What You Need to Know About Margin Balance

What You Need to Know About Margin Balance

Margin trading simply means borrowing money from a brokerage to purchase securities, and margin balance is the amount of money an investor owes to the brokerage. Trading stocks and other securities on margin allows investors to expand their purchasing power, though the availability of margin is predicated on the holdings an investor has in the first place.

Accordingly, when an investor uses the brokerage’s funds to buy securities, this results in a margin debit balance. Similar to a credit card or traditional loan, a margin balance is a line of credit that the borrower must repay with interest. Having a margin balance outstanding is common in margin trading, but investors should understand the implications of owing money to a brokerage — and what can happen if you’re subject to a margin call.

Key Points

•   Margin balance refers to the amount an investor owes to a brokerage after borrowing funds to purchase securities, enabling increased purchasing power in trading.

•   Investors must meet minimum margin requirements, including an initial deposit and ongoing maintenance margin guidelines, to avoid margin calls from the brokerage.

•   A negative margin balance indicates the amount owed to the brokerage, while a positive balance signifies excess funds available in the margin account.

•   Interest on margin balances varies by brokerage and account size, impacting the net return on investments and necessitating careful management of margin accounts.

•   To mitigate risks, investors should maintain adequate funds in their margin accounts and consider setting limits on borrowing to avoid overextending themselves financially.

What Is Margin Balance?

Again, margin balance is the amount of money an investor owes to its brokerage at any given time in a margin trading account. When an investor opens a margin account, they must make an initial deposit, called the “minimum margin.” The Financial Industry Regulatory Authority (FINRA) requires a minimum margin of at least $2,000, though some brokerages may require a higher minimum.

After making that deposit to their brokerage account, investors can then trade using an initial margin. Federal Reserve Board Regulation T allows investors to borrow up to 50% of the purchase price of securities when trading on margin. So, for example, a margin trader could purchase $10,000 worth of stocks using their own funds and another $10,000 using the brokerage’s funds. The $10,000 borrowed from the brokerage represents the investor’s margin balance.

You can trade a variety of securities in a margin account, including stocks, and derivatives such as options or futures.

The rules for margin balance forex are slightly different. In forex trading, margin represents collateral or security that an investor must deposit with the brokerage to start trading. The brokerage typically sets this as a percentage of the trading order.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How Margin Balance Works

Margin balance allows investors to borrow money, then repay it to the brokerage with interest. A negative margin balance or margin debit balance represents the amount subject to interest charges. This amount is always either a negative number or $0, depending on how much an investor has outstanding.

Unlike other types of loans, margin balance loans do not have a set repayment schedule. Investors can make payments toward the principal and interest through their brokerage account at a pace convenient for them. They can also deposit cash into their margin accounts or sell off margin securities to reduce their margin balance.

Margin Calls

While there is some flexibility associated with paying off a negative margin balance, investors should understand their interest charges as well as the possibility of being subject to a margin call. Margin calls essentially act as a stopgap risk management tool for the brokerage.

In addition to the minimum margin and the initial margin requirements, investors must observe maintenance margin guidelines. This represents a minimum amount of equity the investor must keep in their account. Under FINRA rules, the maintenance requirement is at least 25% equity, based on the value of the margin account. Some brokerages may raise this to 30%, 40% or more.

Using the previous example, assume that an investor deposits $10,000 of their own money and borrowers $10,000 from their brokerage to invest in marginable securities. Now, say that the investment doesn’t go as planned and the stock’s value drops. That initial $20,000 investment is now worth $10,000. When the margin debit balance of $10,000 is subtracted, that results in a net balance of $0, meaning the trader has zero equity and does not meet the maintenance margin requirements.

At this point, the brokerage may initiate a margin call which would require the investor to deposit more cash into their account in order to continue trading. If an investor can not add more cash to cover the maintenance margin requirement, the brokerage may sell off securities from the account to recoup the negative margin balance.

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Negative Margin Balance

A negative margin balance in a margin account represents what’s owed to the brokerage. Depending on the brokerage, the margin debit balance may be listed inside parentheses or have a negative symbol in front of it.

Margin Balance Example

For example, an investor who has a negative margin balance of $12,225 may see one of the following when logging into their account:

•   Margin balance: -$12,225

•   Margin balance: ($12,225)

They both mean the same thing: that investor owes the brokerage $12,225 for trading on margin.

If a trader’s margin balance shows as a positive amount, that means they have a margin credit balance rather than a margin debit balance. A credit balance can occur if an investor sells off shares to clear their negative margin balance but the settlement amount is more than what they owe to the brokerage.

How Margin Balance Is Calculated

Brokerages can lend investors money on margin but in exchange for this convenience, they can charge those investors interest, or margin rates. The level of those rates depends on the brokerage and the type of securities that you’re trading. Many brokerages use a benchmark rate, known as a broker call rate or call money rate, then tier that rate across different margin account balances.

Brokerages can use this as a baseline rate, then add or deduct percentage points. Generally, the larger the margin account balance, the deeper the margin rate discount. Meanwhile, traders who maintain lower margin balances tend to pay higher interest rates. So, an investor with less than $25,000 in their account might pay 7%-8% for margin rates while an investor with over $1 million in their account might pay 4%-5% instead.

Brokerages typically calculate margin interest on a daily basis and charge it to an investor’s account monthly. The interest charges on a margin account can directly affect the net return realized from an investment. Higher margin rates can increase the rate of return needed to break-even on an investment or realize a profit on a stock.

Managing Your Margin Balance

Managing a margin account and margin balances begins with understanding the risks involved, including the possibility of a margin call. The value of your securities can impact your margin balance, and increased volatility could cause the value of margin securities to drop, which could put you below the maintenance margin requirements. You’d then need to deposit more money to your account to continue trading.

Maintaining a cushion of funds inside your margin account could help avoid margin calls. Alternatively, you may keep a reserve of funds elsewhere that you could transfer to your margin account if increased volatility threatens to diminish the value of margin securities in your portfolio.

It’s also important to consider how much money you’re comfortable owing to your brokerage at any given time. Setting a cap on the maximum margin can help you avoid overextending yourself. You can also keep margin balances under control by scheduling regular cash deposits or routinely selling securities to reduce what’s owed. One strategy is to pay enough to cover the interest each month to keep your balance from ballooning.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Takeaway

A margin balance refers to the balance in an investor’s margin account, which involves borrowing money from a brokerage with which to make trades. That can help investors or traders increase their potential returns, if used wisely.

When you open a brokerage account, you can choose either a cash account or a margin account that allows you to engage in margin trading. Margin trading is a more advanced investment strategy that requires some know-how of the markets and a willingness to accept higher levels of risk.

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

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

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

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

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

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

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What Is a Self Directed IRA (SDIRA)?

Guide to Self-Directed IRAs (SDIRA)

Individual retirement accounts, or IRAs, typically allow for a lot of flexibility in the kinds of investments you can make, from stocks and bonds to mutual funds and exchange-traded funds (ETFs).

However, most IRAs don’t allow certain alternative investments like precious metals and real estate. If you want to hold assets like these in your retirement account, you’ll need a self directed IRA (SDIRA), a specific type of Roth or traditional IRA.

Key Points

•   A self-directed IRA (SDIRA) allows individuals to invest in a broader array of assets, including real estate, cryptocurrency, and precious metals, compared to traditional IRAs.

•   Account holders of SDIRAs manage their investments independently, which involves conducting research and due diligence on potential assets, thus increasing their responsibility.

•   While SDIRAs can offer high potential returns, they also carry higher fees and risks, particularly due to the illiquidity of many alternative investments.

•   Contribution limits for SDIRAs mirror those of traditional IRAs, allowing up to $7,000 annually, or $8,000 for individuals aged 50 and older.

•   Opening an SDIRA requires finding an approved custodian, selecting investments, completing transactions through a reputable dealer, and planning for less liquid withdrawals.

What Is a Self-Directed IRA (SDIRA)?

Self directed IRAs and self directed Roth IRAs allow account holders to buy and sell a wider variety of investments than regular traditional IRAs and Roth IRAs. Experienced investors, familiar with sophisticated or risky investments, often use these.

While a custodian or a trustee administers the SDIRA, the account holder typically manages the allocation themselves, taking on responsibility for researching investments and due diligence. These accounts may also come with higher fees than regular IRAs, which can cut into the size of your retirement nest egg over time.

What Assets Can You Put in a Self-Directed IRA or a Self-Directed Roth IRA?

Individuals can hold a number of unique alternative investments in their SDIRA, including but not limited to:

•   Real estate and land

•   Cryptocurrency

•   Precious metals

•   Mineral, oil, and gas rights

•   Water rights

•   LLC membership interest

•   Tax liens

•   Foreign currency

•   Startups through crowdfunding platforms

Recommended: Types of Alternative Investments

Types of SDIRAs

There are specific kinds of SDIRAs customized to investors looking for certain types of investments. The different types include:

Self-directed SEP IRAs

Simplified Employee Pension IRAs (SEP IRAs) are for small business owners or those who are self-employed so that they can make contributions that are tax deductible for themselves and any eligible employees they might have. This type of retirement account gives them the flexibility to invest in alternative investments.

Self-directed SIMPLE IRAs

A Savings Incentive Match Plan IRA (SIMPLE IRA) is a tax-deferred retirement plan for employers and employees of small businesses. Both the employer and the employees can make contributions to this plan. It allows for some alternative kinds of investments.

Recommended: SIMPLE IRA vs Traditional

Self-directed Precious Metal IRAs

Similarly, there are self-directed IRAs for those who would like to invest in precious metals like gold. However, be aware that some precious metal IRAs may charge higher fees than the market price for precious metals.

How Do Self-Directed IRAs Work?

Now that you know the answer to the question, what is a self directed IRA?, it’s important to understand how these accounts work and the self directed IRA rules. You’ll also want to familiarize yourself with the guidelines regarding opening an IRA if you have a 401(k).

Aside from their ability to hold otherwise off-limits alternative investments, SDIRAs work much like their traditional counterparts. SDIRAs are tax-advantaged retirement accounts, and they can come in two flavors: traditional SDIRAs and Roth SDIRAs.

Traditional IRA Contributions and Withdrawal Rules

IRA contributions to traditional accounts goes in before taxes, which reduces investors’ taxable income, lowering their income tax bill in the year they make the contribution. For 2024, individuals can contribute up to $7,000 in total across accounts. Those age 50 and up can make an extra $1,000 catch-up contribution for a total of $8,000. Investments inside the account grow tax-deferred.

It’s important to pay close attention to self directed IRA rules, particularly rules for IRA withdrawals. Once individuals begin to make withdrawals at age 59 ½, they are taxed at normal income tax rates. Account holders who make withdrawals before that age may owe taxes and a possible 10% early withdrawal penalty. Traditional SDIRA account holders must begin making required minimum distributions (RMDs) after age 73.

Roth IRA Contributions and Withdrawal Rules

Roth SDIRAs have the same contribution limits as traditional SDIRAs. However, retirement savers contribute to Roths with after-tax dollars. Investments inside the account grow tax-free, and withdrawals after age 59 ½ aren’t subject to income tax.

Roths are also not subject to RMD rules. As long as an individual has had the account for at least five years (as defined by the IRS), they can withdraw Roth contributions at any time without penalty, though earnings may be subject to tax if withdrawn before age 59 ½.

There are also rules restricting who can contribute to a Roth IRA, based on their income. In 2024, Roth eligibility begins phasing out at $146,000 for single people, and $230,000 for people who are married and file their taxes jointly.

Individuals can maintain both traditional and Roth IRA accounts, however, contribution limits are cumulative across accounts, and cannot exceed $7,000, or $8,000 for those 50 and over.

Traditional vs Roth SDIRA

There are some differences between a self-directed traditional IRA and a self-directed Roth IRA.

With a traditional SDIRA, you save pre-tax money for your retirement, just like you do with a traditional IRA plan. You pay taxes on the money when you withdraw it, which you can do without penalty starting at age 59 ½. However, a self-directed traditional IRA gives you the flexibility to invest in alternative assets, like real estate or precious metals.

With a self-directed Roth IRA, just like a regular Roth IRA, you make after-tax contributions to the plan. The withdrawals you make starting at age 59 ½ are tax-free, as long as you have had the account for at least five years, according to the five-year rule. With this type of self-directed IRA, you can invest in alternative investments, such as private equity, real estate, and precious metals.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Pros and Cons of Self-Directed IRAs

Self-directed IRAs offer unique perks for the right investor. However, those interested must weigh those benefits against potential drawbacks.

Benefits of Self-Directed IRAs

An SDIRA allows investors to branch out into different types of investments to which they might otherwise not have access. This allows investors to seek out potentially higher returns and diversify their portfolios beyond the offerings in traditional IRAs.

Alternative investments have the potential to offer higher returns than investors might achieve with stock market investments. However, investors beware: These opportunities for higher rewards come at the price of higher risk.

Also, investors’ ability to hold a broader spectrum of investments that can help them diversify their portfolio and potentially manage risks, such as inflation risk or longevity risk, the chance an investor will run out of money before they die. For example, some SDIRAs allow investors to hold gold, a traditional hedge against inflation.

Drawbacks of Self-Directed IRAs

While there are some very real advantages to using SDIRAs, these must be weighed against their disadvantages.

For starters, investments like stocks and shares of ETFs are highly liquid. Investors who need their money quickly can sell them in a relatively short period of time, usually a matter of days.

However, some of the investments available in SDIRAs are not liquid. For example, real estate and physical commodities like precious metals may take quite a bit of time to sell if you need to access your money. Individuals who need to sell these assets quickly may find themselves in a situation in which they must accept less than they believe the asset is worth.

SDIRAs may also carry higher fees. Individuals who hold regular IRA accounts may not have to pay management or investment fees. However, SDIRA holders may have to pay fees associated with holding the account and with the purchase and maintenance of certain assets.

Finally, SDIRAs place a lot of responsibility in the hands of their account holders. Investors must research investments themselves and perform due diligence to make sure that whatever they’re buying is legitimate and matches their risk tolerance.

What’s more, investors must make sure the assets they hold meet IRS rules. Running afoul of these rules can be costly, in some cases causing investors to pay taxes and penalties.
Here’s a look at the pros and cons of SDIRAs at a glance:

Pros

Cons

Tax-advantaged growth. Contributions to traditional accounts are tax deductible. Investments grow tax-deferred in traditional accounts and tax-free in Roth accounts. Not liquid. Selling alternative investments may be slow and difficult.
Same contribution limits as regular IRAs. In 2024, individuals can contribute up to $7,000 a year, or $8,000 for those aged 50 and up. Higher fees. Individuals may be on the hook for account fees and fees associated with alternative investments.
Higher returns. Alternative investments may offer higher returns than those available in the stock market. Increased responsibility. Investors must research investments carefully themselves and ensure they stay within rules for approved IRA investments.
Diversification. SDIRAs offer investors the ability to invest in assets beyond the stock and bond markets. Higher risk. Alternative investments tend to be riskier than more traditional investments.

4 Steps to Opening a Self-Directed IRA

Investors who want to open an SDIRA will need to take the following steps:

1. Find a custodian or trustee.

This can be a bank, trust company, or another IRS-approved entity. You’ll need to follow their requirements for opening an IRA account. Some SDIRAs specialize in certain asset classes, so look for a custodian that allows you to invest in the asset classes in which you’re interested.

2. Choose investments.

Decide which alternatives you want to hold in your SDIRA. Perform necessary research and due diligence.

3. Complete the transaction.

Find a reputable dealer from which your custodian can purchase the assets, and ask them to complete the sale.

4. Plan withdrawals carefully.

Because alternative assets have less liquidity than other types of investments, you may need to plan sales well in advance of needing retirement income or meeting any required minimum distributions.

Investing in Your Retirement With SoFi

If you’re opening your first IRA account, you’re likely best served with a traditional or Roth IRA. Because of the complications involved in using an SDIRA, only sophisticated investors should consider it.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Easily manage your retirement savings with a SoFi IRA.

FAQ

Are self-directed IRAs a good idea?

There are advantages and disadvantages to self-directed IRAs. Benefits include the fact that you can make alternative types of investments you might not otherwise be able to. That could help you diversify your portfolio and potentially increase your returns.

However, there are drawbacks to SDIRAs, including higher risk because alternative investments tend to be riskier, and potentially higher fees for maintenance of investments in the plan and account fees. In addition, investors need to research the investments themselves and follow the IRS rules carefully to make sure they comply. Finally, many alternative investments are not liquid, which means they could take longer and be more difficult to sell.

Can you set up a self-directed IRA yourself?

To set up a self-directed IRA, find a custodian or trustee such as a bank or trust company to open an account, research and choose your investments, find a reputable dealer for the investments you’d like to make, and have your custodian complete the transactions.

How much money can you put in a self-directed IRA?

In 2024, you can contribute up to $7,000 to a traditional or Roth self-directed IRA, plus an additional $1,000 if you’re 50 or older.


Photo credit: iStock/Andres Victorero


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

SoFi Invest®

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

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

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In the Money (ITM) vs Out of the Money (OTM) Options

In the Money vs Out of the Money Options: Main Differences

In options trading, knowing the difference between being “in the money” (ITM) and “out of the money” (OTM) allows the holder of a contract to know whether they’ll enjoy a profit from their option. The terms refer to the relationship between the options strike price and the market value of the underlying asset.

“In the money” refers to options that have profit potential if exercised today, while “out of the money” refers to those that do not. In the rare case that the market price of an underlying security reaches the strike price of an option exactly at the time of expiry, this would be called an “at the money option.”

Key Points

•   Understanding the difference between “in the money” and “out of the money” options is crucial for options traders to gauge potential profitability.

•   Options classified as “in the money” have intrinsic value and can yield profits when exercised, while “out of the money” options lack intrinsic value and may expire worthless.

•   The potential for profit from options depends on the relationship between the strike price and the current market price of the underlying asset.

•   Higher volatility often leads to options being written “out of the money,” appealing to speculators due to lower premiums and potential for larger price swings.

•   Decisions to buy “in the money” or “out of the money” options should align with an investor’s goals, risk tolerance, and confidence in the underlying asset’s future performance.

What Does “In the Money” Mean?

In the money (ITM) describes a contract that would be profitable if its owner were to choose to exercise the option today. If this is the case, the option is said to have intrinsic value.

A call option would be in the money if the strike price is lower than the current market price of the underlying security. An investor holding such a contract could exercise the option to buy the security at a discount and sell it for a profit right away.

Put options, which are a way to short a stock, would be in the money if the strike price is higher than the current market price of the underlying security. A contract of this nature allows the holder to sell the security at a higher price than it currently trades for and pocket the difference.

In either case, an in the money contract has intrinsic value, so the options trader can exercise the option and make money doing so.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Example of In the Money

For example, say an investor owns a call option with a strike price of $15 on a stock currently trading at $16 per share. This option would be in the money because its owner could exercise the option to realize a profit. The contract gives the holder the right to buy 100 shares of the stock at $15, even though the market price is currently $16.

The contract holder could take shares acquired through the contract for a total of $1,500 and sell them for $1,600, realizing a profit of $100 minus the premium paid for the contract and any associated trading fees or commissions.

While call options give the holder the right to buy a security, put options give holders the right to sell. For example, say an investor owns a put option with a strike price of $10 on a stock that is trading at $9 per share. This would be an in the money option. The holder could sell 100 shares of stock at a price of $10 for a total of $1,000, even though it only costs $900 to buy those same shares. The contract holder would realize that difference of $100 as profit, minus the premium and any fees.

What Does “Out of the Money” Mean?

Out of the money (OTM) is the opposite of being in the money. OTM contracts do not have intrinsic value. If an option is out of the money at the time of expiration, the contract will expire worthless. Options are out of the money when the relation of their strike prices to the current market price of their securities are opposite that of in the money options.

For calls, an option with a strike price higher than the current price of the underlying security would be out of the money. Exercising such an option would result in an investor buying a security for a price higher than its current market value.

For puts, an option with a strike price lower than the current price of its security would be out of the money. Exercising such an option would cause an investor to sell a security at a price lower than its current market value.

In either case, contracts are out of the money because they don’t have intrinsic value – anyone exercising those contracts would lose money.

Example of Out of the Money

Say an investor buys a call option with a strike price of $15 on a stock currently trading at $13. This option would be out of the money. An investor might buy an option like this in the hopes that the stock will rise above the strike price before expiration, in which case a profit could be realized.

Another example would be an investor buying a put option with a strike price of $7 on a stock currently trading at $10. This would also be an out of the money option. An investor might buy this kind of option with the belief that the stock will fall below the strike price before expiration.


💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

What’s the Difference Between In the Money and Out of the Money?

The premium of an options contract involves two different factors: intrinsic value and extrinsic value. Options that have intrinsic value at the time they are written to have a strike price that is profitable relative to the current market price. In other words, such options are already in the money when written.

But not all options are written ITM. Those without intrinsic value rely instead on their extrinsic value. This value comes from speculative bets that investors make over a period of time. For this reason, assets with higher volatility often have their options contracts written out of the money, as investors expect there to be bigger price swings. Conversely, assets considered to be less volatile often have their options written in the money.

Options written out of the money are ideal for speculators because such contracts come with less expensive premiums and are often created for more volatile assets.

Recommended: Popular Options Trading Terminology to Know

Should I Buy ITM or OTM Options?

The answer to this question depends on an investor’s goals and risk tolerance. Options that are further out of the money can be more rewarding, but come with greater risk, uncertainty, and volatility. Whether an option is in or out of the money (and how far they’re out of the money), and the amount of time before the expiry of the option impacts the premium for that option, with riskier options typically costing more.

Whether to buy ITM or OTM options also depends on how confident an investor feels about the future of the underlying security. If a trader feels fairly certain that a particular stock will trade at a much higher price three months from now, then they might not hesitate to buy a call option with a very high strike price, making it out of the money.

Conversely, if an investor thinks a stock will fall in price, they can buy a put option with a very low strike price, which would also make the option out of the money.

Beginners and those with lower risk tolerance may prefer buying options that are only somewhat out of the money or those that are in the money. These options usually have lower premiums, meaning they cost less to buy. There are also generally greater odds that the contract will wind up in the money before expiration, as it will take a less dramatic move to make that happen.

Investors can also choose to combine multiple options legs into a spread strategy that attempts to take advantage of both possibilities.

Recommended: 10 Important Options Trading Strategies

The Takeaway

In options trading, “in the money” refers to options that have profit potential if exercised immediately, while “out of the money” refers to those that don’t. Options contracts don’t have to be exercised to realize a profit. Sometimes investors buy contracts with the intent of selling them on the open market soon after they become in the money for quick gains.

In either case, it’s important to consider if an option is in the money or out of the money when buying or writing options contracts, as well as when deciding when to execute them. Options trading is an advanced investing strategy, and investors should know what they’re doing before engaging with it – or should speak with a financial professional for guidance.

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

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


Photo credit: iStock/damircudic

SoFi Invest®

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

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

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

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

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Average Stockbroker Commission Percentage

Moving money around and buying securities isn’t free, and on average, a stockbroker or brokerage will charge a commission between 1% and 2%. Investing in the stock market is usually alluring for those trying to grow their money. Stockbrokers often charge commissions and other fees for the use of their services, but note that these brokerage fees can vary widely.

Investors must pay attention to average brokerage fees when making investment decisions; finding the right broker can play a significant role in long-term financial outcomes. Before delving into how much stockbrokers typically charge for their services, it’s worth understanding their role in an individual’s investment strategy.

Key Points

•   Stockbrokers typically charge commissions ranging from 1% to 2% of the total transaction value, influencing long-term investment outcomes significantly.

•   There are two main types of stockbrokers: full-service, which offers comprehensive services and higher fees, and discount brokers, which charge lower, per-transaction fees.

•   Common brokerage fees include management fees, trading commissions, and retirement account fees, all of which can impact overall investment returns.

•   High brokerage fees can discourage investment and reduce long-term gains, making it essential for investors to understand and compare costs associated with different brokers.

•   Despite the costs, using a stockbroker can provide valuable resources and guidance for novice investors navigating complex financial markets.

What Does a Stockbroker Do?

A stockbroker, or investment broker, is an individual or firm that charges a fee or commission to buy or sell stocks and other securities on behalf of their clients. Using a stockbroker is relatively common for people looking to invest in the market.

Buying stocks isn’t like making other purchases because the channels through which stocks are bought and sold are fairly controlled. While an individual buying a computer could choose to purchase directly from a manufacturer, a store, or a friend, the channels for buying stocks are much more limited. Generally, purchases of stock are required to flow through a stockbroker.

However, there are some instances when someone may buy stocks without a broker, including buying and selling through direct stock and dividend reinvestment plans.

In addition to selling shares of companies, a stockbroker may also sell other traded securities such as mutual funds and exchange-traded funds (ETFs).

What Is the Average Stock Broker Commission Fee?

The amount charged by a brokerage firm for its services can vary greatly. Some firms may charge a flat fee for their services, while others may charge a percentage of the overall value of the transaction. The average fee charged by brokerage firms is typically between 1% and 2% of the total transaction value.

Full-Service vs Discount Stockbrokers

The main two categories of stockbrokers are full-service brokers and discount brokers. You want to understand the differences before opening a brokerage account.

A full-service brokerage firm offers a more hands-on service, helping clients balance their portfolios and providing other investment advice. Discount brokers allow an investor to buy and sell stock and other assets, but provide few add-ons but still. Commission rates and additional fees vary accordingly.

Because full-service stockbrokers provide an array of services, they typically base their commissions on a more all-inclusive model determined by the value of the investments they manage. While there may also be additional fees, the typical commission structure for a full-service broker is known as the percentage of assets under management. The cost is charged annually and is listed within fee schedules as “x%/AUM” (assets under management).

Discount brokers, on the other hand, typically charge a per-transaction flat stock trade fee, regardless of the type of stock or number of shares being bought or sold.

For example, if the stock trade fee is $5 per trade, that’s what an individual would pay whether they were buying five shares of a stock valued at $50 a share ($250) or 500 shares ($25,000).

However, many discount brokers do not charge commissions for trading stocks.

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

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

Common Brokerage Fees

Various investment fees and costs are associated with the buying and selling of investments. Investors should consider these brokerage fees when choosing a broker and deciding what investments to make.

Management Fees

An investment’s management fee is the fee the investment manager charges for its services. This fee is typically a percentage of the investment’s assets under management and is deducted from the investment’s returns.

If you use a full-service brokerage that offers money management services, they will often charge a management fee. Some charge as much as 2%, and others may charge less. Generally speaking, the more money you have invested with a broker or money manager, the lower your management fee will be.

Commission For Trading

Many brokerage firms charge a commission for making trades on behalf of clients. Fees and commissions vary widely depending on the type of transaction and broker. Again, those fees can be based on a percentage of the transaction’s value — usually between 1% to 2% — or they can be a flat fee.

The commissions for trading depend on whether an investor uses a full-service or discount broker. Because full-service brokers offer a wide range of advice and services, their commissions per trade may be higher than a discount or online brokerage might charge.

Discount brokers offer fewer advice and services, so they can charge a lower flat fee per trade, from less than $5 to more than $30. In recent years, the biggest online brokerage firms have offered no commission trading, partly due to competition and because they instead get paid through a practice known as payment for order flow.

Retirement Account Fees: 401(k)

If you have a 401(k) account through your employer, there are several fees to keep in mind when making your investments.

First, you’ll likely be charged an administration fee to maintain the plan. These fees may range from 0.5% to more than 2% of your 401(k) balance. The 401(k) provider charges this fee to your employer, and the cost is usually passed down to the employees.

Additionally, the actual investments in your 401(k), like mutual funds and ETFs, charge management fees that you’ll have to pay.

Mutual Fund Fees

Investors interested in buying and selling mutual funds must consider the fees associated with these investment vehicles.

Expense Ratio

The expense ratio is the yearly cost that mutual funds and ETFs charge investors to cover operating costs. The expense ratio measures the total costs as a percentage of the fund’s total assets. The fund’s costs may include management, custodial, marketing, and other expenses.

The average expense ratio for an actively managed mutual fund ranges from 0.5% to 1.0%, while passive funds have an average expense ratio of 0.2%.

The costs of operating the mutual fund are deducted from your investment, reducing your returns each year.

Sales Load

Mutual fund investors may pay sales loads — also known as sales charges — when they buy or sell shares of the fund. The sales load is how the broker or advisor gets paid for their service.

A sales load isn’t a flat transaction fee, however. Instead, it’s a percentage of the assets invested. FINRA caps mutual fund sales loads at 8.5%, though the common range is between 3% and 6%.

Brokerage Fee Impact on Investments Long-Term

Brokerage and investment fees and commissions can eat away at long-term gains. Thus, working with a brokerage that charges lower fees may help you achieve your long-term financial goals sooner, as you’ll be paying fewer fees.

To illustrate, if full-service brokerage charges a 1.5% annual management fee on a $50,000 portfolio, that costs $750 for the investor during a single year. While that charge doesn’t seem significant for one year, those fees will add up and eat into overall returns over time.

Brokerage Fee Pros

One of the benefits of using a brokerage is that you have access to valuable resources, research, and advice. These services may help you make better investment decisions, leading to better financial outcomes. So, you may get what you pay for, even if you think the fees may be steep.

Brokerage Fee Cons

As noted above, brokerage fees can be expensive and eat into investment returns. This is especially a problem if you don’t do your homework and pay attention to all the fees charged by brokers and the kind of investments you make.

Additionally, high brokerage fees may discourage some people from investing, leading to poor long-term financial outcomes.

Is It Worth Using a Stockbroker?

Using a stockbroker, especially a full-service brokerage, can be ideal for investors intimidated by complicated financial markets. The idea of having a licensed professional guide novice investors through every investment decision and trade might seem like a good way to get more comfortable with the principles of investing. But as the above examples illustrate, the average full-service stockbroker commission can make the full-service approach expensive.

The Takeaway

A stockbroker or brokerage will charge a commission between 1% and 2%, but there are options on the market that charge no commissions at all, and other investment vehicles with similar fees or commission charges.

With long-term returns that have historically outpaced interest rates on savings, investing in the stock market can be a powerful strategy for financial growth. Even beginners may find investing less intimidating than they thought — and possibly steer clear of high stockbroker fees.

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

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

FAQ

How do stock brokerage fees work?

Stock brokerage fees are typically a commission that a broker charges for executing trades on behalf of their clients. These fees can vary depending on the type of trade being executed, as well as the broker’s commission structure.

Are there any alternatives to a brokerage fee?

A brokerage fee is a charge assessed by a broker for their services, which typically include advice, transaction execution, and asset management. There are a variety of alternatives to brokerage fees, including flat fees, subscription fees, and performance-based fees.


SoFi Invest®

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

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

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

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

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Day Trading Strategies for Beginners

Day trading is a type of active trading where an investor buys and sells stocks or other assets based on short-term price movements. Day trading is often thought to differ from a buy-and-hold strategy typically used by long-term investors.

With day trading, the investor is not necessarily looking for assets that will make money over the long-term. Instead, a day trader seeks to generate short-term gains.

Investors should know, though, that day trading is an incredibly risky strategy and there’s a high chance of losing money.

Key Points

•   Day trading involves buying and selling assets within short time frames to capitalize on price fluctuations, differing significantly from long-term investment strategies.

•   Various day trading strategies include technical analysis, swing trading, momentum trading, and scalping, each employing distinct methods to achieve short-term profits.

•   Successful day traders prioritize liquidity, volatility, and high trading volume, enabling rapid execution of trades while minimizing potential losses from price swings.

•   Risk management is crucial in day trading; investors should only risk capital they can afford to lose and remain disciplined to avoid emotional decision-making.

•   Understanding trading costs, tax implications, and regulations is essential for day traders to navigate the complexities of the market and optimize their strategies.

What Is Day Trading?

Day trading incorporates short-term trades on a daily or weekly basis in an effort to generate returns. The Securities and Exchange Commission (SEC) says that “day traders buy, sell and short-sell stocks throughout the day in the hope that the stocks continue climbing or falling in value for the seconds or minutes they hold the shares, allowing them to lock in quick profits.”

A long-term investor, conversely, may buy a stock because they think that the company will grow its revenue and earnings, creating value for itself and the economy. Long-term investors believe that that growth will ultimately benefit shareholders, whether through share-price appreciation or dividend payouts.

A day trader, on the other hand, likely gives little credence to whether a company represents “good” or “bad” value. Instead, they are concerned with how price volatility will push an asset like a stock higher in the near-term.

Day trading is a form of self-directed active investing, whereby an investor attempts to manage their investments and outperform or “beat” the stock market.

Recommended: A User’s Guide to Day Trading Terminology

7 Common Day Trading Strategies

Some common types of day trading strategies that you may want to research include technical analysis, scalping, momentum, swing trading, margin and so on. Here’s a closer look at them.

1. Technical Analysis

Technical analysis is a type of trading method that uses price patterns to forecast future movement. A general rule of thumb in investing is that past performance never guarantees future results. However, technical analysts believe that because of market psychology, history tends to repeat itself.

Support and resistance are price levels that traders look at when they’re applying technical analysis. “Support” is where the price of an asset tends to stop falling and “resistance” is where the price tends to stop climbing. So, for instance, if an asset falls to a support level, some may believe that buyers are likely to swoop in at that point.

2. Swing Trading

Swing trading is a type of stock market trading that attempts to capitalize on short-term price momentum in the market. The swings can be to the upside or to the downside and typically from a couple days to roughly two weeks.

Generally, a swing trader uses a mix of fundamental and technical analysis to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, ETFs, and other market instruments that exhibit volatility.

3. Momentum Trading

Momentum trading is a type of short-term, high-risk trading strategy. While momentum trades can be held for longer periods when trends continue, the term generally refers to trades that are held for a day or several days, on average.

Momentum traders strive to chase the market by identifying the trend in price action of a specific security and extract profit by predicting its near-term future movement. Looking for a good entry point when prices fall and then determining a profitable exit point is the method to momentum trading.

4. Scalp Trading

In scalp trading, or scalping, the goal of this trading style is to make profits off of small changes in asset prices. Generally, this means buying a stock, waiting for it to increase in value by a small amount, then selling it. The theory behind it is that many small gains can add up to a significant profit over time.

5. Penny Stocks

Penny stocks — shares priced at pennies to up to $5 apiece — are often popular among day traders. However, they can be difficult to trade because many are illiquid. Penny stocks aren’t typically traded on the major exchanges, further increasing potential difficulties with trading. Typically, penny stocks sell in over-the-counter (OTC) markets.

6. Limit and Market Orders

There are types of orders that day traders quickly become familiar with. A limit order is when an investor sets the price at which they’d like to buy or sell a stock. For example, you only want to buy a stock if it falls below $40 per share, or sell it if the price rises to over $60. A limit order guarantees a particular price but does not guarantee execution.

With a market order, you are guaranteed execution but not necessarily price. Investors get the next price available at that time. This price may be slightly different than what is quoted, as the price of that underlying security changes while the order goes through.

7. Margin Trading

Margin accounts are a type of brokerage account that allows the investor to borrow money from the broker-dealer to purchase securities. The account acts as collateral for the loan. The interest rate on the borrowed money is determined by the brokerage firm.

Trading with this borrowed money — called margin trading — increases an investor’s purchasing power, but comes with much higher risk. If the securities lose value, an investor could be left losing more cash than they originally invested.

In the case that the investor’s holdings decline, the brokerage firm might require them to deposit additional cash or securities into their account, or sell the securities to cover the loss. This is known as a margin call. A brokerage firm can deliver a margin call without advance notice and can even decide which of the investor’s holdings are sold.

Best Securities For Day Trading

Day traders can work across asset classes and securities: company stocks, fractional shares, ETFs, bonds, fiat currencies, cryptocurrencies, or commodities like oil and precious metals. They can also trade options or futures — different types of derivatives contracts.

But there are some commonalities that day-trading markets tend to have, including liquidity, volatility, and volume.

Liquidity

Liquidity refers to how quickly an asset can be bought and sold without causing a significant change in its price. In other words, how smoothly can a trader make a trade?

Liquidity is important to day traders because they need to move in and out of positions quickly without having prices move against them. That means prices don’t move higher when day traders are buying, or move down when they’re starting to sell.

Volatility

Market volatility can often be considered a negative thing in investing. However, for day traders, volatility can be essential because they need big price swings to potentially capture profits.

Of course, volatility could mean big losses for day traders too, but a slow-moving market typically doesn’t offer much opportunity for day traders.

Volume

High stock volume may indicate that there is a lot of interest in a security, while low volume can indicate the opposite. Elevated interest means there’s a greater likelihood of more liquidity and volatility — which are, as discussed, two other characteristics that day traders look for.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Day Trading Basics — How to Get Started

Before starting to day trade, some investors set aside a dollar amount they’re comfortable investing — and potentially losing. They need to figure out their personal risk tolerance, in other words.

Getting the hang of day trading can take some time, so newbie day traders may want to start with a small handful of stocks. This will be more manageable and give traders time to hone their skills.

Recommended: How Many Stocks Should I Own?

Good day traders can benefit from staying informed about events that may cause big price shifts. These can range from economic and geopolitical news to specific company developments.

Here’s also a list of important concepts or terms every prospective day trader should know.

1. Trading Costs

If you’re utilizing day trading strategies, it’s wise to consider the cost. Many major brokerage firms accommodate day trading, but some charge a fee for each trade. This is called a transaction cost, commission, mark up, mark down, or a trading fee. Some firms also charge various other fees for day trading or trading penny stocks.

Some platforms are specifically designed for day trading, offering low-cost or even zero-cost trades and a variety of features to help traders research and track markets.

2. Pattern Day Trader

A pattern day trader is a designation created by the Financial Industry Regulatory Authority (FINRA). A brokerage or investing platform will classify investors as pattern day traders if they day trade a security four or more times in five business days, and the number of day trades accounts for more than 6% of their total trading activity for that same five-day period.

When investors get identified as pattern day traders, they must have at least $25,000 in their trading account. Otherwise, the account could get restricted per FINRA’s day-trading margin requirement rules.

3. Freeriding

In a cash account, an investor must pay for the purchase of a security before selling it. Freeriding occurs when an investor buys and then sells a security without first paying for it.

This is not allowed under the Federal Reserve Board’s Regulation T. In cases where freeriding occurs, the investor’s account may be frozen by the broker for a 90-day period. During the freeze, an investor is still able to make trades or purchases but must pay for them fully on the date of the trade.

4. Tax Implications of Trader vs Investor

The IRS makes a distinction between a trader and an investor. Generally, an investor is someone who buys and sells securities for personal investment. A trader on the other hand is considered by the law to be in business. The tax implications are different for each.

According to the IRS, a trader must meet the following requirements below. If an individual does not meet these guidelines, they are considered an investor.

•   “You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;

•   Your activity must be substantial; and

•   You must carry on the activity with continuity and regularity.”

5. Capital Gains Taxes

Another important tax implication to note is that the IRS differentiates between short-term and long-term investments for capital gains tax rates. Generally, investments held for over a year are considered long-term and those held for under a year are short-term.

While long-term capital gains may benefit from a lower tax rate, short-term capital gains are taxed at the same rate as ordinary income.

A capital loss occurs when an investment loses value. In certain circumstances, when a capital loss exceeds a capital gain, the difference could potentially be applied as a tax deduction. Some brokerages may also offer automated tax loss harvesting as a way to strategically offset investment profits.

6. Wash Sale Rule

While capital losses can sometimes be taken as a tax deduction, there are certain regulations in place to prevent investors from abusing those benefits. One such regulation is the wash sale rule, which says that investors cannot benefit from selling a security at a loss and then buy a substantially identical security within the next 30 days.

A wash sale also occurs if you sell a security and then your spouse or a corporation you control buys a substantially identical security within the next 30 days.

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

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


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

Which Day Trading Strategy Is Best for Beginners?

There’s no single answer that’s going to be correct for every trader. But investors might want to stick to the simpler strategies to get a hang of day trading. For instance, they could take a try at technical analysis to try and determine which trades may end up being profitable. Or, they could stick with swing trades to test the waters, too.

Perhaps the most important thing to keep in mind is that day trading is, as mentioned, incredibly risky.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Best Times to Day Trade

As mentioned, day traders seek high liquidity, volatility and volumes. That’s why when it comes to stocks, the first 15 minutes of the trading day, after the equity market opens at 9:30am, may be one of the active stretches for day traders.

The stock market tends to be more volatile during this time, as traders and investors try to figure out the market’s direction and prices react to company reports or economic data that was released before the opening bell. Volume also tends to pick up before the closing bell at 4pm.

For futures, commodities and currencies trading, markets are open 24 hours so day traders can be active around the clock. However, they may find less liquidity at night when most investors and traders in the U.S. aren’t as active.

Day Trading Risk Management

The SEC issued a stern warning regarding day trading in 2005, and that message still holds value today. They noted that most people do not have the wealth, time, or temperament to be successful in day trading.

If an individual isn’t comfortable with the risks associated with day trading, they shouldn’t delve into the practice. But if someone is curious, here are some steps they can take to manage the risks that stem from day trading:

1.    Try not to invest more than you can afford. This is particularly important with options and margin trading. It’s crucial for investors to understand how leverage works in such trading accounts and that they can lose more than they originally invested.

2.    Investors and traders often benefit from tracking and monitoring volatility. One way to do this is by finding one’s portfolio beta, or the sensitivity to swings in the broader market. Adjusting one’s portfolio so it’s not too sensitive to sweeping volatility may be helpful.

3.    Day traders often benefit from picking a trading strategy and sticking with it. One struggle many day traders contend with is avoiding getting swept up by the moment and deviating from a plan, only to lock in losses.

4.    Don’t let your emotions take the driver’s seat. Fear and greed can dominate investing and sway decisions. But in investing, it can be better to keep a cool head and avoid reactionary behavior.

Is It Difficult To Make Money Day Trading?

While it may feel like it’s easy to make a couple of lucky moves and turn a profit from some trades, it isn’t easy to make money day trading. Again, it’s very, very risky, and new traders would do well not to assume they’re going to make any money at all. That said, there are professional traders out there, but they use professional-grade tools and experience to help inform their decisions. New traders shouldn’t expect to emulate a professional trader’s success.

The Takeaway

Day trading involves making short-term stock trades in an effort to generate returns. It can be lucrative, but is extremely risky, and prospective traders would likely do well to practice and learn some tools of the trade before giving it a shot. They’ll also want to closely consider their risk tolerance, too.

Again, while stock investing can be an important way to build wealth for individuals, it’s crucial however to know that the consequences of risky day trading can be catastrophic. Investors need to be disciplined, cautious and put in the time and effort before delving into day trading strategies.

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

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

FAQ

What is day trading and how does it differ from other trading strategies?

Day trading involves making short-term trades with stocks or other securities in an effort to make a profit. Other strategies may involve longer-term investments, which are not bought and sold on a daily or weekly (or monthly) basis.

Are there any risk management techniques specific to day trading strategies?

Traders can do many things to try and limit their risks, and that can include working with different brokers or platforms, incorporating thinking patterns or rituals before making trades, setting up stop-losses, and diversifying their portfolios.

Are day trading strategies suitable for all types of markets, such as stocks, forex, or cryptocurrencies?

Day trading can be done in many asset classes and markets, which can include stocks, forex, and even crypto. But each asset is different, and the markets may not behave the same ways, either. As such, traders may want to do some homework before jumping in.

How much capital is typically required to implement day trading strategies?

It’s generally recommended that traders start with at least $25,000 in their brokerage accounts before day trading.

Are there any specific timeframes or market conditions that are more favorable for day trading strategies?

Perhaps the best times of the day for day traders are immediately after the markets open, and shortly before they close. There may also be more market action on certain days of the week (Mondays, for instance) which create good conditions for day traders.


SoFi Invest®

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

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

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

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

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