windows for air leaks.

• Caulk and add weather stripping as needed.

• Consider solar control film that can block heat and reduce glare.

• If a pane is cracked, in a pinch the glass alone can be replaced with an insulated glass unit.

How Long Do Windows Last?

The lifespan of a window depends on a number of factors, such as quality and type of material, local climate, and proper installation. In general, you can expect windows to last 15 to 30 or even 50 years.

Wood windows can last a long time, but might require a bit of maintenance on your part, whereas vinyl or fiberglass windows may require none. Fiberglass typically lasts the longest period of time.

Your local weather can play a big part. Extreme heat or cold can shorten the lifespan, salt spray from the ocean can corrode window exteriors, while humidity can lead to warping or rotting.

Whether or not a window is properly installed can also impact how long it lasts. If it is sealed improperly, for example, moisture may get in and damage the frame.

Finally, consider how much a window is used. Normal wear and tear on parts in windows that are opened and closed frequently can lead to replacement more often than windows that are rarely opened.

Should I Replace All My Windows at Once?

Whether or not you decide to replace all of your windows at once will largely depend on your budget. Consider that the price to replace 10 windows in a modest house could be several thousand dollars.

However, replacing all your windows at once can yield bulk savings, qualify for discounts, and save by having installation done once vs. paying for multiple visits. You might consider a home improvement loan (which is a kind of unsecured personal loan) to get the job done all at once if you don’t have enough cash saved up.

If you don’t have the budget to replace all your windows in one go, it’s common to swap windows out in stages. In this case, windows at the front of the house are generally the first to be replaced. They’re public-facing and add to the curb appeal of the home. The windows in the back of the house tend to come next, followed by any upstairs windows.

What Type of Window Should I Buy?

The first thing to consider is materials. You might consider wood windows if you’re trying to match them to an existing wood exterior or trim. You might choose fiberglass or composite for its durability and ability to look like painted wood. Or you might decide on vinyl for its affordability.

You’ll also want to consider the many types of windows available. For example, single-hung windows are among the most popular and cheapest options. They have a fixed upper window and allow you to open a lower window sash.

Double-hung windows are pricier but have two moving window sashes that allow for increased airflow and easier cleaning. There are also bay windows, arched windows, sliding windows, and many more to choose from.

The glass option you choose is an important decision. There are a variety of insulating options, such as dual-pane or triple-pane windows. Glass can be treated with a low-emittance coating to reflect heat in the summer and keep it in in the winter.

In climates where you need to cool the house for much of the year, consider three-coat low-e glazing, which best reduces heat from the sun. In colder climates that require more heating, it may make sense to go with a two-coat low-e treatment.

The space between glass may be filled with a nontoxic gas that can provide better insulation than air.

What’s the Best Time of Year for Replacing Windows?

Spring and fall tend to be the most popular times to replace windows. That’s because in these more moderate months, you don’t have to worry about winter air getting into your house, requiring you to jack up your heat or close off rooms to control drafts. The same holds true for summer: Avoiding the hot season can help you sidestep blasting the a/c as windows are taken out and replaced. These factors can be especially irksome if you’re having multiple windows replaced.

Weather can affect how materials behave. For example, caulk doesn’t adhere well in extreme cold, nor does it cure well in very high temperatures. As a result, you may want to aim to replace windows when temperatures are between 40 and 80 degrees.

If you can stand the cold, you may be able to secure a discount to have windows installed in the winter. A contractor can help you decide on the right time of year to have your new windows installed.

The Takeaway

The cost of replacing windows depends on the materials (wood, vinyl, fiberglass), style, size, and labor costs. Prices can range from several hundred to several thousand dollars per window. Think of new windows as a long-term investment that may provide energy savings, visual appeal, and, potentially, enhanced resale value. Typically, people finance them from savings or with a personal loan,

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

What is the average price for replacement windows?

Windows can typically cost anywhere from $100 or so to a few thousand dollars each, depending on such factors as size, material, and where you live and purchase from. As you might guess, custom windows can be pricier than standard-size ones.

Is it cheaper to replace all windows at once?

Yes, it can be cheaper to have all your windows replaced at once. You might save on a bulk purchase, qualify for discounts, and pay less by having installation done just once vs. having contractors make multiple visits.

Should I replace windows that are more than 20 years old?

Yes, windows that are 20 years or more old and are experiencing issues like drafts, condensation, and diminished energy efficiency can benefit from replacement. They may not be at the very end of their lifespan but could probably be nearing the date that they should be upgraded.

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*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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SOPL-Q225-049

Everything You Ever Wanted to Know About Insider Trading

History of U.S. Insider Trading Laws

Examples of Insider Trading

Is Insider Trading Ever Legal?

Who Enforces Insider Trading Rules?

How Insider Trading Is Investigated

What Happens in an Insider Trading Investigation

Penalties for Insider Trading

The Takeaway

FAQ

What is an example of insider trading?

Is it illegal to buy stock in a company you work for?

How do people get caught for insider trading?

ETF Tax Efficiency: Advantages Over Mutual Funds

ETFs & Mutual Funds: How They Differ

ETF Tax Advantages Over Mutual Funds

Lower Capital Gains Impact

Index Tracking Tax Benefits

The Use of “Creation Units”

Downsides of ETFs and Taxes

Distributions and Dividends

Increased Trade Activity on Actively Managed Funds

Trading Costs

The Takeaway

FAQ

What are the advantages of ETFs over mutual funds?

What are the differences between ETFs and mutual funds?

What are some potential tax-related disadvantages of ETFs compared to mutual funds?

Understanding Inverse ETFs

How Does an Inverse ETF Work?

What Do Inverse ETFs Invest In?

Leveraged Inverse ETFs

Who Invests in Inverse ETFs?

What Are the Risks of Inverse ETFs?

The Takeaway

FAQ

How does an inverse ETF work?

How often do inverse ETFs reset?

What are the risks of inverse ETFs?

What Is the Difference Between EBIT and EBITDA?

What Is EBIT?

Is Depreciation Included in EBIT?

What EBIT Tells Investors

What Is EBITDA?

EBIT vs EBITDA: Which Is Better?

Drawbacks of EBIT vs EBITDA

The Takeaway

FAQ

What is EBIT?

What is EBITDA?

What is the difference between EBITDA and EBIT?

How Much Does It Cost to Replace Windows?

How Much Do Windows Cost?

When Should I Replace My Windows?

Can I Repair Old Windows?

How Long Do Windows Last?

Should I Replace All My Windows at Once?

What Type of Window Should I Buy?

What’s the Best Time of Year for Replacing Windows?

The Takeaway

FAQ

What is the average price for replacement windows?

Is it cheaper to replace all windows at once?

Should I replace windows that are more than 20 years old?

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