goalActiveInvesting Archives

Apr

2025

Are Fractional Shares Worth Buying?

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

Fractional shares are a useful way to allow new investors to get their feet wet by investing small amounts of money into parts of a share of stock. For some investors, fractional shares are worth it because it means they can own a part of a stock from a company they are interested in, without committing to buying a whole share.

While fractional shares have much in common with whole shares, they don’t trade on the open market as a standalone product. Because of that, fractional shares must be sold through a major brokerage.

Key Points

• Fractional shares enable new investors to purchase parts of expensive stocks, enhancing accessibility.

• They facilitate dollar-cost averaging and dividend reinvestment plans, optimizing investment strategies.

• Stock splits and mergers can result in the creation of fractional shares.

• Some brokerages impose limitations on order types and may charge higher transaction fees.

• Fractional shares promote financial inclusion and offer growth potential for investors with limited capital.

What Does It Mean to Buy Fractional Shares?

A fractional share is less than one whole equity share (e.g. 0.34 shares). Fractional shares appreciate or depreciate at the same rate as whole shares, and distribute dividends at the same yield proportionate to the fractional amount.

Fractional shares were previously only available to institutional investors at one-sixteenth intervals, but have recently become widely available to retail investors at exact decimals (in order to increase market pricing precision and lower trading costs).

This new capability offers another layer of financial inclusion to casual investors by lowering minimum investing requirements to thousands of stocks and assets and making them available in smaller quantities.

Why Fractional Shares Are Worth Buying

For some investors, these positives make buying fractional shares worth it.

Access to Unaffordable Stocks

Fractional shares can help build a portfolio made of select stocks, some of which may be too expensive for some investors to afford one whole share. With fractional shares, an investor can choose stocks based on more than just price per share.

Previously, new investors would face price discrimination for not having enough funds to buy one whole share. But with fractional shares, an investor with $1,000 to spend who wants to buy a stock that costs $2,000 per share, can buy 0.5 shares of that stock.

Fractional shares make it easier to spread a modest investment amount across a variety of stocks. Over time, it may be possible to buy more of each stock to total one or more whole shares. In the meantime, buying a fractional share allows an investor to immediately benefit from a stock’s gain, begin the countdown to qualify for long-term capital gains (if applicable), and receive dividends.

A Doorway to Investing

History has shown that the stock market typically outperforms fixed-income assets and interest-bearing savings accounts by a wide margin. If equities continue to provide returns comparable to the long-term average of around 7%, even a small investment can outperform money market savings accounts, which typically yield 1-2%. (Though as always, it’s important to remember that past performance does not guarantee future success.)

By utilizing fractional shares, beginners can make small investments in the stock market with significantly more growth potential even with average market returns versus savings accounts that typically don’t even match inflation.

Maximized Dollar-Cost Averaging

Fractional shares help maximize dollar-cost averaging, in which investors invest a fixed amount of money at regular intervals.

Because stock shares trade at precise amounts down to the second decimal, it’s rare for flat investment amounts to buy perfectly-even amounts of shares. With fractional shares, the full investment amount can be invested down to the last cent.

For example, if an investor contributes $500 monthly to a mutual fund with shares each worth $30, they would receive 16.66 shares. This process then repeats next month and the same investment amount is used to purchase the maximum number of shares, with both new and old fractional shares pooled together to form a whole share whenever possible.

Maximized Dividend Reinvestment Plans

This same scenario applies to dividend reinvestment plans (also known as DRIP investing). In smaller dividend investment accounts, initial dividends received may be too small to afford one whole share. With fractional shares, the marginal dividend amount can be reinvested no matter how small the amount.

Fractional shares can be an important component in a dividend reinvestment strategy because of the power of compounding. If an investor automatically invests $500 per month at $30 per share but can’t buy fractional shares, only $480 of $500 can be invested that month, forfeiting the opportunity to buy 0.66 shares. While this doesn’t seem like much, not investing that extra $20 every month can diminish both investment gains and dividends over time.

Stock Splits

Stock splits occur when a company reduces its stock price by proportionately issuing more shares to shareholders at a reduced price. This process doesn’t affect the total value of an investment in the stock, but rather how the value is calculated.

For some investors, a stock split may cause a split of existing shares, resulting in fractional shares. For example, if an investor owns 11 shares of a company stock worth $30 and that company undergoes a two-for-three stock split, the 15 shares would increase to 22.5 but each share’s price would decrease from $30 to $20. In this scenario, the stock split results in the same total of $450 but generates a fractional share.

Mergers or Acquisitions

If two (or more) companies merge, they often combine stocks using a predetermined ratio that may produce fractional shares. This ratio can be imprecise and generate fractional shares depending on how many shares a shareholder owns. Alternatively, shareholders are sometimes given the option of receiving cash in lieu of fractional shares following an impending stock split, merger, or acquisition.

Too expensive? Not your favorite stocks.

Own part of a stock with fractional share investing.

Invest with as little as $5.

Disadvantages of Buying Fractional Shares

Fractional shares can be a useful asset if permitted, but depending on where you buy them could have major implications on their value.

Order Type Limitations

Full stock shares are typically enabled for a variety of order types to accommodate different types of trading requests. However, depending on the brokerage, fractional shares can be limited to basic order types, such as market buys and sells. This prevents an investor from setting limit orders to trigger at certain price conditions and from executing trades outside of regular market hours.

Transferability

Not all brokerages allow fractional shares to be transferred in or out, making it difficult to consolidate investment accounts without losing the principal investment or market gains from fractional shares. This can also force an investor to hold a position they no longer desire, or sell at an undesirable price to consolidate funds.

Liquidity

If the selling stock doesn’t have much demand in the market, selling fractional shares might take longer than hoped or come at a less advantageous price due to a wider spread. It may also be possible to come across a stock with full shares that are liquid but fractional shares that are not, providing difficulty in executing trades let alone at close to market price.

Commissions

Brokerages that charge trading commissions may charge a flat fee per trade, regardless of share price or quantity of shares traded. This can be disadvantageous for someone who can only afford to buy fractional shares, as they’re being charged the same fee as someone who can buy whole or even multiple shares. Over time, these trading fees can add up and siphon limited capital that could otherwise be used to buy additional fractional shares.

Higher transaction fees

Worse yet, some brokerages may even charge higher transaction fees for processing fractional shares, further increasing investor overhead despite investing smaller amounts.

What Happens to Fractional Shares When You Sell?

As with most brokerages that allow fractional shares, fractional shares can either be sold individually or with other shares of the same asset. Capital gains or losses are then calculated based on the buy and sell prices proportionate to the fractional share.

The Takeaway

Fractional shares are an innovative market concept recently made available to investors. They allow investors of all experience and income levels access to the broader stock market – making it worth buying fractional shares for many investors.

Fractional shares have many other benefits as well — including the potential to maximize both DRIP and dollar-cost averaging. Still, as always, it makes sense to pay attention to downsides as well, such as fees disproportionate to the investment, and order limitations.

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).

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®

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

SOIN-Q225-032

Mar

2025

How to Build an Investment Portfolio for Beginners

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

These days it’s fairly straightforward to set up an investment portfolio, even if you’re a beginner. By understanding a few fundamentals, it’s possible to learn how to create an investment portfolio that can help build your savings over time, and support your progress toward certain goals, like retirement.

Identifying your goals is the first step in the investing process. Then, it’s important to determine a time frame you’ll need to reach your goal — e.g., one year, five years, 30 years — and understand your personal tolerance for risk.

These three fundamentals will help you make subsequent decisions about your investment portfolio, like which investments to choose.

Key Points

• It’s relatively easy to build a basic investment portfolio, using only a few key fundamentals.

• An investment portfolio is usually tied to a goal like retirement or wealth building, or sometimes a savings goal (e.g., a down payment).

• Most investment portfolios consist of securities like stocks, bonds, mutual funds, or other types of assets.

• By identifying your goal, time horizon, and risk tolerance, it’s possible to create a well-balanced portfolio that’s also diversified.

• A beginning investor can select their own investments, work with a financial professional, or choose a robo advisor (which offers pre-set portfolios).

The Basics: What Is an Investment Portfolio?

An investment portfolio is a collection of investments, such as different types of stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and other assets.

Types of Investment Portfolios

An investment portfolio aims to achieve specific investment goals, such as generating income, building wealth, or preserving capital, while managing market risk and volatility.

You might have an investment portfolio in your retirement account, and another portfolio in a taxable account.

While it’s possible to select your own investments, a financial advisor can also help select investment for a portfolio. It’s also possible to invest in a pre-set portfolio known as a robo advisor, or automated portfolio.

These days, investing online is a common route, whether you use an online brokerage or a brick-and-mortar one.

Why Building a Balanced Portfolio Matters

Building a balanced investment portfolio matters for several reasons. As noted above, a balanced, diversified portfolio can help manage the risk and volatility of the financial markets.

What Is a Balanced Portfolio?

While it’s possible to invest all your money in one mutual fund or ETF (or stock or bond), decades of investing research shows that putting all your money into a single investment can be risky. If that single asset drops in value, it would impact your entire nest egg.

Building a balanced portfolio, where you invest in a range of different types of assets — a strategy known as diversification — may help mitigate some risk factors, and over the long term may even improve performance (although there are no guarantees).

The Value of Diversification

Many people avoid building an investment portfolio because they fear the swings of the market and the potential to lose money. But by diversifying investments across different asset classes and sectors, the impact of any one investment on the overall portfolio is reduced.

This beginner investment strategy can help protect the portfolio from significant losses due to the poor performance of any single investment.

Additionally, by including a mix of different types of investments, investors can benefit from the potential returns of different asset classes while minimizing risk. For example, building a portfolio made up of relatively risky, high-growth stocks balanced with stable, low-risk government bonds may allow you to benefit from long-term price growth from the stocks while also generating stable returns from the bonds.

Creating a balanced portfolio and using diversification are strategies to mitigate risk, not a guarantee of returns.

Assessing Risk Tolerance and Setting Investment Goals

In the financial world, risk refers specifically to the risk of losing money. Each investor’s tolerance for risk is an essential component of their personal investing strategy, because it guides their investment choices. Below are two general strategies many investors follow, depending on their risk tolerance.

Conservative vs. Aggressive Investing

• An aggressive investment strategy is for investors who are willing to take risks to grow their money. Aggressive refers to the willingness to take on risk.

Stocks, which are shares in a company, tend to be more risky than bonds, which are debt instruments and generally offer a fixed yield or return over time. When you buy stocks, the value can fluctuate. While the price of bonds also goes up and down, owning a bond can provide a stream of income payments that, in some cases (i.e., government bonds rather than corporate), are guaranteed.

One rule you often hear in finance: High risk, high reward. Which means: Stocks tend to be higher risk investments, with the potential for higher rewards. Bonds tend to be lower risk, with the likelihood of lower returns.

• Conservative investing is for investors who are leery of losing any of their money. Conservative strategies may be better suited for older investors because the closer you get to your ultimate goal, the less room you will have for big dips in your portfolio should the market sell off. But a conservative mindset can apply to any age group.

You can prioritize lower-risk investments as you get closer to retirement. Lower-risk investments can include fixed-income (bonds) and money-market accounts, as well as dividend-paying stocks.

These investments may not have the same return-generating potential as high-risk stocks, but for conservative investors typically the most important goal is to not lose money.

Choosing a Goal for Your Portfolio

Long- and short-term goals depend on where you are in life. Your relationship with money and investing may change as you get older and your circumstances evolve. As this happens, it’s best to understand your goals and figure out how to meet them ahead of time.

If you’re still a beginner investing in your 20s, you’re in luck because time is on your side. That means, when building an investment portfolio you have a longer time horizon in which to make mistakes (and correct them).

You can also potentially afford to take more risks because even if there is a period of market volatility, you’ll likely have time to recover from any losses.

If you’re older and closer to retirement age, you can reconfigure your investments so that your risks are lower and your investments become more conservative, predictable, and less prone to significant drops in value.

As you go through life, consider creating short- and long-term goal timelines. If you keep them flexible, you can always change them as needed. But of course, you’d want to check on them regularly and the big financial picture they’re helping you create.

Short Term: Starting an Emergency Fund

Before you think about an investing portfolio, it’s wise to make sure you have enough money stashed away for emergencies. Whether you experience a job loss, an unplanned move, health problems, auto or home repairs — these, and plenty of other surprises can strike at the worst possible time.

That’s when your emergency fund comes in.

Generally, it makes sense to keep your emergency money in low-risk, liquid assets. Liquidity helps ensure you can get your money if and when you need it. Also, you don’t want to take risks with emergency money because you may not have time to recover if the market experiences a severe downturn.

Medium Term: Saving for a Major Event

It’s also possible to start an investment portfolio for a goal that’s a few years down the road: e.g., graduate school, a wedding, adoption, a big trip, a down payment on a home.

For more ambitious goals like these, you may need more growth than a savings account or certificate of deposit (CD). Learning how to build a portfolio of stocks and other assets could help you reach your goal — as long as you don’t take on too much risk.

In this case, an automated portfolio might make sense, because with a few personal inputs, it’s possible to use these so-called robo advisors to achieve a range of goals using a pre-set portfolio tailored to your goal, time horizon, and risk tolerance.

Recommended: What Is Automated Investing?

Long Term: Starting a Retirement Portfolio

One of the most common types of longer-term investing portfolios is your retirement portfolio.

How to build an investment portfolio for this crucial goal? First, think about your desired retirement age, and how much money you would need to live on yearly in retirement. You can use a retirement calculator to get a better idea of these expenses.

One of the most frequently recommended strategies for long-term retirement savings is starting a 401(k), opening an IRA, or doing both. The benefit of this type of investment account is that they have tax advantages.

Another benefit of 401(k)s and IRAs is that they help you build an investment portfolio over the long term.

Prioritizing Diversification

As mentioned above, portfolio diversification means keeping your money in a range of assets in order to manage risk. All investments are risky, but in different ways and to varying degrees. For example, by investing in lower-risk bonds as well as equities (stocks), you may help offset some of the risk of investing in stocks.

The idea is to find a balance of potential risk and reward by investing in different asset classes, geographies, industries, risk profiles.

Types of Diversification

• While diversification sounds straightforward, it can be quite complex. There are a multitude of diversification strategies. Some examples:

• Simple diversification. This refers to distributing your assets among a variety of different asset classes (e.g. stocks, bonds, real estate, etc.).

• Geographic diversification. You can target different global regions with your investments, to achieve a balance of risk and return.

Market capitalization. Investing in large-cap versus small-cap funds is another way to create a balance of equities within your portfolio.

Understanding Types of Risk

Diversification can help manage certain types of risk, but not all types of risk.

Systematic Risk

Systematic risk is considered ‘undiversifiable’ because it’s inherent to the entire market. It’s due to forces that are essentially unpredictable.

In other words: Big things happen, like economic peaks and troughs, geopolitical conflicts, and pandemics. These events will affect almost all businesses, industries, and economies. There are not many places to hide during these events, so they’ll likely affect your investments too.

One smart way to manage systematic risk: You may want to calculate your portfolio’s beta, another term for the systematic risk that can’t be diversified away. This can be done by measuring your portfolio’s sensitivity to broader market swings.

Understanding Idiosyncratic Risk

Idiosyncratic risk is different in that this type of risk pertains to a certain industry or sector. For instance, a scandal could rock a business, or a tech disruption could make a particular business suddenly obsolete.

As a result, a stock’s value could fall, along with the strength of your investment portfolio. This is where portfolio diversification can have an impact. If you only invest in three companies and one goes under, that’s a big risk. If you invest in 20 companies and one goes under, not so much.

Owning many different assets that behave differently in various environments can help smooth your investment journey, reduce your risk, and hopefully allow you to stick with your strategy and reach your goals.

4 Steps Towards Building an Investment Portfolio

Here are four steps toward building an investment portfolio:

1. Set Your Goals

The first step to building an investment portfolio is determining your investment goals. Are you investing to build wealth for retirement, to save for a down payment on a home, or another reason? Your investment goals will determine your investment strategy.

2. What Sort of Account Do You Want?

Investors can choose several kinds of investment accounts to build wealth. The type of investment accounts that investors should open depends on their investment goals and the investments they plan to make. Here are some common investment accounts that investors may consider:

Taxable vs. Tax-Deferred Accounts

• Individual brokerage account: This is a taxable brokerage account that allows investors to buy and sell stocks, bonds, mutual funds, ETFs, and other securities. This account is ideal for investors who want to manage their own investments and have the flexibility to buy and sell securities as they wish.

Gains are taxable, either as ordinary income or according to capital gains tax rules.

• Retirement accounts: These different retirement plans, such as 401(k)s, traditional, SEP and SIMPLE IRAs are all considered tax-deferred accounts. The money you contribute (or save) reduces your taxable income for that year, but you pay taxes later in retirement. These accounts have contribution limits and may restrict when and how withdrawals can be made.

Note that Roth IRAs are not tax-deferred, but they are tax advantaged accounts as well. The money you contribute is after-tax (it won’t reduce your current-year taxable income), and qualified withdrawals in retirement are tax free.

• Automated investing accounts: These accounts, also known as robo advisors, use algorithms to manage investments based on an investor’s goals and risk tolerance.

3. Choosing Investments Based on Risk Tolerance

Once you’ve set your investment goals, the next step is to determine your investments based on your risk tolerance. As discussed above, risk tolerance refers to the amount of risk you are willing to take with your investments.

Balancing Risk and Return

If you’re comfortable with higher levels of risk, you may be able to invest in more aggressive assets, such as stocks or commodities. Higher risk investments may provide bigger gains — but there are no guarantees.

If you’re risk-averse, you may prefer more conservative investments, such as bonds or certificates of deposit (CDs). Lower-risk investments are less volatile, but they generally offer a lower return.

4. Allocating Your Assets

The next step in building an investment portfolio is to choose your asset allocation. This involves deciding what percentage of your portfolio you want to allocate to different investments, such as stocks, bonds, and real estate.

Once you have built your investment portfolio, it is important to monitor it regularly and make necessary adjustments. This may include rebalancing your portfolio to ensure it remains diversified and aligned with your investment goals and risk tolerance.

The Takeaway

Building an investment portfolio is a process that depends on where a person is in their life as well as their financial goals, and their risk tolerance. Every individual should consider long-term and short-term investments and the importance of portfolio diversification when building an investment portfolio and investing in the stock market.

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

FAQ

How much money do you need to start building an investment portfolio?

The amount needed to start building an investment portfolio can vary depending on your goal, but it’s possible to start with a small amount, such as a few hundred or thousand dollars. Some online brokers and investment platforms have no minimum requirement, making it possible for investors to start with very little money.

Can beginners create their own stock portfolios?

Beginners can create their own stock portfolios. Access to online brokers and trading platforms makes it easier for beginners to buy and sell stocks and build their own portfolios.

What should be included in investment portfolios?

Generally, an investment portfolio should include a mix of investments, such as stocks, bonds, mutual funds, ETFs, and cash, depending on the investor’s goals, risk tolerance, and time horizon. Regular monitoring and rebalancing are important to keep the portfolio aligned with the investor’s objectives.

What is the 60/40 portfolio rule?

The 60-40 rule refers to 60% equities (or stock) and 40% bonds. It’s a basic portfolio allocation, and as such may not be right for everyone.

What is a balanced portfolio?

A balanced portfolio ideally includes a range of asset classes in order to manage risk and potential market volatility.

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.

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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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.

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.

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-037

Feb

2025

man with laptop and tablet at table mobile

Day Trading Strategies for Beginners

By Inyoung Hwang | Growing Wealth, Investing | No Comments

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

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

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

Key Points

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

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

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

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

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

What Is Day Trading?

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

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

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

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

7 Common Day Trading Strategies

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

1. Technical Analysis

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

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

2. Swing Trading

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

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

3. Momentum Trading

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

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

4. Scalp Trading

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

5. Penny Stocks

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

6. Limit and Market Orders

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

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

7. Margin Trading

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

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

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

Best Securities For Day Trading

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

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

Liquidity

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

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

Volatility

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

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

Volume

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

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

Day Trading Basics — How to Get Started

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

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

Recommended: How Many Stocks Should I Own?

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

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

1. Trading Costs

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

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

2. Pattern Day Trader

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

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

3. Freeriding

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

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

4. Tax Implications of Trader vs Investor

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

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

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

• Your activity must be substantial; and

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

5. Capital Gains Taxes

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

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

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

6. Wash Sale Rule

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

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

Which Day Trading Strategy Is Best for Beginners?

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

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

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

Best Times to Day Trade

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

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

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

Day Trading Risk Management

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

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

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

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

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

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

Is It Difficult To Make Money Day Trading?

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

Test your understanding of what you just read.

The Takeaway

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

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

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

FAQ

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

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

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

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

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

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

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

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

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

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

SoFi Invest®

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

Feb

2025

9 Types of Investments & Their Pros and Cons

By Pam O’Brien | Growing Wealth, Investing | No Comments

There are numerous different types of investments, ranging from stocks and bonds, to real estate and commodities. In tandem, these different types of investments can help investors build a diversified portfolio, and in effect, may help them reach their financial goals.

But having a solid understanding of the different types of investments is paramount, too, to creating and following through on an investment strategy. As such, you’ll want to at least have some baseline knowledge of each type — with that knowledge in-hand, you should hopefully be able to make financial decisions that align with your goals and strategy.

Key Points

• Investing in a variety of assets can help investors target financial goals and balance risk.

• Stocks, bonds, mutual funds, ETFs, annuities, derivatives, commodities, real estate, and private companies are common investment types.

• Each investment type offers unique benefits and drawbacks, such as stability or potentially higher returns in exchange for higher risk

• Diversification through different investments can protect against market volatility and enhance returns.

• Additional resources are available for in-depth learning about each investment type.

9 Common Types of Investments

Having different types of investments, as well as short-term vs. long-term investments can help you diversify your portfolio. All together, your portfolio should align with your financial or investment goals, and balance potential risks with potential returns — it isn’t easy, but it all starts with understanding what, exactly, you’re investing in. Here are some of the most common types of investments investors should know about.

1. Stocks

When you think of investing and investment types, you probably think of the stock market. A stock gives an investor fractional ownership of a public company in units known as shares.

Pros and Cons of Stock Investing

Here’s a brief rundown of the pros and cons of investing in stocks:

thumb_up

Pros:

• If the stock goes up, you can sell it for a profit.

• Some stocks pay dividends to investors.

• Stocks tend to offer higher potential returns than bonds.

• Stocks are considered liquid assets, so you can typically sell them quickly if necessary.

thumb_down

Cons:

• There are no guaranteed returns. For instance, the market could suddenly go down.

• The stock market can be volatile. Returns can vary widely from year to year.

• You typically need to hang onto stocks for longer time periods to see potential returns.

• You can lose a lot of money or get in over your head if you don’t do your research before investing.

Why Invest in Stocks?

Only publicly-traded companies trade on the stock market; private companies are privately owned. They can sometimes still be invested in, though the process isn’t always as easy and open to as many investors.

Further, investors may want to invest in stocks as stock can potentially make money in two ways: It could pay dividends if the company decides to pay out part of its profits to its shareholders, or an investor could sell the stock for more than they paid for it.

Some investors are looking for steady streams of income and therefore pick stocks because of their dividend payments. Others may look at value or growth stocks, companies that are trading below their true worth or those that are experiencing revenue or earnings gains at a faster pace.

2. Bonds

Bonds are essentially loans you make to a company or a government — federal or local — for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime. That stability is one reason many investors are interested in buying bonds, though it’s important to know they are not without risk.

Different Types of Bonds

Treasurys: These are bonds issued by the U.S. government. Treasurys (sometimes stylized as “Treasuries”) can have maturities that range from one-month to 30-years, but the 10-year note is considered a benchmark for the bond market as a whole.

Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.

Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest. High-yield bonds, also known as junk bonds, tend to have higher yields but lower credit ratings.

Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.

Zero-coupon bonds: Zero-coupon bonds may be issued by the U.S. Treasury, corporations, and state and local government agencies. These bonds don’t pay interest. Instead, investors buy them at a great discount from their face value, and when a bond matures, the investor receives the face value of the bond.

Pros and Cons of Bond Investing

Here’s a rundown of the pros and cons of bond investments:

thumb_up

Pros:

• Bonds offer regular interest payments.

• Bonds tend to be lower risk than stocks.

• Treasurys are generally considered to be safe investments.

• High-yield bonds tend to pay higher returns and they have more consistent rates.

thumb_down

Cons:

• The rate of returns with bonds tends to be much lower than it is with stocks.

• Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell.

• Bonds can decrease in value during periods of high interest rates.

• High-yield bonds are riskier and have a higher risk of default, and investors could potentially lose all the money they’ve invested in them.

Why Invest in Bonds?

When it comes to bonds vs. stocks, the former are typically backed by large companies or the full faith and credit of the government. Because of this, they’re often considered lower risk than stocks.

However, the risk of investing in bonds varies, and bonds are rated for their quality and credit-worthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be some of the least risky investments. Note, though, that they also tend to have lower returns.

3. Mutual Funds

A mutual fund is an investment managed by a professional. Funds often focus on an asset class, industry or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Index Funds

While mutual funds offer certain advantages to investors, those interested in a more passive approach may prefer index funds. Index funds are a form of passive investment, which means they’re not actively-managed, and instead, aim to track a market index, or portion of the market, such as the S&P 500 or something similar.

Pros and Cons of Investing in Mutual Funds

Here are some of the pros and cons of investing in mutual funds:

thumb_up

Pros:

• Mutual funds are easy and convenient to buy.

• Since they offer portfolio diversification, they may carry less risk than individual stocks.

• A professional manager chooses the investments for you.

• You earn money when the assets in the mutual fund rise in value.

• There is potential dividend reinvestment, meaning dividends can be used to buy additional shares in the fund, which could help your investment grow.

thumb_down

Cons:

• There is typically a minimum investment you need to make.

• Mutual funds typically require an annual fee called an expense ratio and some funds may also have sales charges.

• Trades are executed only once per day at the close of the market, which means you can’t buy or sell mutual funds in real time.

• The management team could be poor or make bad decisions.

• You will generally owe taxes on distributions from the fund.

Why Invest in Mutual Funds?

Investors may be interested in mutual funds because they offer a sort of out-of-the-box diversification, with exposure to many different types of securities or assets in one package. They’re also managed by a professional, which some investors may find attractive. On the other hand, they may have higher fees, and it’s always important to remember that past performance isn’t indicative of future performance, either.

4. ETFs

Exchange traded funds, or ETFs, are in some ways similar to a mutual fund, but there are key differences. One of the main differences is that ETFs can be traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. In addition, ETFs tend to be passive investments that track an underlying index. They also come in a range of asset mixes.

Pros and Cons of ETFs

Here’s a quick breakdown of the pros and cons of investing in ETFs:

thumb_up

Pros:

• ETFs are easy to buy and sell on the stock market.

• They often have lower annual expense ratios (annual fees) than mutual funds.

• ETFs can help diversify your portfolio.

• They are more liquid than mutual funds.

thumb_down

Cons:

• The ease of trading ETFs might tempt an investor to sell an investment they should hold onto.

• A brokerage may charge commission for ETF trades.This could be in addition to fund management fees.

• May provide a lower yield on asset gains (as opposed to investing directly in the asset).

Why Invest in ETFs?

ETFs may be an attractive choice for some investors because they may offer built-in diversification, tons of choices, and typically have lower costs or associated fees than similar products, such as mutual funds. But they’re also subject to many of the same risks as other investments.

5. Annuities

An annuity is an insurance contract that an individual purchases upfront and, in turn, receives set payments. There are fixed annuities, which guarantee a set payment, and variable annuities, which put people’s payments into investment options and pay out down the road at set intervals. There are also immediate annuities that begin making regular payments to investors right away. (Note that SoFi Invest does not offer annuities to its members.)

Pros and Cons of Investing in Annuities

Here are some of the pros and cons of annuity investments:

thumb_up

Pros:

• Annuities are generally low risk investments.

• They offer regular payments.

• Some types offer guaranteed rates of return.

• May provide a supplemental investment for retirement.

thumb_down

Cons:

• Annuities typically offer lower returns compared to stocks and bonds.

• They typically have high fees.

• Annuities can be complex and difficult to understand.

• It can be challenging to get out of an annuities contract.

Why Invest in Annuities?

Investors may like that there are so many different types of annuities to invest in, and the fact that they can offer guaranteed and predictable payments, tax-deferred growth, and low-stress management. However, they do often have lower interest payments compared to bonds, there can be penalties for early withdrawals, and associated fees.

6. Derivatives

There are several types of derivatives, but two popular ones are futures and options. Futures contracts are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.

Meanwhile, in options trading, buyers have the right, but not the obligation, to buy or sell an asset at a set price. A derivatives trading guide can be helpful to learn more about how these investments work.

Pros and Cons of Options Trading

Here are some of the pros and cons to derivative investments:

thumb_up

Pros:

• Derivatives allow investors to lock in a price on a security or commodity.

• They can be helpful for mitigating risk with certain assets.

• They have the potential to provide returns when an investor sells them.

thumb_down

Cons:

• Derivatives can be very risky and are best left to traders who have experience with them.

• Trading derivatives is very complex.

• Because they expire on a certain date, the timing might not work in your favor.

Why Investors Trade Options

Trading options is a fairly high-level investment activity — it’s not for everyone. There can be significant risks, and options trading strategies can be complex. That said, trading options has the potential to be profitable for experienced investors.

7. Commodities

A commodity is a raw material — such as oil, gold, corn, or coffee. Trading commodities has a reputation for being risky and volatile. That’s because they’re heavily driven by supply and demand forces. Say for instance, there’s a bad harvest of coffee beans one year. That might help push up prices. But on the other hand, if a country discovers a major oil field, that could dramatically depress prices of the fuel.

Pros and Cons of Commodity Trading

Here are some pros and cons of commodity trading:

thumb_up

Pros:

• Commodities can diversify an investor’s portfolio.

• Commodities tend to be more protected from the volatility of the stock market than stocks and bonds.

• Prices of commodities are driven by supply and demand instead of the market, which can make them more resilient.

• Investing in commodities can help hedge against inflation because commodities prices tend to rise when consumer prices do.

thumb_down

Cons:

• Commodities are considered high-risk investments because the commodities market can fluctuate based on factors like the weather. Prices could plummet suddenly.

• Commodities trading is often best left to investors experienced in trading in them.

• Commodities offer no dividends.

• An investor could end up having to take physical possession of a commodity if they don’t close out the position, and/or having to sell it.

Why Invest in Commodities?

Investors have several ways they can gain exposure to commodities. They can directly hold the physical commodity, although this option is very rare for individual investors (Imagine having to store barrels and barrels of oil).

So, many investors wager on commodity markets via derivatives — financial contracts whose prices are tied to the underlying raw material. For instance, instead of buying physical bars of precious metals to invest in them, a trader might use futures contracts to make speculative trades on gold or silver. Another way that retail investors may get exposure to commodities is through exchanged-traded funds (ETFs) that track prices of raw materials.

That said, there are risks associated with commodities trading, and investors may want to ensure that it aligns with their investment strategy and goals before getting started.

8. Real Estate

Owning real estate, either directly or as part of real estate investment trust (REIT) investing or limited partnerships, gives you a tangible asset that may increase in value over time. If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.

Pros and Cons of Investing in Real Estate

Consider these pros and cons of investing in real estate (REITs, in particular):

thumb_up

Pros:

• Real estate is a tangible asset that tends to appreciate in value.

• There are typically tax deductions and benefits, depending on what you own.

• Investing in real estate, such as through a REIT, can help diversify your portfolio.

• By law, REITs must pay 90% of their income in dividends.

thumb_down

Cons:

• Real estate is typically illiquid, although REIT investments offer more liquidity than property.

• There are constant ongoing expenses and work needed to maintain a property.

• REITs are generally very sensitive to changes in interest rates, especially rising rates.

• With a REIT, dividends are taxed at a rate that’s usually higher than the rate for many other investments.

Why Invest in Real Estate?

Investing in real estate may help diversify a portfolio, generate recurring cash flow (from rent, or dividends), or enable ownership of a tangible asset that may increase in value over time. However, investments may be subject to changes in the real estate market, such as rising and falling interest rates and regulatory changes, and are often better suited for longer-term investments.

9. Private Companies

Only public companies sell shares of stock, however private companies do also look for investment at times — it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.

Pros and Cons of Investing in Private Companies

Here are some pros and cons of investing in private companies:

thumb_up

Pros:

• Potential for good returns on your investment.

• Lets investors get in early with promising startups and/or innovative technology or products.

• Investing in private companies can help diversify your portfolio.

thumb_down

Cons:

• You could lose your money if the company fails.

• The value of your shares in the company could be reduced if the company issues new shares or chooses to raise additional capital. Your shares may then be worth less (this is known as dilution).

• Investing in a private company is illiquid, and it can be very difficult to sell your assets.

• Dividends are rarely paid by private companies.

• There could be potential for fraud since private company investment tends to be less regulated than other investments.

Tips for Investing in IPOs

Investing in companies that are going public for the first time via an IPO can be attractive to investors who think the company has potential — IPO investing is fairly popular, but can be risky. With that in mind, if you do want to invest in companies going public, you’ll want to do your homework, and review filings and disclosures the company has filed with regulators, and anything else you might come across that could help inform your decision.

And remember, too, that IPO investing is generally considered high risk – a hot new stock can lose steam just as easily as it can gain it.

Investment Account Options

An investor can put money into different types of investment accounts, each with their own benefits. The type of account can impact what kinds of returns an investor sees, as well as when and how they can withdraw their money.

401(k)

A 401(k) plan is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.

Pros and Cons of 401(k)s

thumb_up

Pros:

• Contributions you make to a 401(k) can reduce your taxable income. The money is not taxed until you withdraw it when you retire.

• Contributions can be automatically deducted from your paycheck.

• Your employer may provide matching funds up to a certain limit.

• You can roll over a 401(k) if you leave your job.

thumb_down

Cons:

• There is a cap on how much you can contribute each year.

• Most withdrawals before age 59 ½ will incur a 10% penalty.

• You must take required minimum distributions (RMDs) from traditional 401(k) plans when you reach a certain age. (Roth 401(k)s are not subject to RMDs during the account holder’s lifetime.)

• You may have limited investment options.

IRA

IRA stands for “individual retirement account” — so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money for retirement without needing an employer-backed 401(k).

With a traditional IRA, individuals contribute pre-tax dollars to the account, up to the annual limit. Those contributions are tax-deferred, meaning you don’t need to pay taxes on those funds (and their earnings) until they’re withdrawn in retirement. With a Roth IRA, however, you can contribute after-tax dollars up to the annual limit. Those funds and their earnings are not subject to taxes when qualified withdrawals are made.

Pros and Cons of IRAs

thumb_up

Pros:

• IRA accounts are tax advantaged: Earnings grow tax-deferred for traditional IRAs and tax-free free for Roth IRAs.

• You can choose how the money is invested, giving you more control.

• Those aged 50 and over can contribute an extra $1,000 in catch-up contributions.

thumb_down

Cons:

• Relatively low annual contribution limits ($7,000 in both 2024 and 2025).

• There is a 10% penalty for most early withdrawals before age 59 ½.

Brokerage Accounts

A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, ETFs. Some brokerage firms charge fees on the trades you make, while others offer free trading but send your orders to third parties to execute — a practice known as payment for order flow. Investors can be taxed on any realized gains.

You might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.

There are even a number of investment options out there not listed here — like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business.

Pros and Cons of Brokerage Accounts

thumb_up

Pros:

• Offer flexibility to invest in a wide range of assets.

• Brokerage accounts provide the potential for growth, depending on your investments. However, all investments come with risks that include the potential for loss.

• You can contribute as much as you like to a brokerage account.

thumb_down

Cons:

• You must pay taxes on your investment income and capital gains in the year they are received.

• Investments in brokerage accounts are not tax deductible.

• There is a risk that you could lose the money you invested.

The Takeaway

It might still seem overwhelming to figure out what kinds of investments will help you achieve your goals. There are different investment strategies and finding the right one can depend on where you are in your career, what your financial goals are and how far away retirement is. Options such as index funds and ETFs may help provide immediate diversification, while a financial professional can help advise you on how you might build your portfolio so that it aligns with your objectives.

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

FAQ

What is the most common investment type?

Stocks are one of the most common and well-known types of investments. A stock gives an investor fractional ownership of a public company in units known as shares.

How do I decide when to invest?

Some prime times to start investing include when you have a retirement fund at work that you can contribute to and that your employer may contribute matching funds to (up to a certain amount); you have an emergency fund of three to six months’ worth of money already set aside and you have additional money to invest for your future; there are financial goals you’re ready to save up for, such as buying a house, saving for your kids’ college funds, or investing for retirement. Please remember you need to consider your investment objectives and risk tolerance when deciding the “right” time to start investing.

Should I use multiple investment types?

Yes. It’s wise to diversify your portfolio. That way, you’ll have different types of assets which will increase the chances that some of them will do well even when others don’t. This will also help reduce your risk of losing money on one single type of investment. In short, having a diverse mix of assets helps you balance risk with return. However, diversification does not eliminate all risk.

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.

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.

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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q424-097

Jan

2025

Capital Gains Tax Rates and Rules for 2025

By Carla Tardi | Growing Wealth, invest, Investing | No Comments

What Is Capital Gains Tax?

Capital gains are the profits you make from selling investments, like stocks, bonds, properties, and so on. Capital gains tax doesn’t apply when you simply own these assets — it only hits when you profit from selling them.

Short-term capital gains (from assets you’ve held for less than a year) are taxed at a higher rate than long-term capital gains (from assets you’ve held for a year or more).

In addition, other factors can affect an investor’s capital gains tax rate, including: which asset they’re selling, their annual income, as well as their marital status.

▶️

Video: What Are Unrealized Gains?
Learn the basics in under 2 minutes.
Watch Now

Capital Gains Tax Rates Today

Whether you hold onto an investment for at least a year can make a big difference in how much you pay in taxes.

When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.

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

Short-Term Capital Gains Tax Rates for Tax Year 2025

The short-term capital gains tax is taxed as regular income or at the “marginal rate,” so the rates are based on what tax bracket you’re in.

The Internal Revenue Service (IRS) changes these numbers every year to adjust for inflation. You may learn your tax bracket by going to the IRS website, or asking your accountant.

Here’s a table that shows the short-term capital gains tax rates for the 2025 tax year, for tax returns that are usually filed in 2026, according to the IRS.

Marginal Rate	Income limits: Single filers	Income limits: Married, filing jointly
10%	$0 to $11,925	$0 to $23,850
12%	$11,926 to $48,475	$23,851 to $96,950
22%	$48,476 to $103,350	$96,951 to $206,700
24%	$103,351 to $197,300	$206,701 to $394,600
32%	$197,301 to $250,525	$394,601 to $501,050
35%	$250,526 to $626,350	$501,051 to $751,600
37%	$626,351 or higher	$751,601 or higher

Long-Term Capital Gains Tax Rates for Tax Year 2025

Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates fall into three brackets: 0%, 15%, and 20%.

The following table shows the long-term capital-gains tax rates for the 2025 tax year by income and status, according to the IRS.

Capital Gains Tax Rate	Income — Single	Married, Filing Jointly	Married, Filing Separately	Head of Household
0%	Up to $48,350	Up to $96,700	Up to $48,350	Up to $64,750
15%	$48,351 to $533,400	$96,701 to $600,050	$48,351 to $300,000	$64,751 – $566,700
20%	Over $533,400	Over $600,050	Over $300,000	Over $566,700

A higher 28% is applied to long-term capital gains from transactions involving art, antiques, stamps, wine, and precious metals.

Additionally, individuals with modified adjusted gross incomes (MAGIs) over $200,000 and couples filing jointly with MAGIs over $250,000 — who have net investment income, may have to pay the Net Investment Income Tax (NIIT), which is 3.8% on the lesser of the net investment income or the excess over the MAGI limits.

Tips For Lowering Capital Gains Taxes

Hanging onto an investment for more than a year can lower your capital gains taxes significantly.

Capital gains taxes also don’t apply to so-called “tax-advantaged accounts” like 401(k) plans, IRAs, or 529 college savings accounts. So selling investments within these accounts won’t generate capital gains taxes.

Instead, traditional 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529 plans are tax-free.

Single homeowners also get a break on the first $250,000 they make from the sale of their primary residence, which they need to have lived in for at least two of the past five years. The limit is $500,000 for a married couple filing jointly.

Tax Loss Harvesting

Tax-loss harvesting is another way to save money on capital gains. Tax-loss harvesting is the strategy of selling some investments at a loss to offset the taxable profits from another investment.

Using short-term losses to offset short-term gains is a way to take advantage of tax-loss harvesting — because, as discussed above, short-term gains are taxed at higher rates. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.

Investors can also apply losses from investments of as much as $3,000 to offset income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year.

How U.S. Capital Gains Taxes Compare

Generally, capital gains tax rates affect the wealthiest taxpayers, who typically make a bigger chunk of their income from profitable investments.

Here’s a closer look at how capital gains taxes compare with other taxes, including those in other countries.

Compared to Other Taxes

The maximum long-term capital gains taxes rate of 20% is lower than the highest marginal rate of 37%.

Proponents of the lower long-term capital gains tax rate say the discrepancy exists to encourage investments. It may also prompt investors to sell their profitable investments more frequently, rather than hanging on to them.

Comparison to Capital Gains Taxes In Other Countries

In 2023, the Tax Foundation listed the capital gains taxes of the 27 different European Organization for Economic Cooperation and Development (OECD) countries. The U.S.’ maximum rate of 20% is roughly midway on the spectrum of comparable capital gains taxes.

In comparison, Denmark had the highest top capital gains tax at a rate of 42%. Norway was second-highest at 37.84%. Finland and France were third on the list, both at 34%. In addition, the following European countries all levied higher capital gains taxes than the U.S. (listed in order from highest to lowest): Ireland, the Netherlands, Sweden, Portugal, Austria, Germany, Italy, Spain, and Iceland.

Compared With Historical Capital Gains Tax Rates

Because short-term capital gains tax rates are the same as those for wages and salaries, they adjust when ordinary income tax rates change. As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 20% started in 2013.

For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.

Going back in time, in the 1920s the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high, at around 28%, in the late 1980s and 1990s. Then, between 2004 and 2012, they dropped to 15%.

💡 Quick Tip: Did you know that investment losses aren’t necessarily bad news? Some losses can be used to offset gains, potentially reducing how much tax you owe. Learn more about investment taxes.

The Takeaway

Capital gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year to adjust for inflation.

It’s important for investors to know that capital gains tax rates can differ significantly based on whether they’ve held an investment for less than a year or more than a year. An investor’s income level also determines how much they pay in capital gains taxes.

An accountant or financial advisor can suggest ways to lower your capital gains taxes as well as help you set financial goals.

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

SoFi Invest®

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

SOIN-Q424-111

Are Fractional Shares Worth Buying?

What Does It Mean to Buy Fractional Shares?

Why Fractional Shares Are Worth Buying

Access to Unaffordable Stocks

A Doorway to Investing

Maximized Dollar-Cost Averaging

Maximized Dividend Reinvestment Plans

Stock Splits

Mergers or Acquisitions

Too expensive? Not your favorite stocks.

Own part of a stock with fractional share investing.

Invest with as little as $5.

Disadvantages of Buying Fractional Shares

Order Type Limitations

Transferability

Liquidity

Commissions

Higher transaction fees

What Happens to Fractional Shares When You Sell?

The Takeaway

How to Build an Investment Portfolio for Beginners

The Basics: What Is an Investment Portfolio?

Types of Investment Portfolios

Why Building a Balanced Portfolio Matters

What Is a Balanced Portfolio?

The Value of Diversification

Assessing Risk Tolerance and Setting Investment Goals

Conservative vs. Aggressive Investing

Choosing a Goal for Your Portfolio

Short Term: Starting an Emergency Fund

Medium Term: Saving for a Major Event

Long Term: Starting a Retirement Portfolio

Prioritizing Diversification

Types of Diversification

Understanding Types of Risk

Systematic Risk

Understanding Idiosyncratic Risk

4 Steps Towards Building an Investment Portfolio

1. Set Your Goals

2. What Sort of Account Do You Want?

Taxable vs. Tax-Deferred Accounts

3. Choosing Investments Based on Risk Tolerance

Balancing Risk and Return

4. Allocating Your Assets

The Takeaway

FAQ

How much money do you need to start building an investment portfolio?

Can beginners create their own stock portfolios?

What should be included in investment portfolios?

What is the 60/40 portfolio rule?

What is a balanced portfolio?

Day Trading Strategies for Beginners

What Is Day Trading?

7 Common Day Trading Strategies

1. Technical Analysis

2. Swing Trading

3. Momentum Trading

4. Scalp Trading

5. Penny Stocks

6. Limit and Market Orders

7. Margin Trading

Best Securities For Day Trading

Liquidity

Volatility

Volume

Day Trading Basics — How to Get Started

1. Trading Costs

2. Pattern Day Trader

3. Freeriding

4. Tax Implications of Trader vs Investor

5. Capital Gains Taxes

6. Wash Sale Rule

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

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

Which Day Trading Strategy Is Best for Beginners?

Best Times to Day Trade

Day Trading Risk Management

Is It Difficult To Make Money Day Trading?

The Takeaway

FAQ