What Is the January Effect and Is It Good For Investors?

January Effect: What It Is and Is It Good for Investors?

The January Effect is a term that some financial market analysts use to classify the first month as one of the best-performing months, stock-wise, during the year. Analysts and investors who believe in this phenomenon claim that stocks have large price increases in the first month of the year, primarily due to a decline in share prices in December. Theoretically, following the dip in December, investors pour into stocks, which may boost prices in January.

However, many analysts claim that the January Effect and other seasonal anomalies are nothing more than market myths, with little evidence to prove the phenomenon definitively. Nonetheless, it may be helpful for investors to understand the history and possible causes behind the January Effect.

Key Points

•   January Effect suggests stocks rise in January due to December price dips, which creates buying opportunities.

•   Small-cap stocks benefit most from the January Effect due to liquidity.

•   Tax-loss harvesting during the month of December may lower stock prices.

•   Investors then buy in January, boosting stock prices.

•   January Effect’s impact is debated; It’s either attributed to market myths or real behavior.

What Is the January Effect?

As noted above, the January Effect is a phenomenon in which stocks supposedly see rising valuations during the first month of the year. The theory is that many investors sell holdings and take gains from the previous year in December, which can push prices down. This dip supposedly creates buying opportunities in the first month of the new year as investors return from the holidays. This buying can drive prices up, creating a “January Effect.”

Believers of the January Effect say it typically occurs in the first week of trading after the New Year and can last for a few weeks. Additionally, the January Effect primarily affects small-cap stocks more than larger stocks because they are less liquid.

To take advantage of the January Effect, investors who are online investing or otherwise can either buy stocks in December that are expected to benefit from the January Effect or buy stocks in January when prices are expected to be higher due to the effect. Investors can also look for stocks with low prices in December, but have historically experienced a surge in January, and buy those stocks before the increase.

Recommended: How To Know When to Buy, Sell, Or Hold a Stock

What Causes the January Effect?

Here are a few reasons why stocks may rise in the first month of the year.

Tax-Loss Harvesting

Stock prices supposedly decline in December, when many investors sell certain holdings to lock in gains or losses to take advantage of year-end tax strategies, like tax-loss harvesting.

With tax-loss harvesting, investors can lower their taxable income by writing off their annual losses, with the tax timetable ending on December 31. According to U.S. tax law, an investor only needs to pay capital gains taxes on their investments’ total realized gains (or losses).

For example, suppose an investor owned shares in three companies for the year and sold the stocks in December. The total value of the profit and loss winds up being taxed.

Company A: $20,000 profit
Company B: $10,000 profit
Company C: $15,000 loss

For tax purposes, the investor can tally up the total investment value of all three stocks in a portfolio — in this case, that figure is $15,000 ($20,000 + $10,000 – $15,000). Consequently, the investor would only have to pay capital gains taxes on $15,000 for the year rather than the $30,000 in profits.

If the investor still believes in Company C and only sold the stock to benefit from tax-loss harvesting, they can repurchase the stock 30 days after the sale to avoid the wash-sale rule. The wash-sale rule prevents investors from benefiting from selling a security at a loss and then buying a substantially identical security within the next 30 days.

Recommended: Tax Loss Carryforward

A Clean Slate for Consumers

U.S. consumers, who play a critical role in the U.S. economy, traditionally view January as a fresh start. Adding stocks to their portfolios or existing equity positions is a way consumers hit the New Year’s Day “reset” button. If retail investors buy stocks in the new year, it can result in a rally for stocks to start the year.

Moreover, many workers may receive bonus pay in December or January may use this windfall to buy stocks in the first month of the year, adding to the January Effect.

Portfolio Managers May Buy In January

Like consumers, January may give mutual fund portfolio managers a chance to start the year fresh and buy new stocks, bonds, and commodities. That puts managers in a position to get a head start on building a portfolio with a good yearly-performance figure, thus adding more investors to their funds.

Additionally, portfolio managers may have sold losing stocks in December as a way to clean up their end-of-year reports, a practice known as “window dressing.” With portfolio managers selling in December and buying in January, it could boost stock prices at the beginning of the year.

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Is the January Effect Real?

The January Effect has been studied extensively, and there is evidence to suggest that it is somewhat real. Studies have found that small- and mid-cap stocks tend to outperform the market during January because they are less liquid.

But some analysts note that the effect has become less pronounced in recent years due to the rise of tax-advantaged investing accounts, like 401(k)s and individual retirement accounts (IRAs). Investors who use these accounts may not have a reason to sell in December to benefit from tax-loss harvesting. Therefore, while the January Effect may be somewhat real, its impact may be more muted than in the past.

January Effect and Efficient Markets

However, many investors claim that the January Effect is not real because it is at odds with the efficient markets hypothesis. An efficient market is where the market price of securities represents an unbiased estimate of the investment’s actual value.

Efficient market backers say that external factors — like the January Effect or any non-disciplined investment strategy — aren’t effective in portfolio management. Since all investors have access to the same information that a calendar-based anomaly may occur, it’s impossible for investors to time the stock market to take advantage of the effect. Efficient market theorists don’t believe that calendar-based market movements affect market outcomes.

The best strategy, according to efficient market backers, is to buy stocks based on the stock’s underlying value — and not based upon dates in the yearly calendar.

History of the January Effect

The phrase “January Effect” is primarily credited to Sydney Wachtel, an investment banker who coined the term in 1942. Wachtel observed that many small-cap stocks had significantly higher returns in January than the rest of the year, a trend he first noticed in 1925.

He attributed this to the “year-end tax-loss selling” that occurred in December, which caused small-cap stocks to become undervalued. Wachtel argued that investors had an opportunity to capitalize on this by buying small-cap stocks during the month of January.

However, it wasn’t until the 1970s that the notion of a stock rally in January earned mainstream acceptance, as analysts and academics began rolling out research papers on the topic.

The January Effect has been studied extensively since then, and many theories have been proposed as to why the phenomenon may occur. These include ideas discussed above, like tax-loss harvesting, investor psychology, window-dressing by portfolio managers, and liquidity effects in stocks. Despite these theories, the January Effect remains an unexplained phenomenon, and there is a debate about whether following the strategy is beneficial.

The Takeaway

Like other market anomalies and calendar effects, the January Effect is considered by some to be evidence against the efficient markets hypothesis. Nevertheless, there is evidence that the stock market does perform better in January, especially with small-cap stocks. Whether one believes in the January Effect or not, it’s always a good idea for investors to use strategies that can best help them meet their long-term 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).

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.


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Guide to Yield to Maturity (YTM)

When investors evaluate which bonds to buy, they often take a look at yield to maturity (YTM), the total rate of return a bond will earn over its life, assuming it has made all interest payments and repaid the principal.

Calculating YTM can be complicated. Doing so takes into account a bond’s face value, current price, number of years to maturity and coupon, or interest payments. It also assumes that all interest payments are reinvested at a constant rate of return. With these figures in hand, they will be better equipped to understand the bond market and which bonds will offer the greatest yield if held to maturity.

Key Points

•   Yield to Maturity (YTM) represents the total return expected from holding a bond until it matures, factoring in interest payments and principal repayment.

•   Calculating YTM involves the bond’s coupon rate, face value, current market price, and the time to maturity, making it a complex formula.

•   YTM is useful for comparing bonds with different characteristics, helping investors anticipate returns and understand interest rate risks associated with bond investments.

•   Limitations of YTM include assumptions about reinvestment of interest payments and the neglect of taxes, which can significantly affect actual returns.

•   Investors can utilize YTM as a tool for decision-making but should consider diversifying their portfolios and possibly consulting financial professionals for guidance.

What Is Yield to Maturity (YTM)?

The yield to maturity (YTM) is the estimated rate investors earn when holding a bond until it reaches maturity or full value. The YTM is stated as an annual rate and can differ from the stated coupon rate.

The calculations in the yield to maturity formula include the following factors:

•   Coupon rate: Also known as a bond’s interest rate, the coupon rate is the regular payment issuers pay bondholders for the right to borrow their money. The higher the coupon rate, the higher the yield.

•   Face value: A bond’s face value, or par value, is the amount paid to a bondholder at its maturity date.

•   Market price: A bond’s market price refers to how much an investor would have to pay for a bond on the open market currently. The price buyers pay on the secondary market may be higher or lower than a bond’s face value. The higher the price of the bond, the lower the yield.

•   Maturity date: The date when the issuer repays the principal is known as the maturity date.

The YTM formula assumes all coupon payments are made as scheduled, and most calculations assume interest will be reinvested.

💡 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.

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How to Calculate Yield to Maturity

Calculating yield to maturity can be done by following a formula — but fair warning, it’s not simple arithmetic!

Yield to Maturity (YTM) Formula

To calculate yield to maturity, investors can use the following YTM formula:

yield to maturity formula

In this calculation:

C = Interest or coupon payment
FV = Face value of the investment
PV = Present value or current price of the investment
t = Years it takes the investment to reach the full value or maturity

Example of YTM Calculation

Here’s an example of how to use the YTM formula.

Suppose there’s a bond with a market price of $800, a face value of $1,000, and a coupon value of $150. The bond will reach maturity in 10 years, with a coupon rate of about 14%.

By using this formula, the estimated yield to maturity would calculate as follows:

example of yield to maturity formula

The Importance of Yield to Maturity

Knowing a bond’s YTM can help investors compare bonds with various maturity and coupon rates, and ultimately, what their dividend yield could look like. For example, consider two bonds of varying maturity: a five-year bond with a 3% YTM and a 10-year bond with a 2.5% YTM. Investor’s can easily see that the five-year bond is more valuable.

YTM is particularly useful when attempting to compare older bonds sold in a secondary market, which can be priced at a premium or discounted — meaning they cost more or less than the bond’s face value. Understanding the YTM formula also helps investors understand how market conditions can impact their portfolio based on the investment they select. Since yields rise when prices drop (and vice versa) as seen on a yield curve, investors can forecast how their investment will perform.

Additionally, YTM can help investors understand how likely they are to be affected by interest rate risk — the danger that the value of a bond may be adversely affected due to the changes in interest rate. Current YTM is inversely proportional to interest rate risk. That means, the higher the YTM, the less bond prices will be affected should interest rates change, in theory.

Yield to Maturity vs Yield to Call

With a callable, or redeemable bond, issuers can choose to repay the principal amount before the maturity date, halting interest payments early. This throws a bit of a wrench into the YTM calculation. Instead, investors may want to use a yield to call (YTC) calculation. To do so, they can use the YTM calculation, substituting the maturity date for the soonest possible call date.

Typically a bond issuer will call a bond only if it will result in a financial gain. For example, if the interest rate drops below a coupon rate, the issuer may decide to recall the bond to borrow funds at a lower rate. This situation is similar to when interest rates drop and homeowners refinance their home loans.

For investors that use callable bonds for income, yield to call is significant. Suppose the issuer decides to call the bond when the interest rates are lower than when the investor purchases it. If an investor decides to reinvest their payout, they may have a tough time finding a comparable bond that offers the yield they need to support their lifestyle. They may feel it necessary to take on more risk, looking to high-yield bonds.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Yield to Maturity vs Coupon Rate

While a bond’s coupon rate is another important piece of information that investors need to keep in mind, it’s not the same as yield to maturity. The coupon rate tells investors the annual amount of interest that a bond’s owner is set to receive — the two may be the same when a bond is initially purchased, but will likely diverge over time due to changing economic and market conditions.

Limitations of Yield to Maturity

The yield to maturity calculation does have limitations.

Taxes

It’s important to note that YTM calculations exclude taxes. While some bonds, like municipal bonds and U.S. Treasury bonds, may be tax exempt on a federal and state level, most other bonds are taxable. In some cases, a tax-exempt bond may have a lower interest rate but ultimately offer a higher yield once taxes are factored in.

As an investor, it can be especially helpful to consider the after-tax yield rate of return. For example, suppose an investor in the 35% federal tax bracket who doesn’t pay state income taxes is considering investing in either Bond X or Bond Y. Bond X is a tax-exempt bond and pays a 4% interest rate, while Bond Y is taxable and pays 6% interest.

While the 4% yield for Bond X remains the same, the after-tax yield for Bond Y is 3.8%. While it seemed like the less lucrative of the two options up front, Bond X should ultimately yield a higher return after taxes.

Presuppositions

Another YTM limitation is that it makes assumptions about the future that may not necessarily come to fruition. Specifically, it assumes that a bondholder will hang on to the bond until its maturity date, which may or may not actually happen. It also assumes that profits from the investment will be reinvested in a uniform manner — again, that may or may not be the case.

The Takeaway

Using the yield to maturity formula can help investors compare bond options with different coupon and maturity rates, market and par values, and determine which one offers the potential for a higher yield. But calculating the YTM is not an exact science, especially when you’re gauging the return on a callable bond, say, or adding the impact of taxes to the mix.

YTM is just one tool investors can use to determine which bond may best serve their financial needs and goals. One alternative to choosing individual bonds is to invest in bond mutual funds or bond exchange-traded funds (ETFs). Investors can also speak with a financial professional for guidance.

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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 a bond’s yield to maturity (YTM)?

A bond’s yield to maturity is the total return an investor can anticipate receiving if the bond is held to its maturity date. YTM calculations assume that all interest payments will be made by the issuer and reinvested by the bondholder at a constant rate of interest.

What is the difference between a bond’s coupon rate and its YTM?

A bond’s coupon, or interest, rate is fixed from the moment an investor buys it. However, the same bond’s YTM can fluctuate over time depending on the price paid for it and other interest prices available on the market. If YTM is lower than the coupon rate, it may indicate that the bond is being sold at a premium to its face value. If it’s lower, it may be that the bond is priced at a discount to face value.

What is yield to maturity and how is it calculated?

Yield to maturity refers to the total return an investor can expect or anticipate from a bond if they hold it to maturity. It’s calculated using variables including the time to maturity, a bond’s face value, its current price, and its coupon rate.

Why is yield to maturity important?

The yield to maturity formula can give investors an idea of what they can expect in terms of returns from their bond holdings. But again, there are some assumptions the calculation takes into account, so an investor’s mileage may vary.

Is a higher YTM better?

A higher YTM may be better under certain circumstances. For example, since a higher YTM may indicate a bond is being sold for less than its face value, it may represent a valuable opportunity to invest. However, if the bond is discounted because the company that offered it is in trouble or interest rates offered by other investments are more appealing, then a high YTM might not be such a good thing. Investors must research investments carefully and understand the full story before they buy.


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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.
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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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What Is a Pattern Day Trader?

A pattern day trader is actually a designation created by the Financial Industry Regulatory Authority (FINRA), and it refers to traders who day trade a security four or more times within a five-day period.

Because of their status, there are certain rules and stipulations that apply only to pattern day traders, which brokerages and investing firms must adhere to.

Read on to learn more about pattern day traders, what rules apply to them, and how they’re different from regular day traders.

Key Points

•   A pattern day trader is classified as someone who executes four or more day trades within a five-day period, exceeding 6% of their total trading activity.

•   Investors identified as pattern day traders must maintain a minimum balance of $25,000 in their margin accounts to meet regulatory requirements set by FINRA.

•   Engaging in pattern day trading can yield profits, but it also carries significant risks, especially when utilizing margin accounts, which can amplify both gains and losses.

•   The Pattern Day Trader Rule was established to limit excessive risk-taking among individual traders, requiring firms to impose stricter trading restrictions on active day traders.

•   Being designated as a pattern day trader may lead to account restrictions, including a 90-day trading freeze if the minimum balance requirement is not met.

Pattern Day Trader, Definition

The FINRA definition of a pattern day trader is clear: A brokerage or investing platform must 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 in a margin account.

When investors are 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.

How Does Pattern Day Trading Work?

Pattern day trading works as the rules stipulate: An investor or trader trades a single security at least four times within a five business day window, and those moves amount to more than 6% of their overall trading activity.

Effectively, this may not look like much more than engaging in typical day trading strategies for the investor. The important elements at play are that the investor is engaging in a flurry of activity, often trading a single security, and using a margin account to do so.

Remember: A margin account allows the trader to borrow money to buy investments, so the brokerage that’s lending the trader money has an interest in making sure they can repay what they owe.

Example of Pattern Day Trading

Here is how pattern day trading might look in practice:

On Monday, you purchase 10 shares of Stock A using a margin account. Later that day, you sell the 10 shares of Stock A. This is a day trade.

On Tuesday, you purchase 15 shares of stock A in the morning and then sell the 15 shares soon after lunch. Subsequently, you purchase 5 shares of stock A, which you hold only briefly before selling prior to the market close. You have completed two day trades during the day, bringing your running total — including Monday’s trades — to three.

On Thursday, you purchase 10 shares of stock A and 5 shares of stock B in the morning. That same afternoon, you sell the 10 shares of stock A and the 5 shares of stock B. This also constitutes two day trades, bringing your total day trades to five during the running four-day period. Because you have executed four or more day trades in a rolling five business day period, you may now be flagged as a pattern day trader.

Note: Depending on whether your firm uses an alternative method of calculating day trades, multiple trades where there is no change in direction might only count as one day trade. For example:

•   Buy 20 shares of stock A

•   Sell 15 shares of stock A

•   Sell 5 shares of stock A

If done within a single day, this could still only count as one day trade.

Do Pattern Day Traders Make Money?

Yes, pattern day traders can and do make money — if they didn’t, nobody would engage in it, after all. But pattern day trading incurs much of the same risks of day trading. Day traders run the risk of getting in over their heads when using margin accounts, and finding themselves in debt.

This is why it’s important for aspiring day traders to make sure they have a clear and deep understanding of both margin and the use of leverage before they give serious thought to trading at a high level.

It’s the risks associated with it, too, that led to the development and implementation of the Pattern Day Trader Rule, which can have implications for investors.

What Is the Pattern Day Trader Rule?

The Pattern Day Trader Rule established by FINRA requires that an investor have at least $25,000 cash and other eligible securities in their margin account in order to conduct four or more day trades within five days. If the account dips below $25,000, the investor will need to bring the balance back up in order to day trade again.

Essentially, this is to help make sure that the trader actually has the funds to cover their trading activity if they were to experience losses.

Note that, according to FINRA, a day trade occurs when a security is bought and then sold within a single day. However, simply purchasing shares of a security would not be considered a day trade, as long as that security is not sold later on that same day, per FINRA rules. This also applies to shorting a stock and options trading.

The PDT Rule established by FINRA requires that an investor have at least $25,000 in their margin account in order to conduct four or more day trades within five days.

But merely day trading isn’t enough to trigger the PDT Rule.

All brokerage and investing platforms are required by FINRA, a nongovernmental regulatory organization, to follow this rule. Most firms provide warnings to their clients if they are close to breaking the PDT rule or have already violated it. Breaking the rule may result in a trading platform placing a 90-day trading freeze on the client’s account. Brokers can allow for the $25,000 to be made up with cash, as well as eligible securities.

Some brokerages may have a broader definition for who is considered a “pattern day trader.” This means they could be stricter about which investors are classified as such, and they could place trading restrictions on those investors.

A broker can designate an investor a pattern day trader as long as the firm has a “reasonable basis” to do so, according to FINRA guidelines.

Why Did FINRA Create the Pattern Day Trader Rule?

FINRA and the Securities and Exchange Commission (SEC) created the PDT margin rule during the height of the dot-com bubble in the late 1990s and early 2000s in order to curb excessive risk-taking among individual traders.

FINRA and the Securities and Exchange Commission (SEC) created the PDT margin rule amidst the heyday of the dot-com bubble in order to curb excessive risk taking among individual traders.

FINRA set the minimum account requirement for pattern day traders at $25,000 after gathering input from a number of brokerage firms. The majority of these firms felt that a $25,000 “cushion” would alleviate the extra risks from day trading. Many firms felt that the $2,000 for regular margin accounts was insufficient as this minimum was set in 1974, before technology allowed for the electronic day trading that is popular today.

Investing platforms offering brokerage accounts are actually free to impose a higher minimum account requirement. Some investing platforms impose the $25,000 minimum balance requirement even on accounts that aren’t margin accounts.

Pattern Day Trader vs Day Trader

As discussed, there is a difference between a pattern day trader and a plain old day trader. The difference has to do with the details of their trading: Pattern day traders are more active and assume more risk than typical day traders, which is what catches the attention of their brokerages.

Essentially, a pattern day trader is someone who makes a habit of day trading. Any investor can engage in day trading — but it’s the repeated engagement of day trading that presents an identifiable pattern. That’s what present more of a risk to a brokerage, especially if the trader is trading on margin, and which may earn the trader the PDT label, and subject them to stricter rules.

Does the Pattern Day Trader Rule Apply to Margin Accounts?

As a refresher: Margin trading is when investors are allowed to make trades with some of their own money and some money that is borrowed from their broker. It’s a way for investors to boost their purchasing power. However, the big risk is that investors end up losing more money than their initial investment.

Investors trading on margin are required to keep a certain cash minimum. That balance is used as collateral by the brokerage firm for the loan that was provided. The initial minimum for a regular margin account is $2,000 (or 50% of the initial margin purchase, whichever is greater). Again, that minimum moves up to $25,000 if the investor is classified as a “pattern day trader.”

FINRA rules allow pattern day traders to get a boost in their buying power to four times the maintenance margin excess — any extra money besides the minimum required in a margin account. However, most brokerages don’t provide 4:1 leverage for positions held overnight, meaning investors may have to close positions before the trading day ends or face borrowing costs.

If an investor exceeds their buying power limitation, they can receive a margin call from their broker. The investor would have five days to meet this margin call, during which their buying power will be restricted to two times their maintenance margin. If the investor doesn’t meet the margin call in five days, their trading account can be restricted for 90 days.

Does the Pattern Day Trader Rule Apply to Cash Accounts?

Whether the Pattern Day Trader Rule applies to other types of investing accounts, like cash accounts, is up to the specific brokerage or investing firm. The primary difference between a cash account vs. a margin account is that with cash accounts, all trades are done with money investors have on hand. Some trading platforms only apply the PDT rule to margin accounts and don’t apply it to cash accounts.

However, some platforms may adhere to FINRA rules that govern margin accounts even if they don’t offer margin trading. This means that a $25,000 minimum balance of cash and other securities must be kept in order for an investor to do more than four day trades in a five-business-day window.

Investors with cash accounts also need to be careful of free riding violations. This is when an investor buys securities and then pays for the purchase by using proceeds from a sale of the same securities. Such a practice would be in violation of the Federal Reserve Board’s Regulation T and result in a 90-day trading freeze.

Pros of Being a Pattern Day Trader

The pros to being a pattern day trader are somewhat obvious: High-risk trading goes along with the potential for bigger rewards and higher profits. Traders also have a short-term time horizon, and aren’t necessarily locking up their resources in longer-term investments, either, which can be a positive for some investors.

Also, the use of leverage and margin allows them to potentially earn bigger returns while using a smaller amount of capital.

Cons of Being a Pattern Day Trader

The biggest and most obvious downside to being a pattern day trader is that you’re contending with a significant amount of risk. Using leverage and margin to trade compounds that risk, too, so day trading does require thick skin and the ability to handle a lot of risk. (Make sure to consider your risk tolerance and investment objectives before engaging in day trading.) Given the intricacies of day trading, it can also be more time and research intensive.

Tips to Avoid Becoming a Pattern Day Trader

Here are some steps investors can take to avoid getting a PDT designation:

1.    Investors can call their brokerage or trading platform or carefully read the official rules on what kind of trading leads to a “Pattern Day Trader” designation, what restrictions can potentially be placed, and what types of accounts are affected.

2.    Investors can keep a close count of how many day trades they do in a rolling five-day period. It’s important to note that buying and selling during premarket and after-market trading hours can cause a trade to be considered a day trade. In addition, a large order that a broker could only execute by breaking up into many smaller orders may constitute multiple day trades.

3.    Investors can consider holding onto securities overnight. This will help them avoid making a trade count as a day trade, although with margin accounts, they may not have the 4:1 leverage afforded to them overnight.

4.    If an investor wants to make their fourth day trade in a five-day window, they can make sure they have $25,000 in cash and other securities in their brokerage account the night before to prevent the account from being frozen.

5.    Investors can open a brokerage account with another firm if they’ve already hit three day trades over five days with one trading platform. However, it’s good to keep in mind that the PDT rule is meant to protect investors from excessive risk taking.

It’s also important to know that taking time to make wise or careful investment decisions could be in the investor’s favor.

The Takeaway

Pattern day traders, as spelled out by FINRA guidelines, are traders who trade a security four or more times within five business days, and their day trades amount to more than 6% of their total trading activity using a margin account.

Being labeled a pattern day trader by a brokerage can trigger the PDT Rule, which means that the trader needs to keep at least $25,000 in their margin account.

While day trading can reap big rewards, it also has big risks — and that’s something that brokerages are keenly aware of, and why they may choose to have stricter requirements for pattern day traders.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.


Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

What happens if you get flagged as a pattern day trader?

If you’re labeled as a pattern day trader, your brokerage may require you to keep at least $25,000 in cash or other assets in your margin account as a sort of collateral.

Do pattern day traders make money?

Yes, some pattern day traders make money, which is why some people choose to do it professionally. But many, perhaps most, lose money, as there is a significant amount of risk that goes along with day trading.

What is the pattern day trader rule?

The Pattern Day Trader Rule was established by FINRA, and requires traders to have at least $25,000 in their margin account in order to conduct four or more day trades within five days. If the account dips below $25,000 the trader needs to deposit additional funds.


*Borrow at 12%. 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.
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.

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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ETF Fees: How Are They Deducted & How Much Do They Cost?

Because exchange-traded funds (ETFs) are typically passively managed and based on market index, ETFs tend to have lower overall fees as compared with many mutual funds.

In addition, the way ETFs are structured these funds typically generate fewer trades and thus the costs to run the fund (including applicable taxes) are also lower than mutual funds.

When it comes to calculating the cost of owning an exchange-traded fund (or ETF), an investor needs to factor in not just management fees and expense ratios, but also the costs associated with trading the ETFs.

Key Points

•   Exchange-traded funds (ETFs) generally have lower fees than mutual funds due to their passive management and reduced trading costs.

•   The total cost of owning an ETF includes management fees, expense ratios, and trading costs, which can impact an investor’s returns.

•   Management fees and expense ratios are expressed as a percentage of the fund’s net asset value, helping investors understand annual costs.

•   Unlike some mutual funds, ETFs typically do not have front-end load fees. However, they do have expense ratios and may potentially involve commissions, so it’s important to consider all costs when evaluating their cost-effectiveness as an investment option.

•   Knowing the expense ratio and other fees is crucial for investors, as these costs can significantly affect long-term investment returns.

Quick ETF Crash Course

An exchange-traded fund is a collection of dozens or even hundreds of securities such as stocks or bonds, that give an investor access to different companies within a single fund. ETFs can be a low-cost way to add diversification to a portfolio.


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

How ETFs Work

Most ETFs are passive, which means they track an index. Their aim is to provide an investor with exposure to a particular segment of the market in an attempt to return the average for that market.

If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a portfolio manager or group of analysts make decisions about what securities to buy and sell within the fund. Generally, these active funds will charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.

Some of the largest ETFs, reflect large swaths of the market as a whole, similar to index mutual funds (though there are some differences between index mutual funds and ETFs).

ETFs typically reflect formulas investment companies come up with to select stocks or other assets with certain characteristics that make sense in a portfolio. There are also ETFs for commodities and leveraged ETFs that can magnify gains — or losses.

ETF Costs

Like any business, an ETF typically has operational expenses, including management and marketing costs. These costs are passed on to the shareholders of the ETF and are expressed as a percentage called an expense ratio. But ETFs can include other fees and costs as well. Some are easier to find than others.

How Are ETF Fees Calculated?

Investment fees are calculated in a range of ways.

ETF Management Fees

ETFs carry management fees, which tend to cover the technical and intellectual work involved in selecting and managing assets in an ETF.

When you look up the fees of a given ETF, they are shown as a percentage of the ETFs daily assets. One benefit of many ETFs that’s reflected in their low management fees is the lack of what’s known as “management risk” — i.e. the potential losses that may be incurred owing to the guidance of a live portfolio manager.

The Expense Ratio

The overall set of fees for an ETF is known as the expense ratio or the ETF expense ratio. ETFs typically have an expense ratio of 0.05%.

An investor can determine the expense ratio by dividing the annual expenses of the investment by the fund’s total value, though the expense ratio is also typically found on the fund’s website. Knowing the expense ratio will help an investor understand exactly how much money they will spend investing in an ETF fund annually.

For example, if an investor puts $1,000 into an ETF that has an expense ratio of 0.2%, they will pay $20 in fees every year.

ETF Commission Fees

One benefit of ETFs is that you can trade them like any other asset you buy or sell on an exchange, such as a stock or a bond. But as with those assets, investors may be charged a commission when buying and selling ETFs.

Some brokers no longer charge commissions or specifically offer commission-free ETFs. But the availability of these depends on both the ETFs “sponsor” and the brokerage or platform used to buy and sell the funds.

How Are ETF Fees Deducted?

ETF fees are calculated as a percent of the ETFs net asset value, averaged out over a year. These ETF fees are not paid directly — you don’t write a check to the ETF sponsor to pay the management fees. Instead they’re deducted from the Net Asset Value (NAV) of the fund itself, taken directly from returns that could otherwise go to the investor.

The SEC offers an example of just how important fees are: “If an investor invested $10,000 in a fund that produced a 5% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years the investor could have roughly $19,612. But if the fund had expenses of only 0.5%, then the investor would end up with $24,002 — a 23% difference.”


💡 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.

ETF Fees vs Mutual Fund Fees

One fee advantage ETFs have over mutual funds is that ETFs don’t have a front-end load fee. This is an expense associated with the selling of mutual funds that incentivizes brokers to sell one over the other.

Generally speaking, both ETF fees and mutual fund fees have been dropping in recent years as investors move to more passive strategies and providers of these productions compete on providing the lowest cost investment.

That said, though there are exceptions, ETFs tend to be more passive and thus have lower funds. They also don’t have some of the sales costs associated with mutual funds and their intensive marketing apparatuses.

If an ETF tracks an index, buyers can easily compare one provider’s fund to another and select the one with the lowest fee. This process can drive management fees and charges down as providers compete for business.

The Takeaway

ETF fees can be relatively low compared to mutual funds, but as with any investment fees, it’s good to know the potential costs upfront. Knowing an ETF expense ratio and other potential costs can go a long way toward helping an investor understand their total costs for investing in the fund.

For long-term investors, understanding the costs associated with different securities is important as fees can eat into returns. You may want to consider your investment costs when setting up your portfolio.

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.


*If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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.

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.

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 $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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How Much Money Do Banks Insure?

How Much Money Do Banks Insure?

With the recent turmoil in the banking industry, many people are wondering if their deposits are insured (typically, yes), and for how much. When you open and deposit money in a bank account, the Federal Deposit Insurance Corporation (FDIC) will insure your funds up to $250,000 in the rare event that your bank fails.

When it comes to how much money banks insure, that standard FDIC coverage limit can be more specifically stated as $250,000 per depositor, per account ownership type, per financial institution. Some banks participate in programs that extend this FDIC insurance to cover millions1.

The National Credit Union Administration (NCUA) provides similar $250,000 coverage for accounts held at member credit unions.

It’s possible, however, to insure larger amounts of money at your bank. If you’re wondering how you can insure more than $250,000, here’s a closer look at how insuring sizable deposits works.

Key Points

•   The Federal Deposit Insurance Corporation (FDIC) provides insurance coverage for bank deposits up to $250,000 per depositor, per account ownership type, and per institution.

•   Some banks offer programs that extend FDIC insurance coverage beyond the standard limit, allowing for higher amounts to be insured.

•   The FDIC protects various account types, including checking and savings accounts, while investment products like stocks and bonds are not covered.

•   In the event of a bank failure, depositors receive their insured funds quickly, often by the next business day, up to the insured limit.

•   Strategies for insuring excess deposits include using multiple banks, participating in CDARS programs, or opening accounts at NCUA-insured credit unions.

What Does It Mean for Your Money to Be Insured?

When money at a bank is insured, it’s protected against potential losses. Bank insurance works similarly to other types of insurance. If you have a covered loss, then your insurance will make you whole — replacing lost funds up to $250,000. So even if your bank were to go out of business, you would still be able to claim your money up to the $250,000 amount. (As briefly noted above, some banks participate in programs that extend this coverage to higher levels.)

Bank insurance is designed to provide consumers with peace of mind so that they’ll feel confident about depositing money into their accounts. Banks rely on deposits to stay in business.

Here’s a brief look at how banks make money: Funds that are on deposit are then used to make loans to other customers. Those borrowers pay their loans back with interest. That interest can be used by banks in a variety of ways: They can pass it onto customers who make deposits in the form of interest on savings, money market, and certificate of deposit (CD) accounts.

Without a steady flow of deposits, banks would have difficulty making loans to other customers. Insuring deposits can help consumers feel safer about keeping their money in the bank, which can indirectly help banks to continue doing business as usual.

How Do Banks Insure Money?

Banks insure money through the Federal Deposit Insurance Corporation. Banks that are interested in being insured by the FDIC must apply for this coverage. Not all banks are members of the FDIC.

If you manage your money via a credit union, it likely insures its money separately through the National Credit Union Administration (NCUA).

What Is the FDIC?

The FDIC is an independent federal agency that was created by Congress in 1933 following the rash of bank failures that marked the late 1920s and early 1930s. The FDIC’s primary mission is to maintain stability and public confidence in the nation’s banking system. The FDIC does that by:

•   Insuring deposits at member banks

•   Examining and supervising financial institutions for safety and consumer protection

•   Managing receiverships

•   Working to make large, complex financial institutions resolvable

The FDIC boasts an impressive track record. To date, no insured depositor has lost any insured funds as the result of a bank failure.

Recommended: What is the FDIC and Why Does it Exist?

What Are the FDIC Limits?

The FDIC insures bank accounts at member institutions but only up to certain limits. The standard coverage limit is $250,000 per depositor, per account ownership type, per financial institution. No consumer has to purchase this deposit insurance. As long as your accounts are held at an FDIC member bank, you’re automatically covered.

The $250,000 limit applies to all the deposit accounts you hold at a single bank. So if you have a checking account, savings account, and a CD account, for example, that are all owned by you and you alone, your combined deposits would be covered up to $250,000.

The FDIC coverage limit applies at each bank you have accounts with and each category of accounts you have with the bank.

That said, some banks do participate in programs that extend this typical $250,000 coverage into the millions; check at your financial institution to see if this is available if you want to keep large sums of money on deposit.

Recommended: Do Checking Accounts Have a Maximum Limit?

What Does FDIC Insurance Extend To?

There are different ways to deposit money into a bank account, and it’s important to know which accounts fall under the FDIC insurance umbrella. The types of deposit accounts the FDIC insures include checking accounts, savings accounts, money market accounts, and CD accounts. The FDIC can also insure prepaid debit cards when certain conditions are met.

The FDIC does not insure investment products even when purchased at member banks. Deposits the FDIC does not cover include annuities, mutual funds, stocks, bonds, and government securities.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


What Happens if a Bank Fails and My Money Is Fully Insured?

When a bank fails, which is an infrequent occurrence, the FDIC’s primary duty is to pay depositors their money, up to the insured limit. So if you have $200,000 in insured deposits, you wouldn’t lose any of that money. The FDIC would either open an account for you with an equivalent amount of money at a new insured bank or cut you a check for the full amount.

The timeline for receiving funds after a bank failure is typically the next business day. It’s common for the FDIC to shut down a failed bank on Friday and reopen depositor accounts elsewhere on the following Monday. If the FDIC cannot find another insured bank to acquire the failed bank’s accounts, then you’d receive a check instead.

Special rules apply for deposit accounts that exceed $250,000 and are linked to trust documents or deposits established by a third-party broker. In that case, the FDIC may need extra time to determine how much of those deposits are covered before any funds are released to the account owner.

What Happens if a Bank Fails and My Money Is Not Fully Insured?

If you have deposits that exceed the $250,000 coverage limit, the FDIC would follow the same process as outlined above. You’d receive funds up to the entirety of the insured amount you had at the bank.

But what about the excess deposits? Of course, that would likely be an urgent question. You’d receive a claim against the estate of the closed bank for any amounts that were not insured by the FDIC. You’d get a Receiver’s Certificate as proof of the claim, which would allow you to receive payments from the bank’s assets as they’re liquidated.

That doesn’t mean, however, that you’re guaranteed to get all of your money back (unless your bank participates in a program that extends coverage to a higher number). For example, if you had $300,000 in your accounts, you’d be able to get the $250,000 that’s covered by FDIC insurance. But whether you’d be able to get the other $50,000 back would depend on how much the failed bank has in assets and how many other creditors are set to be paid out ahead of you.

Tips to Insure Excess Deposits

If you maintain higher balances in your bank accounts, you may be wondering, “Can I insure more than $250,000?” The answer is yes. You may have to do a little more legwork to make sure that your deposits are covered, but it could pay off if your bank fails. And it would probably enhance your peace of mind.

Here are several options for how to insure excess deposits and keep your funds safe.

Using a Bank That Offers More Than $250,000 Insurance

As mentioned above, there are some banks that participate in programs that allow them to extend the FDIC insurance to cover millions. If this feature is important to you, it would be wise to seek out a bank with this option.

Using Multiple FDIC-Insured Banks

Another option: You can spread your money out across deposit accounts at different banks. So if you have $300,000 in deposits at Bank A, you could move $100,000 of that to an account at Bank B.

The FDIC applies the $250,000 coverage limit at each bank where you maintain accounts. Managing accounts at multiple banks may require you to be a little more organized to keep track of funds. But you can simplify things by using a personal finance app to sync account data. With that kind of tech tool, you can view balances and transactions in one place.

Using the CDARS Network

What is CDARs? CDARS stands for Certificate of Deposit Account Registry Service. Recently renamed IntraFi Network Deposits, this program makes it possible for consumers to insure excess deposits using demand deposit accounts, money market accounts, and CD accounts at participating financial institutions.

Here’s a simple overview of how it works. Say you want to place $1 million on deposit at your bank. Since your bank participates in the IntraFi Network, they can take that $1 million and split it up, depositing it into accounts at other network banks. Each new account is covered up to the FDIC limit, as applied to both principal and interest.

Using the IntraFi Network (or CDARs, if you still call it that) could make sense if you have a larger amount of cash you’d like to keep on deposit and earn interest. You’d still maintain your primary account at your current bank, but you’d be able to track deposits across other banks in the network.

Recommended: What Is an Uninsured Certificate of Deposit?

Using an NCUA-Protected Credit Union

Another option for insuring excess deposits is opening an account at an NCUA member credit union. The National Credit Union Share Insurance Fund was created in 1970 by Congress to protect deposits at federally insured credit unions. The current coverage limit is $250,000 per member, per credit union. The same $250,000 limit applies to joint accounts.

You’re not required to choose between coverage with NCUA vs. FDIC insurance. You can have NCUA-insured accounts at credit unions and FDIC-insured accounts at member banks at the same time. This can allow you to divide your funds up into $250K or lower amounts and distribute them among multiple insured banks and credit unions to get the coverage you seek.

Using Banks That Insure With DIF Insurance

The Depositors Insurance Fund (DIF) is a private, industry-sponsored insurance fund that insures deposits at member banks. DIF covers all deposits above the $250,000 FDIC coverage limit. In addition, all DIF member banks are also FDIC member banks.

There’s one caveat, however. DIF insurance is only available at member banks in the state of Massachusetts. What if you don’t live in Massachusetts or are unable to open an account online at a member bank? Then you may not be able to take advantage of this option for insuring excess deposits.

Using a Cash Management Account

Cash management accounts are similar to checking accounts and savings accounts, but they’re offered by brokerages rather than banks. For example, if you open an IRA or taxable investing account, you might be offered a cash management account. It could serve as a place to hold money that you plan to invest or settlement funds from the sale of securities.

One interesting feature of cash management accounts is that some of them offer a sweep feature which makes it possible to insure excess deposits. They do this by moving some of the funds in your cash account into deposit accounts at FDIC member banks. This is done for you automatically so you don’t have to worry about keeping your account balances within FDIC limits.

It’s important to check with the brokerage house or other entity to find out if your account would have this feature when you are considering this way of holding and securing your money.

What if My Current Bank Is Not FDIC-Insured?

Understanding how much money a bank will insure matters because you don’t want to be left in the lurch if your bank fails. Not all banks are covered, however, and while non-FDIC banks are rare, they do exist.

If your current bank is not a member of the FDIC, then you may want to consider moving your accounts to a different financial institution. Doing so can provide peace of mind, particularly if you maintain larger balances in your accounts.

You can use the FDIC BankFind tool to locate member banks in your area. Keep in mind that you’re not limited to branch banking either. There are a number of online banks that are members of the FDIC. You can likely get the benefit of deposit insurance along with low fees and competitive rates on these bank accounts.

Banking With SoFi

Knowing whether your bank deposits are protected against failure can help you feel more comfortable about where you keep your money. While the odds of your bank failing are low, it’s important to know what the FDIC or another organization would do to protect you in that scenario. You probably worked hard for your money and want to know it’s secure.

SoFi offers a Checking and Savings account in one convenient place. You can get a great rate on deposits while paying no account fees. And SoFi security measures ensure that your accounts stay safe when you’re accessing them online or through the SoFi mobile app. Plus, SoFi recently announced that deposits may be insured up to $2 million through participation in the SoFi Insured Deposit Program, which may add to your peace of mind.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Are there banks that insure more than $250K?

Banks that are FDIC members follow the $250,000 coverage limit. It’s possible, however, to insure excess deposits over that amount through banks that participate in programs that extend FDIC coverage or ones that belong to IntraFi Network Deposits (formerly CDARS). You may also be able to increase your coverage limit by using cash management accounts with an FDIC sweep feature offered at a brokerage.

How do millionaires insure their money?

Millionaires can insure their money by depositing funds in FDIC-insured accounts, NCUA-insured accounts, through IntraFi Network Deposits, or through cash management accounts. They may also allocate some of their cash to low-risk investments, such as Treasury securities or government bonds. However, they might not worry as much about insurance and choose to keep their money in stocks, real estate, or other vehicles. It’s a very personal decision.

Are joint accounts FDIC-insured to $500,000?

Joint accounts are insured up to $250,000 per owner. So if you own a joint bank account with your spouse, for example, you’d each be covered up to that amount for a combined limit of $500,000. Joint accounts are insured separately. Your coverage limit does not affect the limit that applies to single-ownership accounts.


Photo credit: iStock/PeopleImages

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


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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