How to Know When to Sell a Stock

Knowing when to sell a stock is a complex enterprise, even for the most sophisticated investors. In a perfect world you’d sell a stock when you’d made a profit and wanted to capture the gains. But even that scenario raises questions of your target amount (have you made enough?) and timing (would it be better to hold the stock longer?).

Similar questions arise when the stock is losing value. Is it a true loser or is the company just underperforming? Should you sell and cut your losses — or would you be locking in losses just before a rebound?

Adding to the above there are questions of personal need, opportunity costs, tax considerations, and more that investors must keep in mind as they decide when to sell their stocks. Fortunately there is a fairly finite list of considerations, as well as different order types like market sell, stop-loss, stop-limit, and others that give investors some control over the decision of when to sell a stock.

Key Points

•   Knowing when to sell stocks requires considering factors such as a company’s fundamentals, opportunity cost, valuation, personal needs, and tax implications.

•   Economic reports and earnings releases can affect stock prices, but there is no specific ideal time to sell.

•   Different sell order types, such as market sell, limit sell, stop-loss sell, and stop-limit sell, offer investors varying levels of control and execution.

•   Investors selling stock should consider how a sale aligns with their financial goals, risk tolerance, and time horizon.

•   Financial advisors and online brokerage platforms provide options for selling stocks, but costs and individual preferences should be considered.



💡 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.

When Is a Good Time to Sell Stocks?

There are a few ways to approach the question of when to sell stocks. Risk, style, investing goals, and how much time you have are all critical variables. Perhaps the most relevant answer is “when you need to,” as that criterion alone requires specific calculations that depend on your overall plan, the type of investor you are, your risk tolerance, market conditions (i.e. stock market fluctuations), and of course the stock itself.

When deciding when to sell a stock, you might weigh:

•   How the stock fits into your goals

•   Company fundamentals

•   Economic trends

•   Your hoped-for profit

•   Volatility and/or losses

•   Taxes

In addition, whether you sell your stocks will boil down to your investment style — are you day trading or employing a buy-and-hold strategy? — how much risk you’re willing to assume, and your overall time horizon and other goals (i.e. tax considerations).

Many investors who are simply investing for retirement may rarely sell stocks. After all, over time the average stock market return has been about 10% (not taking inflation into account).

And while there are no guarantees, in general the old saying that “time in the market is better than timing the market” tends to hold true.

Others, who are looking to turn a profit on a weekly or monthly basis, may sell much more frequently. It’s more a matter of looking at what you’re hoping to generate from your investments, and how fast you’re hoping to generate it.

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8 Reasons You Might Sell a Stock

There are several reasons that could prompt you to think about selling your stock.

1. When You No Longer Believe in the Company

When you bought shares of a certain company, you presumably did so because you believed that the company was promising and you wanted to invest in its stock, and/or that the share price was reasonable. But if you start to believe that the underlying fundamentals of the business are in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.

There are many reasons you may lose faith in a stock’s underlying fundamentals. For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems.

Part of the task here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year, and what feels like it could be the start of a more sustained change within the business.

Recommended: Tips on Evaluating Stock Performance

2. Due to Opportunity Cost

Every investment decision you make comes at the cost of some other decision you can’t make. When you invest your money in one thing, the tradeoff is that you cannot invest that money in something else.

So, for each stock you buy you are doing so at the cost of not buying some other asset.

Given the performance of the stock you’re currently holding, it might be worth evaluating it to see if there could be a more profitable way to deploy those same dollars. Exchange-traded funds (ETFs) that provide easy access to other asset classes — like bonds or commodities — have also created competition to simply holding company stocks.

This is easier said than done, however, because we are often emotionally invested in the stocks that we’ve already purchased. Nonetheless, it’s important to include an evaluation of opportunity costs as part of your overall decision about when to sell a stock.

3. Because the Valuation Is High

Often, stocks are evaluated in terms of their price-to-earnings (P/E) ratios. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.

The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future. But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors or a benchmark market, like the S&P 500 Index, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.

A P/E ratio could increase due to one of two reasons: Because the price has increased without a corresponding increase in the expected earnings for that company, or because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.

4. For Personal Reasons

It’s also possible that you may need to sell a stock for personal reasons, such as:

•   You need the cash (owing to a job loss, emergency, etc.)

•   You no longer believe in the mission of the company

•   Your risk tolerance has changed and you’re moving away from equities

•   You want to try another strategy other than active investing, for example automated investing, where your investment choices are largely guided by the input of a sophisticated algorithm.

Since personal reasons may also have emotions attached to them, it’s wise to balance out your personal feelings with an evaluation of other reasons to sell the stock.

5. Because of Taxes

Employing a tax-efficient investing strategy shouldn’t outweigh making decisions based on other priorities. Still, it’s important to take taxes into account when making decisions about which stocks to keep and which stocks to sell.

When purchased outside of a retirement account, gains on the sale of an investment are subject to capital gains tax rules. It may be possible to offset some capital gains with capital losses, which are triggered by selling stocks at a loss.

This strategy is known as tax-loss harvesting.

For example, if an investor sells a security for a $25,000 gain, and sells another security at a $10,000 loss, the loss could be applied so that the investor would only see a capital gain of $15,000 ($25,000 – $10,000).

If you’re considering this as part of a self-directed trading strategy, you may want to consult a tax professional, as the rules can be complicated in terms of short-term vs. long-term gains, replacing a stock you sell with one that’s substantially different, as well as how to carryover losses.

•   Understanding how a tax loss can be carried forward

The difference between capital gains and capital losses is called a net capital gain. If losses exceed gains, that’s a net capital loss.

•   If an investor has an overall net capital loss for the year, they can deduct up to $3,000 against other kinds of income — including their salary and interest income.

•   Any excess net capital loss can be carried over to subsequent years (known as a tax-loss carryover or carry forward) and deducted against capital gains and up to $3,000 of other kinds of income — depending on the circumstances.

•   For those who are married filing separately, the annual net capital loss deduction limit is only $1,500.

Recommended: Unrealized Gains and Losses Explained

6. To Rebalance a Portfolio

If you’re looking to make some tweaks to your investment strategy for one reason or another, you may want to sell some stocks as a part of a strategy to rebalance your portfolio. The reason for rebalancing is to keep your portfolio anchored on the asset allocation that you prefer.

As some investments rise and fall over time, your asset allocation naturally shifts. Some asset classes might exceed the percentage you originally chose, based on your risk tolerance.

Investors are encouraged to rebalance their portfolios regularly — but not too often — as market and economic conditions can and do change. An annual rebalancing strategy is common.

This typically involves taking a look at your desired asset allocation, thinking about your risk tolerance (and how it may have changed), and deciding how you may want to change the different asset classes that comprise your portfolio, if at all.

7. Because You Made a Mistake

You may want to sell stocks if you simply made a mistake. Perhaps the company or sector is not a priority for you, or not a good bet in your eye. Maybe a stock is too risk or volatile. Maybe you bought into a company because it was in the news, or friends were raving about it (a.k.a. FOMO trading).

All of these conditions can happen to investors, and knowing when to sell a stock sometimes means owning up to a mistake.

Recommended: Guide to Financially Preparing for Retirement

8. You’ve Met Your Goals

In the best case, of course, you might want to sell a stock once you’ve met your goals. Perhaps the price is right, or you’re ready to retire, or you’ve crossed some other threshold where you no longer need to hold onto the stock.
In that case, the decision to sell will likely come down to timing and taxes. Or, if you’re preparing to retire, you may also want to consider whether you’re holding the stock in a tax-deferred account or not.


💡 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.

4 Reasons You Might Not Want to Sell a Stock

In addition to weighing possible reasons for selling a stock, there are counter arguments for holding onto your shares.

1. Because a Stock Went Up

As mentioned, most stock prices will go up at some point, and you may want to hold onto your stock in the hope that it will continue to grow. That’s a valid reason, especially if you’re thinking long term.

Just bear in mind that there are no guarantees, and past performance is no guarantee of future results, as the industry mantra goes. So even if a stock’s price is rising, you may want to have a few other reasons for not selling the stock.

2. Because a Stock Went Down

Just as a stock may go up, the price will also go down at some point. At those moments it may be tempting to cut your losses before you accrue even bigger ones — especially if you believe that the stock’s value will continue to drop.

But, again, it may be helpful to think longer term rather than what’s happening today. The stock price might rebound, and you may only lock your losses in by selling. Analyzing the company fundamentals as well as the economic climate can help you make this decision.

Recommended: What Happens If a Stock Goes to Zero?

3. Because of an Economic Forecast

Economic forecasting uses a range of economic indicators — such as interest rates, consumer confidence, the rate of inflation, unemployment rates — to predict or anticipate economic growth. But economic forecasting is not an exact science, and it’s wise to consider other factors.

In addition, economic forecasts come and go. This is especially the case in the short term. Therefore, changes in stock prices may have as much to do with investor sentiment or outside forces (such as political or economic events or announcements) as they do with the health of the underlying company.

4. Because Everyone Else Is Selling

Understanding the impact of other investors on your own decisions is equally important. While you may think you’re capable of remaining calm in the face of media hype and headlines, as numerous behavioral finance studies have shown it’s surprisingly easy to get caught up in what other investors are doing.

If you find yourself questioning your own investment plan or your own logic, think twice to make sure the impulse to sell isn’t brought on by strong emotions or by the opinions of others.

Selling a Stock 101

These are the basic steps required to cash out and sell stocks:

1.    Whether by phone or via an online brokerage account platform, let your broker know which of your stock holdings you’d like to sell.

2.    Specify which order type (more on that below). This can determine at what price level your stock is sold.

3.    Fill out any other information your broker requires in order to initiate the sale. For instance, some accounts may have a “time in force” option, or when the order expires. Keep in mind, the trade date is different from the settlement date. It usually takes a couple of days for a trade to settle.

4.    Click “Sell” or “Submit Order.”

Different Sell Order Types

There are several different stock order types that can be useful in different situations.

Market Sell Order

This order type involves selling a stock immediately. The order will be executed without the investor specifying any price level to sell at. It’s important for investors to know however that because share prices are constantly shifting, they might not get the exact price they see on their stock-data feed. There may also be a difference due to delayed versus real-time stock quotes to consider as well.

Generally speaking, the advantage of using a market order is that your trade is likely to be executed quickly. That’s especially true for bigger or more popular stocks, which tend to be more liquid. But again: the biggest potential drawback is that you might not get the exact price you thought you were due to market volatility.

Limit Sell Order

Limit orders involve selling a stock at a specific price. For example, if you’re buying stocks, you can specify a price that you’re willing to pay — the trade will then be executed at that price, or lower.

If you’re selling stocks, the inverse is true — your stock will be sold at the specified price, or higher.

The upside to using limit orders is that they give investors some semblance of control by allowing them to name their price. The investor can then walk away, and let their brokerage handle the execution for them.

The downsides, though, include the fact that the trade may never execute if the specified price isn’t reached, and that using limit orders may take some practice and experience to properly execute.

Stop-Loss Sell Order

A stop-loss order is a level at which an automatic sell order kicks in. In other words, an investor specifies a price at which the broker should start selling, should the stock hit that level. This can also be referred to as a “sell-stop order.” But note that there are other types of stop-loss orders, such as buy-stop orders, and trailing stop-loss orders.

Stop-loss orders can be useful in that they can prevent investors from losing more than they’re comfortable with, or that they can afford to lose. They, as the name implies, are a very useful tool to prevent losses. But depending on overall market conditions, they can also work against an investor. If there’s a short-term drop in share prices, for instance, it’s possible that an investor could miss out on gains if share prices rebound in the medium or long term.

Stop-Limit Sell Order

A stop-limit sell order is an order that’s executed if your stock’s price drops to a certain price, but only if the shares can be sold at or above the limit price specified. They are, in effect, a sort of bridge between stop and limit orders. These types of orders can help investors dodge the risk that a stop order executed at an unexpected price, giving them more control over the price at which a sell order will execute.

Different Ways to Sell Stocks

There are desktop platforms and mobile phone apps that offer brokerage services. These are likely the most common platforms individual or retail investors use to currently buy or sell stocks. However, another option is through a financial advisor.

Financial advisors are professionals who have been entrusted to handle certain financial responsibilities and you can send them a stock sale order to execute. They can do a number of other things for you, too, including proffer advice and help you formulate an investing strategy. But there are costs to using financial advisors, so it may not be worth it, depending on how involved in the markets you are.

The Takeaway

There are times when it may be a good idea to sell your stocks, and others when it’s not. For example, if you’ve lost faith in a company, need a cash infusion, or are doing some portfolio rebalancing, it may be a good time to sell shares of a certain stock.

On the other hand, if you’re unnerved that your stock’s price fell after a bad earnings report, you may want to hold on and let things play out. It’s difficult, and is a true test of your risk tolerance. But over time, it should become easier and more natural as you gain experience as an investor.

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).


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FAQ

How can you tell when to sell a stock?

There’s no exact science, and determining whether it’s a good time to sell a stock will come down to the individual investor’s strategy, risk tolerance, and time horizon. However, you can also keep an eye on a stock’s valuation, consider your opportunity costs, and weigh other factors in order to make the decision.

Should you ever sell stocks when they’re down?

You can sell stocks when they lose value for any number of reasons, but it’s wise to make sure you’re doing so as a part of an overall investing strategy, e.g. tax-loss harvesting, and not simply because you’re making an emotional or impulsive decision based on current market conditions.

How much profit do I need before I sell a stock?

There’s no exact science or answer to determine how much of a return you’d need to see before you sell a stock. That’s up to the specific investor, and there may be times when selling a stock at a loss is preferable for tax purposes or other reasons.


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What Is Stock Volatility and How Do You Measure It?

What Is Stock Volatility?

Stock volatility is often defined as big swings in price, but technically the volatility of a stock refers to how much its price tends to vary from the mean. The same is true of stock market volatility; when an index tends to perform a certain percentage above or below the mean, it’s a signal of volatility.

Generally, the higher the volatility of a stock, the more risk an investor incurs when they purchase or hold it. But volatility can also provide opportunities for some investors.

How to Measure Stock Volatility

There are a handful of ways to measure stock volatility. Each metric gives investors different information, and a different view of stock market fluctuations.

Standard Deviation

Standard deviation is a common stock volatility measure; it refers to how far a stock’s performance varies from its average. Investors often measure an investment’s volatility by the standard deviation of returns compared with a broader market index or past returns. Standard deviation measures the extent to which a data point deviates from an expected value, i.e. the mean return.

Beta

Beta is another way to measure volatility; it captures systematic risk, which refers to the volatility of a security (or of a portfolio) versus the market as a whole.

For example, beta can measure the volatility of a stock versus its benchmark (e.g. the S&P 500 or another relevant index). If a stock or mutual fund has a beta of 1.0, its inherent volatility is no different than the market at large. If the beta of a stock is higher or lower than its benchmark, that indicates higher or lower volatility.

Recommended: How to Find Portfolio Beta

VIX

The Cboe Global Markets Volatility Index, known as the VIX for short, is a tool used to measure implied volatility in the market. In simple terms, the VIX index tells investors how professional investors feel about the market at any given time.

The VIX Index is a real-time calculation that measures expected volatility in the stock market. One of the most recognized barometers of fluctuations in financial markets, the VIX measures how much volatility investing experts expect to see in the market over the next 30 days. This measurement reflects real-time quotes of S&P 500 Index (SPX) call option and put option prices.

Maximum Drawdown

Maximum drawdown, or MDD, is another stock volatility measure, and can give investors a sense of how much downside risk exists for a given stock (though not the risks of the stock market overall). It basically measures the maximum fall in value that a stock has seen in the past, and is reflected in the difference between that maximum trough, and the highest peak in value before its value fell.

You may recognize the terms peak and trough when discussing the business cycle and bull markets, too. MDD is a peak-to-trough calculation, in other words. It’s a simpler calculation than standard deviation, too:

MDD= Trough Value−Peak Value / Peak Value​



💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Using Standard Deviation to Calculate Volatility

You can use the standard deviation and variance of returns to create a basic measure of stock volatility. This measure captures variance in price changes over a certain period of time, so you can gauge how far from the mean the stock price tends to go (i.e. how volatile it is).

Formula: σT = volatility, where:

σ = standard deviation of returns

T = number of time periods

1. To arrive at the variance, imagine a stock that starts in January with a monthly closing price of $10, and adds $1 per month. Month 1 = $10. Month 2 = $11. Month 3 = $12 … and so on, for all 12 months (or whatever time period you choose).

2. Add the stock price for each month, to arrive at a total of $186.

3. Divide $186 by the number of time periods (12 months in this case) to get an average stock price of $15.50 for the year.

4. Subtract the mean ($15.50) from each monthly value; include results that are negative numbers.

5. Square all the deviations (which will also remove negative numbers), and add them together to get the sum ($50.50); divide the sum by the number of time periods (in this case 12) to get a variance of $4.21.

6. Take the square root of $4.21 to get $2.05 = which is the standard deviation for this particular stock. Knowing this provides an important point of comparison for investors, because it indicates whether a stock’s price fluctuations could be within ‘normal’ ranges or too volatile.

Recommended: What Is a Stock?

Types of Stock Volatility

There are two common types of stock volatility that investors use to measure the riskiness of an investment: implied volatility and historical volatility. These two types of volatility are often used by options traders, who make trades based on the potential volatility of the options contract’s underlying asset.

Historical Volatility

Historical volatility (HV), also known as statistical volatility, is a measurement of the price dispersion of a financial security or index over a period of time. Investors calculate this by determining the average deviation from an average price. Historical volatility typically looks at daily returns, but some investors use it to look at intraday price changes.

As the name implies, historical volatility used past performance to assess present volatility. When a stock sees large daily price swings compared to its history, it will typically have a historical volatility reading. Historical volatility does not measure direction; it simply indicates the deviation from an average.

Implied Volatility

Implied volatility (IV) is a metric that captures the market’s expectation of future movements in the price of a security. Implied volatility employs a set of predictive factors to forecast the future changes of a security’s price.

Implied volatility doesn’t anticipate which way prices might move, up or down, only how likely the volatility will be.

What Causes Market Volatility?

The stock market is known for having boom-and-bust cycles, which is another way of describing stock market volatility. And there are numerous factors that can influence market volatility. Here are just a few:

Company Performance

Regarding individual stocks, events tied to the company’s performance can drive volatility in its shares. This can include countless factors including: earnings reports, a product announcement, a merger, a change in management, and much more.

Investor Behavior

Long periods of rising share prices tend to drive investors to take on more risk. They enter into more speculative positions and buy assets like high-risk stocks.

In doing so, investors may disregard their own risk tolerance, and make themselves more vulnerable to market shocks. This pattern can lead to market busts when investors need to sell their holdings en masse when the market is shaky.

Global Events

For instance, the early stages of the COVID pandemic in February and March 2020 created shockwaves in the markets. As economies across the globe shut down, investors began to sell off risky assets, bringing about high levels of volatility in the financial markets.

Governments enacted extraordinary fiscal and monetary stimulus programs to calm this volatility and bring stability to the markets.

But even as these efforts took effect, other global factors — the war in Ukraine impacting energy prices — also took a toll. And federal reserve interest rate increases during 2022 — instituted at the fastest rate in history in an effort to tamper inflation — likewise roiled the markets, causing stock volatility.

Seasonality

You’ve heard the old saying, “Sell in May and go away.” That’s a reflection of a phenomenon called market seasonality, which means that year in and year out there are certain patterns that tend to occur around the same times.

While seasonality certainly doesn’t guarantee any investment outcomes, some sectors do see more demand and greater production during specific times of year. Summer months tend to impact the travel sector; the fall might see an uptick in school-related consumer goods, and so on.

Depending on the year, this rise and fall of demand can impact volatility for some stocks.

Market Cycles

In a similar way, markets also have their cycles; these cycles emerge thanks to trends generated by what’s going on in different business sectors. For example, the rapid evolution of AI in 2023 and early 2024 may have sparked a bit of a market cycle in the tech sector, as the demand for certain products and technologies jumped.

That said, it’s difficult to spot a market cycle until it’s over. Sometimes what appears to be a cycle is simply a normal set of fluctuations. But the anticipation or perception of a cycle can drive volatility.

Liquidity

Other factors that can drive volatility include liquidity and the derivatives market. Stock liquidity is the ease with which an asset can be bought and sold without affecting prices. If an asset is tough to unload and gets sold at a significantly lower price, that could inject fear into the market and cause other investors to sell, ramping up volatility.

Separately, there’s sometimes a debate as to whether equity derivatives — contracts that are based on an underlying asset (e.g. futures and options) — can cause volatility. For instance, in 2020, investors debated whether large volumes of stock options trading caused sellers of the options, typically banks, to hedge themselves by buying stocks, exposing the market to sudden ups and downs when the banks had to purchase or sell shares quickly.

What Causes Stock Prices to Go Up?

As noted, any number of things can cause a stock’s price to go up — be it good or bad news. For instance, geopolitical events can cause certain stocks to appreciate in price, while others may fall. When there’s political instability, some investors seek safer investments and may pile into consumer staple stocks, or investments that track the price of precious metals.

When the economy is faring well, earnings season can be another time during which stock prices go up as companies report positive news to investors, who may, in turn, feel better about the economy overall, which can affect their investing decisions.

What Causes Stock Prices to Go Down?

Just as nearly anything and everything can drive stock prices up, there are countless factors that can likewise drive values down. That can include bad earnings reports from companies, or earnings data that doesn’t live up to expectations. Political or regulatory changes can also spook investors, who may sell certain stocks and drive prices down.

Again: Stock prices can go down for any and every reason, or no reason at all. This is as good a time as any to remind you that there really is no such thing as a completely safe investment.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How to Manage Volatility When Investing

Let’s imagine that it’s 2007, and an individual has money invested in the U.S. stock market. Unfortunately, this investor is about to face one of the largest stock market crashes in history: The S&P 500 fell by 48% during the crash of 2008-2009.

This sort of dramatic drop in the stock market isn’t typical, and it can be traumatic even for the savviest and most experienced investor. So, the first step to handling stock market volatility is understanding that there will always be some price fluctuation.

The second step is to know one’s risk tolerance and financial goals, then invest, readjust, and rebalance your portfolio accordingly.

Balance Risk and Reward

Generally speaking, higher rewards sometimes come with higher risks. For example, younger investors in their 20s might want to target higher growth options and be open to more volatile stocks. They may have enough time to weather the gains and losses and, possibly, come out ahead over time.

The reverse is true for someone approaching retirement who wants stable portfolio returns. With a shorter time horizon there’s less time to recover from volatility, so investing in lower-risk securities may make more sense.
Some strategies offer ways that more cautious investors might take to mitigate volatility in their portfolios. One way is diversification.

Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating all of it in one area. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

For example: Lower volatility stocks, such as utility or consumer staple companies, can add stability to a stock portfolio. Meanwhile, energy, technology, and consumer discretionary shares tend to be more turbulent because their businesses are more cyclical, or tied to the broader economy.

Another way to diversify one’s portfolio is to add bonds, alternative investments, or even cash. When deciding to add bonds or stocks to a portfolio, it’s helpful to know that the former is generally a less volatile asset class.

This is useful to know if you’re managing your own portfolio, or if you want to try automated investing, where a sophisticated algorithm provides different asset allocation options in pre-set portfolios.

There are a few other things to take into consideration when managing volatility in your portfolio.

Assess Risk Tolerance

A big part of effectively managing stock volatility as it relates to your portfolio is knowing your limits, or, as discussed, your risk tolerance. How much risk can you actually handle when it comes down to it?

Every investor will need to give that question some thought when deciding how to deploy their money.

While bigger risks often come with bigger rewards, when the market does experience a downturn, there’s the outstanding question of whether you’ll stick to your investing strategy or cut and run. Each investor’s risk tolerance will be different, but it’s important to think about how you can actually handle the risk you take on when investing.

Stick to Long-Term Investing Strategies

One way to manage market volatility is to stick to a long-term investing strategy, such as a buy-and-hold strategy. If you stick to long-term investments rather than derivatives or other short-term assets or tools, you can somewhat ignore the day-to-day ups and downs of stock prices, and in doing so you may be able to better weather market volatility.

Avoid Timing the Market

Timing the market, as it relates to trading and investing, means waiting for ideal market conditions, and then making a move to try and capitalize on the best market outcome. But nobody can predict the future, and this is a high-risk strategy.

When seeing stock market charts and business news headlines, it can be tempting to imagine you can strike it rich by timing your investments perfectly. In reality, figuring out when to buy or sell securities is extremely difficult. Both professional and at-home investors make serious mistakes when trying to time the market.

Consider Dollar-Cost Averaging

Dollar cost averaging is essentially a way to manage volatility as you continue to save and build wealth. It’s a basic investment strategy where you buy a fixed dollar amount of an investment on a regular cadence (e.g. weekly or monthly). The goal is not to invest when prices are high or low, but rather to keep your investment steady, and thereby avoid the temptation to time the market.

That’s because with dollar cost averaging (DCA) you invest the same dollar amount each time. When prices are lower, you buy more; when prices are higher, you buy less. Otherwise, you might be tempted to follow your emotions and buy less when prices drop, and more when prices are increasing (a common tendency among investors).

How Much Stock Volatility Is Normal?

The average stock market return in the U.S. is roughly 10% annualized over time, or about 6% or 7% taking inflation into account.

When looking at nearly 100 years of data, as of the end of July 26 2023, the yearly average stock market return was between 8% and 12% only eight times. In reality, stock market returns are typically much higher or much lower.

It’s also important to remember that past market performance is not indicative of future returns. But looking at history can help an investor gauge how much volatility and market fluctuation might be considered normal. Since the end of World War II, the S&P 500 has posted 14 drops of more than 20%, including the most recent in 2022 — a dip precipitated by the rapid rise in interest rates.

These prolonged downturns of 20% or more are considered bear markets. While bear markets have a bad name, they don’t always lead to recession, and on average bear markets are shorter than bull markets.

Investing in Stocks With SoFi

Stock volatility is the pace at which the price of a company’s shares move up or down during a certain period of time. Volatility is a complex topic, and it often sparks debate among investors, traders, and academics about what causes it.

While equities are considered an important part of any investment portfolio, they are also known for being volatile, and some degree of turbulence is something most stock investors have to live with.

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).


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

FAQ

Is volatility the same as risk?

In a sense, yes. Volatility is an indicator of risk. So a stock that is highly volatile, with big price changes, is considered riskier than a stock that is less volatile and maintains a more stable price.

Who should buy stocks when volatility strikes?

Certain types of investors, e.g. day traders and options traders, may have strategies that enable them to profit from volatile securities (although there are no guarantees). In some cases, ordinary investors with a very high risk tolerance may want to invest in a volatile stock — but they have to be willing to face the possibility of steep losses.

What is the best stock volatility indicator?

Perhaps the most common or popular one is the VIX. Depending on which way the VIX is trending, it may throw off buy or sell signals to investors. The VIX can be helpful for assessing risk in order to capitalize on anticipated market movements.

What is good volatility for a stock?

Deciding whether the volatility of a certain stock is “good” is a matter of your personal investing style and goals. Some investors may seek out volatile equities if they believe they have a strategy that can capitalize on price fluctuations. Other investors with a long-term view may not mind volatility if they believe the outcome over time will be favorable — while others may opt for as little volatility in their portfolios as possible.

What causes volatility in a stock?

Just about anything can cause stock volatility. Some of the more common causes of volatility are earnings reports or other company news; geopolitical news and developments; or broader economic changes, such as interest rate hikes or inflation.


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.

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

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

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

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

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2024 Tax Season: Capital Gains Tax Guide

What Is Capital Gains Tax?

Capital gains taxes are the taxes you pay on any profits you make from selling investments, like stocks, bonds, properties, cars, or businesses. The tax isn’t applied for owning these assets — it only hits when you profit from selling them.

It’s important for beginner investors to understand that a number of factors can affect their capital gains tax rate: how long they hold onto an investment, which asset they’re selling, the amount of their annual income, as well as their marital status.

Read on to learn how capital gains work, the capital gains tax rates, and tips for lowering capital gains taxes.

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 2023)

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 breaks down the short-term capital gains tax rates for the 2023 tax year, or for tax returns that are filed in 2024.

Marginal Rate

Income — Single

Married, filing jointly

10% Up to $11,000 Up to $22,000
12% $11,000 to $44,725 $22,000 to $89,450
22% $44,725 to $95,375 $89,450 to $190,750
24% $95,375 to $182,100 $190,750 to $364,200
32% $182,100 to $231,250 $364,200 to $462,500
35% $231,250 to $578,125 $462,500 to $693,750
37% $578,125 or more More than $693,750

Long-Term Capital Gains Tax Rate By Income for Tax Year 2023 (or Tax Season 2024)

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 breaks down the long-term capital-gains tax rates for the 2023 tax year by income and status.

Capital Gains Tax Rate

Income — Single

Married, Filing Separately

Head of Household

Married, Filing Jointly

0% Up to $44,625 Up to $44,625 Up to $59,750 Up to $89,250
15% $44,626 to $492,300 $44,626 to $276,900 $59,751 to $523,050 $89,251 to $553,850
20% $492,301 or more $276,901 or more $523,051 or more $553,851 or more

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.

Recommended: Benefits of Using a 529 College Savings Plan

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.

For new investors, it might be helpful to know that you may deduct as much as $3,000 in losses from an investment to help offset the amount of taxes on your income.

How US 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. For instance, in 2018, tax rates went down because of the Trump Administration’s tax cuts. Therefore, so did short-term capital gains rates.

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.

Tax Loss Harvesting

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.

Recommended: Is Automated Tax Loss Harvesting a Good Idea?

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 at least 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.

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).


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


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

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

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.

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

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Investing vs. Speculation: Understanding the Core Differences

All investments carry some risk, but the difference between speculating and investing is the amount of risk involved. Speculative investments are typically short-term, and far riskier than traditional investing products and strategies, and may involve the risk of total loss.

Investing typically indicates a more long-term approach to making a profit, with an eye toward managing risk.

Defining Investing and Speculation

Speculating often describes scenarios when there’s a high chance the investment will deliver losses, but also when the investment could result in a high profit. High-risk, high-reward investments include commodities, crypto, derivatives, futures, and more.

In contrast, investing generally refers to transactions where an individual has researched an asset, and puts money into it with the hope that prices will rise over time. There are no guarantees, of course, and all types of investing include some form of risk.

Examples of Investments and Speculative Investments

Assets that are thought of as more traditional types of investments include publicly traded stocks, mutual funds, exchange-traded funds (ETFs), bonds (e.g. U.S. Treasury bonds, municipal bonds, high-grade corporate bonds), and real estate.

Even some so-called alternative investments would be considered more long-term and less speculative: e.g., jewelry, art, collectibles.

Assets that are almost always considered speculative are junk bonds, options, futures, cryptocurrency, forex and foreign currencies, and investments in startup companies.

Sometimes it isn’t as simple as saying that all investments in the stock market or in exchange-traded funds or in mutual funds hold the same amount of risk, or are “definitely” classified as investments. Even within certain asset classes, there can be large variations across the speculation spectrum.


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

The Traditional Approach to Investing

When it comes to the more traditional approach to investing, individuals typically buy and hold assets in their investment portfolios or retirement accounts, with the aim of seeing reasonable, long-term gains.

Traditional forms of investing focus on the performance of the underlying business or organization, not on the day-to-day or hour-by-hour price movements of an asset.

For this reason, more traditional investors tend to rely on various forms of analysis (e.g. fundamental analysis of stocks) and analytical tools and metrics to gauge the health of a company, asset, or market sector.

Speculation: A High-Risk, High-Reward Game

The difference between speculating and investing can be nuanced and a matter of opinion. (After all, some investors view the stock market as a form of gambling.) But when traders are speculating, they are typically seeking super-high gains in a relatively short period of time: e.g., hours, days, or weeks.

In the case of commodities or futures trading, the time horizon might be longer, but the aim of making a big profit fairly quickly is at the heart of most speculation.

Speculators may also use leverage, a.k.a. margin trading, to boost their buying power and amplify gains where possible (although using leverage can also lead to steep losses).

The Psychology of Investing vs. Speculating

The psychology of a typical investor is quite different from that of a speculative investor, and again revolves around the higher tolerance for risk in pursuit of a potentially bigger reward in a very short time frame.

Long-Term Investing

Speculating

Taking calculated or minimal risks Willing to take on high-risk endeavors
Pursuit of reasonable gains Pursuit of abnormally high returns
Willing to invest for the long term Willing to invest only for the short term
Uses a mix of traditional investments and strategies (e.g. stocks, bonds, funds) Uses single strategies and alternative investments
Infrequent use of leverage/margin Frequent use of leverage/margin

Historical Perspectives on Investing and Speculation

The history of investing and speculating has long been entwined. In the earliest days of trading thousands of years ago, most markets were focused on the exchange of tangible commodities like livestock, grain, etc. Wealthy investors might put their money into global voyages or even wars. Thus many early investors could be described as speculators.

But investing in forms of debt as a way to make money was also common, eventually leading to the bond market as we know it today.

The concept of investing in companies and focusing on longer-term gains took hold gradually. As markets became more sophisticated over the centuries, and a wider range of technologies, strategies, and financial products came into use, the division between investing and speculating became more distinct.

Recommended: What Causes a Stock Market Bubble?

Speculation History: Notable Market Bubbles and Crashes

The history of investing is rife with market bubbles, manias, and crashes. While the speculative market around tulip bulbs in 17th-century Holland is well known, as is the Great Financial Crisis here in the U.S. in 2008-09, there have been many similar financial events throughout the world — most of them driven by speculation.

What marks a bubble is a well-established series of stages driven by investor emotions like exuberance (i.e., greed) followed by panic and loss. That’s because many investors tend to be irrational, especially when in pursuit of a quick profit that seems like “a sure thing.”

Some classic examples of financial bubbles that changed the course of history:

•   The South Sea Bubble (U.K., 1711 to 1720) — The South Sea company was created in 1711 to help reduce national war debt. The company stock peaked in 1720 and then crashed, taking with it the fortunes of many.

•   The Roaring Twenties (U.S., 1924 to 1929) — The 1920s saw a rapid expansion of the U.S. economy, thanks to both corporations’ and consumers’ growing use of credit. Stock market speculation reached a peak in 1929, followed by the infamous crash, and the Great Depression.

•   Japanese Bubble Economy (1984 to 1989) — The Japanese economy experienced a historic two-decade period of growth beginning in the 1960s, that was further fueled by financial deregulation and widespread speculation that artificially inflated the worth of many corporations and land values. By late 1989, as the government raised interest rates, the economy fell into a prolonged slowdown that took years to recover from.

•   Dot-Com Bubble (1995 to 2002) — Sparked by rapid internet adoption, the dot-com boom saw the rapid growth of tech companies in the late 1990s, when the Nasdaq rose 800%. But by October 2002 it had fallen 78% from that high mark.

Key Differences Between Investing and Speculating

What can be confusing for some investors is that there is an overlap between investing in the traditional sense, and speculative investing in higher risk instruments.

And some types of investing fall into the gray area between the two. For example, options trading, commodities trading, or buying IPO stock are considered high-risk endeavors that should be reserved for more experienced investors. What makes these types of investments more speculative, again, is the shorter time frame and the overall risk level.

Time Horizon: Long-term Goals vs. Quick Gains

As noted above, investors typically take a longer view and invest for a longer time frame; speculators seek quick-turn profits within a shorter period.

That’s because more traditional investors are inclined to seek profits over time, based on the quality of their investments. This strategy at its core is a way of managing risk in order to maximize potential gains.

Speculators are more aggressive: They’re geared toward quick profits, using a single strategy or asset to deliver an outsized gain — with a willingness to accept a much higher risk factor, and the potential for steep losses.

Fundamental Analysis vs. Market Timing

As a result of these two different mindsets, investors and speculators utilize different means of achieving their ends.

Investors focused on more traditional strategies might use tools like fundamental analysis to gauge the worthiness of an investment.

Speculators don’t necessarily base their choices on the quality of a certain asset. They’re more interested in the technical analysis of securities that will help them predict and, ideally, profit from short-term price movements.
While buy-and-hold investors focus on time in the market, speculators are looking to time the market.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Real-World Implications of Investment vs. Speculation

To better understand the respective value and impact of investing vs. speculating, it helps to consider the real-world implications of each strategy.

The Impact of Speculation on Markets

It’s important to remember that speculation occurs in many if not all market sectors. So speculation isn’t bad, nor does it always add to volatility — although in certain circumstances it can.

For example, some point to IPO shares as an example of how speculative investors, who are looking for quick profits, may help fuel the volatility of IPO stock.

Speculation does add liquidity to the markets, though, which facilitates trading. And speculative investors often inject cash into companies that need it, which provides a vital function in the economy.

Strategic Approaches to Investment

Whether an investor chooses a more traditional route or a more speculative one, or a combination of these strategies, comes down to that person’s skill, goals, and ability to tolerate risk.

Diversification and Asset Allocation

For more traditional, longer-term investors, there are two main tools in their toolkit that help manage risk over time.

•   Diversification is the practice of investing in more than one asset class, and also diversifying within that asset class. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

•   Asset allocation is the practice of balancing a portfolio between more aggressive and more conservative holdings, also with the aim of growth while managing risk.

When Does Speculation Make Sense?

Speculation makes sense for a certain type of investor, with a certain level of experience and risk profile. It’s not so much that speculative investing always makes sense in Cases A, B, or C. It’s more about an investor mastering certain speculative strategies to the degree that they feel comfortable with the level of risk they’re taking on.

The Takeaway

One way to differentiate between investment and speculation is through the lens of probability. If an asset is purchased that carries a reasonable probability of profit over time, it’s an investment. If an asset carries a higher likelihood of significant fluctuation and volatility, it is speculation.

A long-term commitment to a broad stock market investment, like an equity-based index fund, is generally considered an investment. Historical data shows us that the likelihood of seeing gains over long periods, like 20 years or more, is high.

Compare that with a trader who purchases a single stock with the expectation that the price will surge that very day (or even that year!) — which is far more difficult to predict and has a much lower probability of success.

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).


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
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.

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

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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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Day Trading Strategies for Beginners

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.

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.

Recommended: A User’s Guide to Day Trading Terminology

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.

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

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*Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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.

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.

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.

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.


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