Nov
03
2025
A man gestures animatedly at a laptop while speaking to a woman.

How AI Investing Trends Are Shaping the Future

By | invest | Comments Off on How AI Investing Trends Are Shaping the Future

In recent years, artificial intelligence (AI) has had a dramatic impact on modern investing. AI tools and systems have begun to impact not only how institutional investors operate and make decisions, but also how many everyday individual investors monitor their portfolios, spot new opportunities, and make decisions. From AI-powered robo-advisors to machine learning platforms that adjust portfolios in real time, AI is increasingly embedded in the investment ecosystem.

What does the future of AI in finance hold? Analyzing AI investing trends offers insight into the opportunities — and challenges — that may lie ahead for both institutional and individual investors.

Key Points

•   AI investing uses algorithms and machine learning to analyze data, identify patterns, and predict potential trends.

•   AI systems process vast amounts of data faster and more objectively than humans.

•   Algorithms may be used to efficiently construct, monitor, and rebalance investment portfolios.

•   Robo-advisors are gaining popularity, especially among younger investors, due to low costs and automation.

•   Future opportunities include models that more deeply integrate AI tools and human advisors, but challenges like data accuracy and ethical governance persist.

The Rise of AI Investing

Artificial intelligence isn’t as new to finance as it might seem. The foundations of AI —- such as automation and algorithm-driven processes —- have quietly shaped the financial markets over the last several decades.

One of the earliest investment applications emerged in the 1980s with algorithmic trading, in which computers automatically executed trades based on certain market data. In the 1990s, finance shifted further towards data-driven AI, as researchers developed algorithms capable of recognizing patterns in datasets. This laid the groundwork for modern machine learning, which is when computer systems are able to learn and adapt without following explicit instructions.[1]

By 2011, deep learning — which uses neural networks to interpret complex data and tackle intricate problems — pushed AI further into finance. Investment firms began testing algorithmic trading systems powered by AI. In 2018, BlackRock established an AI lab to explore the use of machine learning, data science, and natural language processing (which uses machine learning to enable computers to understand and communicate with human language).[2]

Today, AI technologies are advanced enough for investment managers to create everything from AI-informed funds to fully automated, AI-directed funds. Here’s a look at some of the most common applications of AI in investing:

•   Algorithmic and high-frequency trading

•   Predictive analytics and market forecasting

•   Risk management and fraud detection

•   Portfolio optimization

•   AI-driven robo-advisors

As AI becomes more widespread in investing, it’s important to consider what changes may be on the horizon. Here are some of the top AI investing trends to watch in 2025 and beyond.

Mainstream Adoption of Robo-Advisors

Robo-advisors challenge the traditional advisory model by using algorithms rather than human insight to construct, monitor, and rebalance portfolios. While the number of investors who rely on robo-advisors to invest in stocks is still relatively small, research indicates that adoption may be growing, especially among younger investors.

Here’s how robo-advisor use compares across generations, according to a 2025 investment trends report from the data analytics firm YouGov:[3]

Percentage of Investors Who Use Robo-Advisors
Gen Z 14%
Millennials 20%
Gen X 14%
Baby Boomers 6%

According to Fortune Business Insights, the global robo-advisor market is projected to grow from $10.86 billion in 2025 to $69.32 billion by 2032.[4] This suggests that significantly more investors will seek low-cost, automated investment advice online in the coming years.

Learn more: What Is a Robo-Advisor? How Do They Work?

AI-Powered Stock Screening and Market Signals

AI stock screeners can do what the typical investor can’t: process vast amounts of data almost instantaneously to detect patterns and potential market signals.

Powered by machine learning and natural language processing, these tools analyze market data, financial reports, and even investor sentiment, allowing them to conduct a more comprehensive analysis of the market. AI stock screeners may spot potential opportunities to invest in based on both technical and fundamental analysis indicators, and make estimated assumptions about which way a stock may move next.

Of course, no tool can predict investing outcomes, just as no tool can guarantee profits or eliminate risk. An AI stock screener can be a useful co-pilot, however, and may help investors make more informed choices. As AI screeners continue to evolve and become more sophisticated, more investors may turn to these tools to try to identify potentially favorable stocks.

Recommended: Top AI Stocks to Invest In: 2025 Guide

Growth in Thematic and Tech-Driven Investing

Thematic investing refers to choosing investments based on big ideas or trends — such as clean energy, AI, robotics, ESG (environmental, social, and governance), or biotech — rather than traditional factors like sector or geography.

AI helps enable thematic investing by identifying which themes appear to be gaining momentum early. For example, AI tools can help monitor policy changes, patent filings, corporate R&D disclosures, and even scientific publications to see which technologies may be poised for growth. AI can also help model the possible economic impact of emerging industries, estimating growth trajectories, risk factors, and competition.

With all of these options, it’s important to remember that AI is not a perfect investing tool — there’s no such thing. AI’s information is only as useful as the data it processes. With AI’s ability to analyze and model complex data, however, investors may continue to turn to AI thematic investing in 2025 and beyond.

Personalized Portfolios Using Machine Learning

Customization may be a helpful benefit of AI-enabled investing. Rather than having fixed portfolios or only a few models (such as “conservative,” “balanced,” or “aggressive”), AI-powered platforms are increasingly able to tailor portfolios to an investor’s individual goals, risk tolerance, time horizon, preferences, and liquidity needs.

Robo-advisors are an example of this in action. When you join a robo-advisor platform, you’ll typically complete a questionnaire, which is designed to assess your risk tolerance, goals, and investing preferences. If you’re managing investments through an AI-powered robo-advisor, the platform’s algorithm uses machine learning to analyze your responses and make recommendations that are tailored to your situation.

Recommended: A Beginner’s Guide to the Stock Market

Real-Time Risk Monitoring and Portfolio Rebalancing

Markets move quickly —- news, geopolitics, supply chains, inflation, and regulatory decisions can all spark unexpected volatility in the market. AI tools are increasingly being used to monitor risk in real time and help rebalance portfolios more proactively.

AI can quickly analyze historical performance, market sentiment, and price movements to model potential risks, which may help investors stay ahead of sudden changes. Automated rebalancing, a feature of many robo-advisors, helps to keep portfolios aligned with an investor’s target allocation by recommending or executing trades as markets shift.

The AI investing market is expanding rapidly, with new tools and platforms emerging all the time. Below is an overview of the different kinds of AI-powered tools and platforms that are currently available to assist investors. (While SoFi offers robo investing, it does not currently offer members tax-loss harvesting services or AI-specific analysis tools.)

•   Robo-advisors: One way to access artificial intelligence in the investment sphere is through a robot advisor that incorporates AI. These tools leverage machine learning to help improve risk management, portfolio rebalancing, and tax-loss harvesting. One advantage is their relatively low cost and low minimum investment requirements.

•   AI-powered screening platforms: If you prefer active trading, AI stock screeners can help you with your investment decisions. Some screeners are stand-alone applications, while others may be incorporated into your brokerage account as a core feature.

•   Sentiment analysis tools: AI-powered sentiment analysis sites and tools analyze news and social media posts to gauge investor sentiment. These tools leverage natural language processing to go beyond classifying articles or posts as merely positive or negative, but considers context and nuance in communications. This allows them to help effectively monitor trends, “buzz,” or shifts in perception.

•   Thematic discovery engines: Many investment platforms enable thematic investing powered by AI. These engines are able to mine corporate communications (e.g., earnings reports, regulatory filings, and other public information) for common keywords supporting a theme. This may uncover a web of interconnected companies, allowing investors to consider interests beyond traditional market sectors or the well-known industry leaders.

Recommended: How to Invest Using AI Tools

How AI Is Reshaping Investor Behavior

Investors are becoming more receptive to AI in their financial lives. According to a March 2025 Ipsos/TD Bank survey, 43% of Americans are comfortable with a hybrid approach that combines AI with human financial advisors, while 44% are open to using AI to manage investments.[5]

AI’s appeal lies largely in its speed, cost-efficiency, and convenience. Many investors now rely on digital platforms and apps to manage portfolios and gather information. Globally, 77% of investors have at least a part of their portfolio on a digital platform or app, while nearly 75% source investment information through digital means, according to Amundi’s 2025 Digital Investment report.[6] These numbers are likely to climb as AI becomes more integrated into wealth management.

The Future of AI in Finance

As AI’s role in investing deepens, the coming years may bring opportunities but also challenges.

While AI has numerous benefits, there are also potential risks involved in using AI to make investment decisions. One ongoing concern is that the reliability of AI tools depends heavily on the accuracy of their data. Skewed or incorrect inputs or algorithmic bias can undermine recommendations and potentially put investors at risk. The lack of transparency about how AI models operate and how customer data is stored and used are also ongoing concerns.

Moving forward, success will likely come from balancing automated investing and human judgment, ensuring transparency, and managing risks responsibly. Here’s a look at how AI in investing may play out over the next several years:

•  Deeper integration and hybrid models: The most successful AI strategies will likely be human advisors and AI systems working together. In a hybrid approach, AI handles data processing and monitoring, while humans continue to bring judgment, ethics, and clients’ unique needs into investment decisions.

•  Transparency and ethical governance: Financial institutions that address bias and adopt transparent and fair AI practices may gain investor confidence and trust.

•  Shift to customer-facing applications: While much of the investment in AI has been concentrated on foundational systems, such as hardware and AI models, many institutions are now focusing more on AI-powered products and services to enhance the retail investor experience.

The Takeaway

AI investing trends aren’t a passing fad — they represent a fundamental shift in how many inventors (both institutions and individuals) approach investing. AI systems and tools are now widely used to help improve efficiency, lower costs, and potentially increase investment returns.

That said, AI is still best thought of as a supporting tool, not a replacement for human judgement. While it can help investors of all experience levels make more informed decisions, AI isn’t a magic wand. Understanding risk, knowing your goals, keeping an eye on fees, and being skeptical of overhyped promises remain essential.

As adoption of AI grows, investors who learn how to use this technology responsibly — balancing the benefits with the risks — may be better positioned to navigate markets and build long-term wealth.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.


See why SoFi is this year’s top-ranked robo advisor.

FAQ

What is the biggest change AI brings to investing?

The biggest change AI brings to investing is speed and precision in decision-making. Traditional methods rely heavily on manual analysis, but AI can process vast amounts of financial data, news, and market trends in real time. This allows investors to spot potential opportunities or risks much faster than before. While no AI tool can predict outcomes or guarantee results, this technology helps make investing more data-driven, efficient, and accessible.

Will AI replace human financial advisors?

AI is unlikely to fully replace human financial advisors but may instead complement their roles. While AI excels at analyzing data, spotting trends, and automating tasks like portfolio rebalancing, it lacks the human qualities needed for personalized advice, empathy, and building trust. Advisors provide guidance that goes beyond numbers, such as understanding life goals, emotions, and unique circumstances. AI allows advisors to focus on relationship-building and strategic planning rather than routine calculations.

How does AI help with managing investment risk?

AI may help manage investment risk by continuously analyzing market conditions, company performance, and global events. AI may also help detect early warning signals, such as unusual trading patterns or shifts in economic indicators, in real time. AI also uses predictive models to stress-test portfolios against different scenarios, which may help identify potential downturns. That said, it’s important to remember that AI, nor any tool, can definitively predict how assets will perform.

How is AI impacting new investors?

AI can help make investing more accessible and less intimidating for beginners. By automating portfolio creation, rebalancing, and risk assessments, AI may also allow beginners to start investing with more confidence. Ultimately, AI reduces barriers to entry, potentially helping new investors learn more about their options and strategies.

What are the main benefits of AI in investing?

The main benefits of AI in investing include efficiency, accuracy, and accessibility. AI can process massive datasets quickly, providing insights that would take humans weeks or months to uncover. By reducing emotional bias and relying on data-driven analysis, AI may also improve accuracy, and potentially improve portfolio performance. For individuals, AI makes professional-level investing tools available at lower costs, often through robo-advisors or apps. It’s important to keep in mind, however, that no AI tool can predict outcomes or guarantee results.

About the author

Rebecca Lake

Rebecca Lake

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

Article Sources
  1. Medium. AI in the 1980s and 1990s: The Decades That Changed Everything.
  2. Binance. Biggest Asset Manager Company Blackrock.
  3. YouGov. US investment trends report 2025.
  4. Fortune Business Insights. Robo Advisory Market Size, Share & Industry Analysis.
  5. Ipsos. Majority of Americans (89%) Are Comfortable Adapting to New Technology in Daily Life.
  6. Amundi. Retail investors go digital while confirming the key role of professional advice.

Photo credit: iStock/Don Wu

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.

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

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

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Nov
03
2025
A person wearing glasses uses their phone while sitting at a table with a laptop and papers.

How to Invest Using AI Tools

By | invest | Comments Off on How to Invest Using AI Tools

From quickly analyzing vast data sets to powering automated investing to providing personalized recommendations, artificial intelligence (AI) is fundamentally changing the speed and accessibility of investing.

But using AI to invest also has its share of risks, as its complexity may sometimes be understated or glossed over by eager proponents. Weighing the advantages and disadvantages of this technology can help you decide if AI-guided investing makes sense for your financial plan.

Key Points

•   AI investing tools rely on algorithms and machine learning to provide information that may help investors personalize and diversify their portfolios.

•   There are multiple ways to use AI for stock investing, including via robo-advisors, stock screeners, and risk management tools.

•   One of the biggest risks of using AI to invest is accuracy; AI tools are only as reliable as the underlying data they base their analysis on.

•   Investors should be aware of the possibility of AI bias, which is when data output is biased as a result of skewed or unrepresentative data sets.

•   Balancing AI with help from an advisor may help investors benefit from extensive data analysis as well as a professional’s strategic and empathetic judgment.

What Is AI Investing?

AI investing tools and systems use algorithms and machine learning to analyze market data, identify opportunities, and complete trades. AI investing tools may do one of these things or all of them — what ties them together is the reliance on artificial intelligence to help inform investment decisions.

Robo-advisors and stock pickers are two examples of AI-powered investing tools. One is a form of passive investing, while the other is designed for active investors.

•  AI robo-advisors rely on algorithms, often in combination with portfolios built by specialists, to provide investment options based on an investor’s risk tolerance, time horizon, and goals. Investments are rebalanced automatically to maintain the investor’s preferred portfolio allocation. Robo investing may involve human input, but once an investment strategy is developed, AI generally automates portfolio management.

•  AI stock pickers use machine learning and natural language processing to analyze large data sets for specific trends. Investors then receive recommendations on stocks to buy or sell, based on the findings. AI stock pickers may merge technical and fundamental stock analysis to provide information in a fraction of the time of traditional research methods.

Using AI for stock trading means you can choose which approach to take, based on whether you prefer to be more hands-on or hands-off with your portfolio.

Deep dive: What Is a Robo Advisor?

How AI is Changing the Investment Landscape

AI’s integration into the investment landscape is happening on multiple levels, though there are some clear trends in AI investing to be aware of.

A growing number of financial advisors, financial planners, and wealth managers, for example, are utilizing automated investing tools to help develop financial plans and build client portfolios. At the individual investor level, AI tools may make it easier to identify market trends through pattern recognition technology. Some AI platforms even allow investors to create custom algorithms that recommend when to potentially buy or sell specific investments, though investors should always take any additional or personal information into account before making a trade.

AI investing has enormous possibilities, but it has limitations as well.

What AI Can Do

If you’re interested in learning how to invest using AI, it’s helpful to have a realistic view of its capabilities. AI tools are equipped to:

•  Analyze vast amounts of market data in much less time than it would take a human to analyze the same information.

•  Identify historical patterns and trends based on that analysis.

•  Offer investment recommendations based on your goals, risk tolerance, and age.

•  Help rebalance portfolios to maintain the desired asset allocation.

•  Monitor market conditions in real time.[1]

Speed aside, the above tasks are things a human financial advisor can help with. The difference is that using AI for investing is generally more affordable than a human advisor. That said, a human advisor can offer strategic and investment recommendations that are tailored to your own unique circumstances and goals, while also offering emotional support.

What AI Can’t Do

AI-guided investing is still relatively new, and there are places it can’t take investors — yet. For instance, AI investing tools cannot:

•  Employ emotional and contextual intelligence to inform investing recommendations

•  Help an investor navigate complex circumstances

•  Verify its own information is free of hallucinations and appropriate for an investor

•  Make stock predictions with 100% accuracy (as this is impossible)

•  Predict black swan events in the market

•  Decide on an appropriate investing strategy for an investor

One of the biggest flaws associated with using AI to invest is that the results you get are entirely dependent on the quality of the data being processed. If an AI investing tool has incomplete or incorrect data, that could skew results and lead to recommendations that don’t align with your investment goals.[2]

And of course, AI can’t talk you down when panic sets in over market volatility. A human advisor, on the other hand, can help you navigate periods of uncertainty and help you determine whether your portfolio is appropriate for your circumstances.

Benefits of Using AI for Investing

There are some potential upsides to AI-powered investing. Here’s what AI investing tools bring to the table.

•  Speed: AI’s superpower, if you will, is being able to digest large amounts of data at lightning speed. AI tools may analyze market data in seconds that might otherwise take you (or your advisor) hours or even days.

•  Scalability: Scalability refers to how easy it is for something to expand. In the context of investing, AI tools can help financial advisors serve a greater number of clients and do so more efficiently. Individual investors, meanwhile, may use AI to conduct broader stock analysis than they’d be able to do on their own.

•  Less emotional bias: AI tools are not clouded by human emotional and behavioral biases. Instead, they generate investment recommendations based on the data that’s available to them. Using AI to invest could help you maintain discipline when volatility sets in, though again, AI lacks the human touch you’d get with a financial advisor.

•  Cost efficiency: We’ve already touched on financial advisor fees. Overall, fixed-percentage fees average about 1% annually. AI investing tools can often help you put together a complete portfolio for a fraction of that cost. That allows you to hold on to more of your investment earnings.

•  A level of personalization: Using AI for stock investing doesn’t mean you have to follow a one-size-fits-all approach. While AI investing tools may not offer the same level of personalization as a financial planner, they rely on your input to guide you toward an investment plan that reflects your needs and goals.

AI Investing Risks and Considerations

AI is an imperfect technology, and no discussion of its benefits is complete without covering the potential risks. Lack of transparency, lack of human guidance, data privacy, and bias[3] are some of the chief concerns surrounding the use of AI for investing.

Lack of Transparency in AI Models

If you’re using AI for stock investing, it’s important to have insight into how a particular tool works. More specifically, you may want to know how that tool determines which stocks to recommend and why.

Some AI tools may be more transparent than others, however. A lack of transparency can make it difficult to gauge whether the investments being made on your behalf are the right ones for you.

Overreliance and Need for Human Oversight

Leaning too heavily on AI tools for investing (or anything else) can become a problem. For example, building an investment portfolio based solely on artificial intelligence may introduce its own set of risks. A research analysis of AI use in educational settings found a possible link between increased reliance on AI and diminishing cognitive abilities in the areas of critical thinking and decision-making.[4]

In other words, there’s the possibility that using AI to invest could cause you to develop blinders and screen out other helpful sources of information. Working with a human advisor or using AI tools that are guided by human oversight may help reduce the possibility of your financial plan becoming too reliant on algorithms.

Data Privacy and Protection

Cybersecurity is always a concern when managing financial accounts online. If you’re using an AI tool or platform for investment decisions, that tool should be a secure one.

When evaluating AI investing tools, consider:

•  What data is collected from you

•  How that data is stored and who has access to it

•  What measures the developer takes to identify and defend against potential data hacks (e.g., encryption)

•  Which third-party vendors may have access to your data

Transparency matters here as well. A reputable AI company should be completely transparent about how your data is collected and used, and what steps it takes to prevent breaches.

Platform Trustworthiness and Algorithmic Bias

Reputation matters when deciding which AI platform or tool to invest with. Reading user reviews and checking the investment company’s Trustpilot or Better Business Bureau ratings may offer insight into how reliable and trustworthy it is.

The potential for algorithmic bias is also something to be aware of. This can occur when an algorithm is trained on data that is biased and excludes key data points[5] that may better reflect market conditions. For example, a biased algorithm may recommend specific investments to you based on your age. That can be a problem if the underlying data is biased in a way that makes assumptions about people in your age group that do not reflect your unique financial situation.

6 Ways You Can Use AI to Invest

While AI investing is quickly evolving, AI is not entirely new to the investing world. Investment firms have been using machine learning and algorithms to analyze data and understand risk for a number of years, and so it’s possible and perhaps even likely that many investors are already benefiting in some way from AI.

However, if you’re ready to explore investing using AI, there are several ways to do it. We’ve already mentioned AI robo-advisors and stock pickers, but you may be interested in other routes that may help you build a diversified portfolio. Here are some beginner-friendly options if the AI landscape is unfamiliar territory for you.

1. Use a Robo-Advisor to Automate Your Portfolio

Robo-advisors use algorithms to select investments for you, based on your goals and risk tolerance. You typically complete a questionnaire, and the algorithm uses your responses to recommend a portfolio strategy.

Depending on the tool you use, the algorithm may automatically rebalance your portfolio which helps keep your asset allocation aligned with your goals. Some robo platforms may also offer limited access to a human financial advisor or include automated tax loss harvesting, which may reduce what you owe in capital gains tax. (Be aware that SoFi does not offer tax loss harvesting at this time.)

You’ll pay an advisory management fee for these services, which may be anywhere from 0.20% to 0.85% annually. Some robo-advisors may charge no fees for assets under a certain threshold, which can be a plus if you’re looking for a low-cost way to explore AI investing tools.

2. Screen Stocks Based on Predictive Analytics

AI stock screeners use machine learning to analyze stocks and make predictive forecasts about performance. These screeners rely on:

•  Fundamentals and financial data

•  Company earnings reports

•  Market sentiment

•  Historical patterns and trends

•  News and social media reports

These tools can perform real-time analysis to try to identify trading opportunities as they arise, though it’s also important to keep in mind that it’s impossible for any tool (or human) to predict future market performance.

Recommended: Top AI Stocks by Market Cap (2025)

3. Build a Diversified Portfolio With AI-Driven Risk Management

Risk management is an important component in any portfolio. Too much risk or too little exposure to risk can directly affect outcomes and your alignment with your overall goals. Diversification is a common tactic for lowering your exposure to risk in your portfolio.

AI investing tools may analyze your current asset allocation and offer recommendations on how to increase diversification across different asset classes, sectors, and geographies. Depending on the tool or tools you use, you may have access to:

•  Portfolio optimization strategies

•  Stress-testing and modeling

•  Scenario analysis

•  Real-time market monitoring

•  Tax optimization strategies

Using AI to invest can make diversification seem less daunting. Modeling and visualizations can help you understand potential outcomes before you move any assets around.

4. Get Personalized Investment Suggestions Based on Your Goals

Portfolio building is personal, and the advice or recommendations you receive should be tailored to your situation. While an AI-driven investing platform will likely not offer the same degree of personalization as a human advisor, AI investing platforms may offer investment suggestions (such as certain ETFs, sectors, or asset mixes) based on your personal information and goals. Recommendations are typically based on a mix of factors:

•  Age and time horizon

•  Financial goals

•  Risk tolerance

•  Risk capacity

If you’re unsure of the difference between those last two terms, risk tolerance is how much risk you’re comfortable taking. Risk capacity refers to how much risk you are able to take on without jeopardizing your investment goals.

AI investing tools can use your inputs in each of these areas as a guide to build your portfolio. Some models can monitor investor behavior and make recommendations to reflect shifting goals or risk tolerance.

5. Analyze News and Sentiment at Scale

Market sentiment refers to how investors feel about the market at any given time. Sentiment analysis is an important consideration when trading because of the connection between investor emotions and behavior.

AI investing tools can scan the latest news, social media posts, financial research, and other sources to analyze data about market sentiment, sometimes in seconds.

That can be invaluable if you’re an active trader. Market sentiment can turn at a moment’s notice. The more attuned you are to it, the better positioned you may be to determine your trading strategy. That said, AI is dependent on its data sources and it’s important to be aware that it may not always interpret market sentiment accurately.

6. Monitor and Adjust Your Investments Automatically

Tracking your portfolio can be time-consuming, and often a little nerve-wracking if there’s an uptick in volatility. AI tools can track performance and market conditions in real-time, so you don’t have to stay glued to your device.

These tools can go a step further and handle automatic portfolio rebalancing to help keep your asset allocation on target. You can also set up alerts so you’re notified when a particular investment or sector experiences significant pricing fluctuations. That allows you to adjust your portfolio as needed, without constant hands-on monitoring.

The Takeaway

Using AI to invest can save time and help you make more informed decisions about your portfolio. Awareness of AI’s risks, plus a comprehensive investment strategy, can help you find the right balance of relying on AI investing tools, working with human advisors, and potentially leveraging your own research as you build a plan that aligns with your goals.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.


See why SoFi is this year’s top-ranked robo advisor.

FAQs

What’s the easiest way for me to start using AI for investing?

One of the easiest ways to start using AI to invest is to let a robo-advisor do the work of managing your portfolio for you. You can choose from custom portfolios that reflect your goals and risk tolerance. If you like, you can invest automatically with recurring contributions.

How does AI help me choose investments?

AI tools use machine learning and natural language processing to analyze data and identify patterns or trends in stock movements. These tools may combine data analysis with input from investors regarding their age, risk tolerance, and goals to develop personalized investment recommendations.

How can I be sure the AI’s recommendations are reliable?

Any recommendations you may get from an AI investing tool are only as reliable as the underlying data they analyze. Transparency matters, and that’s why any AI platform or tool you decide to use should clearly explain how it sources data and what safeguards it uses to help ensure that data is accurate and unbiased. It’s important to remember, however, that no investing tool or human can predict price movements or market outcomes with certainty.

Is my data safe with AI investing tools?

AI investing tools typically have built-in protections to keep your data safe, and FINRA has privacy rules that investment firms must follow independent of the technology they use. Again, look for transparency when comparing AI investment platforms and avoid companies that offer little to no explanation about how your personal data is stored or used.

Can AI predict the next stock market crash?

No investment tool, whether AI-powered or not, can predict the next stock market crash with 100% accuracy. AI investing tools perform analysis, similar to what a financial advisor does — but faster. Diversifying your portfolio and paying attention to market trends may offer some protection against the worst impacts of a market crash.

About the author

Rebecca Lake

Rebecca Lake

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

Article Sources
  1. Investing.com. AI Stock Trading: How Artificial Intelligence Can Revolutionize Your Stock Picking.
  2. Data Ideology. AI Data Quality Matters—Bad Data Leads to AI Failure.
  3. CFA Institute. AI Bias by Design: What the Claude Prompt Leak Reveals for Investment Professionals.
  4. SpringerOpen. The effects of over-reliance on AI dialogue systems on students’ cognitive abilities: a systematic review.
  5. IBM. What is algorithmic bias?.

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.

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

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.

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.

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.

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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Nov
03
2025
In the Money (ITM) vs Out of the Money (OTM) Options

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

By | Growing Wealth, invest, Investing | Comments Off on In the Money vs Out of the Money Options: Main Differences

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.

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

“In the money” refers to options that may be profitable if exercised today, while “out of the money” refers to those that lack intrinsic value. In the rare case that the market price of an underlying security reaches the strike price of an option exactly at the time of expiry, this is considered an “at the money option.”

Key Points

•   Understanding the difference between “in the money” and “out of the money” options can help options traders gauge potential profitability.

•   Options classified as “in the money” have intrinsic value and may be profitable if exercised, while “out of the money” options lack intrinsic value and may expire worthless.

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

•   Options based on assets with higher volatility are often written “out of the money,” which can appeal to speculators due to their typically lower premiums and the potential for larger price swings.

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

What Does “In the Money” Mean?

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

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

Put options, which are a way to speculate on a decline of a stock (known as shorting a stock), would be in the money if the strike price is higher than the current market price of the underlying security. A contract of this nature allows the holder to sell the security at a higher price than it currently trades for and potentially profit from the difference.

In either case, an in the money contract has intrinsic value, so the options trader may choose to exercise the option to profit from it, assuming the gains exceed the premiums paid to purchase the contract.

Example of In the Money

For example, say an options trader owns a call option with a strike price of $15 on a stock currently trading at $17 per share. This option would be in the money because its owner could exercise the option to realize a profit. The contract gives the holder the right to buy 100 shares of the stock at $15, even though the market price is currently $17.

The contract holder could take shares acquired through the contract for a total of $1,500 and potentially sell them for $1,700, hypothetically realizing a profit of $200 minus the premium paid for the contract and any associated trading fees or commissions.

While call options give the holder the right to buy a security, put options give holders the right to sell. For example, say an investor owns a put option with a strike price of $10 on a stock that is trading at $8 per share. This would be an in the money option. The holder could sell 100 shares of stock at a price of $10 for a total of $1,000, even though those shares are only worth $800 shares on the market. The contract holder would then realize that difference of $200 as profit, minus the premium and any fees.

What Does “Out of the Money” Mean?

Out of the money (OTM) is the opposite of being in the money. OTM contracts do not have intrinsic value. If an option is out of the money at the time of expiration, the contract expires worthless. Options are out of the money when the relation of their strike prices to the current market price of their securities is the opposite of in the money options: they have no intrinsic value but may still carry time value before expiration.

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

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

In either case, the contracts are out of the money because they don’t have intrinsic value – anyone exercising those contracts could incur a loss.

Example of Out of the Money

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

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

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

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

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

Options written out of the money may appeal to speculators because their contracts may come with lower premiums and offer a high potential payoff relative to cost, despite a lower chance of expiring in the money.

Recommended: Popular Options Trading Terminology to Know

Should I Buy ITM or OTM Options?

The answer to this question depends on an investor’s goals and risk tolerance. Options that are further out of the money may offer higher potential rewards but can come with greater risk, uncertainty, and volatility. Whether an option is in or out of the money (and the extent that it’s out of the money), can impact the premium for that option, as can the amount of time before expiry and its level of implied volatility.

Whether to buy ITM or OTM options also depends on how confident an investor feels about the future of the underlying asset. If a trader believes that a particular stock may trade at a much higher price three months from now, then they might not hesitate to buy a call option with a very high strike price, which would be both deeply out of the money and likely lower cost.

Conversely, if an investor thinks a stock may decline in value, they might buy a put option with a very low strike price, which would also make the option out of the money and lower cost.

Beginning options traders and those with lower risk tolerance may prefer buying options that are only somewhat out of the money or those that are in the money. These options often have lower premiums than in-the-money contracts, and cost more than deeply out-of-the-money options, striking a balance between affordability and probability. There are also generally greater odds that the contract might end up in the money before expiration, as it requires a less dramatic move to make that happen.

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

Recommended: 10 Important Options Trading Strategies

Test your understanding of what you just read.

The Takeaway

In options trading, “in the money” refers to options that offer profit potential if exercised immediately (having extrinsic value), while “out of the money” refers to those that don’t (lacking intrinsic value). Options contracts don’t necessarily have to be exercised for a trader to realize a profit from them. Sometimes investors buy out-of-the-money contracts with the intent of selling them on the open market for a profit if they move into the money before expiration. Though, of course, they risk losing the premium paid if the option remains out of the money and expires worthless.

In either case, it’s important to consider if an option is in the money or out of the money when buying or writing options contracts, as well as when deciding when to execute them. Options trading is an advanced investing strategy, and investors may benefit from understanding the risks before participating or consulting a financial professional for guidance.

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.

Frequently Asked Questions

What is the difference between in the money and out of the money?

ITM options have intrinsic value because the strike price is favorable relative to the market price. OTM options have no intrinsic value and would not be profitable if exercised immediately. ITM options generally cost more, while OTM options tend to have lower premiums and rely on the price of the underlying asset moving in a favorable direction before expiration.

What is the difference between ITM and OTM options?

ITM options can be exercised at a price that’s better than the current market value, giving them intrinsic value. OTM options have strike prices that are not favorable relative to the market price and therefore have no intrinsic value. ITM options are more expensive but carry a higher probability of expiring with value, while OTM options are cheaper but more speculative.

What is the difference between an out-of-the-money and in-the-money put?

An ITM put has a strike price above the current market price of the underlying asset, which gives it intrinsic value. An OTM put has a strike price below the current market price, so it cannot currently be exercised for a profit. The difference lies in whether the put option would generate value if exercised immediately.

How can you tell if an option is in or out of the money?

Check the relationship between the option’s strike price and the current market price of the underlying asset. A call is in the money when the strike price is below the market price; it’s out of the money when the strike is above. For puts, it’s the opposite: the option is in the money when the strike is above the market price and out of the money when it’s below.

Photo credit: iStock/damircudic

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.

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.

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Nov
03
2025
What Are Underlying Assets? Types & Examples

What are Underlying Assets?

By | Growing Wealth, invest, Investing | Comments Off on What are Underlying Assets?

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.

Underlying assets are the financial instruments (stocks, bonds, and commodities) that help determine the value of derivatives (options, futures, and swaps). These assets serve as the foundation for many trading strategies, influencing how derivatives contracts are priced and how risk is managed in the market.

Here, we look at the role of underlying assets in derivatives trading, and outline the five of the most common types used by investors.

Key Points

•   Underlying assets are the securities derivatives are based on, such as stocks, bonds, and commodities.

•   Investors may trade derivatives to speculate and attempt to profit from the future price movements of underlying assets, or to hedge against risk.

•   Derivatives prices are based on the price of the underlying asset, as well as potentially other factors, depending on the type of derivative.

•   Derivatives carry high risk and are complex, often requiring advanced trading knowledge.

•   These financial instruments may be used by investment firms, hedge funds, institutional investors, and retail investors.

What Is an Underlying Asset?

An underlying asset is a financial instrument, like a stock, bond, or commodity, that helps determine the value of a related derivative contract. Underlying assets can be individual securities (like stocks or bonds) or groups of securities (like in an index fund).

A derivative is a financial contract between two or more parties based on the current or future value of an underlying asset. Derivatives can take many forms, involving trading in widely used markets like futures, equity options, swaps, and warrants, among others.

These contracts can involve significant risk as investors speculate on the future price movements of an underlying asset. An investor may profit if the price of the underlying asset moves as they anticipated, but they could potentially face steep losses if the price moves in an adverse direction. Derivatives are also often used to hedge against potential losses in other investments.

How Underlying Assets Work

To illustrate how underlying assets work in the derivatives market, consider options trading as an example.

An option is a financial derivative that gives the contract holder the right, but not the obligation, to buy or sell an underlying security by or at a specific time and at a specific price. When an option is exercised by the contract holder, that means the holder has exercised the right to buy or sell an underlying asset.

Options come in two specific categories: puts and calls.

•   Put options allow the options owner to sell an underlying asset (such as a stock or commodity) at a certain price and on or by a certain date (known as the expiration date).

•   Call options enable the owner to buy an underlying asset (like a stock or a commodity) at a certain price and on or by a certain date.

The underlying asset first comes into play when that options contract is initiated.

Example of an Underlying Asset in Play

Suppose an investor believes the price of a company’s stock is going to rise. The stock is currently trading at $275 per share, and so they opt to purchase a call option with a strike price of $285. The contract is struck on September 1 and the options contract expiration date is November 30.

Now that the contract is up and running, the performance of the underlying asset (the stock) can determine whether the option becomes profitable or expires worthless.

In this scenario, the options owner now has the “option” (hence the name) to buy 100 shares of the stock at $285 per share on or before November 30. If the underlying stock, which is now trading at $275, moves above the $285 strike price, the options owner can exercise the contract and potentially profit from the difference between the strike price and the market price.

If, for example, the stock slides to $290 per share in the options contract timeframe, the call options owner can exercise the purchase of the stock at $285 per share, $5 below its current value of the stock (i.e., the underlying asset). With each contract typically representing 100 shares of stock, the profits can add up on the call option investment.

If, on the other hand, the stock remains below the $285 per share level, and the November 30 deadline has come and gone, the options owner would not exercise the contract, since the stock is now worth less than the $285 strike price. That’s also the price the options owner has to pay for the stock by the expiration date.

Keep in mind, too, that options buyers must also take into account the amount they spent to purchase the options contract, since this would detract from their potential profits. If for example, the premium for a contract was $1 per share, or $100 total, they would need the price of the underlying asset to rise above $286 (the breakeven point) to profit.

This scenario represents the importance of the underlying asset. The derivatives investment depends entirely on the performance of the underlying asset, with abundant risk for derivative speculators who’ve taken positions on the underlying asset moving in a certain direction over a certain period of time.

5 Different Types of Underlying Assets

Underlying assets come in myriad forms in the derivatives trading market, with certain assets being used more frequently due to their liquidity and price volatility.

Here’s a snapshot.

1. Stocks

One of the most widely used underlying assets is stocks, which is only natural given the pervasiveness of stocks in the investment world.

Derivatives traders rely on equities as benchmark assets when making market moves. Since stocks are so widely traded, it gives derivatives investors more options to speculate, hedge, and generally leverage stocks as an underlying asset.

2. Bonds and Fixed Income Instruments

Bonds, typified by Treasury, municipal, and corporate bonds, among others, are also used as derivative instruments. Since bond prices do fluctuate based on general economic and market conditions, derivative investors may try to leverage bonds as an underlying asset as both bond interest rates and prices fluctuate.

3. Index Funds

Derivative traders also use funds as underlying assets, especially exchange-traded funds (ETFs), which are widely traded in short-term (or intra-day) trading sessions. Besides being highly liquid and fairly easy to trade, exchange-traded funds are also tradeable on major global exchanges at any point during the trading day.

That’s not the case with mutual funds, which can only be traded after the day’s trading session comes to a close. The distinction is important to derivative traders, who have more opportunities for market movement with ETFs than they might with mutual funds.

ETFs also cover a wide variety of investment market sectors, such as stocks, bonds, commodities, international and emerging markets, and business sector funds (such as manufacturing, health care, and finance). That availability gives derivatives investors even more flexibility, which is a characteristic investors typically seek with underlying assets.

4. Currencies

Global currencies like the dollar or yen, among many others, are also frequently used by derivative investors as underlying assets. A primary reason is the typically fast-moving foreign currency (FX) market, where prices can change rapidly based on geopolitical, economic, and market conditions.

Currencies usually trade fast and often, which may make for a volatile market — and derivative investors tend to steer cash toward underlying assets that demonstrate volatility, as quick market movements may create short-term profit potential. Given that they move so quickly, currencies can also move in the wrong direction quickly, which is why some financial professionals caution that currency markets may be too volatile for most individual investors.

5. Commodities

Common global commodities like gold, silver, platinum, and oil and gas can also serve as the basis for derivatives contracts traded by investors.

Historically, commodities have been one of the most volatile and fast-moving investment markets. Like currencies, commodities are often highly desirable for derivative traders, but high volatility may lead to significant investment losses in the derivatives market if the investor lacks the experience and knowledge required to trade against underlying assets.

The Takeaway

Underlying assets are the fundamental financial instruments used to create derivatives contracts and strategies. Derivatives, such as options, futures, and swaps, can come with high risk — and trading against those assets requires a comprehensive knowledge of trading, position sizing, leverage, hedging, and speculation.

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 are underlying assets?

Underlying assets are the foundation of derivatives contracts. They influence how a derivatives contract is priced and serve as the basis of a derivative buyer or seller’s trading strategy. Broadly, investors trade derivatives to try to profit from the future price movements of underlying assets, or to hedge against risk with other assets they own.

What are different types of underlying assets?

The different types of underlying assets may include stocks, bonds, index funds (especially ETFs), global currencies, and commodities like gold and oil. These assets are generally chosen for their liquidity, volatility, and their role as the foundation for various derivatives trading strategies.

Are gold and silver considered underlying assets?

Yes, gold, silver, and other precious metals may serve as underlying assets in derivatives contracts. Precious metals are considered commodities, and derivatives are frequently based on these and other types of commodities, such as oil, gas, and agricultural products. Due to their historical volatility, commodities like gold and silver are often desirable for derivative traders, though these trades entail significant risk.

Photo credit: iStock/MixMedia

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.

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.

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

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

SOIN-Q325-032

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Nov
02
2025
A couple sits in front of an open laptop, holding financial documents and looking concerned.

Tips for Financially Surviving a Layoff

By | Budgeting & Goals, Financial Independence, money | Comments Off on Tips for Financially Surviving a Layoff

Losing your job can be emotionally painful and can throw your finances for a major curveball. How will you pay your bills? How long will this situation last?

Take a deep breath, and arm yourself with knowledge for financially surviving a layoff. Whether you’re going through this situation right now or are worried it might occur, you can likely make adjustments and you can make and tap resources to weather this challenge. It’s a phase to move through but not to define you, so learn the details.

Key Points

•   Losing a job can be emotionally and financially challenging.

•   Build an emergency fund to cover expenses in a job loss situation.

•   File for unemployment benefits if eligible.

•   Consider starting a side hustle for extra income.

•   Network on LinkedIn and prioritize debt payments.

Preparing Financially for a Layoff

Unfortunately, layoffs seem to be a part of modern life. According to a recent report by Challenger, Gray & Christmas, an executive outplacement firm, 946,426 jobs were cut in the year to date as of fall 2025. This represents a 55% increase versus the year prior. That’s not heartening, but it’s a way of saying that if you are laid off, you are not alone, and it can also be wise to prepare financially for a layoff if you are currently employed.

Not having a steady income probably means you’ll have to figure out how to pay your bills when laid off. Until you find another stream of income, it’s important to keep your budget in order and learn to live within your means. Being financially prepared means having a clear understanding of what your expenses are so you can stay on track, especially with debt, if you have it. There are also resources you can access that may help with your cash flow during this difficult time.

Steps to Take to Prepare for a Layoff

Here are some smart moves that can help you be prepared and not panic if you do get laid off.

Start an Emergency Fund

A common strategy is to build up an emergency fund prior to an event like job loss. It’s a way of preparing for a layoff before it happens. An emergency or rainy day fund is typically a savings account that you’ve been adding to on a weekly or monthly basis. A high-yield savings account can be a good interest-bearing but liquid place to keep the funds.

Having roughly three to six months’ (or more) worth of monthly expenses is helpful (you can use an emergency fund calculator to help you do the math). That sum can tide you over at a moment of job loss and give you peace of mind.

•   You may want to automate your savings and have a small amount ($25 can get the ball rolling) transferred from checking to savings every payday. Or have that amount direct-deposited into savings.

•   The emergency fund should only be accessed for emergencies, as its name suggests. (No fair dipping into this kind of savings account when there’s an amazing sale at your favorite store.)

•   If you have the opportunity to contribute more than usual (say, you receive a financial windfall, like a bonus or a tax refund), do boost your emergency savings because you never know when you will need to tap into that account.

Budget, Budget, Budget

If you have an inkling that your company is preparing to lay off some employees or if you lose your job, it’s wise to double-check your weekly budget. This means separating your necessary spending from your discretionary spending.

•   Necessary expenses include things like rent or a mortgage, utilities, food, and health insurance. Don’t forget about minimum debt payments, such as student loan and credit card payments.

•   Discretionary spending may include traveling, dining out, new clothes, and entertainment.

It can be helpful to focus on how much you need to spend each month for necessary expenses (some people refer to this as their monthly “nut.”) Make a list of these basic living expenses and see what they total. Then, pre-layoff, you’ll also see how much you can allocate for activities that you want to do. It’s probably not the best idea to spend every penny each month. You want to have extra money at the end of the month to put toward savings.

If and when a layoff hits, you’ll focus on necessities and minimize your discretionary spending (more details below). You can also tweak your budget when unemployed to, say, cut back on some long-term savings to get you through this moment.

File Unemployment Benefits

If you do lose your job, you may be able to qualify for unemployment benefits. This can get some funds flowing your way to help tide you over.

•   Read the eligibility requirements to see if your situation aligns with the rules for unemployment. The eligibility requirements are likely to vary from state to state and may be determined on a case by case basis; payment amounts will vary as well.

•   If you qualify, filing for unemployment benefits will allow you to receive payments if you are out of a job without cause. (There is a possibility that those who are fired because they don’t meet job qualifications may receive funds as well.)

•   Generally, to qualify for unemployment benefits, you should be able and available for work, as well as be looking for employment. Once you’ve determined your eligibility, you can file on your state’s official government office of unemployment compensation website. The site should give you guidance on when to expect benefits.

Ask About Severance Packages

Severance pay can be provided for employees after they are no longer employed at a company. Severance is based on the duration of employment, but your employer is not required to provide severance upon termination.

If you were terminated through no fault of your own, employers may pay, for example, two weeks of salary for each year of employment. Severance may also include health insurance benefits and even services to help you find a new job. These can be very helpful supports when you’ve lost your job.

Use Credit Cards Only for Emergencies

If you become unemployed, it’s wise to stop using credit cards to make purchases. Paying with your credit card creates debt that comes with high interest rates (currently more than 20%). At such high interest rates, debt can really snowball.

Also, when you are out of work, it can be challenging to pay an existing credit card balance. If you manage to pay the minimum balances of your credit card debt rather than paying in full every month, the credit card debt may cost you more over time since you also have to factor in added interest.

If you find yourself in this kind of a bind with credit card debt, take action. Consider a balance transfer credit card that offers no or very low interest rates for a period of time. Or speak with a debt counselor at a nonprofit organization like the National Foundation for Credit Counseling (NFCC).

Make Sure Emergency Funds Are in Order

Emergency funds, as mentioned above, are an important part of a financial plan and can be a lifesaver for someone who is unemployed. If you are in a situation where you unexpectedly don’t have a stream of income until you find another job, you’ll be more at ease if you have built up an emergency fund over time, as mentioned above.

In this case, you can dip into your emergency fund for mandatory expenses to fulfill your short-term needs. If you don’t have emergency funds, unemployment benefits become that much more important. Borrowing from a close friend or a family member might also be an option.

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*Earn up to 4.30% Annual Percentage Yield (APY) on SoFi Savings with a 0.70% APY Boost (added to the 3.60% APY as of 11/12/25) for up to 6 months. Open a new SoFi Checking & Savings account and enroll in SoFi Plus by 1/31/26. Rates variable, subject to change. Terms apply here. SoFi Bank, N.A. Member FDIC.

Practical Tips for Saving Money After a Job Loss

Saving money after a layoff can certainly be difficult. You don’t have the usual cash infusion to pay your bills and buy groceries. That is why you need to proceed with caution and learn how to economize when you lose your job. Here are strategies for making ends meet during this difficult time.

Get Back on LinkedIn and Start Networking

If you’re job-hunting, Linkedin can be a great tool for networking. The platform is set up so you can find and interact with former colleagues, alumni from your college, and professionals at companies you aspire to work for.

•   Start commenting on people’s Linkedin posts and have conversations with existing connections.

•   Build up your profile so recruiters know your job history, your professional skills, and that you are looking for work. This can lead to job opportunities.

Prioritize and Negotiate Any Debts if Needed

Continuing to pay down debt while unemployed should still be a priority. One strategy to pursue is paying off debt that has the highest interest rate. Debt with higher interest rates cost more, so paying this off first will have you saving money in the long-term.

But if you’re wondering how to pay down debt if you don’t have any income, here’s one answer: Try to negotiate your debt. It can be possible to work with your credit card company to negotiate interest rates, payment amounts, and the terms on your credit card debt.

Avoid Luxuries Temporarily

Being unemployed can be a frightening experience. You no longer have a steady flow of income and may not feel financially prepared to weather short-term expenses. To ease this burden, work to eliminate spending on luxuries. Now might be a good moment to downsize streaming services and other subscriptions.

Also eyeball what expenses you have on the horizon: If you had booked a vacation house or a cruise for a few months down the line, it may make good financial sense to investigate getting a refund. That money could be allocated toward your everyday expenses as you job-hunt.

Look at Investments and Retirement

If you are temporarily out of a job, do your best to keep your hands off your retirement funds. You worked hard to save that money, and it’s there to fund a long-term financial goal. That said, some people do tap their retirement accounts as a last resort when unemployed.

When you withdraw from your retirement account before the age of 59 ½, you will incur a penalty tax. However, there are some cases where you may be able to withdraw funds when unemployed without paying this.

You may be able to set up what’s known as a substantially equal periodic payments (SEPP) over five years or until you hit age 59 ½, whichever is greater. However, if you do receive this kind of distribution, it will likely count as income and may therefore lower any unemployment benefits you may be receiving. Talk with your plan administrator to learn more.

Start a Side Hustle

You might consider starting a side hustle to bring in some extra cash while looking for full-time work. There are many ways to earn more money. You could rent out an extra bedroom in your home or apartment, sell unwanted items, drive for Uber or Lyft, or market your professional skills on online service platforms such as Fiverr or Upwork. These are viable avenues to get some money coming in until you lock down a new job.

The Takeaway

Figuring out how to manage your finances when you are in between jobs can be stressful, but there are ways to prepare and then actions that can help you get by. Building and then tapping an emergency fund, accessing unemployment, and budgeting are some actions to take.

Also make sure your banking partner is making it easy and profitable for you to do business with them.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.60% APY on SoFi Checking and Savings.

FAQ

How do you manage the emotional impact of getting laid off?

Getting laid off or fired from your job is a tough challenge. You may feel angry and ashamed. Acknowledge those feelings, and remind yourself that millions of others have navigated this situation. You are not alone. Also, taking action can foster feelings of control and personal agency. Updating your resume, networking, reworking your budget, and engaging in self care rituals (like exercise) may also be positive steps.

How do you recover after being laid off?

Recognize the shock and upsetting feelings that you are likely experiencing. Then, take steps to improve your situation: Seek unemployment benefits, apply for jobs, start a side hustle, cut some expenses, and perhaps volunteer to build new skills and fill free time. These moves can help you move forward from your job loss.

Is it better to be fired or laid off?

In both scenarios, you don’t have a job, but if you are fired, it is typically due to a performance issue. With a layoff, you will likely be able to file for unemployment and you may receive severance pay from your employer. When you are fired, you may or may not be able to receive unemployment funds and you will probably not be eligible for severance.

Photo credit: iStock/skynesher

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

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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