Sep
24
2025
What is Volatility Skew and How Can You Trade It?

What Is Volatility Skew and How Can You Trade It?

By | Growing Wealth, invest, Investing | Comments Off on What Is Volatility Skew and How Can You Trade It?

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Volatility skew describes how implied volatility varies across at-the-money (ATM), in-the-money (ITM), and out-of-the-money (OTM) options with the same underlying asset. It can reflect market sentiment and anticipation of upward or downward price movement.

Volatility skew most commonly refers to vertical skews, which compare options with the same expiration date but different strike prices. However, there are also horizontal skews, or time skews, which look at options with the same strike price, but varying expiration dates.

Learn more about how volatility skew works, why it matters to options traders, and how it relates to strategies like puts, calls, and spreads.

Key Points

•   Volatility skew refers to the variation in implied volatility between at-the-money, in-the-money, and out-of-the-money options for the same asset.

•   Investors can use volatility skew as an indicator to decide on buying or selling options contracts based on market sentiment and price movements.

•   Horizontal skew examines options with varying strike prices and the same expiration date, while vertical skew examines those with varying expirations and the same strike price.

•   Measuring volatility skew involves plotting implied volatility against strike prices or expiration dates, allowing traders to identify potential market trends and opportunities.

•   Trading based on volatility skew can be risky, especially with complex strategies like vertical (strike-based) or calendar (expiration or horizontal) spreads, making it more suitable for experienced investors.

What Is Volatility Skew?

Volatility skew, also known as option skew, is an options trading concept that reflects the difference in implied volatility across in-the-money options, at-the-money options, and out-of-the-money options. These differences can appear across strike prices (vertical skew) or across expiration dates (horizontal skew).

The more common of these is the vertical skew, which investors may use to understand market sentiment. With vertical skews, implied volatility is compared across options contracts for the same underlying asset with the same expiration date but different strike prices. The strike prices may reflect varying levels of implied volatility, each of which can be plotted on a graph.

Volatility skewness refers to the slope of the implied volatility on that graph, which may help inform traders about potential market expectations. A balanced U-shaped curve is called a “volatility smile,” while an unbalanced downward curve is called a “volatility smirk.” Both of these may suggest a market expectation of upcoming price movements.

What Is Implied Volatility (IV)?

Implied volatility, denoted by the sigma symbol (σ), is an estimate of the volatility a given asset may experience between now and the contract’s expiration date. It’s basically the level of uncertainty that investors have about an underlying stock and how much they believe the stock’s price may fluctuate in either direction.

The volatility of an underlying asset changes constantly. The more the price of the asset changes, the more volatility it has. But implied volatility doesn’t necessarily follow the same pattern, because it depends on how investors view the asset and whether they believe it will have volatility. Implied volatility is usually shown using standard deviations and percentages over a particular period of time.

Option pricing assumes that options for the same asset that have the same expiration share the same level of implied volatility. In the Black-Scholes model, strike price is an input, but the assumption is that volatility remains constant across strikes. But investors are often willing to overpay for stock options when they think there is more volatility to the downside than the upside.

Different types of options contracts have different levels of implied volatility, and it’s important for traders to understand this when determining their options trading strategy.


💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

What Does Volatility Skew Mean for Investors?

Implied volatility depends on supply and demand dynamics as well as investor sentiment about the options. The volatility skew may help investors better understand the market and decide whether to buy or sell particular contracts. It’s an important indicator for investors who trade options.

Stocks that are decreasing in price tend to have more implied volatility on the downside. If there is higher implied volatility in the underlying asset, the price of an option can increase, resulting in a downside equity skew.

If a skew has higher implied volatility, this can indicate that options premiums will be higher. So investors can look at volatility skews to find low- and high-priced contracts when evaluating whether to buy or sell.

There are, again, two types of volatility skew. Vertical skew shows the variation in implied volatility across options contracts that have different strike prices and the same expiration date. This is more commonly used by retail traders. Horizontal skew shows the difference in implied volatility across expiration dates for options contracts that have the same strike price.

How Do You Measure Volatility Skew?

Investors measure volatility skew by plotting implied volatility values across strike prices or expiration dates. For example, with a vertical skew, a trader could look at a list of bid/ask prices for options contracts for a particular asset that expire on the same date. They often take the midpoint of the bid/ask option prices to estimate implied volatility (especially in liquid markets) and chart those values out.

The tilt of the skew can shift over time based on changing market sentiment. Observing these changes may help investors identify potential market trends to inform skew-related strategies. For instance, if the stock price increases significantly, traders might view it as overbought and anticipate a potential pullback. This can shift the skew, steepening its curve and reflecting increased demand for at-the-money or downside put options.

There are five factors that influence the price of options:

• Underlying stock or asset market price

• Strike price

• Time to expiry

• Interest rate

• Implied volatility

Investors can calculate the volatility at different strike prices and graph those out to see the volatility skew.

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 $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.

How Do You Trade With Volatility Skew?

As mentioned above, the two types of volatility skew are horizontal and vertical. These can both be used in options trading.

Vertical Skew

Investors tend to use vertical skew to try to determine market expectations and sentiment, and it is more commonly referenced than horizontal skew. Also referred to as volatility skew and option skew, vertical skew, as mentioned earlier, looks at the variation in implied volatility across strike prices for options that have the same expiration date.

Two common skew patterns that may indicate upcoming price movements are, as noted above, the smile and the smirk:

•   Volatility Smile: Implied volatility is higher for both ITM and OTM than ATM, creating a U-shaped curve.

•   Volatility Smirk: Implied volatility is higher for OTM puts than OTM calls, often reflecting demand for downside protection.

Using vertical skew, traders may find opportunities to trade debit spreads and credit spreads, evaluating which strike prices may offer favorable entry points.

For example, a trader might find a stock they believe will increase in value before its option contract expires. So they may want to use a bull put spread to buy in hopes of profiting bull put spread for a net credit, expressing a moderately bullish or neutral view, to profit from a price rise while limiting downside. They will have many strikes to choose from, so they can use vertical skew to identify potentially mispriced contracts based on relative implied volatility. The trader can identify a strike with favorable pricing, wait for the underlying to move or implied volatility to increase, and potentially sell the spread for a profit.

Horizontal Skew

There are many factors that drive changes in horizontal skew, such as product announcements, earnings reports, and global events. For instance, if traders are uncertain about the short-term future of a stock because of an upcoming earnings report, the implied volatility may increase and the horizontal skew may flatten.

Traders look for opportunities by using calendar spreads to look at the differences between option expiration implied volatility. Where there is implied volatility in a horizontal skew, there may be inefficient pricing that traders can take advantage of.

If the implied volatility is higher than expected in the front month, the option contract may be priced higher, which is referred to as positive horizontal skew.

On the other hand, if the implied volatility of the back month is higher than expected, this is known as negative horizontal skew or “reverse calendar spread.” In this situation, traders would sell the back month and buy the front month because they may profit if the price of the underlying asset increases before the back month contract expires.

For example, a trader might look at the market for a stock and find that there is a horizontal skew in the option calls, meaning traders are putting in buy and sell orders with the prediction that it’s more likely the stock will increase a lot in the long term than in the short term.

If the trader doesn’t think the current market predictions are correct, they might use a reverse calendar call spread, similar to shorting a stock and predicting it may decline. If the price of the stock plummets, both the long- and short-term contracts may lose value, and the trader could buy them back at a lower price than they sold them for.

In this case, the trader could also potentially profit if the implied volatility of the options decreases. They chose to sell when the implied volatility was high during the front month, so if the implied volatility decreases, they may be able to buy back at a lower price.

Although this has the potential to be a profitable way to trade, it also comes with high risk of potential loss because it’s a short call that requires significant margin. Stock exchanges require traders to have significant funds in their account if they want to place this type of trade.


💡 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.

The Takeaway

Options trading is popular with many investors, and volatility skew is one way for options traders to gauge market sentiment and assess relative pricing across strike prices or expirations. Traders might look at either horizontal or vertical skew to help determine an options strategy that aligns with their broader strategy.

However, options trading is risky. It’s generally more appropriate for experienced investors than for beginners. While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is a volatility skew?

A volatility skew is the difference in implied volatility across options with the same expiration date but different strike prices. Volatility skews reflect investor sentiment and demand for downside or upside protection. Traders may watch for steep or unusual skews as signals of potential market movement.

How to trade the market when volatility spikes?

When volatility spikes, options premiums often rise. Some traders may consider selling options to potentially capture high premiums, while others might use spreads or protective puts. These strategies can be risky and may not suit all experience levels.

How can I trade volatility?

Traders may attempt to trade volatility through options strategies that respond to implied volatility changes. These include straddles, strangles, and calendar spreads. The goal isn’t to predict direction but to benefit from volatility shifts. This approach may carry significant risk.

What is skewness in trading?

In options trading, skewness refers to the curve shape of implied volatility across strike prices. A balanced shape is called a volatility smile, while an unbalanced one is a volatility smirk. Skewness helps traders identify where the market is pricing in greater uncertainty.

Photo credit: iStock/Just_Super

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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

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

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.

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Sep
23
2025

What Is Asset Allocation?

By | Growing Wealth, invest, Investing | Comments Off on What Is Asset Allocation?

Asset allocation is the practice of investing across different asset classes in a portfolio in order to balance the different potential risks and rewards. Asset allocation is closely tied to portfolio diversification, which means spreading one’s money across both asset classes and investment options within those classes. In a general sense, asset allocation is like taking the age-old advice of not putting all your eggs in one basket. An investor can’t avoid risk entirely, but diversifying their investments may help mitigate the risk that one asset class poses.

The three main asset classes are typically stocks, bonds, and cash, but some investors also allocate money into real estate, a range of commodities, private-equity or hedge funds, as well as cryptocurrencies. Determining what kind of asset allocation makes the most sense for you depends on personal goals, time horizon, and risk tolerance.

Key Points

•   Asset allocation involves distributing investments across various asset classes to help balance risks and rewards.

•   Financial goals, risk tolerance, and time horizon shape an asset allocation strategy.

•   Short-term goals generally require lower risk investments, while long-term goals can handle higher risk.

•   The 100 Rule suggests subtracting your age from 100 to determine stock allocation, though some recommend using 110 or even 120.

•   Regular portfolio rebalancing is essential to maintain alignment with financial goals and risk tolerance.

Common Assets

Some of the most common assets you can invest in are stocks, bonds, and cash equivalents.

•   Stocks: Stocks can be volatile, with the market going up and down, but they may also offer a higher return than bonds over the long run.

•   Bonds: Bonds, such as Treasuries or municipal bonds, can be viewed as lower risk because they’re backed by government entities, but they also offer lower returns. There are higher-yield corporate bonds, which have greater returns and risk, but also tend to be less volatile than stocks.

•   Cash or cash equivalents: This includes money in savings accounts or money market accounts, as well as certificates of deposit or Treasury bills. Obviously, the returns on these are very low but they’re also very secure. The biggest concern with cash investments is if inflation outpaces the return, then you technically could be losing money (e.g., future purchasing power).

What Factors Determine Your Asset Allocation?

There are three basic factors that will affect your asset allocation: Your goals, your risk tolerance, and your time horizon.

•   Goals. Your goals may be short term, such as starting a business, or saving for a down payment on a house in the next year or two. Or they may be long term, like planning ahead for that child’s education or saving for your retirement.

•   Risk tolerance. Your risk tolerance is how much volatility you can tolerate. Risk tolerance is your willingness to handle potential investment losses against gains, and may be difficult to zero in on. If you take on more risk than you’re comfortable with, and the market starts to drop, you might panic and sell investments at an inopportune time.

•   Time horizon. Finally, your time horizon is the amount of time you have to invest before you need to achieve your goal. This factor can help you determine how much risk you’re comfortable with and influence your portfolio allocation. For example, if you have a long horizon, there is more time to ride out the ups and downs in the market, and as a result, your risk tolerance may be higher.

You can see how these three factors come together to determine your asset allocation. If you have a short-term financial goal and will need to access your money relatively quickly — for example, if you’re about to buy that house you’ve been saving for — your risk tolerance will likely be lower, as you don’t want a market downturn to take a bite out of your investments just when you need to cash them out.

On the other hand, if you have a greater tolerance for risk — and if you think you may need more money for a down payment several years down the road — you may choose a more aggressive allocation in the hope of seeing more growth.

What’s an Effective Asset Allocation Strategy?

The best asset allocation to meet your financial goals depends on a number of factors, most importantly your timeframe and your risk tolerance. For example, if you’re very far away from retirement, then you may be able to handle more risk in your retirement portfolio. But if you’re investing for your teenage kids’ college education, then that’s potentially a shorter time frame and you may not want to take as many risks.

Your risk tolerance may also affect how you react to ups and downs in the market. That’s something to keep in mind.

Also, if you’re someone who worries about every blip in your investment portfolio, then you may want to consider less risky investments. No investment is without risk, but you can spread the risk out across different assets and asset classes. In general, higher-risk investments may offer higher returns, but it’s never guaranteed and most investors will benefit from having a longer time horizon.

The 100 Rule

A common rule of thumb is known as The 100 Rule: Subtract your age from 100 and that’s the percentage of your portfolio that should be invested in stocks. For example, if you’re 25, then the 100 rule would suggest that 75% of your portfolio be in stocks and 25% in safer investments, like bonds, Treasurys, cash or money market accounts.

Target date funds are funds that more or less follow this style of rule — automatically adjusting the make-up of stocks vs. bonds as you near your target retirement date.

However, there are some caveats to this rule of thumb — people are living longer, every person’s situation may be different, and this is really only an asset allocation suggestion for retirement, not other financial goals you might have. Some financial advisors have even adjusted it to “The 110 or 120 Rule” because of increases in life expectancy.

What Is Risk Tolerance-Based Asset Allocation?

Risk tolerance–based asset allocation involves shaping your portfolio based on the level of risk you’re most comfortable with. For example, if you fit into the aggressive investor risk tolerance profile, that means you may commit a larger share of your portfolio to stocks and other higher-risk investments.

On the other hand, you may have a smaller asset allocation to stocks if you lean more toward the conservative end of the spectrum. The style of investor you are will likely shift throughout your lifetime. As discussed above, different life stages bring new concerns and priorities to mind, and this will naturally change how you view your asset allocation.

One thing that’s important to understand when basing asset allocation on risk tolerance is how that aligns with your risk capacity. Your risk capacity is the amount of risk you must take to achieve your investment goals. This is important to understand for choosing assets based on risk tolerance to find the right portfolio allocation.

If you have a low risk tolerance, but a higher risk capacity is required to achieve the investment goals you’ve set, then you may be at risk of falling short of those goals.

Meanwhile, having a higher risk tolerance but a lower risk capacity could result in taking on more risk than you need to in order to achieve your investment goals. Finding the right balance between the two is key when using a risk tolerance based asset allocation strategy.

How to Rebalance Asset Allocation

The other factor to consider is when to rebalance your portfolio in order to stay in line with your asset allocation goals. Over time, the different assets in your portfolio have different returns, so the amount you have invested in each changes — one stock might have high enough returns that it grows and makes up a significant portion of your stock investments.

If, for example, you’re aiming for 70% in stocks and 30% in bonds, but your stock investments grow faster until they make up 80% of your portfolio, then it might be time to rebalance. Rebalancing just means adjusting your investments to return to your desired portfolio make-up and asset allocation.

There are many rebalancing strategies, but you can choose to rebalance at set times – monthly, quarterly, or annually — or when an asset changes a certain amount from your desired allocation (for example, if any one asset is more than 5% off your target make-up).

In order to rebalance, you simply sell the investments that are more than their target and buy the ones that have fallen under their target until each is back to the weight you want.

The Takeaway

The effect of asset allocation has been studied over the years and while the findings varied, one thing has remained constant: how you allocate your money to different assets is vitally important in determining what kind of returns you see.

However, it’s more than just diversifying within each asset class; it’s also about diversifying your entire investment portfolio across asset classes and styles. In general, for instance, stocks are considered riskier than bonds, though there are also different kinds of bonds with different risk levels.

There are many different kinds of funds with different asset allocation, and a fund doesn’t guarantee diversification, especially if it’s a fund that invests in just one sector or market. That’s why it’s important to understand what you want out of your portfolio and find an asset allocation to meet your goals, which may require professional help.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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

FAQ

How often should I review and rebalance my asset allocation?

You can review and rebalance your portfolio and asset allocation at any time, but you may want to set regular check-ins, whether they’re quarterly, biannually, or annually. One general rule to consider is rebalancing your portfolio whenever an asset allocation changes by 5% or more.

What factors should I consider when determining my asset allocation?

There are three main factors that will affect your asset allocation. First are your goals and whether they’re short term like saving for a house, or long term like retirement. Second is your risk tolerance. Risk tolerance is important because you’ll want to take on only as much risk as you can live with. Otherwise, you might panic during a market downturn and sell investments at a loss. The third factor to consider for asset allocation is your time horizon, or the amount of time you have to invest to achieve your goals.

How can I assess my risk tolerance and align it with my asset allocation strategy?

With risk tolerance–based asset allocation, you shape your portfolio based on the level of risk you’re most comfortable with. That said, the type of investor you are will likely change through the decades. Different life stages come with new priorities, and those will influence how you view your asset allocation.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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

CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE


Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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SOIN-Q325-073

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Sep
23
2025
A Walkthrough of What Leverage Trading Is

Understanding Leverage Trading

By | Growing Wealth, invest, Investing | Comments Off on Understanding Leverage Trading

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Using leverage is a common trading strategy whereby qualified investors borrow cash to increase their trading power. Thus, investors can leverage a small amount of capital to get exposure to a much bigger position.

For example, a leverage ratio of 20:1 means a $1 investment can buy $20 worth of an asset.

To use leverage, qualified traders must open a margin account with a brokerage in order to place bigger bets, and potentially earn higher returns on their initial capital. (The terms leverage and margin are often used interchangeably.)

However, leveraged trading also significantly increases a trader’s risk of losses. If the asset moves in the wrong direction, the trader not only suffers a loss but must repay the amount borrowed, plus interest and fees.

This is one reason that only experienced investors qualify for margin accounts and leverage trading opportunities.

Key Points

•   Leverage trading is a high-risk strategy that involves using borrowed funds to amplify buying power to seek potentially higher returns.

•   To use leverage, traders must qualify to open a margin account. Leverage trading or trading on margin are often used interchangeably.

•   By using a small amount of capital to place bigger bets, traders may see bigger returns. Risks include the potential to lose more than the initial investment.

•   Not all securities are eligible for leverage; rules vary by broker and security type.

•   Leverage is typically reserved for qualified investors, due to its high risk.

What Is Leverage Trading?

In both business and finance, the term leverage refers to the use of debt to power an expansion or purchase securities. With leverage trading, traders can use a margin account to borrow funds in order to take bigger positions with assets like stocks, derivatives, and foreign currencies (forex).

A margin account allows qualified traders to borrow from a brokerage to purchase securities that are worth more than the cash they have on hand. In this case, the cash or securities already in the trader’s account act as collateral.

What Is Margin, How Does It Work?

Leverage and margin are related but different concepts. For example, a trader can use margin to increase their leverage. Margin is the tool, and leverage is the force behind the tool, which can be used to potentially increase returns (or losses).

Not all investors can open a margin account, however, and different brokerages may have different margin requirements.
To start, an investor must complete a margin agreement with their brokerage, and remain compliant with a number of industry rules. For example, most margin accounts require a $2,000 minimum deposit (the minimum margin).

Once the margin feature is added to the investor’s account, that part of their account falls under the rules of FINRA, the Federal Reserve Board, the Securities and Exchange Commission (SEC), and exchanges such as the NYSE, as well as the policies of the brokerage itself.

Margin rules for equity trades, for example, require that the investor maintain 50% of the value of a trade in their margin account (per the Fed’s Regulation T) — a 2:1 ratio. The margin requirements for other securities, like forex and futures contracts, are much lower and allow for higher leverage (e.g., 3% to 15%).

Which Securities Are Eligible for Margin?

Not all securities can be bought using leverage, however. Industry rules dictate that equities known as penny stocks, as well as Initial Public Offering (IPO) stocks, and other volatile and illiquid securities, are not marginable.

Generally, stocks and exchange-traded funds (ETFs) that are worth more than $3 per share, as well as mutual funds and certain types of bonds, are eligible for leverage trades using margin. Check with your broker, as rules can vary by jurisdiction.

Margin can be used to trade many derivatives like options and futures, but this type of leverage trading can be risky.

Forex options trading, for example, allows traders to take a larger position using very small amounts of cash. While there is no standard amount of margin in the forex market, it is common for traders to post 1% margin, which allows them to trade $100,000 of notional currency for every $1,000 posted — a ratio of 100:1.

Leverage Risks and Rewards

Leverage trading can only be successful if the return on an investment is higher than the cost to borrow money, which you must repay with interest and fees.

Leverage trading can significantly increase potential earnings, but it is also very risky because you can lose more than the entire amount of your investment. For that reason leverage is usually only available to experienced traders.

What Is Pattern Day Trading?

Pattern day trading is a type of trading style that typically requires a much higher initial margin amount. Someone would be flagged as a pattern day trader if they make four or more day trades during a period of five business days — and if those trades amount to more than 6% of their overall trading activity.

Day trading refers to those who buy and sell a single security within one day. It’s a high-risk strategy that some traders employ to profit from very short-term price movements.

Once a trader is identified as a pattern day trader, per FINRA rules, they must keep a minimum of $25,000 in cash and/or equity in their margin account.

FINRA established the Pattern Day Trader Rule to limit risk-taking among day traders, by requiring firms to impose these restrictions.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

*For full margin details, see terms.

History of Leverage Trading

The use of leverage has a long history in the world of trading and finance.

Ancient Uses of Leverage

There is evidence that a form of leverage trading first emerged in ancient civilizations, often through the exchange of commodities. Traders could put down a small amount of money as a deposit on a share of a future crop or herd of cattle, for example.

Another more rudimentary form of leverage enabled merchants to raise money for an expedition from investors, who would invest smaller amounts with the hope of greater profits from the expedition, assuming the trip was successful.

Over the centuries, the use of leverage became more sophisticated, enabling the creation of various types of derivatives, including futures contracts.

Leverage in the 20th-Century

Over time leverage ratios became quite high, and they were not well regulated until the stock market crash of 1929. That event forced a reassessment of restrictions around the use of leverage.

For a period of time starting in the mid-20th century, leveraged buyouts became a popular business acquisition strategy. As it sounds, leveraged buyouts involve the use of borrowed capital to buy out an existing company, and then use different strategies to turn it around and make a profit.

Leveraged buyouts are still a common private equity strategy, but they can often fail.

Today, thanks to advances in technology and stronger regulations, allowable leverage ratios and rules governing margin accounts are subject to greater oversight.

How Leverage Works in Trading

Leverage trading consists of a trader borrowing money from a broker using margin, then using the borrowed funds along with their own money to enter into trades.

The key to understanding how using leverage can potentially help generate higher returns, but also greater losses, is that the margin funds are a fixed liability.

Suppose a trader starts with $50, and borrows $50 to buy $100 worth of stock. Whether the stock’s value goes up or down from there, the trader is on the hook to repay the $50, plus interest and any related fees, to the broker.


💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.

Example of Leverage Trading

Using the above example, suppose the stock appreciates by 10%, for a total of $110, and the trader closes out the position. They return the $50 they borrowed, and keep the remaining $60. That equates to a $10 gain on their $50 of capital, and a 20% return — double the return of the underlying stock, before fees and expenses.

Now, consider what happens if the stock declines in value by 10%. The trader closes out the position and receives $90, but has to give the broker back the $50 they borrowed, plus interest and fees. They are left with $40, a loss of $10, plus the margin expenses, which is a 20% loss or more.

Understanding Leverage Ratio

Leverage is often expressed as a ratio. For example, a leverage ratio of 2:1 is generally the rule for using margin for equity trades. If you have $50, you can buy $100 worth of stock.

In the case of other types of securities, the leverage ratio can be much higher. A leverage ratio of 20 means a $1,000 investment would allow you to open a trading position of $20,000; 50:1 would allow you to take a position of $50,000.

Maximum Leverage

Brokers have limits on how much they’ll lend traders based on the amount of funds the trader has in their account, their own regulations, and government regulations around leverage trading. If you’re considering using leverage, be sure to understand the rules.

•   Stocks. Thanks to the Federal Reserve Board’s Regulation T, plus a FINRA rule governing margin trades in brokerage accounts, the maximum you can borrow is 50% for an equity trade.

•   Forex. The foreign currency market tends to allow greater amounts of leverage. In some cases, as high as 100:1 in the U.S.

•   Commodities. Commodities rules around maximum leverage and leverage ratios can fluctuate based on the underlying asset.

Pros and Cons of Leveraged Trading

On the surface, leverage may sound like a powerful tool for investors — which it can be. But leverage can be a double-edged sword: Leverage can add to buying power and potentially increase returns, but it can also magnify losses, and put an investor in the hole.

Pros

Using leverage can increase your trading power, sometimes to a large degree. It’s important to know the rules, as leverage ratios vary according to the securities you’re trading, the jurisdiction you’re in, and sometimes your broker’s discretion.

If you meet the criteria for using leverage or opening a margin account to trade, it’s relatively easy to access the funds and open bigger positions. Sometimes, placing that bigger bet can pay off with a much higher return than you would have gotten if you invested just the capital you had on hand.

Cons

Just as using leverage can amplify gains, it can amplify losses — in some cases to the point where you lose your initial investment, you must repay the money you borrowed, and you may owe fees and interest on top of that.

For that reason, many brokers require investors to meet certain criteria before they can open a margin account and place leveraged trades.

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Pros of Leverage:

•   Increases buying power

•   Potential to earn higher returns

•   Relatively easy to use, if you qualify

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Cons of Leverage:

•   Leverage funds must be repaid, with interest

•   Potential to lose more than your initial investment

•   Investors must meet specific criteria in order to use leverage or open a margin account

Types of Leverage Trading

There are a few different types of leverage trading, each with similarities and differences.

Trading on Margin

As noted, margin is money that a trader borrows from their broker to purchase securities. They use the other securities in their account as collateral for the loan.

If a leveraged trade goes down in value, a trader may be subject to a margin call. This means they will need to sell other securities to cover the loss, or deposit enough funds to meet the margin minimum. Failing that, a brokerage could sell other securities from the investor’s account.

Many brokers charge interest on margin loans. So in order for a trader to earn a profit, the security has to increase in value enough to cover the interest.

Leveraged ETFs

Some ETFs use leverage to try and increase potential gains based on the index they track. For example, there is an ETF that specifically aims to return 3x the returns that the regular S&P 500 index would get.

It’s important to note that most funds reset on a daily basis. The leveraged ETF aims to match the single day performance of the underlying index. So over the long term even if an index increases in value, a leveraged ETF might decrease in value.

Derivatives

Traders can also use leverage trading with derivatives and options contracts, although leverage in these cases looks quite different.

For example, using leverage with futures contracts is not considered a loan, exactly; it’s called a performance bond. The investor puts down a good faith deposit (the initial margin) in order to control a desired position. Once the position is open, the required or maintenance margin must be met. The terms of that contract are determined by the exchange.

Buying a single option contract lets a trader control many shares of the underlying security — generally 100 shares — for far less than the value of those 100 shares. As the underlying security increases or decreases in value, the value of the options contract changes.

Options trading is highly risky and generally recommended only for experienced traders.

Forex Leverage

Forex trading allows even more leverage than futures contracts. That said, leverage ratios vary by the type of currency pairs being traded. In addition, a broker may have different margin requirements depending on the size of the trade overall, as well as the potential volatility of the currencies involved in the trade.

Recommended: Options Trading 101

Leverage Trading Terms to Know

There are several key terms to know in order to fully understand leverage trading.

Account balance: The total amount of funds in a trader’s account that are not currently in trades.

Buying power: This is the total amount a trader has available to enter into leverage trades, including both their own capital and the amount they can borrow.

Coverage: The ratio of the amount of funds currently in leveraged trades in one’s account to the net balance in their account.

Margin Requirement: This is the amount of funds a brokerage requires a trader to have in their margin account when entering into leverage trades. If a trader incurs losses, those funds will be used to cover them. Traders can also use securities they hold in their account to cover losses.

Margin call: If a trader’s account balance falls below the margin requirement, the broker will issue a margin call. This is a warning telling the trader they have to either add more funds to their account or close out some of their positions to meet the minimum margin requirement. The broker does this to make sure the trader has sufficient funds in their account to cover potential losses.

Used margin: When an investor enters into trades, some of their account balance is held by the broker as collateral in case it needs to be used to cover losses. That amount will only be available for the trader to use after they close out some of their positions.

Usable margin: This is the money in one’s account that is currently available to put into new trades.

Open position: When a trader is currently holding an asset they are in an open position. For instance, if a trader owns 100 shares of XYZ stock, they have an open position on the stock until they sell it.

Close position: The total value of an investment at the time the trader closes it out.

Stop-loss: Traders can set a price at which their asset will automatically be sold in order to prevent further losses if its value is decreasing. This is very useful if a trader wants to hold positions overnight or if a stock is very volatile.

Tips for Helping to Manage the Risks of Leveraged Trading

Experience and skill can help you manage the risk factors inherent in leveraged trades, and a couple of basic protective strategies may help.

Hedge Your Bets

It might be possible to hedge against potential losses by taking an offsetting position to the leverage trade.

Limit Potential Loss of Capital

One rule of thumb suggests that traders limit their loss of capital to no more than 3% of the actual cash portion of the trade. While it’s difficult to know the exact risk level involved in a particular trade, it’s wise to observe certain limits to protect from loss.

Decide Whether Leverage Trading Is Right for You

Although there is potential for significant earnings using leverage trading, there is no guarantee of any earnings, and there is also potential for significant loss. For this reason leverage trading is often said to be best left to experienced traders.

If an investor wants to try leverage trading it’s important for them to assess their financial situation, figure out how much they’re willing to risk, and conduct detailed analysis of the securities they are looking to trade.

Setting up a stop-loss order may help decrease the risk of losses, and traders can also set up a take-profit order to automatically take profits on a position when it reaches a certain amount.

The Takeaway

Leveraged trading is a popular strategy for investors looking to increase their potential profits. By using borrowed funds it’s possible to take much bigger positions, and possibly see bigger wins. But using leverage, or trading on margin, is very risky because you can lose more than you have (the money you borrow has to be repaid in full, plus interest).

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, from 4.75% to 9.50%*

FAQ

How much leverage is too high?

Knowing how much you can afford to lose is an important calculation when making leveraged trades. In addition, the amount of leverage available to you will also be restricted by existing regulations or brokerage rules. And remember, if a trade goes south, your broker can liquidate existing assets to cover your losses and any margin.

What is the safest way to use leverage in trading?

Investing always involves risk, and the use of leverage is a high-risk endeavor. When using leverage it’s wise to know your limits, both financially and in terms of your skill as an investor. It’s also important to maintain a clear understanding of the regulations around the use of margin.

Can you lose more than you invest with leverage?

Yes. The biggest risk with using leverage is that you can lose more than the total amount of your initial investment.

Why is leverage not recommended for beginners?

All forms of leverage are complex and highly regulated, and demand a certain level of sophistication. For the most part, only experienced investors should use leverage.

Photo credit: iStock/ljubaphoto

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

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. This should not be considered a recommendation to participate in IPOs 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 more information on the allocation process please visit IPO Allocation Procedures.

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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.

SOIN-Q325-055

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Sep
23
2025
Guide to Meme Stock Investing in 2021

What Are Meme Stocks? Guide to Meme Stock Investing

By | Growing Wealth, invest, Investing | Comments Off on What Are Meme Stocks? Guide to Meme Stock Investing

Meme stocks are stocks that go viral on social media platforms and quickly increase in price. Meme stocks have gotten a lot of attention in recent years, especially since the pandemic in 2020. Back in May, 2021, shares of GameStop, as well as other similarly meme-driven stocks such as AMC, Koss BlackBerry, and Koss Corp., suddenly spiked after a post on the X platform by Keith Gill (known as Roaring Kitty) of a popular gaming meme signifying “things are getting serious” is believed to have reignited the meme stock phenomenon that had boosted GameStop shares more than 1,000%.

At the time, online investors rallied together to create a massive short squeeze that befuddled traditional investors and made headlines across the globe. There has been more recent “meme stock” action as well, but that, largely, was the genesis.

Key Points

•   Meme stocks are shares of companies that gain popularity through social media, leading to viral status and rapid price increases.

•   These stocks are heavily influenced by retail investors’ sentiments rather than the company’s fundamental value.

•   The volatility of meme stocks is high, making them a risky investment choice.

•   Trading in meme stocks surged during the pandemic, with platforms like Reddit driving significant price swings.

•   Meme stock movements can lead to substantial market impacts, including short squeezes that can negatively impact institutional investors.

What Is a Meme Stock?

Meme stocks are company stocks that have gone viral due to popularity among retail investors on social-media platforms.

In a traditional buy-and-hold strategy, investors seek stocks whose shares appear undervalued relative to the company’s fundamental worth or growth potential. In contrast, prices of meme stocks are closely tied to sentiment and chatter among day traders on the Internet, rather than the value of the underlying business. Meme stocks can be extremely volatile and risky.

Common Meme Stock Terminology

Meme stocks have a specific terminology that those who invest in them use. These are a few of the common terms:

•   Apes: These are members of the meme stock community

•   Diamond hands: This refers to hanging onto a stock, even if it suffers losses, because the investor thinks the price will go back up.

•   Hold the line: This is about standing your ground with meme stocks and holding onto them, despite volatility.

•   Tendies: Profits made in meme stock. The word is a play on chicken tenders.

•   To the moon: The belief that the stock will rise sky high.

Characteristics of Meme Stocks

It can be difficult to pin down what, exactly, makes a meme stock a meme stock. But generally, there are some similarities. For one, they’re almost always at the center of some intense action and attention on social media. They’re also stocks that are disconnected from the fundamentals, meaning that their share values may not reflect the current strength of their business performance. And they tend to be very volatile, rapidly gaining or losing value.

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

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

*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.

Background on Meme Stocks

In the past, before the pandemic, when it came to institutional investors vs. retail ones, the former were thought to hold clout in markets. But in 2021, small investors showed they could be a force to be reckoned with, coordinating trades on Internet platforms like Reddit, X (formerly Twitter), YouTube, or Discord to fuel big price swings.

These investors also helped drive moves in different types of cryptocurrencies as well as SPACs, or special purpose acquisition companies.

In January 2021, Investors on the Reddit forum “r/wallstreetbets” banded together and triggered a short squeeze in GameStop Corp. (GME), a popular short among hedge funds. When an investor or trader is shorting a stock, it means they’re wagering that the price of the shares will fall. A short squeeze refers to rapid price gains in a stock, as traders exit their bearish positions at a loss en masse.

Retail investors succeeded in triggering a short squeeze on GameStop stock, leading to losses for hedge funds, who then turned to trying to monitor social-media forums in order to spot the next meme stock.

However, controversy ensued when some brokerage firms halted trading in some meme stocks, citing an inability to post collateral at clearinghouses. Such moves led to angry retail investors and day traders and congressional hearings that looked into brokerage practices such as payment for order flow.

Role of Social Media and Online Communities

A stock becomes a meme when it goes viral. It may become popular on online platforms like Reddit, X, and YouTube. A meme stock can gain a following in discussion groups in these platforms, and the online communities can fuel price swings in the stock.

Examples of Meme Stocks

The first major meme stock example was GameStop Corp., as mentioned above. Investors on the Reddit forum “r/wallstreetbets” banded together. Those investors triggered a short squeeze, which drove up the price of the stock. In January 2021, GameStop stock went as high as $120.75 at one point, after trading as low as $0.70 in the preceding months.

There was another surge of interest in the stock in May 2024, when Roaring Kitty (a key figure in the original short squeeze) returned to social media after a three year absence.

Other meme stocks have included AMC Entertainment Holdings, Inc., a movie theater chain; Blackberry Limited, the smartphone maker; and Bed, Bath and Beyond, Inc. In 2025, other meme stock trended, including Kohl’s and Krispy Kreme.

Pros and Cons of Trading Meme Stocks

Meme stocks can be difficult to wrap your head around, but for some investors, there may be some things that draw them in – or away.

Benefits of Trading Meme Stocks

A couple of the main benefits of trading meme stocks include the fact that they’ve helped retail investors reassume a bit of power in the markets, and brought in younger investors.

•  Rise of Retail Traders: Retail investors have shown they need to be taken more seriously by the rest of the market.

•  Younger Investors: Given the hyper-online ways in which meme stocks come about, younger investors have learned more about investing and trading through these social-media fads. Still, it’s unclear whether meme stocks will help engender healthy long-term financial planning habits for beginner investors in their 20s.

•  Potential for Returns: Naturally, there’s the chance that investors could get in at the right time and generate big returns on their meme stock investments. Note, however, that the risks of losing your investment are perhaps even more likely.

Risks of Trading Meme Stocks

There are a number of potential drawbacks and risks associated with meme stocks, however.

•  Lack of Fundamentals: Meme stocks tend to go viral not because of the performance or potential of the underlying business, but because of the sometimes irrational enthusiasm of retail investors and day traders. That puts meme-stock investors at greater risk of downward share performance, if the fundamentals of the business disappoint when the economy or markets dip.

•  High Volatility: Studies have shown that passive, diversified investments tend to outperform active trading over the long term. The volatility of meme stocks means that investors are at greater risk of locking in losses or seeing their portfolios underperform in the near term. Take for instance, when trading was halted on GameStop, investors potentially couldn’t execute sell orders.

•  Potential Stock Dilution: In some cases, meme-stock companies have tried to take advantage of higher valuations by issuing new shares. In such examples, it’s important that investors understand stock dilution, which occurs when the number of outstanding shares increases and every shareholder ends up owning a less significant piece.

💡 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.

How to Trade Meme Stocks

Single-name stocks are also not the only ways investors can get exposure to meme stocks. Options trading in meme stocks tend to be liquid, often allowing investors to buy and sell calls and puts easily.

If an investor doesn’t want to research or follow specific meme stocks, another way to get exposure to the phenomenon is by buying an exchange-traded fund (ETF) that holds companies popular on brokerage platforms.

In addition, here are some precautions that investors can take when trading meme stocks:

1.   Diversify Your Portfolio: Rather than just holding meme stocks in their portfolios, investors may benefit from also getting exposure to more broad-based ETFs, blue-chip stocks, or dividend-paying companies. Such stocks tend to post more muted price moves, which may help offset the volatility of meme stocks.

2.   Set Stop-Loss Orders: Investors can pre-set orders so that a meme stock automatically gets sold if it hits a certain price. A stop-loss order can be used to lock-in profits, so if the shares rise, or to limit losses, if the stock’s price falls.

Risk Management Strategies for Meme Stocks

Perhaps the most important or worthwhile things an investor can do when trading meme stocks is to do a lot of research and pay significant amounts of attention to what’s going on with their stocks, and do their best to maintain a sense of discipline, and not to let their emotions carry them away.

If you’re trading meme stocks, you’re perhaps already swept up in a bit of hype — do what you can to keep your wits and know when you should exit a position. There’s no easy way to do that, so keep your personal risk tolerances and limits in mind.

The Takeaway

In 2021, during the pandemic, the proliferation of zero-commission brokerage accounts and stay-at-home orders led to an individual-investor surge. That led to the creation and rise of meme stocks, and meme stock trading.

Sometimes, individual traders target companies with high short interest to turn into meme stocks. Certain meme stocks like GameStop and AMC capture news headlines by posting rapid, colossal gains, but once the trading frenzy subsides, many meme stocks also plummet. Investors may want to consider other, less risky investments for their portfolio.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

What is a meme stock rally?

A meme stock rally is when a meme stock that became popular through social media skyrockets in price.

What is a meme stock ETF?

Meme stock ETFs are exchange-traded funds based around meme stocks. ETF meme holdings are made up of primarily meme stocks.

What investment strategy should you use for meme stocks?

Investing in meme stocks can be extremely risky. If you do decide to invest in them, you may benefit from also having other assets, such as ETFs or blue-chip stocks, in your portfolio to help diversify it. That may help offset the volatility of meme stocks.

Why are meme stocks considered risky investments?

Meme stocks are generally the focus of emotional swings on social media, are disconnected from their underlying fundamentals, and are extremely volatile. Taken all together, that means they’re fairly high-risk investments.

How do online forums influence meme stock prices?

A stock may become a meme when it goes viral on social media or an online forum. It may become popular on online platforms like Reddit, X, and YouTube, and then a meme stock can gain a following in discussion groups in these platforms. Then, the online communities can fuel price swings in the stock.

Photo credit: iStock/RgStudio

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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

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.

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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE


Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

SOIN-Q325-054

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Sep
22
2025
What Are High-Net Worth Individuals?

What Are High-Net-Worth Individuals?

By | Growing Wealth, invest, Investing | Comments Off on What Are High-Net-Worth Individuals?

A high-net-worth individual (HNWI) is generally considered to be someone who has at least $1 million in liquid assets. Liquid assets include cash and investments that can easily be converted into cash.

Someone who has a high net worth may rely on specialized financial services for money management. For example, they may work with a wealth manager or open accounts at a private bank. In terms of financial planning, the needs of high-net-worth individuals may include estate planning, investment guidance, and tax management.

Achieving a high net worth is often done through strategic investing and careful portfolio building. It’s important to keep in mind that high-net-worth individuals may have access to certain investments that the everyday investor would not. Minimizing liabilities is another part of the wealth-building puzzle, as net worth takes debt into account alongside assets.

Key Points

•   High-net-worth individuals (HNWIs) have at least $1 million in liquid assets.

•   Very-high-net-worth individuals (VHNW) have $5 to $30 million in liquid assets.

•   Ultra-high-net-worth individuals (UHNWIs) have $30 million or more in liquid assets.

•   HNWIs may enjoy benefits like reduced fees, discounts on financial services, access to exclusive investments.

•   Increasing net worth involves paying off debts, reducing expenses, and investing early and consistently.

What Defines a High-Net-Worth Individual?

A high-net-worth individual is someone who has substantial wealth. One commonly accepted definition of high net worth is having $1 million or more in liquid assets after all liabilities (debts) are subtracted. Liquid assets include cash and investments like stocks but exclude any assets that can be difficult to sell, such as the individual’s primary home and assets like antiques and fine art.

That said, definitions of high net worth can vary. Financial advisors who are registered with the Securities and Exchange Commission (SEC ) must report how many HNWI clients they have on Form ADV each year. For the purposes of this form, a HNWI is defined as having $750,000 in investable assets or a $1.5 million net worth.

The SEC also refers to high net worth individuals when discussing accredited investors. An accredited investor is defined as having:

•   Earned income of $200,000 or more (or $300,000 for couples) in each of the two prior years, with a reasonable expectation of the same income in future years

•   Net worth of over $1 million either alone or with a spouse, excluding the value of a primary residence



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Benefits Afforded to HNWIs

High-net-worth individuals may get a number of special benefits. For instance, they might qualify for reduced fees and discounts on financial services like investments and banking. They may also be granted access to special perks and events.

HNWI can also invest in things other investors or the general public can’t, such as hedge funds, venture capital funds, and private equity funds.

HNWI Examples & Statistics

The super rich, or HNWIs, are tracked by Forbes on the Real-Time Billionaires List, which is updated daily. As of September 4, 2025, these were the HNWI at the top of the list:

•   Elon Musk with a net worth of $428.4 billion

•   Larry Ellison with a net worth of $272.8 billion

•   Mark Zuckerberg with a net worth of $252.4 billion

•   Jeff Bezos with a net worth of $238.2 billion

•   Larry Page with a net worth of $192.5 billion

Recommended: What’s the Difference Between Income and Net Worth?

How Is Net Worth Calculated?

Wondering how to find net worth? It’s a relatively simple calculation. There are three steps for figuring out net worth:

1.    Add up assets. These can include:

◦   Bank account balances, including checking, savings, and certificates of deposit

◦   Retirement accounts

◦   Taxable investment accounts

◦   Property, such as real estate or vehicles

◦   Collectibles or antiques

◦   Businesses someone owns

2.    Add up liabilities. Liabilities are debts owed. For example, a home’s value can be considered an asset for net worth calculations. But if there’s a mortgage owing on it, that amount has to be entered into the liabilities column.

3.    Subtract liabilities from assets. The remaining amount is an individual’s net worth.

Net worth can be a positive or negative number, depending on how much someone has in assets versus what they owe in liabilities.

Net Worth vs Liquid Net Worth

In simple terms, net worth is the difference between assets and liabilities. Liquid net worth is a subset of net worth that only considers cash and other holdings that can quickly become cash, minus your liabilities (what you owe).

Liquids assets include cash in a savings account, stocks, money market funds, and exchange-traded funds (EFTs). Examples of illiquid assets are real estate, land, hedge funds, antiques, jewelry, and collections (such as cars, coins, or rare stamps).

What Is an Ultra-High-Net-Worth Individual?

A very-high-net-worth individual (VHNWI) is someone holding liquid assets between $5 million and $30 million. To fit the definition of an ultra-high-net-worth individual (UHNWI), you need to have liquid assets of $30 million or more. People who are considered to be ultra-high-net-worth individuals are among the wealthiest in the world.

For example, UHNWIs fall into the top 1% of U.S. households, which requires a minimum of $13.7 million in net worth. However, UHNWIs may or may not be part of the top 0.1% in the U.S., since this requires a net worth of approximately $62 million.

According to Knight Frank’s 2024 Wealth Report, the U.S. is home to the most UHNWIs in the world, which is 208,560.


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How to Get a Higher Net Worth

Reaching high-net-worth status can be a lofty goal but it’s one many HENRYs — high earner, not rich yet — work toward. The typical HENRY makes most or all of their income from working. While they may earn an above-average income, they may not have sufficient disposable income to start building wealth to increase their net worth.

There are, however, some ways to change that. For example, someone who earns a higher income but doesn’t have the higher net worth to reflect it may consider things like:

•   Paying off student loans or other debts

•   Relocating to a less expensive area to reduce their cost of living

•   Rethinking their tax strategy so they’re able to keep more of their income

•   Finding ways to increase income

Coming up with a solid investment strategy is also important for boosting net worth. That includes diversifying across assets like stocks, bonds, and real estate. It’s also important to start early and invest consistently, as this allows you to benefit from compound growth (when the returns you earn start earning returns of their own).

Creating multiple streams of income with investments and/or starting a side hustle can also help with making progress toward a higher net worth. At the same time, it’s important to take advantage of wealth-building assets you may already have on hand.

For example, if you have access to a 401(k) or similar plan at work, then making contributions can be an easy way to increase net worth. If your employer offers a company matching contribution you could use that free money to help build wealth.

The Takeaway

High-net-worth individuals are typically described as people who have $1 million or more in liquid assets. Those with $5 to $30 million in liquid assets may be labeled as “very high net worth”, and those with more than $30 million in liquid assets are generally considered ultra-high-net worth individuals.

While HNWIs enjoy access to exclusive financial opportunities, the path to building wealth is rooted in strategies anyone can use. These include consistent investing, minimizing liabilities, and focusing on long-term growth.

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FAQ

What are different types of high-net-worth individuals?

There are several types of high-net-worth individuals. Those who are high net worth have more than $1 million in liquid assets. Individuals with at least $5 million in liquid assets are considered very high net worth. If a person has more than $30 million in liquid assets they are considered ultra high net worth.

Where are most of the HNWIs located?

The U.S. has the highest number of high-net-worth individuals (HNWIs). According to Knight Frank’s 2025 Wealth Report, the number of individuals living in the U.S. with at least $10 million in net worth is 905,000. Next comes China (with 472,000), followed by Japan (122,000), India (86,000), and Germany (70,000).

Do high-net-worth individuals include 401(k)?

A 401(k) is part of your net worth, which is defined as your total assets (what you own) minus your total liabilities (what you owe). However, a high-net-worth individual (HNWI) is generally defined as someone who has at least $1 million in liquid assets. Liquid assets include cash and investments that can easily be converted into cash. A 401(k) usually isn’t considered a liquid asset unless you’ve reached the age of 59 ½, since making a withdrawal prior to this age can trigger a penalty.

About the author

Rebecca Lake

Rebecca Lake

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


Photo credit: iStock/Cecilie_Arcurs

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