invest Archives

Jun

2025

What’s the Reflation Trade?

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

The reflation trade is a bet that certain sectors of the market perform well immediately after a recession or economic crisis. Essentially, it’s a bet on cyclical stocks at the beginning of a market recovery.

Reflation is the recovery in prices that typically comes immediately after a low-point in the economic cycle — often after economic stimulus, and the reflation trade is the purchase of specific stocks or stocks within sectors believed to outperform in that type of environment.

Key Points

• Reflation trade strategy focuses on sectors expected to thrive post-recession.

• Investment areas include hospitality, dining, energy, materials, financials, value stocks, bonds, and commodities.

• Small cap stocks are also beneficial in this strategy.

• A reflation trade strategy bets on economic recovery and growth.

• Diversification across different types of reflation assets is recommended for balanced risk and reward.

Reflation vs Inflation

While both reflation and inflation are characterized by rising prices, they are not the same thing.

Reflation is a recovery of prices lost during an economic downturn along with employment growth, and many economists see reflation as a healthy sign of an improving economy. It often accompanies economic stimulus, and may reflect monetary policy designed to stimulate spending and halt deflation.

Inflation, on the other hand, does not look at employment or any other economic factors. It is the rise in prices beyond their “normal” range, and poses a threat to economic recovery, since it can reduce the purchasing power of consumers and make it more expensive to borrow money.

Reflation is also different from what happens during stagflation, in which prices go up but wages don’t follow.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Understanding Reflation Trade Opportunities

Reflation doesn’t just mean that the market as a whole will rise as economic activity returns to normal or even higher levels. Instead there’s a focus on certain sectors as they reflate after a decline.

For example, some investors might see reflationary dynamics in sectors like hospitality or dining during a pandemic, along with travel and tourism. It may also be noticeable, under those circumstances, in more indirectly affected sectors like energy and materials.

Again, assuming an economy suffers a pandemic, part of the reflation trade could be a switch from purchases of goods to services, as people go out more, whether it’s movie theaters, restaurant meals, theme parks and hotels. These are the sectors that would perform well if the reflation thesis turned out to be true.

Investors interested in the reflation trade can invest in individual stocks, or get more diversified exposure by investing in sector-specific exchange-traded funds (ETFs) or index funds.

Reflation Trade Sectors

While hospitality stocks might make sense for investors considering a reflation trade, there are other sectors that typically perform well in most reflationary environments. Here’s a look at a few of them:

Financial Stocks

Banks and other financial institutions tend to do well after an economic recession, since they can benefit from both higher interest rates and ramped up consumer spending.

Value Investing

Companies that deliver steady, long-term growth often get undervalued during economic downtimes, meaning that they’re poised for better performance as the market begins to improve. That’s the logic behind value investing.

Bonds

When interest rates are rising — in either the short- or the long-term — investing in bonds may benefit from a reflationary market.

Commodities

Since commodities tend to perform well during both periods of inflation and periods of economic growth, they’re a favored investment among those looking for a reflationary trade. As such, commodities trading could be an attractive area in a reflationary market.

Small Cap Stocks

Investments in small cap stocks tend to increase in value after recessions or during periods of growth, making them another asset that investors might consider in a reflationary market.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re 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.

The Takeaway

The reflationary trade is a bet on specific sectors of the economy or certain types of asset classes in the aftermath of an economic downturn. If you’re interested in incorporating the reflation trade into your portfolio, you could do so either via individual stocks or by buying sector-specific exchange-traded funds (ETFs) or mutual funds.

But note that the economy is a complicated thing, and that there are cycles it naturally takes, but it’s also susceptible to all sorts of other events. That includes natural disasters, political changes, or even pandemics and other global crises. With that in mind, it can be difficult to be sure of what sort of environment the economy is in, exactly, at any given time.

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

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

Is reflation the same as inflation?

No, reflation refers to a recovery in prices or value lost during an economic downturn, along with employment growth. Inflation is simply a rise in the prices of goods and services over time.

What are common reflation trade sectors?

Common reflation trade sectors include stocks of different types (such as financial stocks, small-cap stocks, etc.), bonds, and commodities.

What does reflation trade refer to?

The reflation trade is a bet that certain sectors of the market perform well immediately after a recession or economic crisis. In other words, it’s a bet on cyclical stocks at the beginning of a market recovery.

Photo credit: iStock/eugenesergeev

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

SOIN-Q225-124

Jun

2025

Understanding the Margin of Safety Formula and Calculation

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

The margin of safety formula provides a way for investors to calculate a safe price at which to buy a security. This method derives from the value investing school of thought. According to value investing principles, stocks have an intrinsic value and a market value. Intrinsic value is the price they “should” be trading at, while market value is its current price.

Figuring out the difference between these two prices, typically expressed as a percentage, is the essence of the margin of safety formula. Using it correctly may help protect investors from painful losses.

Key Points

• The margin of safety formula helps investors determine a safe buying price for a security.

• It is calculated as 1 – (Current Stock Price / Intrinsic Stock Price).

• A 10% margin of safety means the stock can drop 10% before incurring a loss.

• Larger margins of safety, typically 20% to 30%, are considered better for managing investment risks.

• The formula helps identify undervalued stocks and provides a buffer against errors in intrinsic value estimates.

What Is a Margin of Safety?

A margin of safety, as it relates to investing, gives investors an idea of how much margin of error they have when evaluating investments. Making profitable investment decisions is largely about investment risk management. The risk involved in a trade needs to be balanced with the potential reward. In financial markets, taking greater risks often gives the potential for greater rewards but also for greater losses — a concept known as the risk-reward ratio.

There are actually two ways that margin of safety can be utilized. One is in the investing sphere, the other is in accounting.

Margin of Safety in Investing

As it relates to investing, the purpose of calculating a margin of safety is to give investors a cushion for unexpected losses should their analysis prove to be off. This can be helpful because although estimating the intrinsic value of a stock is supposed to be an objective process, it’s done by humans who can make mistakes or inject their own biases. Even the most experienced and successful traders, both institutional and retail investors — all don’t always make the right call.

To try and correct for this possibility, value investors can determine their margin of safety when entering a position.

Expressed as a percentage, this figure is intended to represent the amount of error that could go into calculating the intrinsic value of a stock without ruining the trade. In other words, the percentage answers the question, “By what margin can I be wrong here without losing too much money?”

Margin of Safety in Accounting

In accounting, margin of safety is a financial metric that calculates the difference between forecasted sales and sales at a break-even point. While this has obvious use in a business context, it’s not really applicable to investors.

Margin of Safety Formula

The margin of safety formula works like this:

Margin of safety = 1 – [Current Stock Price] / [Intrinsic Stock Price]

Example of Calculating Margin of Safety

Let’s look at an example of calculating margin of safety.

An investor wants to buy shares of company A for the current market price of $9 per share. After a thorough analysis of the company’s fundamentals, this investor believes the intrinsic value of the stock to be closer to $10. Plugging these numbers into the margin of safety formula yields the following results:

1 – (9/10) = 10%.

In this example, the margin of safety percentage would be 10%.

The idea is that an investor could be off on their intrinsic value price target by as much as 10% and theoretically not take a loss, or only a very small one.

Now an investor has determined their margin of safety. How might they use this figure?

To provide a substantial cushion for potential losses, an investor could plan to enter into a trade at a price lower than its intrinsic value. This could be done using the calculated margin of safety.

In the example above, say an investor decided that 10% wasn’t a wide enough margin, and instead wanted to be extra cautious and use 20%. They would then set a price target of $8, which is 20% lower than the stock’s estimated value of $10.

Who Uses the Margin of Safety Formula?

The margin of safety is typically used by investors of value stocks. Value investors look for stocks that could be undervalued, or trading at prices lower than they should be, to find profitable trading opportunities. The method for accomplishing this involves the difference between market value and intrinsic value.

The market value of a stock is simply what price it’s trading for at the moment. This fluctuates constantly and can extend well beyond intrinsic value during times of greed or fall far below intrinsic value during times of fear.

Intrinsic value is a calculation of what price a stock likely should be trading at based on fundamental analysis. There are several factors that determine a stock price and the analysis considers both quantitative and qualitative factors. That might include things like past, present, and estimated future earnings, profits and revenue, brand recognition, products and patents owned, or a variety of other factors.

💡 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 Investors Can Use Margin of Safety

After determining the intrinsic value of a stock, an investor could simply buy it if the current market price happens to be lower. But what if their calculations were wrong? That’s where a margin of safety comes in. And why it can be very important when investing in stocks.

Because no one can consider all of the appropriate factors and make a perfect calculation, factoring in a margin of safety can help to ensure investors don’t take unnecessary losses.

As mentioned, too, the margin of safety formula is also used in accounting to determine how far a company’s sales could fall before the company becomes unprofitable. Here we will focus on the definition used in investing.

Ideal Margin of Safety

It’s difficult to say if there’s an ideal margin of safety for any particular investor. But we can say that the larger the margin of safety is, the more room an investor has to be wrong — which isn’t necessarily a bad thing. With that in mind, a larger or wider margin of safety is probably better for most investors.

How Important Is the Margin of Safety?

With the idea in mind that a wider or larger margin of safety allows for more room to be wrong about investment choices or analyses, it can be fairly important for investors. But it really will come down to the individual investor, who considers their own personal risk tolerance and investment strategy, and how it meshes with their tolerance for being wrong.

While it may be important to a degree, there are likely other factors that eclipse it in terms of overall importance in an investing strategy. For example, investing regularly and often may be more important — but again, it’ll come down to the individual.

The Takeaway

In investing, the margin of safety formula is a way for investors to be extra careful when selecting an entry point in a security. By determining a percentage and placing a discount to a stock’s estimated value, an investor can find a mathematical framework with which they can try to be safer with their money.

It’s relatively easy to learn how to calculate one’s margin of safety. There are only two variables — the market value of a stock and the intrinsic value. Dividing the market value by the intrinsic value then subtracting the result from one equals the margin of safety.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What is the ideal margin of safety for investing activities?

There may not be an ideal margin of safety for investors, but as a general rule of thumb, the wider the margin, the more room they have to be wrong. Therefore, the bigger, the better, in most cases.

Is the margin of safety the same as the degree of operating leverage?

In accounting, the margin of safety refers to the difference between actual sales and break-even sales, whereas the degree of operating leverage is a different metric altogether. So, no, they’re not the same.

What is a good margin of safety percentage?

While there is no hard and fast answer, some experts might say that a good margin of safety percentage is somewhere in the 20% to 30% range.

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

SOIN-Q225-127

Jun

2025

How to Invest in Gold: Tips for 1st Time Gold Investors

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

There are numerous ways to invest in gold, including buying physical coins or bullion, or even through stocks or funds. But there are a lot of things to take into consideration before investing in gold, especially for first-timers.

As you build your investing portfolio, you might wonder: Is gold a good investment? While some investors may be interested in it as a hedge against inflation or market downturns, or to further diversify their portfolio, it’s important to know that investing in gold isn’t simple, especially for first-time investors. One reason is that there are so many ways to invest in gold, each with their own pros and cons.

Key Points

• Investors may invest in gold through physical gold, coins, jewelry, mining stocks, ETFs, mutual funds, futures, and options.

• Consider factors like cost, storage, market volatility, and purity when choosing how to invest in gold.

• Physical gold, coins, and jewelry offer direct ownership but may have high costs, storage needs, and markups.

• Gold mining stocks, ETFs, mutual funds, and derivatives provide various levels of risk and potential returns.

• First-time investors should explore gold as a hedge, verify authenticity, research risks, and actively monitor derivatives.

Why Some Investors Like Gold

Historically, investors have turned to gold as a way to hedge against the possibility of inflation or events that could negatively impact the equity markets. And while it can be volatile in the short term, gold has historically held its value well over the long term. Even investors who are not particularly concerned about inflation or about calamities affecting the broader market, may turn to gold as a way to diversify a portfolio.

5 Ways to Invest in Gold

For anyone considering investing in this precious metal, it can be helpful to familiarize yourself with the different ways one can invest in gold.

Buy Physical Gold

When thinking of ways to invest in gold, the first image that may come to mind is piles of gold bars in a place like Fort Knox. Those bars are also known as bullion, and it comes in bars that can be as small as a few grams, or as large as 400 ounces. The most common denominations of gold bullion are one- and 10-ounce bars.

For many investors, even the one-ounce bars can be too expensive, as they can cost thousands of dollars each. And because the bullion is a physical item, there’s no easy way to own a fraction of a bar. But if you do want to own bullion directly, the first order of business is to find a reputable dealer to buy from, and then look into the costs of delivery and insurance for the asset. Another option if you buy bullion is to pay for storage, either in a large vault or in a safety deposit box at a bank.

Buy Gold Coins

Gold coins offer another way to directly own the shiny yellow metal, in a variety of denominations including half-ounce and quarter-ounce. Well-known gold coins include South African Krugerrands, Canadian Maple Leafs, and American Gold Eagles, which have been known to sell at a premium to their actual gold content among collectors.

While you may be able to buy gold coins at a discount from local collectors or pawn shops, most investors will likely opt for a reputable dealer. As with bullion, it is important to protect this hard asset, either through insurance, or with a vault or safe deposit box.

Buy Gold Jewelry

If you don’t want your gold investment to just sit in a vault, then gold jewelry may be appealing. But it comes with its own considerations. The first is that gold jewelry may not have as much actual gold content as the jeweler claims. Verifying the authenticity of a piece not only protects you, but it will also help when it comes time to sell the piece. One way to do this is to only buy jewelry from reputable dealers, who can also deliver documentation about the piece.

Another point to remember is that a piece of jewelry will also come with a markup from the company that made it, which can make the piece cost as much as three times the value of its metal. And jewelry typically isn’t 100% pure gold — or 24 karats — so it’s important to know the purity and melt value of the jewelry before you buy.

Buy the Stocks of Gold Mining Companies

One way to take advantage of growth in the value of gold with your existing brokerage account that you might want to consider is to buy the stocks of companies in the gold business, including miners and refiners.

While gold stocks tend to go up and down with the price of gold, they may also experience price changes based on the company’s own prospects.

Buy Gold ETFs and Mutual Funds

If the risks of individual mining and refining companies are too much, you may want to consider a gold exchange-traded fund (ETF) or mutual fund. These vehicles — which are available through one’s brokerage account — invest in gold in different ways.

Buy Gold Futures and Options

Experienced investors with some familiarity trading derivatives may consider investing in the gold market through futures and options. These contracts allow the investor to buy or sell gold for an agreed-upon price by a fixed date. To trade these contracts, an investor needs a brokerage account that offers the ability to trade them.

An investment in gold options or futures contracts, however, requires active monitoring. These contracts expire on a regular basis, so investors have to be ready to sell, roll over, or exercise them as gold prices change, and as the contracts reach their expiration dates.

💡 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.

Considerations for Investing in Gold

Perhaps the most important thing to know about investing in gold is that it’s all but impossible to get a sense of where its value is headed in the near-term. In other words, predicting the future price of an idiosyncratic and volatile commodity like gold is all but impossible.

For instance, back in 2020, gold increased in value by 24.6% in U.S. dollars, and reached all-time highs in a number of currencies, in anticipation of a coming wave of inflation.

As of mid-2025, gold prices were hovering around all-time highs, having increased nearly 100% since mid-2020.

Further, one reason why gold investors believe the precious metal may have strong prospects is that the broader economy has been in an inflationary period. Most major economies experienced inflation following the pandemic, and gold prices increased accordingly.

The Takeaway

Investors interested in gold typically gravitate toward it as a hedge against inflation or as a means of diversifying their portfolios. Those who want access to this precious metal have some choices: They can buy bullion, coins, jewelry, mining stocks, ETFs, mutual funds, futures, and options.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

Why do some investors like investing in gold?

Many investors turn to gold as a way to hedge against inflation, or as a “safe haven” during market volatility. It can also be a way to diversify a portfolio.

Is it possible to buy gold stocks?

You can’t buy “gold stocks” specifically, but it is possible to buy stocks of companies involved in or adjacent to gold mining and production, as well as funds.

What are common ways to invest in gold?

Some common ways to invest in gold include buying physical gold such as bullion, coins, or jewelry, buying shares of gold-related stocks or funds, or options and futures related to gold.

Image credit: iStock/LeonidKos

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SOIN-Q225-126

Jun

2025

What Is a Straddle in Options Trading?

By Inyoung Hwang | invest, Investing, Terminology | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

A straddle is an options trading strategy investors may use to try to profit from changes in volatility, regardless of which direction an asset moves. Because the strategy isn’t pinned to a specific market direction, a straddle is considered a “neutral options strategy.”

Long straddles are used when an investor expects significant price movement in an underlying asset but is uncertain of the direction. They involve simultaneously buying a call and a put with the same strike price and expiration date.

Short straddles are used when an investor expects little movement in an asset’s price. They involve selling both a call and a put with the same time strike price and expiration. It’s important to keep in mind that straddles are a complex options strategy that aren’t suitable for most investors.

Key Points

• A straddle is an options strategy involving a call and a put with the same strike price and expiration.

• Long straddles are used when significant price movement is expected but the direction is uncertain.

• Short straddles aim to profit from low volatility but can expose traders to unlimited losses.

• In a long straddle, the combined premiums paid represent the maximum potential loss.

• Time decay and volatility shifts can strongly affect the value of both long and short straddle positions.

Understanding Puts and Calls

Understanding the difference between put and call options is essential to understanding straddles. A call option gives buyers the right, but not the obligation, to buy an asset at a specific strike price, whereas a put option gives buyers the right, but not the obligation, to sell an asset at a set strike price.

Meanwhile, a seller of a call option is obligated to deliver the underlying asset if the buyer exercises the contract. Similarly, a seller of a put is obligated to buy the underlying asset if the contract is exercised.

In options terminology, the strike price is the level at which the options contract can be exercised. For instance, say a stock is trading at $10 a share and a call option on that stock has a strike price of $12. If the stock reaches $12, the option buyer has the right, though not the obligation, to exercise the option.

An option’s expiration date is the date by which the call or put must be exercised. So an investor has until the expiry to exercise the option and buy or sell the underlying asset. After that date, the options become worthless. Another important term for options investors is the option premium. This is the value, or cost of the option itself.

How to Put on a Straddle Trade

In options trading, an investor can put on a straddle in two ways:

1) For a long straddle, they can buy a call option and a put option. Both contracts need to have the same strike price and expiration date.

2) For a short straddle, they can sell a call and put option that both have the same strike price and expiration date.

Long straddles are popular when investors anticipate an event will significantly move a stock’s price, such as near a company’s earnings or big product announcement. In a long straddle, the move in the underlying asset needs to be large enough to offset the combined cost of the call and put premium if the investor is to break even on the trade. The cost of the two premiums is the maximum amount of money the investor can lose.

On the flip side, short straddles are common when investors think volatility expectations are too high, meaning that share prices will move sideways or only change slightly. In a short straddle, the total premium received is the maximum amount the investor can earn from the trade. The potential loss, however, is unlimited since the share price could theoretically rise to infinity or fall to zero.

Examples of Straddles

Straddles are sophisticated options trading strategies and it’s crucial for investors to understand the potential for both profit and loss when considering these trades. Following are examples that help illustrate how price movements may change outcomes.

Long Straddle Example

Let’s say an investor believes Company A’s stock will either rise or fall sharply around the time it releases its quarterly earnings call. Company A’s shares currently trade in the market at $50 each.

In order to put on a long straddle, the investor pays $2 for a call contract and $2 for a put contract for a total cost of $4. Both contracts have a strike price at $50. The total cost for the investor will be $400, since each options contract equals 100 shares of stock.

To break even, the stock would need to rise above $54 a share or fall below $46. That’s because $50 plus $4 is $54, while $50 minus $4 is $46. Here is the formula to calculate the breakeven levels in long straddles:

Upper breakeven = Strike price + Total of two premiums paid

Lower breakeven = Strike price – Total of two premiums paid

Short Straddle Example

In a short straddle trade, the investor sells a call and put that have the same strike price and expiration. An investor might do this when they believe the market’s expectations for volatility in a stock are too high.

Say for instance, the implied volatility for Company B has climbed substantially. Implied volatility is the market’s expectations for volatility in an asset. In other words, the market believes Company B will see a significant price movement near its upcoming product announcement.

However, one investor thinks these expectations are inflated. If the stock’s movement after the announcement is actually muted, the value of both the calls and puts would drop quickly and the option would likely expire worthless. In that case, the short-straddle investor has benefited by having collected the premiums from selling the options.

Short straddles carry high investment risk, however, because the potential loss from a rising asset price is theoretically unlimited, while the loss from a sharp decline could be substantial. An investor may be required to buy or sell the asset at market price to cover the short call or short put.

Pros & Cons of Straddles

Straddles offer the potential for gains in volatile markets or when volatility remains low, but they also come with risks and costs that traders must consider carefully.

Pros of Straddles

1. Market neutral: Investors may benefit from an options trade even if they’re uncertain which direction the underlying asset will move.

2. Premium costs: In some cases, long straddles may be relatively affordable if implied volatility remains low before an anticipated event. Say, for instance, that an investor finds a stock that they believe will see high volatility in the future. If the cost of the calls and puts is relatively low at the time of purchase, the investor may benefit from a long straddle trade if the asset price moves significantly.

3. Volatility bet: With long straddles, investors have the potential to make money when an asset’s stock volatility is high.

Cons of Straddles

1. Pricey premiums: It can be tricky to get market timing right. When implied or expected volatility for an asset is high, the price of options premiums can also rise. This means investors looking to put on a long straddle trade can encounter costlier premiums. With straddles, investors pay for two options, which can raise the cost of entry.

2. Time decay: Options lose value as they get closer to their expiration date — a concept known as theta, or time decay, in the derivatives market. Time decay may become a concern if market volatility is low for a while and an investor is aiming to exercise a long straddle position.

3. Potential losses: In a short straddle, the potential loss is unlimited while the potential upside is limited.

Straddles vs Strangles

In contrast to a straddle, a long strangle involves buying both calls and puts but with different strike prices.

Strangles are more common when investors believe a stock is more likely to move in one direction, but still want to hold some protection in case the opposite scenario occurs.

Strangles typically cost less to initiate than straddles, but they require a larger price movement in order to be profitable.

The Takeaway

An options straddle is essentially a two-trade bundle that’s designed to allow investors to take a position on whether there will be a significant move in an asset’s price.

A long straddle may offer high returns if the asset moves sharply, while the total premium paid represents the maximum loss. However, if the stock trades sideways or doesn’t post a big move, the investor may lose the money they invested in the premiums. In a short straddle, the opposite is true. If the underlying asset doesn’t post a big move, the investor may profit, but the potential for loss is unlimited.

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

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

Explore SoFi’s user-friendly options trading platform.

FAQ

What is the difference between a straddle and a strangle?

Straddles and strangles both involve buying a call and a put, but straddles use the same strike price, while strangles use different strike prices. Strangles usually cost less than straddles, but they may require a larger price move to generate a profit.

What are the risks of a straddle?

With long straddles, the premiums may be costly and the position can be sensitive to time decay, especially if the underlying asset remains stable. Short straddles carry the risk of seeing unlimited losses if the asset moves sharply.

When do traders use straddles?

Straddles are often used during events that may create large price swings, such as earnings announcements or regulatory decisions. The goal is to benefit from the volatility they create, regardless of the direction. In contrast, short straddles are used when traders expect minimal price movement.

What determines the breakeven points in a straddle?

For a long straddle, breakeven points are calculated by adding and subtracting the total premium paid from the strike price. Profit may only occur if the asset moves beyond these points before expiration.

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

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

SOIN-Q225-025

May

2025

An up-close image of the hand of a woman who is holding a pen and using a calculator to work on her 401(k) plan.

What Is an Expense Ratio?

By Austin Kilham | Growing Wealth, invest, Investing, Terminology | Comments Off

An expense ratio is the annual fee that mutual funds and exchange-traded funds (ETFs) charge investors, to cover operating costs. The fee is deducted from your investment, reducing your returns each year — which is one reason why expense ratios have been shrinking.

Typically, investors may look for funds that offer lower expense ratios, as high expense ratios can take a substantial bite out of long-term returns, affecting investors’ financial plans. Here’s a look at how expense ratios are calculated, what they encompass, and other factors worth considering when choosing a mutual fund or ETF to invest in.

Key Points

• Expense ratios are annual fees charged by funds to cover operating costs, calculated as total fund costs divided by assets under management.

• Lower expense ratios benefit long-term returns, as higher fees can significantly reduce overall investment growth over time.

• Management, custodial, and marketing fees are often included in expense ratios, but loads and redemption fees are charged separately.

• Actively managed funds have higher expense ratios due to frequent trading and manager intervention, while passively managed funds are more cost-effective.

• When evaluating funds, consider how they fit into your financial plan, investment objectives, and the components of the expense ratio.

How Expense Ratios Are Calculated

Though individual investors typically won’t find themselves in a situation where they need to calculate an expense ratio, it’s helpful to know how it’s done. To calculate expense ratios, funds use the following equation:

Expense Ratio = Total Fund Costs/Total Fund Assets Under Management

For example, if a fund holds $500 million in assets under management, and it costs $5 million to maintain the fund each year, the expense ratio would be:

$5 million/$500 million = 0.01

Expressed as a percentage, this translates into an expense ratio of 1%, meaning you would pay $10 for every $1,000 you have invested in this fund.

As you research funds you may come across two terms: gross expense ratio and net expense ratio. Both have to do with the waivers and reimbursements funds may use to attract new investors.

• The gross expense ratio is the figure investors are charged without accounting for fee waivers or reimbursements.

• The net expense ratio takes waivers and reimbursements into account, so it should be a lower amount.

How Expense Ratios Are Charged

A fund’s expense ratio is expressed as a percentage of an individual’s investment in a fund. For example, if a fund has an expense ratio of 0.60%, an investor will pay $6.00 for every $1,000 they have invested in the fund.

The cost of an expense ratio is automatically deducted from an investor’s returns. In fact, when an investor looks at the daily net asset value of an ETF or a mutual fund, the expense ratio is already baked into the number that they see.

The Components of an Expense Ratio

The fees that make up the operating costs of a mutual fund or ETF can vary. Generally speaking, the investment fees included in an expense ratio will include the following:

Management Fees

The management fee is the amount paid to the person/s managing the money in the investment fund — they make decisions about which investments to buy and sell and when to execute trades. Management fees can vary depending on how much activity is required of these managers to maintain the fund.

Custodial Fees

Custodial fees cover the cost of safekeeping services, the process by which a fund or other service holds securities on an investor’s behalf, guarding the securities from being lost or stolen.

Marketing Fees

Also known as 12b-1 fees, marketing fees are used to pay for the advertising of the fund, some shareholder services, and even employee bonuses on occasion. FINRA caps these fees at 1% of your assets in the fund.

Other Investment Fees

Investors may be forced to pay other investment fees when they buy and sell mutual funds and ETFs, including commissions on trades to a broker. The cost of buying and selling securities inside the fund is not included as part of the expense ratio. Additional costs that are not considered operating expenses include loads, a fee mutual funds charge when investors purchase shares. Contingent deferred sales charges and redemption fees, which investors pay when they sell some mutual fund shares, are also paid separately from the expense ratio.

How to Research Expense Ratios

Luckily, you do not have to spend your time calculating expense ratios on your own. The Securities and Exchange Commission (SEC) requires that funds publish their expense ratios in a public document known as a prospectus. The prospectus reports information important to mutual fund and ETF investors, including investment objectives and who the fund managers are.

Online brokers often allow you to look up expense ratios for individual investment funds, and they may even offer tools that allow you to compare ratios across funds.

Average Expense Ratios

Expense ratios vary by fund depending on what investment strategy it’s using. Passively managed funds that frequently track an index, such as the S&P 500 index, and require little intervention from managers, tend to have lower expense ratios. ETFs are usually passively managed, as are some mutual funds. Other mutual funds may be actively managed, requiring a heavier touch from managers, which can jack up the expense ratio.

Expense ratios have been falling for decades, according to the most recent Morningstar Annual U.S. Fund Fee study, released in May 2025. In fact, that report notes that in 2024, the average expense ratio “paid by fund investors was less than half of what it was two decades ago.”

💡 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.

What’s a Good Expense Ratio?

When considering expense ratios across mutual funds and ETFs, it’s helpful to use average expense ratios as a benchmark to get an idea of whether a specific expense ratio is “good.”

Investors may want to target funds with expense ratios that are below average. The lower the expense ratio, the less expensive it is to invest in the fund, meaning more profits would go to the investor vs. the fund.

That said, some investors may prefer to invest in actively managed funds, which typically charge higher fees than passive or index funds.

Looking Beyond Expense Ratios

When comparing mutual funds and ETFs, an investor might choose to consider other factors in addition to expense ratios.

It can be a good idea to consider how a particular fund will fit in their overall financial plan. For example, individuals looking to build a diversified portfolio may want to target a fund that tracks a broad index like the Nasdaq or S&P 500. Or, investors with portfolios heavily weighted in domestic stocks may be on the hunt for funds that include more international stocks.

And it’s also a good idea to know the key differences between mutual funds and ETFs. ETFs, for example, are generally designed to be more tax efficient than mutual funds, which can also have a big impact on an investor’s ultimate return. ETFs are generally lower in cost than mutual funds as well.

The Takeaway

Expense ratios seem small, but they can have a big impact on investor returns. For example, if an individual invested $1,000 in an ETF with a 6% annual return and a 0.20% expense ratio, and continued making a $1,000 investment each year for the next 30 years, they would earn $81,756.91, and spend $3,044.76 on the fund’s expenses.

But expense ratios are only one of many factors to consider when choosing a mutual fund or ETF. Fundamentally your investment choices have to fit into your larger financial plan. But cost should always be a concern.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What is an expense ratio?

An expense ratio in investing is an annual fee that many funds, such as mutual funds or ETFs, charge investors to cover operating and management expenses and costs.

How are expense ratios calculated?

Expense ratios, funds generally use a formula that divides total fund costs by the total fund assets under management.

What expenses does an expense ratio pay for?

Funds typically have many types of expenses and fees, and an expense ratio can wrap together management fees, custodial fees, marketing fees, and commissions together into a single annual charge for investors.

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

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

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

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

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

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.

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.
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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN-Q225-113

What’s the Reflation Trade?

Reflation vs Inflation

Understanding Reflation Trade Opportunities

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Reflation Trade Sectors

Financial Stocks

Value Investing

Bonds

Commodities

Small Cap Stocks

The Takeaway

FAQ

Is reflation the same as inflation?

What are common reflation trade sectors?

What does reflation trade refer to?

Understanding the Margin of Safety Formula and Calculation

What Is a Margin of Safety?

Margin of Safety in Investing

Margin of Safety in Accounting

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Margin of Safety Formula

Example of Calculating Margin of Safety

Who Uses the Margin of Safety Formula?

How Investors Can Use Margin of Safety

Ideal Margin of Safety

How Important Is the Margin of Safety?

The Takeaway

FAQ

What is the ideal margin of safety for investing activities?

Is the margin of safety the same as the degree of operating leverage?

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How to Invest in Gold: Tips for 1st Time Gold Investors

Why Some Investors Like Gold

5 Ways to Invest in Gold

Buy Physical Gold

Buy Gold Coins

Buy Gold Jewelry

Buy the Stocks of Gold Mining Companies

Buy Gold ETFs and Mutual Funds

Buy Gold Futures and Options

Considerations for Investing in Gold

The Takeaway

FAQ

Why do some investors like investing in gold?

Is it possible to buy gold stocks?

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What Is a Straddle in Options Trading?

Understanding Puts and Calls

How to Put on a Straddle Trade

Examples of Straddles

Long Straddle Example

Short Straddle Example

Pros & Cons of Straddles

Pros of Straddles

Cons of Straddles

Straddles vs Strangles

The Takeaway

FAQ

What is the difference between a straddle and a strangle?

What are the risks of a straddle?

When do traders use straddles?

What determines the breakeven points in a straddle?

What Is an Expense Ratio?

How Expense Ratios Are Calculated

How Expense Ratios Are Charged

The Components of an Expense Ratio

Management Fees

Custodial Fees

Marketing Fees

Other Investment Fees

How to Research Expense Ratios

Average Expense Ratios

What’s a Good Expense Ratio?

Looking Beyond Expense Ratios

The Takeaway

FAQ

What is an expense ratio?

How are expense ratios calculated?

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