Oct
17
2025
The Ultimate List of Financial Ratios

The Ultimate List of Financial Ratios

By | Growing Wealth, invest, Investing | Comments Off on The Ultimate List of Financial Ratios

Financial ratios compare specific data points from a company’s balance sheet to capture aspects of that company’s performance. For example, the price-to-earnings (P/E) ratio compares the price per share to the company’s earnings per share as a way of assessing whether the company is overvalued or undervalued.

Other ratios may be used to evaluate other aspects of a company’s financial health: its debt, efficiency, profitability, liquidity, and more.

The use of financial ratios is often used in quantitative or fundamental analysis, though they can also be used for technical analysis. For example, a value investor may use certain types of financial ratios to indicate whether the market has undervalued a company or how much potential its stock has for long-term price appreciation.

Meanwhile, a trend trader may check key financial ratios to determine if a current pricing trend is likely to hold.

With either strategy, informed investors must understand the different kinds of commonly used financial ratios, and how to interpret them.

Key Points

•  Financial ratios serve as tools for evaluating aspects of a company’s financial health, assisting both business owners and investors in decision-making.

•  Key financial ratios include earnings per share (EPS), price-to-earnings (P/E), and debt to equity (D/E), each providing insights into profitability, valuation, and leverage.

•  Liquidity ratios, such as the current ratio and quick ratio, help assess a company’s ability to meet short-term obligations, crucial for evaluating newer firms.

•  Profitability ratios, including gross margin and return on assets, gauge how effectively a company generates income from its operations and assets.

•  Coverage ratios, like the debt-service coverage ratio and interest coverage ratio, measure a company’s capacity to manage its debt obligations, providing insights into financial stability.

What Are Financial Ratios?

A financial ratio is a means of expressing the relationship between two pieces of numerical data, which then provides a measurable insight. When discussing ratios in a business or investment setting, you’re typically talking about information that’s included in a company’s financial statements.

Financial ratios can provide insight into a company, in terms of things like valuation, revenues, and profitability. Various ratios can also aid in comparing two companies.

For example, say you’re considering investing in the tech sector, and you are evaluating two potential companies. One has a share price of $10 while the other has a share price of $55. Basing your decision solely on price alone could be a mistake if you don’t understand what’s driving share prices or how the market values each company.

That’s where financial ratios become useful for understanding the bigger picture of a company’s health and performance. In this example, knowing the P/E ratio of each company — again, which compares the price-per-share to the company’s earnings-per-share (EPS) — can give an investor a sense of each company’s market value versus its current profitability.

Recommended: How to Read Financial Statements

21 Key Financial Ratios

Investors tend to use some financial ratios more often or place more significance on certain ratios when evaluating business or companies, whether investing online or through a brokerage.

Bear in mind that most financial ratios are hard to interpret alone; most have to be taken in context — either in light of other financial data, other companies’ performance, or industry benchmarks.

Here are some of the most important financial ratios to know when buying stocks.

1. Earnings Per Share (EPS)

Earnings per share or EPS measures earnings and profitability. This metric can tell you how likely a company is to generate profits for its investors. A higher EPS typically indicates better profitability, though this rule works best when making apples-to-apples comparisons for companies within the same industry.

EPS Formula:

EPS = Net profit / Number of common shares

To find net profit, you’d subtract total expenses from total revenue. (Investors might also refer to net profit as net income.)

EPS Example:

So, assume a company has a net profit of $2 million, with 12,000,000 shares outstanding. Following the EPS formula, the earnings per share works out to $0.166.

2. Price-to-Earnings (P/E)

Price-to-earnings ratio or P/E, as noted above, helps investors determine whether a company’s stock price is low or high compared to other companies, or to its own past performance. More specifically, the price-to-earnings ratio can give you a sense of how expensive a stock is relative to its competitors, or how the stock’s price is trending over time.

P/E Formula:

P/E = Current stock price / Current earnings per share

P/E Example:

Here’s how it works: A company’s stock is trading at $50 per share. Its EPS for the past 12 months averaged $5. The price-to-earnings ratio works out to 10 — which means investors are willing to pay $10 for every one dollar of earnings. In order to know whether the company’s P/E is high (potentially overvalued) or low (potentially undervalued), the investors typically compare the current P/E ratio to previous ratios, as well as to other companies in the industry.

3. Debt to Equity (D/E)

Debt to equity or D/E is a leverage ratio. This ratio tells investors how much debt a company has in relation to how much equity it holds.

D/E Formula:

D/E = Total liabilities / Shareholders equity

In this formula, liabilities represent money the company owes. Equity represents assets minus liabilities or the company’s book value.

D/E Example:

Say a company has $5 million in debt and $10 million in shareholder equity. Its debt-to-equity ratio would be 0.5. As a general rule, a lower debt to equity ratio is better as it means the company has fewer debt obligations.

4. Return on Equity (ROE)

Return on equity or ROE is another financial ratio that’s used to measure profitability. In simple terms, it’s used to illustrate the return on shareholder equity based on how a company spends its money.

ROE Formula:

ROE = Net income – Preferred dividends / Value of average common equity

ROE Example:

Assume a company has net income of $2 million and pays out preferred dividends of $200,000. The total value of common equity is $10 million. Using the formula, return on equity would equal 0.18 or 18%. A higher ROE means the company generates more profits.

Liquidity Ratios

Liquidity ratios can give you an idea of how easily a company can pay its debts and other liabilities. In other words, liquidity ratios indicate cash flow strength. That can be especially important when considering newer companies, which may face more significant cash flow challenges compared to established companies.

5. Current Ratio

Also known as the working-capital ratio, the current ratio tells you how likely a company is able to meet its financial obligations for the next 12 months. You might check this ratio if you’re interested in whether a company has enough assets to pay off short-term liabilities.

Formula:

Current Ratio = Current Assets / Current Liabilities

Example:

Say a company has $1 million in current assets and $500,000 in current liabilities. It has a current ratio of 2, meaning for every $1 a company has in current liabilities it has $2 in current assets. Generally speaking, a ratio between 1.5 and 2 indicates the company can manage its debts; above 2 a company has strong positive cashflow.

6. Quick Ratio

The quick ratio, also called the acid-test ratio, measures liquidity based on assets and liabilities. But it deducts the value of inventory from these calculations.

Formula:

Quick Ratio = Current Assets – Inventory / Current Liabilities

Example:

Quick ratio is also useful for determining how easily a company can pay its debts. For example, say a company has current assets of $5 million, inventory of $1 million and current liabilities of $500,000. Its quick ratio would be 8, so for every $1 in liabilities the company has $8 in assets.

7. Cash Ratio

A cash ratio tells you how much cash a company has on hand, relative to its total liabilities, and it’s considered a more conservative measure of liquidity than, say, the current or quick ratios. Essentially, it tells you the portion of liabilities the company could pay immediately with cash alone.

Formula:

Cash Ratio = (Cash + Cash Equivalents) / Total Current Liabilities

Example:

A company that has $100,000 in cash and $500,000 in current liabilities would have a cash ratio of 0.2. That means it has enough cash on hand to pay 20% of its current liabilities.

8. Operating Cash Flow Ratio

Operating cash flow can tell you how much cash flow a business generates in a given time frame. This financial ratio is useful for determining how much cash a business has on hand at any given time that it can use to pay off its liabilities.

To calculate the operating cash flow ratio you’ll first need to determine its operating cash flow:

Operating Cash Flow = Net Income + Changes in Assets & Liabilities + Non-cash Expenses – Increase in Working Capital

Then, you calculate the cash flow ratio using this formula:

Formula:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

Example:

For example, if a company has an operating cash flow of $1 million and current liabilities of $250,000, you could calculate that it has an operating cash flow ratio of 4, which means it has $4 in operating cash flow for every $1 of liabilities, in that time frame.

Solvency Ratios

Solvency ratios are financial ratios used to measure a company’s ability to pay its debts over the long term. As an investor, you might be interested in solvency ratios if you think a company may have too much debt or be a potential candidate for a bankruptcy filing. Solvency ratios can also be referred to as leverage ratios.

Debt to equity (D/E), noted above, is a key financial ratio used to measure solvency, though there are other leverage ratios that are helpful as well.

9. Debt Ratio

A company’s debt ratio measures the relationship between its debts and its assets. For instance, you might use a debt ratio to gauge whether a company could pay off its debts with the assets it has currently.

Formula:

Debt Ratio = Total Liabilities / Total Assets

Example:

The lower this number is the better, in terms of risk. A lower debt ratio means a company has less relative debt. So a company that has $25,000 in debt and $100,000 in assets, for example, would have a debt ratio of 0.25. Investors typically consider anything below 0.5 a lower risk.

10. Equity Ratio

Equity ratio is a measure of solvency based on assets and total equity. This ratio can tell you how much of the company is owned by investors and how much of it is leveraged by debt. An equity ratio above 50% can indicate that a company relies primarily on its own capital, and isn’t overleveraged.

Formula:

Equity Ratio = Total Equity / Total Assets

Example:

Investors typically favor a higher equity ratio, as it means the company’s shareholders are more heavily invested and the business isn’t bogged down by debt. So, for example, a company with $800,000 in total equity and $1.1 million in total assets has an equity ratio of 0.70 or 70%. This tells you shareholders own 70% of the company.

Profitability Ratios

Profitability ratios gauge a company’s ability to generate income from sales, balance sheet assets, operations and shareholder’s equity. In other words, how likely is the company to be able to turn a profit?

Return on equity (ROE), noted above, is one profitability ratio investors can use. You can also try these financial ratios for estimating profitability.

11. Gross Margin Ratio

Gross margin ratio compares a company’s gross margin to its net sales. This tells you how much profit a company makes from selling its goods and services after the cost of goods sold is factored in — an important consideration for investors.

Formula:

Gross Margin Ratio = Gross Margin / Net Sales

Example

A company that has a gross margin of $250,000 and $1 million in net sales has a gross margin ratio of 25%. Meanwhile, a company with a $250,000 gross margin and $2 million in net sales has a gross margin ratio of 12.5% and realizes a smaller profit percentage per sale.

12. Operating-Margin Ratio

Operating-margin ratio, sometimes called return on sales (ROS), measures how much total revenue is composed of operating income, or how much revenue a company has after its operating costs. It’s a measure of how efficiently a company generates its revenue and how much of that it turns into profit.

Formula:

Operating Margin Ratio = Operating Income / Net Sales

Example:

A higher operating-margin ratio suggests a more financially stable company with enough operating income to cover its operating costs. For example, if operating income is $250,000 and net sales are $500,000, that means 50 cents per dollar of sales goes toward variable costs.

13. Return on Assets Ratio

Return on assets, or ROA, measures net income produced by a company’s total assets. This lets you see how efficiently a company is using its assets to generate income.

Formula:

Return on Assets = Net Income / Average Total Assets

Example:

Investors typically favor a higher ratio as it shows that the company may be better at using its assets to generate income. For example, a company that has $10 million in net income and $2 million in average total assets generates $5 in income per $1 of assets.

Efficiency Ratios

Efficiency ratios or financial activity ratios give you a sense of how thoroughly a company is using the assets and resources it has on hand. In other words, they can tell you if a company is using its assets efficiently or not.

14. Asset Turnover Ratio

Asset turnover ratio measures how efficient a company’s operations are, as it is a way to see how much sales a company can generate from its assets.

Formula:

Asset Turnover Ratio = Net Sales / Average Total Assets

A higher asset turnover ratio is typically better, as it indicates greater efficiency in terms of how assets are being used to produce sales.

Example:

Say a company has $500,000 in net sales and $50,000 in average total assets. Their asset turnover ratio is 10, meaning every dollar in assets generates $10 in sales.

15. Inventory Turnover Ratio

Inventory turnover ratio illustrates how often a company turns over its inventory. Specifically, how many times a company sells and replaces its inventory in a given time frame.

Formula:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Example:

Investors use average inventory since a company’s inventory can increase or decrease throughout the year as demand ebbs and flows. As an example, if a company has a cost of goods sold equal to $1 million and average inventory of $500,000, its inventory turnover ratio is 2. That means it turns over inventory twice a year.

16. Receivables Turnover Ratio

Receivables turnover ratio measures how well companies manage their accounts receivable, and collect money from customers. Specifically, it considers how long it takes companies to collect on outstanding receivables, and convert credit into cash.

Formula:

Receivables Turnover Ratio = Net Annual Credit Sales / Average Accounts Receivable

Example:

If a company has $100,000 in net annual credit sales, for example, and $15,000 in average accounts receivable its receivables turnover ratio is 6.67. This means that the company collects and converts its credit sales to cash about 6.67 times per year. The higher the number is, the better, since it indicates the business is more efficient at getting customers to pay up.

Coverage Ratios

Coverage ratios are financial ratios that measure how well a company manages its obligations to suppliers, creditors, and anyone else to whom it owes money. Lenders may use coverage ratios to determine a business’s ability to pay back the money it borrows.

17. Debt-Service Coverage Ratio

Debt-service coverage reflects whether a company can pay all of its debts, including interest and principal, at any given time. This ratio can offer creditors insight into a company’s cash flow and debt situation.

Formula:

Debt-Service Coverage Ratio = Operating Income / Total Debt Service Costs

Example:

A ratio above 1 means the company has more than enough money to meet its debt servicing needs. A ratio equal to 1 means its operating income and debt service costs are the same. A ratio below 1 indicates that the company doesn’t have enough operating income to meet its debt service costs.

18. Interest-Coverage Ratio

Interest-coverage ratio is a financial ratio that can tell you whether a company is able to pay interest on its debt obligations on time. This is sometimes called the times interest earned (TIE) ratio. Its chief use is to help determine whether the company is creditworthy.

Formula:

Interest Coverage Ratio = EBIT ( Earnings Before Interest and Taxes) / Annual Interest Expense

Example:

Let’s say a company has an EBIT of $100,000. Meanwhile, annual interest expense is $25,000. That results in an interest coverage ratio of 4, which means the company has four times more earnings than interest payments.

19. Asset-Coverage Ratio

Asset-coverage ratio measures risk by determining how much of a company’s assets would need to be sold to cover its debts. This can give you an idea of a company’s financial stability overall.

Formula:

Asset Coverage Ratio = (Total Assets – Intangible Assets) – (Current Liabilities – Short-term Debt) / Total Debt

You can find all of this information on a company’s balance sheet. The rules for interpreting asset coverage ratio are similar to the ones for debt service coverage ratio.

So a ratio of 1 or higher would suggest the company has sufficient assets to cover its debts. A ratio of 1 would suggest that assets and liabilities are equal. A ratio below 1 means the company doesn’t have enough assets to cover its debts.

Recommended: What Is a Fixed Charge Coverage Ratio?

Market-Prospect Ratios

Market-prospect ratios make it easier to compare the stock price of a publicly traded company with other financial ratios. These ratios can help analyze trends in stock price movements over time. Earnings per share and price-to-earnings are two examples of market prospect ratios, discussed above. Investors can also look to dividend payout ratios and dividend yield to judge market prospects.

20. Dividend Payout Ratio

Dividend payout ratio can tell you how much of a company’s net income it pays out to investors as dividends during a specific time period. It’s the balance between the profits passed on to shareholders as dividends and the profits the company keeps.

Formula:

Dividend Payout Ratio = Total Dividends / Net Income

Example:

A company that pays out $1 million in total dividends and has a net income of $5 million has a dividend payout ratio of 0.2. That means 20% of net income goes to shareholders.

21. Dividend Yield

Dividend yield is a financial ratio that tracks how much cash dividends are paid out to common stock shareholders, relative to the market value per share. Investors use this metric to determine how much an investment generates in dividends.

Formula:

Dividend Yield = Cash Dividends Per Share / Market Value Per Share

Example:

For example, a company that pays out $5 in cash dividends per share for shares valued at $50 each are offering investors a dividend yield of 10%. This can be compared to the dividend yield of another company when choosing between investments.

Ratio Analysis: What Do Financial Ratios Tell You?

Financial statement ratios can be helpful when analyzing stocks. The various formulas included on this financial ratios list offer insight into a company’s profitability, cash flow, debts and assets, all of which can help you form a more complete picture of its overall health. That’s important if you tend to lean toward a fundamental analysis approach for choosing stocks.

Using financial ratios can also give you an idea of how much risk you might be taking on with a particular company, based on how well it manages its financial obligations. You can use these ratios to select companies that align with your risk tolerance and desired return profile.

Test your understanding of what you just read.

The Takeaway

Learning the basics of key financial ratios can be helpful when constructing a stock portfolio. Rather than focusing only on a stock’s price, you can use financial ratios to take a closer look under the hood of a company, to gauge its operating efficiency, level of debt, and profitability.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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

FAQ

Which ratios should you check before investing?

Many investors start with basics like the price-to-earnings (P/E) ratio, the debt-to-equity (D/E) ratio, and the working capital ratio. But different ratios can provide specific insights that may be more relevant to a certain company or industry, e.g., knowing the operating-margin ratio or the inventory-turnover ratio may be more useful in some cases versus others.

What is the best ratio when buying a stock?

There is no “best” ratio to use when buying a stock, because each financial ratio can reveal an important aspect of a company’s performance. Investors may want to consider using a combination of financial ratios in order to make favorable investment decisions.

What is a good P/E ratio?

In general, a lower P/E ratio may be more desirable than a higher P/E ratio, simply because a higher P/E may indicate that investors are paying more for every dollar of earnings — and the stock may be overvalued.

Photo credit: iStock/MStudioImages

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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

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

SOIN-Q325-093

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Oct
17
2025
Wash Trading: What Is It? Is It Legal?

Wash Trading: What Is It and How Does It Work?

By | Growing Wealth, invest, Investing | Comments Off on Wash Trading: What Is It and How Does It Work?

Wash trading is an illegal practice in which an investor buys and sells the same or a nearly identical stock or security within a certain period of time. Wash trading is a prohibited activity under the Commodity Exchange Act (CEA) of 1936 and the Securities Exchange Act of 1934.

Wash trading is basically an attempt at market manipulation and a way to portray false market activity. Read on to learn about the implications of wash trading and how it works.

Key Points

•  Wash trading is a prohibited practice in which investors engage in buying and selling the same or similar securities to create the illusion of trading activity.

•  This practice can be a form of market manipulation and a way to portray false market activity.

•  The goal of wash trading is often to influence pricing or trading activity.

•  Wash trading is illegal and may result in penalties from regulatory agencies.

•  A wash sale is different from wash trading. The wash sale rule prohibits an investor from taking a tax deduction on a loss when they purchase the same or substantially identical security within 30 days before or after the sale.

What Is Wash Trading?

Wash trading occurs when an investor buys and sells the same or a similar security investment around the same time. This is also called round-trip trading, since an investor is essentially ending where they began — with shares of the same security in their portfolio.

Wash trades can be used as a form of market manipulation. Investors may buy and sell the same securities in an attempt to influence pricing or trading activity. The goal may be to spur buying activity to send prices up or encourage selling to drive prices down.

Some investors and brokers might work together to influence trading volume, usually for the financial benefit of both sides. The broker, for example, might benefit from collecting commissions from other investors who want to purchase a stock being targeted for wash trading. The investor, on the other hand, may realize gains from the sale of securities through price manipulation.

Wash trading is different from insider trading, which requires the parties involved to have some special knowledge about a security that the general public doesn’t. However, if an investor or broker possesses insider knowledge they could potentially use it to complete wash trades.

How Does Wash Trading Work?

Essentially, a wash trade means an investor is buying and selling shares of the same security at around the same time. But the definition of wash trades goes further and takes the investor’s intent (and that of any broker they may be working with) into account. There are generally two conditions that must be met for a wash trade to exist:

•  Intent. The intent of the parties involved in a wash trade (i.e., the broker or the investor) must be that at least one individual involved in the transaction must have entered into it specifically for that purpose.

•  Result. The result of the transaction must be a wash trade, meaning the same asset was bought and sold at the same time or within a relatively short time span for accounts with the same or common beneficial ownership.

Beneficial ownership means accounts that are owned by the same individual or entity. Trades made between accounts with common beneficial ownership may draw the eye of financial regulators, as they can suggest wash trading activity is at work.

Wash trades don’t necessarily have to involve actual trades, however. They can also happen if investors and traders appear to make a trade on paper without any assets changing hands.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Example of a Wash Trade

Here’s a wash trade example:

Say an investor owns 100 shares of a stock and sells those shares at a $5,000 loss on September 1. On September 5, they purchase 100 shares of the same stock, then resell them for a $10,000 gain. This could be considered a wash trade if the investor engaged in the trading activity with the intent to manipulate the market.

Is Wash Trading Illegal?

Yes, wash trading is illegal. The Commodity Exchange Act prohibits wash trading. Prior to the passage of the Act, traders used wash trading to manipulate markets and stock prices. The Commodity Futures Trade Commission (CFTC) also enforces regulations regarding wash trading, including guidelines that bar brokers from profiting from wash trade activity.

It’s important to distinguish between wash trading and a wash sale, which is an IRS rule. The IRS wash sale rule does not allow investors to deduct capital losses on their taxes from sales or trades of stocks or other securities in particular circumstances.

Under the IRS rules, a wash sale occurs when an investor sells or trades stocks at a loss and within 30 days before or after the sale they:

•  Purchase substantially identical stock or securities

•  Acquire substantially identical stock or securities in a fully taxable trade

•  Acquire a contract or option to buy substantially identical stock or securities, or

•  Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

Wash sale rules also apply if an investor sells stock and their spouse or a corporation they control buys substantially identical stock. When a wash sale occurs, an investor is not able to claim a tax deduction for those losses.

Essentially, the IRS wash sale rule is a tax rule. Wash trading is a form of intentional market manipulation.

Difference Between Wash Trading & Market Making

Market making and wash trading are not the same thing. A market maker is a firm or individual that buys or sells securities at publicly quoted prices on-demand, and a market maker provides liquidity and facilitates trades between buyers and sellers. For example, if you’re trading through an online broker you’re using a market maker to complete the sale or purchase of securities.

Market making is not market manipulation. A market maker is, effectively, a middleman between investors and the markets. While they do profit from their role by maintaining spreads on the stocks they cover, this is secondary to fulfilling their purpose of keeping shares and capital moving.

Recommended: What Is a Brokerage Account?

How to Detect & Avoid Wash Trading

The simplest way to avoid wash trading as an investor is to be aware of what constitutes a wash trade. Again, this can mean the intent to manipulate the markets by placing similar trades within a short timeframe.

Investors may notice red flags that may signal wash trading, such as multiple trades that have identical quantities and prices, repeated buying and selling between certain traders, and unusual trading patterns or volumes. Financial institutions and regulators also monitor trading data to identify or help prevent manipulative or abusive trading.

To avoid a wash sale, conversely, an investor could be mindful of the securities they are buying and selling and the timeframe in which those transactions are completed. So selling XYZ stock at a loss, then buying it again 10 days later to sell it for a profit would likely constitute a wash sale if they executed the trade and attempted to deduct the initial loss on their taxes.

It’s also important to understand how the 30-day period works. The 30-day rule extends to the 30 days prior to the sale and 30 days after the sale. So effectively, an investor could avoid the wash sale rule by waiting 61 days to replace assets that they sold in their portfolio.

💡 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.

The Takeaway

Wash trading involves selling certain securities and then replacing them in a portfolio with identical or very similar securities within a certain time period. This is typically done with the intent to manipulate the market. Wash trading is illegal.

Wash trading is not to be confused with the wash sale rule. For investors, understanding when the IRS wash sale rule applies can help them comply with tax guidelines. Those who are unclear about it, may wish to consult with a financial or tax professional.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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

FAQ

What’s considered wash trading

Wash trading is an illegal practice in which an investor buys and sells the same or a nearly identical security with the intent of falsely implying increased trading activity. It’s a form of market manipulation that could deceive other investors into making trades.

What’s the difference between wash trading and the wash sale rule?

Wash trading is an illegal practice with an intent to manipulate the market. The wash sales rule is a tax rule that says an investor cannot sell stock or securities for a loss and then buy substantially identical shares within 30 days before or after the sale and claim the deduction of the sale on their taxes.

Is a wash sale illegal?

No, a wash sale is not illegal. A wash sale is a tax rule that does not allow investors to claim a tax deduction if they sold a stock for a loss and then bought a substantially similar stock or security within 30 days before or after the sale.

How do day traders avoid wash sales?

To properly follow the IRS wash sales rule, an investor can wait for more than 30 days before or after the sale of a stock or security for a loss — meaning for a total of 61 days — before purchasing one that’s identical or substantially identical and then claiming the deduction for the sale on their taxes.

Photo credit: iStock/mapodile

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.

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

This article is not intended to be legal advice. Please consult an attorney for advice.

Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

SOIN-Q325-105

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Oct
15
2025
Understanding the Different Types of Mutual Funds

Understanding the Different Types of Mutual Funds

By | Growing Wealth, invest, Investing | Comments Off on Understanding the Different Types of Mutual Funds

A mutual fund is a portfolio or basket of securities (often stocks or bonds) where investors pool their money. Nationally, there are more than 7,000 mutual funds investors can choose from, spanning equity funds, bond funds, growth funds, sector funds, index funds, and more.

Mutual funds are typically actively managed, where a manager or team of professionals decides which securities to buy and sell, although some are passively managed, where the fund simply tracks an index like the S&P 500. The main differences among mutual funds typically come down to their investment objectives and the strategies they use to achieve them.

Key Points

•  Mutual funds pool money from many investors to build a diversified portfolio of securities.

•  Equity funds are higher risk, but have the potential to offer higher long-term growth; bond funds are typically lower risk, but may provide steady income.

•  Money market funds are structured to be highly illiquid and low risk, typically appropriate for short-term investments

•  Index funds passively track market indices, and may offer lower fees and tax efficiency.

•  Balanced funds have a (typically) fixed allocation of stocks and bonds, which may be suitable for moderate risk investors.

How Mutual Funds Work

Mutual funds pool money from many investors to buy a diversified mix of securities, known as a portfolio. These may include:

•  Stocks

•  Bonds

•  Money market instruments

•  Cash or cash equivalents

•  Alternative assets (such as real estate, commodities, or precious metals)

Mutual funds are typically open-end funds, which means shares are continuously issued based on demand, while existing shares are redeemed (or bought back). In contrast, a closed-end fund issues a set number of shares at once during an initial public offering.

You can buy mutual fund shares through a brokerage account, retirement plan, or sometimes directly from the financial group managing the fund. For example, you might hold mutual funds inside a taxable investment account, within an individual retirement account (IRA) with an online brokerage, or as part of your 401(k) at work.

One of the main advantages of mutual funds is the potential for diversification. If one holding underperforms or loses value, the other investments in the fund may help offset those losses, reducing overall portfolio risk.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

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9 Types of Mutual Funds

Before adding mutual funds to your portfolio, it’s important to understand the different types. Some funds aim for growth, while others focus on steady income. Certain mutual funds may carry a higher risk profile than others, though they may offer the potential for higher rewards.

Knowing more about the different mutual fund options can make it easier to choose investments that align with your goals and tolerance for risk.

1. Equity Funds

•   Structure: Typically open-end

•   Risk Level: High

•   Goal: Growth or income

•   Asset Class: Stocks

Equity funds primarily invest in stocks to pursue capital appreciation and potential income from dividends. The types of companies an equity fund invests in will depend on the fund’s objectives.

For example, some equity funds may concentrate on blue-chip companies that tend to offer consistent dividends, while others may lean toward companies that have significant growth potential. Equity funds can also be categorized based on whether they invest in large-cap, mid-cap, or small-cap stocks.

Investing in equity funds can offer the opportunity to earn higher rewards, but they tend to present greater risks. Since the prices of underlying equity investments can fluctuate day to day or even hour to hour, equity funds tend to be more volatile than other types of mutual funds.

2. Bond (Fixed-Income) Funds

•   Structure: Typically open-end; some closed-end

•   Risk Level: Low

•   Goal: Steady income

•   Asset Class: Bonds

Bond funds invest in debt securities, such as government, municipal, or corporate bonds. They give investors a convenient way to access the fixed-income market without buying individual bonds. Some bond funds try to mirror the broad bond market and include short- and long-term bonds from a wide variety of issuers, while other bond funds specialize in certain types of bonds, such as municipal bonds or corporate bonds.

Generally, bond funds tend to be lower risk compared to other types of mutual funds, and bonds issued by the U.S Treasury are backed by the full faith and credit of the U.S. government. However, bonds are not risk-free. Bonds are typically sensitive to interest rate risk (meaning their market value fluctuates inversely with changes in interest rates), as well as credit risk (since a bond’s value is directly tied to the issuer’s ability to repay its debt).

3. Money Market Funds

•   Structure: Open-end

•   Risk Level: Low

•   Goal: Income generation

•   Asset Class: Short-term debt instruments

Money market funds invest in high-quality, short-term debt from governments, banks or corporations. This may include government bonds, municipal bonds, corporate bonds, and certificates of deposit (CDs). Money market funds may also hold cash and cash equivalent securities.

Money market funds can be labeled according to what they invest in. For example, Treasury funds invest in U.S. Treasury securities, while government money market funds can invest in Treasuries as well as other government-backed assets.

In terms of risk, money market funds are considered to be very low risk. That means, however, that money market mutual funds tend to produce lower returns compared to other mutual funds.

It’s also worth noting that money market funds are not the same thing as money market accounts (MMAs). Money market accounts are deposit accounts offered by banks and credit unions. While these accounts can pay interest to savers, they’re more akin to savings accounts than investment vehicles. While money market accounts may be covered by the Federal Deposit Insurance Corporation (FDIC), money market funds may alternatively be insured by the Securities Investor Protection Corporation (SIPC).

4. Index Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Goal: To replicate the performance of an underlying market index

•   Asset Class: Stocks, bonds, or both

Index funds are designed to match the performance of an underlying market index. For example, an index fund may attempt to mirror the returns of the S&P 500 Index or the Russell 2000 Index. The fund does this by investing in some or all of the securities included in that particular index, a process that’s typically automated. Because of this, index funds are considered passively managed, unlike actively managed funds where a manager actively trades to try to exceed a benchmark.

Because index funds need much less hands-on management and don’t require specialized research analysts, they’re generally lower cost than actively managed funds. They’re also considered to be more tax-efficient due to their potentially longer holding periods and less frequent trading, which may result in fewer taxable events. However, an index fund may include both high- and low-performing stocks and bonds. As a result, any returns you earn would be an average of them all.

5. Balanced Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Goal: Provide both growth and income

•   Asset Class: Stocks and bonds

Balanced funds, sometimes referred to as hybrid funds, typically contain a fixed allocation of stocks and bonds for investors interested in both income and capital appreciation. One common example of a balanced fund is a fund that invests 60% of its portfolio in stocks and 40% of its portfolio in bonds.

By holding both growth-oriented equities (stocks) and stability-focused, fixed-income securities (bonds) in one portfolio, these funds aim to provide a middle ground between the high-risk/high-return profile of equity funds and the low-risk/low-return profile of bond funds. Balanced funds automatically maintain their asset allocation and may make sense for moderately conservative, hands-off investors seeking long-term growth potential.

6. Income Funds

•   Structure: Open-end

•   Risk Level: Low to moderate

•   Goal: Provide steady income

•   Asset Class: Bonds, income-generating assets

Income funds are designed with the goal of providing investors with regular income through interest or dividends, rather than focusing mainly on long-term growth. Some income funds focus on bonds, such as government, municipal, or corporate bonds, while others mix equities with bonds to offer a diversified approach to income generation.

Though not risk-free, income funds are generally lower risk than funds that prioritize capital gains. This type of mutual fund can be appealing to investors who value stability and regular cash flow, such as retirees. Income funds may also help balance risk in any investor’s portfolio, especially in uncertain markets.

7. International Funds

•   Structure: Mostly open-end

•   Risk Level: High

•   Goal: Growth or income outside the U.S.

•   Asset Class: Global equities and bonds (excluding U.S. securities)

International mutual funds invest in securities and companies outside of the U.S. This sets them apart from global funds, which can hold a mix of both U.S. and international securities. Some international funds focus on developed economies, while others target emerging markets, which may offer higher growth but come with higher risk.

Adding international funds to a portfolio can increase diversification and access to global opportunities if you’ve primarily invested in U.S. companies or bonds so far. But keep in mind that international funds can carry unique risks, including the risk of currency volatility and changing economic or political environments, especially in emerging markets.

8. Specialty Funds

•   Structure: Open or closed-end

•   Risk Level: Varies

•   Goal: Thematic or sector-specific investing

•   Asset Class: Equities, bonds, alternatives

A specialty fund concentrates on a specific sector, industry, or investment theme, such as technology, health care, or clean energy. They allow investors to target specific opportunities and expand their portfolios beyond traditional stocks or bonds. Specialty funds can offer exposure to assets like real estate, commodities, or even precious metals. You could also use specialty funds to pursue specific investing goals, such as investing with environmental, social, and governance (ESG) principles in mind.

Because of their narrower focus, specialty funds frequently offer less diversification, which means they may come with higher potential risks. This type of mutual fund is generally best suited for investors with a deep understanding of the target market.

💡 Quick Tip: Spreading investments across various securities may help ensure your portfolio is not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

9. Target Date Funds

•   Structure: Typically open-end

•   Risk Level: Declines over time

•   Goal: Retirement planning

•   Asset Class: Mix of stocks, bonds, and short-term investments

Target date funds are mutual funds that adjust their asset allocation automatically so the fund becomes more conservative as the target (typically retirement) date approaches. For example, if you were born in 2000 and plan to retire at 65, you would invest in a 2065 fund. As you get closer to retirement age, your target date fund will gradually become more conservative, increasing its allocations to bonds, cash, or cash equivalents.

Like mutual funds, target date funds are offered by nearly every investment company. In most cases, they’re recognizable by the year in the fund name. If you have a 401(k) at work, you may have access to various target date funds for your portfolio.

While target date funds offer a “set it and forget it” option for retirement planning, they are a one-size-fits-all solution that does not account for an individual’s unique financial situation, risk tolerance, or outside assets. Some investors may prefer a more aggressive or conservative allocation than the one the fund provides.

What’s the Difference Between Mutual Funds and ETFs?

It can be easy to confuse exchange-traded funds (ETFs) with mutual funds, since they have a number of similarities. Both are baskets of securities designed to provide diversification. And both can hold stocks, bonds, or a mix, or follow specific themes or strategies.

However, ETFs and mutual funds differ in several key ways:

•   Trading: ETFs trade throughout the day like stocks, while mutual funds are priced only once daily after the market closes.

•   Liquidity: Because they trade on exchanges throughout the day, ETFs are generally more liquid than traditional mutual funds.

•   Management: Most EFTs are passively managed, while mutual funds are typically actively managed.

•   Cost: Because they are largely passively managed, EFTs often carry lower expenses ratios.

The Takeaway

Mutual funds are among the most accessible and flexible investment options available. With choices ranging from conservative money market funds to aggressive equity and specialty funds, there’s a fund for nearly every type of investor.

The best mutual fund for you depends on your goals, time horizon, and tolerance for risk. Whether you’re seeking steady income, long-term growth, international exposure, or a hand-off retirement plan, understanding the different types of mutual funds can help you build a portfolio that supports your financial future.

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FAQ

What are the four main types of mutual funds?

The four main types of mutual funds are equity funds, debt funds, money market funds, and hybrid funds.

Equity funds invest primarily in stocks and aim for long-term capital growth. Debt funds focus on fixed-income securities like bonds, offering relatively stable returns. Money market funds invest in short-term, low-risk instruments such as Treasury bills. Hybrid funds combine equity and debt securities in varying proportions to balance risk and reward. Each type suits different investor goals, risk tolerances, and time horizons.

What is the 7-5-3-1 rule in SIP?

The 7-5-3-1 rule in SIP (systematic investment plan) is a guideline for disciplined investing. The 7 suggests staying invested for at least seven years to reap the benefits of compounding and market growth. The 5 suggests diversifying your investments across at least five different mutual fund categories to help reduce risk. The 3 is about overcoming three common mental hurdles investors face (disappointment, frustration, and panic). The 1 suggests increasing your SIP amount every year to improve your return potential in the long term.

Which type of mutual fund is best?

The “best” type of mutual fund depends on your goals, risk tolerance, and time horizon. For long-term wealth creation, equity funds often provide the highest growth potential but come with more risk. For those prioritizing stable returns, debt funds or money market funds may be a favorable choice. Investors seeking balance may prefer hybrid funds. The best fund is one that is aligned with your unique financial objectives.

Photo credit: iStock/simonapilolla

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.

Mutual Funds (MFs): 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 clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

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

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

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14
2025
What Are Exotic Options? 11 Types of Exotic Options

What Are Exotic Options? 11 Types of Exotic Options

By | Growing Wealth, invest, Investing | Comments Off on What Are Exotic Options? 11 Types of Exotic Options

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.

An option is a financial instrument that gives the buyer the right to purchase or sell an underlying security, such as a stock, during a set time period for an agreed-upon price. They are popular with some investors because they allow the investor to speculate on the price increase or decrease of a stock, without owning the stock itself.

Exotic options are a class of options that allow investors to take advantage of some features of options contracts to pursue other strategies. Exotic options are non-standard, customizable contracts that may trade over the counter (OTC) and differ in pricing from traditional options.

Key Points

•  Exotic options are complex financial instruments that can be customized using non-standard payoffs, expiration dates, and underlying assets.

•  These options help enable sophisticated investors to tailor risk exposure and implement unique strategies.

•  Exotic option strategies may involve higher or lower costs, and can offer more or less flexibility than traditional contracts, depending on the specific structure.

•  Types may include Asian, barrier, basket, Bermuda, and binary options, each with distinct characteristics.

•  Investors may benefit from financial advice when considering exotic options due to their complexity and high degree of risk.

What Is an Exotic Option?

Exotic options are hybrid securities that offer unique and often customizable payment structures, expiration dates, and strike prices. For those features, they may be priced higher or lower than traditional options, depending on the structure. University of California Berkeley professor Mark Rubinstein popularized the term “Exotic Options” in a 1990 paper about contracts.

To understand what makes an exotic option exotic, let’s review a traditional, plain-vanilla options contract and how it works. With a traditional option, the owner can buy or sell the underlying security for an agreed-upon price either before or at the option’s predetermined expiration date. The holder is not, however, obligated to exercise the option, hence the name.

An exotic option typically has all of those features, but with complex variations in the times when the option can be exercised, as well as in the ways investors may calculate the payoff.

Exotic options are typically traded in the over-the-counter (OTC) market, a smaller dealer-broker network. An exotic option may have underlying assets that differ from those offered by traditional options. Those underlying assets may include commodities like oil, corn and natural gas, in addition to stocks, bonds, and foreign currencies.

There are even exotic derivatives that allow for trading on things like the weather. Both institutional and sophisticated retail investors may use customized exotic options to match their own unique risk-management needs.

11 Types of Exotic Options

There are many types of exotic options that investors can purchase for exotic options trading. Here’s a look at some of them:

1. Asian Options

One of the most common forms of exotic options contract, the Asian option is a contract whose payoff to the holder is based on the average price of the underlying asset over one or more periods, rather than solely on the price at exercise. This makes it different from an American option, whose payout depends on the price of the underlying asset when the holder chooses to exercise it, and different from a European option, whose payoff depends on the price of the security at the time of the option’s expiration.

2. Barrier Options

These options may remain effectively dormant until activated (knock-in), or may terminate if a barrier is reached (knock-out), usually when the price of the underlying asset reaches a certain level.

3. Basket Options

Unlike traditional options, which typically have a single underlying asset, basket options contracts depend on the price movements of more than one underlying asset. For holders, the value of a basket option may be tied to the weighted average of the assets underlying the contract.

4. Bermuda Options

The main differentiator of Bermuda options is when the holder can exercise them. An investor can exercise a Bermuda option at its expiration date, and at certain set dates before then. This makes them different from American options, which holders can exercise at any point during the contract, and European options, which can only be exercised at expiration.

5. Binary Options

Sometimes called digital options, binary options are unique because they only provide a payout to the holder if a predetermined event occurs. This all-or-nothing investment may provide a predetermined payout or asset if the agreed-upon event occurs.

6. Chooser Options

With ordinary options contracts, the investor must decide upfront if they’re buying a call (right to buy the underlying security) or put (right to sell the underlying security) option. But with a chooser option, the holder can decide whether they want the option to be a put or call option at a predetermined date between when they buy the chooser option and when the contract expires.

7. Compound Options

These options, often called split-fee options, allow investors to buy an option on an option. Whether or not a compound option may result in a payout depends on the value or outcome of the underlying option. Investors in compound options have to make their decisions based on the expiration dates and strike prices of both the underlying option, as well as the compound option itself.

8. Extendible Options

The main advantage that extendible options offer is that they give an investor the ability to postpone the expiration date of the contract for an agreed-upon period of time. This can mean adding the extra time for an out-of-the-money option to potentially get into the money, a feature that’s priced into the original option contract.

Extendible options can be holder-extendible, meaning the purchaser can choose to extend their options. They can also be writer-extendible, meaning that the issuer has the right to extend the expiration date of the options contracts, if they so choose.

9. Lookback Options

Lookback options differ from most options because they do not necessarily come with a specified exercise price. Instead, depending on type, the strike (floating-strike) or the payoff (fixed-strike) is automatically determined by the most favorable price the underlying asset reached during the contract.

10. Spread Options

Unlike a traditional option, where the payout may reflect the difference between the contract’s strike price and the spot price of the underlying asset when the investor exercises the contract, a spread option may provide a return tied to the price difference between multiple assets.

11. Range Options

For highly volatile assets, some investors choose to use range options, because their payout is based on the size of the difference between the highest and lowest prices at which the underlying asset trades during the life of the range options contract.

Pros and Cons of Exotic Options

There are benefits and drawbacks to using exotic options.

Pros

•   Some exotic options may have lower premiums than comparable American-style options contracts.

•   Investors can potentially select and customize exotic options to fit very complex and precise strategies.

•   With exotic options, investors can potentially fine-tune the risk exposure of their portfolio.

•   Investors can use exotic options to seek opportunities in unique market conditions.

Cons

•   Many exotic options come with higher costs and less flexibility than traditional contracts.

•   There are no exotic options that guarantee a profit.

•   Because of their unique structures, exotic options may react to market moves in unexpected ways.

•   The complex rules mean that exotic options may carry a higher risk of ultimately becoming worthless.



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

The Takeaway

Exotic options are complex financial instruments that allow investors to speculate on the price of an asset without owning that asset itself. Unlike traditional options, exotic options include customizable features that investors could use to pursue a specific options trading strategy.

As many investors may know, trading options — of all types — is relatively advanced and requires a good amount of background knowledge and understanding of intricate financial assets. For that reason, it may be advisable to speak with a financial professional before diving into options trading.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not support non-standard, exotic options trading at this time.

Photo credit: iStock/Pekic

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.

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Oct
14
2025
How to Invest and Profit During Inflation

How to Invest During Inflation

By | Growing Wealth, invest, Investing | Comments Off on How to Invest During Inflation

While inflation is commonly associated with the rising cost of consumer goods, inflation also impacts investments like stocks, bonds, real estate, and more.

Just as inflation can reduce a consumer’s purchasing power overall, inflation can also impact the performance of different asset classes — particularly fixed-income assets such as bonds and cash — potentially reducing portfolio returns. It’s important for investors to understand how to invest during inflation, and which assets can provide a buffer against inflationary conditions.

After all, inflation doesn’t have to spell bad news for investors. SoFi’s 2025 investor survey reveals that despite inflation concerns this year, most investors are holding steady or increasing their investment contributions.

Key Points

•   Inflation affects purchasing power, and it can also take a toll on stocks, bonds, and other asset classes, impacting consumers and investors.

•   Inflation can impact the performance of some stocks and bond yields, making it advisable to reconsider some investment choices during inflationary periods.

•   During bouts of inflation, investors may want to consider inflation resistant assets, such as stocks of companies that can raise prices, commodities, TIPS, and I bonds.

•   Inflation doesn’t affect all sectors of the economy in the same way, so investors must consider a range of options when adjusting their portfolios.

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

What Is Inflation and How Does It Affect Your Investments?

Inflation is defined as a steady rise in prices. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash flows through the economy, demand for goods and services grows, leading many companies to raise prices.

To some degree, inflation is a natural outcome of a growing economy. Historically, economic booms have come with an annual inflation rate of about 1% to 2%, a range that reflects solid consumer sentiment in a growing economy.

An inflation rate of 3%, 4%, 5% or more is associated with an overheated economy.

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

Key Measures of Inflation

The main barometer of inflation in the United States is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, health care, transportation, food and beverage, and education, among other economic sectors.

The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE), in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

Because investors may have less money to put into the markets when prices rise and their budgets become tighter, inflation may impact the people’s decision to buy stocks online or through a brokerage. Overall, it means there may be less liquidity in the markets. The relationship between investing and inflation may further be affected as interest rates are increased to combat rising prices, potentially affecting business profitability.

Recommended: Stock Market Basics

How Are Investors Responding to Inflation in 2025?

When facing a period of rising prices, deciding how to invest during inflation is top of mind for many investors. But as the 2025 SoFi Investor Insights Survey shows, many investors plan to stay the course. In fact, nearly two-thirds (65%) of respondents said they feel either optimistic or content about their investments over the past year.

A Steady Approach

Despite inflation concerns, most investors are holding steady or increasing their contributions. In fact, even given the potential impact of inflation, only 19% of investors wanted to invest less, while the remaining 82% planned to invest more or maintain their current strategy, including popular investments in 2025.

Donut chart: 46% left investments alone, 36% invested more, and 19% invested less due to inflation.
Source: SoFi 2025 Investor Insights Survey

This speaks to a mindset that can be beneficial when deciding how to invest during inflation or any time, but especially after you start an investing portfolio: It’s important to stick to your strategy — which is based on your financial goals and circumstances — and not make impulsive changes to your investments when there’s a temporary shift in the economy.

Which Investments Might Perform Well During Inflation?

Investing during inflation can be tricky, and it can be helpful to have a defensive investment strategy. It’s important to know that inflation impacts both stock and bond markets, but in different ways.

Inflation and the Stock Market

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

Also, when inflation rises, that puts pressure on investors’ stock market returns to keep up with the inflation rate. For instance, consider a stock portfolio that earns 5% before inflation. If inflation rises at a 6.0% rate, hypothetically, the portfolio may actually lose 1.0% on an inflation-adjusted basis, which can make it difficult to find high inflation investments.

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

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

That said, rising inflation may raise the risk of an economic slowdown or recession. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth.

Recommended: How Do Interest Rates Impact Stocks?

Inflation and the Bond Market

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

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

What to Consider Investing in During Inflation

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

1. Real Estate and REITs

In some cases, investing in certain types of real property assets and real estate investment trusts (REITs) can be useful during inflationary periods, because this alternative asset class tends to move in the opposite direction of stocks (which may suffer during inflation).

REITs and some types of real estate tend to see higher prices at these times, and thus pay higher dividends or income to investors. REITs are required to pay 90% of their income as dividends.

2. Stocks in Companies With Pricing Power

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

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

During periods of inflation, popular investing trends may reflect increased interest in retail or consumer staple stocks.

3. Commodities

Investing in precious metals, oil and gas, and other commodities may also be considered for and an option for inflation hedges. The price growth of many commodities contributes to high inflation. So investors may see returns by investing in commodities during high inflationary periods.

Take the price of oil, natural gas, and gasoline. Businesses and consumers rely highly on oil and gas and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices. That helps make oil — and other commodities — an asset worth considering when inflation is on the move.

4. Treasury Inflation-Protected Securities (TIPS)

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

5. I Bonds

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

General Strategies for Investing in an Inflationary Environment

Aside from considering some of the above investments when investing for inflation, there are some strategies that may also be beneficial to consider.

Stay Focused on Your Long-Term, Diversified Plan

While there are some investing strategies that are exclusively focused on short-term results, most investors plan to invest for the long term — an approach that allows for greater stability over time.

An important tenet of long-term investing is to “buy and hold” investments so they have a chance to grow over the target period of time, weathering the markets’ ups and downs. This approach enables investors to maintain a plan that’s based on their financial values, and which matches their circumstances and helps them reach their goals. It also helps investors avoid making needless changes out of fear or other market reactions.

Another component of a long-term investment strategy is to employ the principles of diversification, which means holding a range of different asset types in your portfolio, in order to help manage risk factors.

Consider Dollar-Cost Averaging to Manage Volatility

Dollar-cost averaging is a strategy that helps manage price volatility, which can be a factor during an inflationary period. With DCA, you pick the securities you want to invest in, and the dollar amount you want to invest on a regular basis (e.g., weekly, monthly, etc.). Typically, people invest the same amount each time, to end up buying more when prices are lower — and less when they’re higher.

Over time, however, the average cost of investments tends to be lower, which may yield potential returns.

Using the DCA method may keep your investment strategy on track — and investors may be less likely to react impulsively or emotionally in response to certain events or headlines, which can increase the risk of loss.

The Takeaway

Investors may want to proceed with caution when inflation rises. It may be tempting to readjust your portfolio because prices are rising. Periods of high inflation usually wane, so throwing a long-term investment plan out the window just because inflation is moving upward may knock you off course to meet your long-term financial goals.

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FAQ

Which investments tend to perform poorly during inflation?

Inflation erodes the value of cash, and as such it can impact a range of securities, including long-term fixed-rate bonds, certain types of stocks, and cash as well as low-interest cash accounts.

Are investors making impulsive decisions in 2025?

The tendency to make impulsive choices can occur at any time. According to SoFi’s 2025 investor survey, however, it does seem that the majority of investors are staying the course.

Is gold a good hedge against inflation?

Some investors believe that gold can be a way to hedge against inflation, because gold has intrinsic (i.e., tangible) value, a limited supply, and the price of gold has been known to rise when inflation-wary investors put more money into this precious metal. That said, the price of gold can fluctuate, and there is always a risk with any investment.

Should I stop investing when inflation is high?

Historically, many long-term investors maintain their established strategy during periods of high inflation. Some investors may consider defensive positions, such as rotating into inflation-protected assets or consumer staples, depending on their risk tolerance.

How can interest rate changes by the Fed affect my investments?

When the Federal Reserve raises or lowers interest rates, that can impact stocks and bonds in different ways. When the Fed lowers rates, that lowers the cost of loans, which can boost company performance and stock prices. Bonds with lower yields may be less appealing. When the Fed raises rates, that increases borrowing costs, which can put a damper on stocks, but raise bond yields.

Photo credit: iStock/pondsaksit

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Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

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