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Creating a Debt Reduction Plan

When you’re worried about money and feel your options are limited, debt can feel like a pair of handcuffs. And if it feels like you can’t do what you want to do — which is to pay it all off and get yourself free — there’s the temptation to do nothing. The right debt reduction plan, however, can help you start paying down your balances, stay on track with your budget, and work towards your future financial goals. Here are some options to get you started.

Key Points

•   Creating a debt reduction plan can alleviate the financial strain of feeling limited by debt.

•   Prioritizing expenses is crucial, distinguishing between essential and nonessential spending to free up funds for debt repayment.

•   The 50-30-20 budgeting rule is recommended, allocating income towards needs, wants, and savings respectively.

•   Debt repayment strategies such as the avalanche, snowball, and fireball methods offer structured approaches to paying down debt.

•   Refinancing through personal loans can consolidate debt into a single payment, potentially at a lower interest rate.

Tips to Build a Debt Reduction Plan

Prioritizing Expenses

A good first step is to look at everything you have coming into your bank account each month (income) and everything that is going out (spending). You can do this with pen and paper, or by leveraging an all-in-one budgeting app, such as SoFi..

Once you have a list of all of your monthly expenses, you can divide them into essential and nonessential expenses. Looking over your nonessential expenses, you may find easy places to cut back (such as streaming services you rarely watch or a membership to a gym you hardly ever use) to free up more funds for debt repayment. You may also need to cut back in other areas, such as meals out, clothing. and other discretionary purchases, at least temporarily.

A budgeting framework you might try is the 50-30-20 rule, which recommends putting 50% of your money toward needs (including minimum debt payments), 30% toward wants, and 20% toward savings and paying more than the minimum on debt payments.

Next, you can come up with a debt repayment strategy. Here are four popular approaches to knocking down debt. The debt avalanche method is probably best suited to those who are analytical, disciplined, and want to pay off their debt in the most efficient manner based solely on the math.

The debt snowball method takes human behavior into consideration and focuses on maintaining motivation as a person pays off their debt.

The debt fireball method is a hybrid approach that combines aspects of the snowball and avalanche methods. Here’s a closer look at each strategy.

Debt Avalanche

The avalanche method puts the focus on interest rates rather than the balance that’s owed on each bill.

1.    The first step is collecting all debt statements and determining the interest rate being charged on each debt.

2.    Next, you’ll want to list all of those debts in order of interest rate, so the debt with highest interest is on top and the debt with the lowest interest rate is at the bottom of the list.

3.    Now, you’ll want to focus on paying more than the minimum monthly payment on the debt that is first on the list, while continuing to make the minimum payments on all the others.

4.    When the first debt is paid off, you can move on to paying more than the minimum on the second debt on your list. By eliminating debts based on interest rate, you can save money on interest.

Debt Snowball

The debt snowball method can be effective in getting a handle on debt by getting rid of debts on your list more quickly than the avalanche method. However, it can cost a bit more.

1.    You’ll start by collecting debt statements and making a list of those debts, but instead of listing them in order of interest rate, organize them in order of size, with the smallest balance on top and the largest balance at the bottom of the list.

2.    Next, you’ll want to put extra money towards the debt at the top of the list, while continuing to pay the minimum on all of the other debts.

3.    Once you wipe away the first debt, you can start putting extra money towards the second debt on the list and, when that is one wiped out, move on to the third, and so on. This method provides early success and, as a result, can motivate you to keep going until you’ve wiped out all of your debts.

Debt Fireball

This strategy is a hybrid approach of the snowball and avalanche methods. It separates debt into two categories and can be helpful when blazing through costly “bad debt” quickly.

1.    You’ll want to start by categorizing all debt either “good” or “bad” debt. “Good” debt is debt that has the potential to increase your net worth, such as student loans, business loans, or mortgages. “Bad” debt, on the other hand, is normally considered to be debt incurred for a depreciating asset, like car loans and credit card debt. These debts also tend to have the highest interest rates.

2.    Next, you can list bad debts from smallest to largest based on their outstanding balances.

3.    Now, you’ll want to make the minimum monthly payment on all outstanding debts — on time, every month — then funnel any excess funds to the smallest of the bad debts. When that balance is paid in full, you can go on to the next-smallest on the bad-debt. This helps to keep the fireball momentum until all the bad debt is repaid.

4.    Once the bad debt is paid off, you can simply keep paying off good debt on the normal schedule. In addition, you may want to apply everything that was being paid toward the bad debt towards a financial goal, such as saving for a house, paying off a mortgage, starting a business, or saving for retirement.

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Using Personal Loans for Debt Reduction

Another debt payoff strategy you may want to consider is refinancing your debt. This involves taking out a personal loan, ideally with a lower rate than you are currently paying on your “bad” debts, and using it to pay off your balances.

Personal loans used for debt consolidation can help pull everything together for those who find it easier to keep up with just one monthly payment. A bonus is that because the interest rates for personal loans are typically lower than credit card interest rates, you can end up saving money.

Here’s a look at the process.

1.    You’ll first want to gather all of your high-interest debt statements and total up the debts to be paid.

2.    A good next step is to research your personal loan options, comparing rates, terms, and qualification requirements from different lenders, including traditional banks, online lenders, and credit unions. You may be able to “prequalify” for a personal loan for debt consolidation to get an idea of what rate you are likely to qualify for. This only requires a soft credit check and won’t impact your score.

3.    Once you’ve found a lender you want to work with, you can apply for the debt consolidation loan. Once approved, you can use the loan to pay off your high-interest debts. Moving forward, you only make payments on the new loan.

The Takeaway

Having a debt reduction plan in place is key to getting rid of those financial handcuffs and being able to look forward to a successful financial future. To get started, you’ll want to assess where you currently stand, find ways to free up funds to put towards debt repayment, and choose a debt payoff method, such as the avalanche or snowball approach.

Another option is to get a debt consolidation loan. This can help simplify repayment and also help you save money on interest. If you’re curious about your options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi debt consolidation loan could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.


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How Much Does it Cost to Adopt a Child?

While opening up your home and your heart to a new child may seem like the natural next step for you and your family, the process can actually be pretty complicated — and costly.

There are a few different adoption methods and each comes with its own unique costs and fees. Read on for a breakdown of some expenses you might run into in the adoption process.

Cost of Adoption from Foster Care

Adopting a child from foster care tends to be less expensive than other options. The process is often funded by the state and, typically, there are few or no fees passed on to the parents. However, some parents may opt to hire a private agency to help them through the process, which can come with out-of-pocket expenses. Parents may be able to recoup some or all of these costs through federal or state programs once the adoption is completed.

Home Study

One of the most important costs to account for in any adoption is the home study, which is when the prospective parents’ home is screened so that the adoption agency or a social worker can get a sense of their day-to-day life. While the cost of a home study might be included in the overall adoption fee from a private agency, the fees can range from a few hundred dollars to several thousand dollars.

Foster care adoptions will also generally have a home study where a social worker observes the interaction between the potential adoptive parents and the child. In some cases, there may be state or federal programs to offset the cost of a home visit.

Tax Credits for Foster Care (and Other) Adoptions

The tax code currently offers an adoption tax credit that can help offset some of the costs involved in adoption, whether you adopt via public foster care, domestic private adoption, or international adoption. The total amount of adoption credits will depend on the tax year, so it’s a good idea to talk to an accountant for more specifics.

Families adopting children from foster care might also qualify for other types of federal assistance depending on the child’s eligibility. This assistance might include:

•   A one-time, non-recurring reimbursement for adoption transaction costs

•   Recurring monthly maintenance payments for the child’s care (Not to exceed what the state would have paid to keep the child in foster care).

Children adopted through foster care may also be eligible for health insurance coverage under Medicaid, and other medical assistance to cover some or all of the child’s needs like special education or therapy.

Planning for Private Agency Adoption

Private adoption costs in the U.S. can vary from state to state. According to the Children’s Bureau, the cost of a private, agency-assisted adoption can range anywhere from $30,000 to $60,000.

Court Documentation Fees

Legal representation for the adoptive parents can run as high as $4,500. Depending on the state, these fees may or may not be covered as part of an agency’s overall pricing.

Independent Adoption Costs

Some families choose to adopt a child without the assistance of an adoption agency and instead work directly through an attorney. It might seem like a cost-saving measure at first, but pricing can still vary. Expenses might be low if you match with a birth parent through word of mouth, or if the birth mother’s expenses are minimal.

However, these adoption costs can still range from around $25,000 to $45,000. This typically includes most of the same costs of any other domestic adoption, including the home study, the birth mom’s medical expenses, and legal and court fees for the adoptive parents and birth parents.

Recommended: Common Financial Mistakes First-Time Parents Make

Expenses for Intercountry Adoption

Adoption fees will differ depending on which country you plan to adopt a child from. Intercountry adoption costs tend to be higher than a U.S.-based adoption because there is usually foreign travel and immigration processing to factor into the equation, in addition to other higher court costs, mandatory adoption education, and other documentation. The average cost can range from $20,000 to $50,000 for a foreign adoption.

Costs can depend on the organization managing the adoption as well — whether it’s the government, private agency, orphanage, non-profit organization, private attorney, or some combination of the above. Some intercountry adoptions are finalized in the child’s home country, while others must be finalized in the United States. Finalizing an adoption in U.S. court can come with extra costs, but also provides additional legal protections and documentation.

Other costs to adopt a child from another country can include:

• Escort fees for when/if parents can’t travel to accompany the child to the U.S.
• Medical care and treatment for the child
• Translation fees
• Foreign attorney or foreign agency fees
• Passport and visa processing
• Counseling and support after placement

Recommended: New Parent’s Guide to Setting Up a Will

Financing the Cost of Adoption

So, with costs ranging from at least a few thousand dollars to up to $60,000 or more, funding an adoption may require some planning. Financially preparing for a child typically means looking into all associated costs, including raising your new child and tackling your own debt.

Some employers may offer financial and other support to help with the adoption process. According to the Dave Thomas Foundation for Adoption , these policies include financial reimbursement and paid leave for adoption, among other benefits.

Additionally, companies with 50 or more employees are required by federal law to grant parental leave to employees who have adopted a child. Mothers and fathers are eligible for up to 12 weeks of unpaid leave after the birth or adoption of a new child.

Grants and loans also exist to help with the cost of adoption and can help with any type of legal adoption, whether a foster care adoption, private agency, or overseas adoption. Most grants and loans have their own eligibility criteria based on things like marital status, income level, and other specifics.

You can also consider taking out a personal loan to help cover the cost of adoption. Some lenders actually offer “adoption loans,” which are typically personal loans designed to cover costs associated with adopting a child.

Recommended: 5 Tips for Saving for a Baby

The Takeaway

The cost of adopting a child can vary widely, from a few thousand dollars to $60,000. Foster care adoptions tend to be less expensive than private agency or intercountry adoptions. There are state or federal tax credits and programs that can help offset the cost of adoption. Other resources to pay for adoption include grants and personal loans.

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


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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.


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What Is the Difference Between Trading Halts and Trading Restrictions?

Trading Halts vs Trading Restrictions

Investors, at one point or another, may find that a security they’re interested in trading or investing in is the subject of a trading halt or trading restrictions. The two are similar, but distinct – and it can be beneficial to understand the differences. A trading halt, for instance, is a temporary pause in trading, whereas trading restrictions are put in place by regulators to suspend trading by individuals who may be bending the rules.

Again, it can be helpful to understand the differences, so if investors do find themselves dealing with a trading halt or trading restrictions, they can make wise decisions about their next moves.

What Is the Difference Between a Trading Halt and a Trading Restriction?

A trading halt is a market event in which the trading of a particular asset or an entire stock exchange is temporarily suspended, whereas a trading restriction is a trading limitation enforced by the Securities Exchange Commission (SEC) and/or investing brokerages that prevent investors from participating in frequent and short-term trading activities at larger scales.

In other words, trading halts are reactionary and trading restrictions are preventative. To better understand, we’ll take a closer look at both trading halts and trading restrictions.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Is a Trading Halt?

A trading halt can be stock-specific or market-wide, affecting traders of all sizes, backgrounds, and geographic locations. The duration of a trading halt can vary, freezing securities of various types or entire markets for minutes or even hours at a time.

Trading halts are artificial, meaning they are not a natural part of markets—however, they have been in existence for some time. Stock market halts date back to 1987, when the SEC mandated the creation of market-wide circuit-breakers (MWCBs) to prevent a repeat of the Oct. 19, 1987 market crash, also known as “Black Monday,” which was one of the worst days for the market in history.

Reasons for Trading Halts

Trading halts are a method of pausing market action to prevent volatility from snowballing in response to unexpected stimuli.

Trading halts are designed only to be triggered when a certain market event occurs that is extreme, unprecedented, or otherwise affects market trading. Halts may be triggered by severe price rises or drops, commonly referred to as “circuit breakers” or “curbs.” Halts are implemented for a variety of reasons, including the following.

1. Anticipation of a Major News Announcement: Code T1: Pending News

A trading halt might be called during the day to allow a company to make an announcement. If the announcement is pre-market, it might result in a trading delay rather than a halt. A trading halt or delay allows investors time to assess the news’ impact.

2. Severe Price Drop: Code LUDP: Volatility Trading Pause

The NYSE also imposes trading halts based on the severity of price moves or stock volatility, applying to both upside and downside swings in short amounts of time. Whereas news-induced trading halts are usually one hour in duration, stocks can get halted for five to 10 minutes for increasing or decreasing rapidly in price over a short period, typically exceeding 10% in a five minute period.

3. Market-Wide Circuit Breakers

There are also three tiers of market-wide circuit breakers that pause trading across all U.S. markets when the benchmark indices the S&P 500, the Dow Jones 30, and the Nasdaq exceed pre-set percentages in terms of price from the prior day’s closing price:

•   Level 1: 15-minute halt when the S&P 500 falls 7% below the previous day’s closing price between 9:30am EST and 3:24pm EST.

•   Level 2: 15-minute halt when the S&P 500 falls 13% below the previous day’s close between 9:30am EST to 3:24pm EST. Level 1 and 2 circuit breakers do not halt trading between 3:25pm EST and 4:00pm EST.

•   Level 3: Trading is closed for the remainder of the day until 4pm EST when the S&P 500 falls 20% below the previous day’s close.

4. Correct an Order Imbalance

Non-regulatory halts or delays occur on exchanges such as the NYSE when a security has a disproportionate imbalance in the pending buy and sell orders. When this occurs, trading is halted, market participants are alerted to the situation, and exchange specialists communicate to investors a reasonable price range where the security may begin trading again on the exchange. However, a non-regulatory trading halt or delay on exchange does not mean other markets must follow suit with this particular security.

Recommended: Understanding the Different Stock Order Types

5. Technical Glitch: Code T6: Extraordinary Market Activity

Trading is halted when it’s determined that unusual market activity such as the misuse or malfunction of an electronic quotation, communication, reporting, or execution system is likely to impact a security’s market.

6. Regulatory Concerns

A trading halt may be placed on a security when there is uncertainty over whether the security meets the market’s listing standards. When this halt is placed by a security’s primary markets, other markets that offer trading of that security must also respect this halt. These include:

•   Code H10: SEC Trading Suspension: A five minute trading halt for a stock priced above $3.00 that moves more than 10% in a five minute period. H10s are commonly imposed by the SEC onto penny stocks and other over-the-counter stocks suspected of stock promotion or fraud.

•   Code T12: Additional Information Requested: A trading halt that occurs when a stock has rallied significantly without any clear impetus. This can be common among orchestrated pump-and-dumps or short squeezes, and in many cases when the halt is lifted, the stock reverts back down because there are no underlying fundamentals supporting the drastic rise in price.

How Long Do Trading Halts Last?

Trading halts are typically no longer than an hour, the remainder of the trading day, or on rare occasions up to 10 days. However, if the SEC deems appropriate, the regulatory body may revoke a security’s registration altogether.

Example of Trading Halts

Stock Volatility

Amid the late-January 2021 Gamestop vs Wall Street meme stock spectacle, Gamestop’s stock saw huge capital inflows over the course of a couple weeks, leading the NYSE in terms of daily volume. The stock’s intraday volume was so high that it triggered the volatility circuit breaker dozens of times over the last week of January and again on February 2, 2021, when it dropped 42%.

Pending News

On February 1, 2021, Adamas Pharmaceuticals’ trading was halted for news pending linked to the day being the FDA action date for the company’s marketing application for Gocovri (amantadine) to treat OFF episodes in Parkinson’s disease patients receiving levodopa-based therapy.

Regulatory Concerns

In June 2020, bankrupt car rental company Hertz’s stock trading was halted pending news around a planned controversial stock sale. The stock was trading down about half a percent to under $2.00 when the SEC told Hertz that the regulator had issues with the company’s stock sale plan.

Market-wide circuit breakers

MWCBs were triggered four times in March 2020 in response to the global COVID-19 pandemic lockdowns that caused two of the six largest single-day drops in market history. This was the first occurrence of market-wide circuit breakers since 1997.


💡 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.

What is a Trading Restriction?

Trading restrictions are trading limitations imposed by the SEC to restrict day trading of U.S. stocks and stock markets. Trading restrictions attempt to prevent “pattern day traders” from operating in the markets unless they maintain a minimum equity balance of $25,000 in their trading account.

Trading restrictions ensure a minimum standard is met by all market participants to trade assets to the fullest extent to which they have access. Margin requirements, pattern day trading, and occasionally limited market hours narrows the potential pool of traders to those with the designated criteria deemed necessary to effectively play by market rules at a certain scale.

Pattern Day Trading

The SEC defines a day trade as “the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account.” Accordingly, the SEC defines a pattern day trader as anyone who executes four or more trades within five trading days. In other words, opening and closing one trade per day is enough to classify a trader as a pattern day trader, applying the $25,000 minimum equity capital restrictions.

In addition to the SEC, some stockbrokers may impose even more stringent definitions of a pattern day trader, classifying pattern day trading as making two or three day trades in a five-day period, thus imposing the $25,000 minimum equity balance on anyone who meets this criteria.

Leverage/Margin

Day traders in the U.S. are permitted to trade on up to 4:1 leverage, meaning day traders can open positions up to four times the amount of cash in their trading account. For example, if a trader has $25,000 in their account, they can open up positions up to $100,000 for the day. However, traders that hold positions overnight are limited to 2:1 leverage, or up to double the amount of cash in their trading account.

Since day traders’ positions are intraday and each trade is less likely to experience larger price swings compared to positions held longer, day traders are allowed to have more leverage. If a trader exceeds their allowed margin, then the day trader’s broker will issue them a margin call, a demand for additional funds to maintain a certain account ‘margin’ requirement. Margin calls are usually brought on by a position decreasing sharply in value or an overleveraged position decreasing enough to fall below the margin requirement.

Recommended: What Is Leverage in Finance?

Examples of Trading Restrictions

PDT Suspended Trading

If Trader Smith has $20,000 in their trading account — $5,000 less than the minimum equity requirement for pattern day, they may only open and close three total trades in a week. If Smith opens and closes five total trades in one week with their same $20,000 account, they will be flagged as a pattern day trader.

Because their account’s equity doesn’t meet the minimum PDT margin requirement, their account may be suspended from trading until they add additional funds to their account to meet the $25,000 minimum equity requirement — or wait five or so days for the suspension to end. All margin and leverage is suspended during a PDT trading suspension, however some brokers may allow for cash account transactions while in PDT suspension.

Margin Calls

A late February 2021 25%+ selloff in the crypto markets was believed to have been started by margin calls that were liquidated, thereby creating a snowball of market sell orders that cascaded lower to then trigger lower liquidation levels and stop-loss orders, creating a feedback loop of selling.

The initial margin calls were triggered when a trader’s leveraged long trade came under pressure during a pullback, at which point the position was liquidated, force-sold after not meeting the margin requirements.

The Takeaway

Trading halts and trading restrictions are similar but different, and can both affect any trader at one time or another. From an individual perspective, there are minimum capital requirements to sign up for trading, especially for those intent on day trading. If a trader doesn’t maintain a certain level of margin, their trading account can be suspended or be limited to trading only with cash available.

Even if traders follow all the rules and maintain their margin requirements, there are certain trading days when trading of particular stocks pauses due to reasons outside of any one person’s control — whether it’s pending news, volatility, suspected fraud, or even a technical error. On rare occasions, the entire market may be halted or shut down for the day due to severe drops.

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The Risks and Rewards of Naked Options

The Risks and Rewards of Naked Options

A naked, or “uncovered,” option is an option that is issued and sold without the seller setting aside enough shares or cash to meet the obligation of the option when it reaches expiration.

Investors can’t exercise an option without the underlying security, but they can still trade the option to make a profit, by selling the option for a premium.

When an option writer sells an option, they’re obligated to deliver the underlying securities (in the case of a call option) or cash (in the case of a put) to the option holder at expiration.

But because a naked writer doesn’t hold the securities or cash, they need to buy it or find it if the option they wrote is in the money, meaning that the investor exercises the option for a profit.

What is a Naked Option?

When an investor buys an option, they’re buying the right to buy or sell a security at a specific price either on or before the option contract’s expiration. An option to buy is known as a “call” option, while an option to sell is known as a “put” option.

Investors who buy options pay a premium for the privilege. To collect those premiums, there are investors who write options. Some hold the stock or the cash equivalent of the stock they have to deliver when the option expires. The ones who don’t are sometimes called naked writers, because their options have no cover.

Naked writers are willing to take that risk because the terms of the options factor in the expected volatility of the underlying security. This differs from options based on the price of the security at the time the option is written. As a result, the underlying security will have to not only move in the direction the holder anticipated, but do so past a certain point for the holder to make money on the option.

Recommended: A Guide to Options Trading

The Pros and Cons of Naked Options

There are risks and rewards associated with naked options. It’s important to understand both sides.

Naked Writers Often Profit

The terms of naked options have given them a track record in which the naked writer tends to come out on top, walking away with the entire premium. That’s made writing these options a popular strategy.

Those premiums vary widely, depending on the risks that the writer takes. The more likely the broader market believes the option will expire “in the money” (with the shares of the underlying stock higher than the strike price), the higher the premium the writer can demand.

But Sometimes the Options Holder Wins

In cases where the naked writer has to provide stock to the option holder at a fixed price, the strategy of writing naked call options can be disastrous. That’s because there’s no limit to how high a stock can go between when a call option is written and when it expires.

Recommended: 10 Options Strategies You Should Know

How to Use Naked Options

While there are some large institutions whose business focuses on writing options, some qualified individual investors can also write options.

Because naked call writing comes with almost limitless risks, brokerage firms only allow high-net-worth investors with hefty account balances to do it. Some will also limit the practice to wealthy investors with a high degree of sophistication. To get a better sense of what a given brokerage allows in terms of writing options, these stipulations are usually detailed in the brokerage’s options agreement. The high risks of writing naked options are why many brokerages apply very high margin requirements for option-writing traders.

Generally, to sell a naked call option, for example, an investor would tell their broker to “sell to open” a call position. This means that the investor would write the naked call option. An investor would do this if they expected the stock to go down, or at least not go any higher than the volatility written into the option contract.

If the investor who writes a naked call is right, and the option stays “out of the money” (meaning the security’s price is below a call option’s strike price) then the investor will pocket a premium. But if they’re wrong, the losses can be profound.

This is why some investors, when they think a stock is likely to drop, are more likely to purchase a put option, and pay the premium. In that case, the worst-case scenario is that they lose the amount of the premium and no more.

How to Manage Naked Option Risk

Because writing naked options comes with potentially unlimited risk, most investors who employ the strategy will also use risk-control strategies. Perhaps the simplest way to hedge the risk of writing the option is to either buy the underlying security, or to buy an offsetting option. The other risk-mitigation strategies can involve derivative instruments and computer models, and may be too time consuming for most investors.

Another important way that options writers try to manage their risk is by being conservative in setting the strike prices of the options. Consider the sellers of fifty-cent put options when the underlying stock was trading in the $100 range. By setting the strike prices so far from where the current market was trading, they limited their risk. That’s because the market would have to do something quite dramatic for those options to be in the money at expiration.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

The Takeaway

With naked options, the investor does not hold a position in the underlying asset. Because this is a risky move, brokerage firms may allow their high-net-worth investors to write naked options.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

With SoFi, user-friendly options trading is finally here.


SoFi Invest®

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

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

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Bond ETFs Explained

Investing in individual bonds can be complicated, but exchange-traded funds (ETFs) that invest in bonds — a.k.a. bond ETFs — can provide a more straightforward way to invest in fixed income securities.

Investors may associate ETFs with stocks, thanks to the popular ETFs that track stock indices like the S&P 500. ETFs also happen to trade on stock exchanges, like the New York Stock Exchange.

Bond ETFs work similarly. Though the ETF holds bonds and not stocks, it trades on a stock exchange. Said another way, a bond ETF is a bundle of bonds that an investor can trade like a stock.

Bond ETFs make it possible for investors to buy a diversified set of bonds, without the time and effort it would take to build a portfolio of individual bonds.

Before getting into the specifics of bond ETFs, it will be helpful to understand ETFs and bonds separately. Let’s begin with ETFs.

ETF 101: Reviewing the Basics

An investment fund provides a way to pool money with other investors so that money can then be spread across many different investments (sometimes referred to as a “basket” of investments).

For most small investors, it would be too costly to individually purchase 500 individual stocks or 1,000 individual bonds. But such a thing becomes possible when doing it alongside thousands of other investors. Though different vehicles, mutual funds and ETFs provide investors with an incredible opportunity to diversify their investments.

For retail investors, investment funds come in two major varieties: mutual funds and exchange-traded funds. Mutual funds and ETFs are constructed differently — ETFs were built to trade on an exchange, as the name implies — but both can be useful tools in gaining broad diversification.

Whether investors will choose a mutual fund or ETF will likely depend on their preference, and context. For example, someone using a workplace retirement plan may only have access to mutual funds, so that’s what they use.

Someone who is investing independently may choose ETFs, because it’s possible to purchase them without any of the normally associated trading costs.

Whether an investor is using a mutual fund or an ETF, what’s most important is what’s held inside that fund. Think of an ETF as a basket that holds an array of securities, like stocks or bonds.

Most ETFs will hold just one type of security — only stocks or only bonds, for example. A bond ETF could be broad, or it could contain a narrower sliver of the bond market, like corporate bonds, green bonds, or short-term treasury bonds.


💡 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.

What Is a Bond?

Effectively, a bond is a loan to an organization: i.e. a company, government, or other entity. Investors loan the entity their money, and then the entity pays interest on the amount of that loan.

Bonds are quite different from stocks, which offer investors the opportunity to buy shares of ownership in a company or entity.

There are countless types of bonds. Treasuries are loans to the U.S. government. Municipal bonds are loans to a state or local government. Companies sometimes issue bonds in order to raise money. These entities are borrowing money from investors and issuing IOUs in the form of bonds.

How Bonds Work

When investors buy a bond, they are agreeing to the rate of interest and other terms set by the bond. Because bonds pay a fixed rate of interest, bonds are sometimes referred to as fixed-income investments.

Bonds typically make interest payments, sometimes referred to as coupon payments, twice annually.

Example of a Bond

Let’s say an investor buys a Coca-Cola bond for $10,000 that pays a 4% rate of interest over 20 years. The bond earns $400 every year, earning the investor a total of $8,000 over the 20-year period. At the end of the period, the $10,000 “principal” investment is returned. As long as the investor holds the bond for the full 20 years, there should be no surprises.

Because bonds pay a fixed rate of return, their earnings potential is largely predictable. But there is limited upside on what can be earned on a bond. For this reason, bonds are considered to be a safer, less volatile complement to stock holdings, which have a higher potential for returns over time.

Types of Bonds

Bonds are issued by different entities and are often categorized by the issuer. There are four categories of bonds available to investors.

Treasury bonds: Bonds issued by the U.S. government.

Municipal bonds: Bonds issued by local governments or government agencies.

Corporate bonds: Bonds issued by a public corporation.

Mortgage and asset-backed bonds: Bonds that pass through the interest paid on a bundle of debts, such as a bundle of mortgages, student loans, car loans, or other financial assets.

As one could imagine, there are many subtypes within these broad categories.

When it comes to risk, the bond market produces a wide range. Corporate, municipal, and asset-backed bonds are generally considered to be higher risk than treasury bonds.

Whereas a business or even a municipal government could potentially “default” on a loan, it is highly unlikely that the U.S. government would go bankrupt. (As yet, the U.S. government has never defaulted on a treasury bond.)

Because they are considered low risk, U.S. treasury bonds typically pay less interest than the other bond types. This is an important trade-off to understand. Higher-risk investments should pay a higher rate of interest in order to compensate the investor for taking on that additional risk.

This is why it is possible to see bonds with high rates of interest issued by unstable governments or by highly speculative companies. These are often referred to simply as high-yield bonds or junk bonds.

Bonds can also vary by their maturity dates. It is possible to purchase bonds with a wide range of timelines, ranging from the very short (a few days) to the very long (30 years). Although it depends on the current state of interest rates, long-term bonds tend to pay more than short-term bonds. This should make intuitive sense; investors want to be compensated for locking their money up for longer periods.

Benefits of Bond ETFs

While bonds offer certain benefits to investors, including relatively low risk and predictable income, these instruments are complex. Owning and managing a portfolio of bonds requires experience and sophistication. This is where bond ETFs come in. In some ways, bond ETFs give retail investors easier access to the bond market.

Bond ETFs can be purchased in small dollar amounts.

For some bonds, the starting price is $1,000. This can be prohibitive for small investors who don’t have $1,000 to start building their bond portfolio, let alone a diversified one.

Generally, ETFs are sold by the share, and the cost of one share varies by ETF. Some trading platforms allow for the purchase of partial shares, which allows investors to get started with as little as $1.

They provide diversification.

It is possible to buy into a fund of hundreds or thousands of bonds using a bond ETF. This type of portfolio diversification would be otherwise impossible to achieve for small investors trying to build a bond portfolio on their own. ETFs make diversification a possibility, even at very small dollar amounts.

They are low cost.

ETFs, by their nature, are low cost. Because they are typically passive funds by style, the management fee embedded within the fund — called the expense ratio — is typically quite low. Compare this to an actively managed mutual fund of bonds, where the expense ratios can top 1%.

There’s another fee that investors will want to be aware of, called a trading cost or transaction fee. This is the cost of buying and selling ETFs (and stocks). These fees can be quite prohibitive for smaller investors. Luckily, there are ways to buy ETFs without paying any trading or transaction fees.

They are easy to buy and sell.

Individual bonds are not always easy to buy and sell. Said another way, they are not particularly liquid. Bonds do not trade on an open exchange, like stocks and ETFs. It is likely that an investor would need to involve a professional to broker the transaction.

ETFs, on the other hand, are very easy to sell. Most banks and trading platforms allow investors to do it themselves, online. This way, an investment can be sold quickly if needed.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Downsides of Bond ETFs

Bond ETFs do have their downsides, though.

Bond ETFs reveal underlying price changes in the bonds, which some investors may find disconcerting. Because yes, it is possible for bonds, and a bond ETF, to lose value.

When holding an individual bond or a portfolio of bonds, an investor is not provided minute-by-minute updates of the market value of that investment. In this way, a bond is like a house. There is no ticker sitting above anyone’s house that tells them the value of that property at that very second.

This is not the case with a bond ETF, where price changes can be felt in near real time. It will be important that investors are prepared for this. It is generally not wise to make a decision about long-term investments based on recent price gyrations, not just with stocks but with bonds, too.

The Takeaway

The first step is to research bond ETFs, as there are many kinds. Bond ETFs can be broad and cover a wide sample of the bond market, or they can be narrower. For example, it is possible to buy a long-term treasury bond ETF or a bond ETF that only holds certain municipal bonds.

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

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


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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.


Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
For additional disclosures related to the SoFi Invest platforms described above, please visit https://www.sofi.com/legal/.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .


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

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