A preferred provider organization (PPO) is a type of health care plan that offers lower out-of-pocket costs to members who use doctors and other providers who are part of the plan’s network.
These preferred providers have signed onto the network at a lower negotiated rate than they might charge outside of the network.
PPOs also offer members the flexibility to see providers outside of the plan’s network, although they will most likely pay more in out-of-pocket costs to do so.
To learn more about PPOs, and how this type of plan compares to other health insurance options, read on.
Key Points
• PPO plans offer flexibility to see any healthcare provider, with lower costs for in-network services.
• PPOs provide access to a large, geographically diverse network of providers.
• No referrals are needed to see specialists, enhancing convenience.
• Monthly premiums for PPOs are typically higher than for HMOs and HDHPs.
• Out-of-network care incurs significantly higher out-of-pocket expenses.
How Does PPO Insurance Work?
When you join a PPO health plan, you’re joining a managed care network that includes primary care doctors, specialists, hospitals, labs, and other healthcare professionals. PPO networks tend to be large and geographically diverse.
If you see a preferred provider, you will likely pay a copay, or you might be responsible for a coinsurance payment (after you meet the health care plan’s deductible).
While you are free to see any health care provider whether or not they are in the PPO network, if you see a provider outside of the network, you may pay significantly more in out-of-pocket costs. In return for flexibility, large networks, and low in-network cost sharing, PPO plans typically charge higher premiums than many other types of plans.
PPOs are a common, and often a popular, choice for employer-sponsored health insurance.
What Are the Costs of Going Out of the PPO’s Network?
If you see a provider who is not part of the plan’s network, you will likely be expected to bear more of the cost. PPOs typically use what’s called a “usual, customary, and reasonable” (UCR) fee schedule for out-of-network services.
Insurers calculate UCR fees based on what doctors in the area are charging for the same service you were provided.
If your doctor charges more than what your insurance company determines to be usual, customary, and reasonable, you most likely will be charged for the difference between the amount charged for the service and the amount covered by your insurer.
Depending on where you live and the service you received, this difference could be significant. It may also come as a surprise to policyholders who assume their medical costs will be covered and don’t fully understand the distinction between in-network and out-of-network providers.
A good way to avoid surprise charges with a PPO (or any health plan) is to talk to your provider and your insurer before you receive treatment about the total cost and what will be covered.
How PPOs Compare to Other Types of Health Care Plans
HMOs typically offer lower premiums and out-of-pocket costs than PPOs in exchange for less flexibility.
Unlike a PPO, HMO members typically must choose a primary care physician from the plan’s network of providers. Care from providers out of the HMO network is generally not covered, except in the case of an emergency.
Also unlike a PPO, an HMO’s network of providers is usually confined to a specific local geographic area.
Another key difference between these two types of plans: HMO members typically must first see their primary care doctor to get a referral to a specialist. With PPOs, referrals are not usually required.
PPOs are also often compared to point of service (POS) plans.
POS plans are generally a cross between an HMO and a PPO. As with a PPO, POS members typically pay less for care from network providers, but may also go out of network if they desire (and potentially pay more).
Like an HMO, POS plans require a referral from your primary care doctor to see a specialist.
PPOs (as well as HMOs and POS plans) are very different from high deductible health plans, or HDHPs.
HDHPs charge a high deductible (what you would have to pay for health care costs before insurance coverage kicks in).
This means that you would need to pay for all of your doctor visits and other medical services out of pocket until you meet this high deductible. In return for higher deductibles, these plans usually charge lower premiums than other insurance plans.
You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for qualified medical expenses.
HDHPs are generally best for relatively healthy people who don’t see doctors frequently or anticipate high medical costs for the coming year.
As with all health insurance options, PPOs have both advantages and disadvantages. Here are a few to consider.
Advantages of PPOs
• Flexibility. PPO members typically do not have to see a primary care physician for referrals to other health care providers, and they may see any doctor they choose (though they may pay more for out-of-network providers).
• Lower costs for in-network care. Out-of-pocket costs, such as copays and coinsurance, for care from in-network providers can be lower than some other types of plans.
• Large provider networks. PPOs usually include a large number of doctors, specialists, hospitals, labs, and other providers in their networks, spanning across cities and states. As a result, network coverage while traveling or for college student dependents can be easier to access than with more restricted plans.
Disadvantages of PPOs
• High premiums. In return for flexibility, PPO members can expect to pay higher monthly premiums than they may find with other types of plans.
• High out-of-pocket costs for out-of-network care. Depending on where you live, the treatment you receive, and how your insurer calculates “usual, customary, and reasonable” fees, you may find you are responsible for a large portion of the bill when you receive care outside of the PPOs network.
• Might be more insurance than you need. If you rarely see doctors and wouldn’t mind potentially switching doctors, you may be able to save money by going with an HMO or a HDHP.
The Takeaway
PPOs are a popular type of health plan because of the flexibility, ease of use, and wide range of provider choices they offer. PPO networks tend to be large and varied enough to include a patient’s existing doctors. If not, members still have the option of going out-of-network and receiving at least some coverage from a PPO. PPO members pay for this flexibility, however.
PPOs typically come with higher premiums, along with extra costs associated with out-of-network care. That can be prohibitive for many consumers.
Your employer’s benefits department or an experienced insurance agent or broker can help you compare PPOs to other types of health care plans and determine which choice is right for your health care needs and your budget.
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FAQ
What is a disadvantage of having an HMO?
One drawback of PPO plans is that they’re often more expensive than HMO plans. Monthly premiums are usually higher, and you’ll likely have to pay more out of pocket if you see doctors who are out of the plan’s network.
What does PPO mean?
PPO stands for preferred provider organization. It’s a type of health care plan that offers lower out-of-pocket costs to members who see health care providers who are part of the PPO plan’s network.
Is having a PPO worth it?
It depends. PPOs tend to have large networks, which can make them a good choice for someone who travels frequently within the U.S. or lives in two different states.
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A spot market is a market where buyers meet sellers and make an immediate exchange. In other words, delivery takes place at the same time payment is made. That can include stock exchanges, currency markets, or commodity markets.
But often when discussing spot markets, we’re talking about commodities. Commodity markets are somewhat different from the markets for stocks, bonds, mutual funds, and ETFs, all of which trade exclusively through brokerages. Because they represent a physical good, commodities have an additional market — the spot market. This market represents a place where the actual commodity gets bought and sold right away.
Key Points
Spot markets involve instant trades and immediate delivery.
Spot prices reflect real-time supply and demand.
Spot markets are less susceptible to manipulation.
OTC and centralized exchanges facilitate spot trades.
Futures markets are speculative, while spot markets are organic.
Spot Markets Definition
If you’re trying to define the spot markets, it may be helpful to think of it as a public financial market, and one on which assets or commodities are bought and sold. They’re also bought and sold for immediate, or quick, delivery. That is, the asset being traded changes hands on the spot.
Prices quoted on spot markets are called the spot price, accordingly.
One example of a spot market is a coin shop where an individual investor goes to buy a gold or silver coin. The prices would be determined by supply and demand. The goods would be delivered upon receipt of payment.
Understanding Spot Markets
Spot markets aren’t all that difficult to understand from a theoretical standpoint. There can be a spot market for just about anything, though they’re often discussed in relation to commodities (perhaps coffee, corn, or construction materials), and specific things like precious metals.
But again, an important part of spot market transactions is that trades take place on the spot — immediately.
Which Types of Assets Can Be Found on Spot Markets?
As noted, all sorts of assets can be found on spot markets. That ranges from food items or other consumables, construction materials, precious metals, and more. If you were, for instance, interested in investing in agriculture from the sense you wanted to trade contracts for oranges or bananas, you could likely do so on the spot market.
Some financial instruments may also be traded on spot markets, such as Treasuries or bonds.
How Spot Market Trades Are Made
In a broad sense, spot market trades occur like trades in any other market. Buyers and sellers come together, a price is determined by supply and demand, and trades are executed — usually digitally, like most things these days. In fact, a spot market may and often does operate like the stock market.
As noted, stock markets are also, in fact, spot markets, with financial securities trading hands instantly (in most cases).
What Does the Spot Price Mean?
As mentioned, the spot price simply refers to the price at which a commodity can be bought or sold in real time, or “on the spot.” This is the price an individual investor will pay for something if they want it right now without having to wait until some future date.
Because of this dynamic, spot markets are thought to reflect genuine supply and demand to a high degree.
The interplay of real supply and demand leads to constantly fluctuating spot prices. When supply tightens or demand rises, prices tend to go up, and when supply increases or demand falls, prices tend to go down.
The Significance of a Spot Market
The spot market of any asset holds special significance in terms of price discovery. It’s thought to be a more honest assessment of economic reality.
The reason is that spot markets tend to be more reliant on real buyers and sellers, and therefore should more accurately reflect current supply and demand than futures markets (which are based on speculation and can be manipulated, as recent legal cases have shown. More on this later.)
Types of Spot Markets
There’s only one type of spot market — the type where delivery of an asset takes place right away. There are two ways this can happen, however. The delivery can take place through a centralized exchange, or the trade can happen over the counter.
Over-the-counter
Over-the counter, or OTC trades, are negotiated between two parties, like the example of buying coins at a coin shop.
Market Exchanges
There are different spot markets for different commodities, and some of them work slightly differently than others.
The spot market for oil, for example, also has buyers and sellers, but a barrel of oil can’t be bought at a local shop. The same goes for some industrial metals like steel and aluminum, which are bought and sold in much higher quantities than silver and gold.
Agricultural commodities like soy, wheat, and corn also have spot markets as well as futures markets.
Spot Market vs Futures Market
One instance that makes clear the difference between a spot market and a futures market is the price of precious metals.
Gold, silver, platinum, and palladium all have their own spot markets and futures markets. When investors check the price of gold on a mainstream financial news network, they are likely going to see the COMEX futures price.
COMEX is short for the Commodity Exchange Inc., a division of the New York Mercantile Exchange. As the largest metals futures market in the world, COMEX handles most related futures contracts.
These contracts are speculatory in nature — traders are making bets on what the price of a commodity will be at some point. Contracts can be bought and sold for specific prices on specific dates.
Most of the contracts are never delivered upon, meaning they don’t involve delivery of the actual underlying commodity, such as gold or silver. Instead, what gets exchanged is a contract or agreement allowing for the potential delivery of a certain amount of metal for a certain price on a certain date.
For the most part, futures trading only has two purposes: hedging bets and speculating for profits. Sophisticated traders sometimes use futures to hedge their bets, meaning they purchase futures that will wind up minimizing their losses in another bet if it doesn’t go their way. And investors of all experience levels can use futures to try to profit from future price action of an asset. Predicting the exact price of something in the future can be difficult and carries high risk.
The spot market works in a different manner entirely. There are no contracts to buy or sell and no future prices to consider. The market is simply determined by what one party is willing to purchase something for.
Spot Market vs Futures Market
Spot Market
Futures Market
No contracts to buy or sell
Contracts are bought and sold outlining future prices
Trades occur instantly
Trades may never actually occur at all
Non-speculative
Speculative by nature
Another important concept to understand is contango and backwardation, which are ways to characterize the state of futures markets based on the relationship between spot and future prices. Some background knowledge on those concepts can help guide your investing strategy.
Note, too, that some investors may be confused by the concepts of margin trading and futures contracts. Margin and futures are two different concepts, and don’t necessarily overlap.
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
Example of a Spot Market
Consider the spot and futures markets for precious metals.
Precious-metal prices that investors see on financial news networks will most often be the current futures price as determined by COMEX. This market price is easy to quote. It’s the sum of all futures trading happening on one central exchange or just a few central exchanges.
The spot market is more difficult to pin down. In this case, the spot market could be generally referred to as the average price that a person would be willing to pay for a single ounce of gold or silver, not including any premiums charged by sellers.
Sometimes there is a difference between prices in the futures market and spot market. The difference is referred to as the “spread.” Under ordinary circumstances, the difference will be modest. During times of uncertainty, though, the spread can become extreme.
Futures Market Manipulation
As for trying to define what spot price means, it’s important to include one final note on futures markets. This will illustrate a key difference between the two markets.
Recent high-profile cases brought by government enforcement agencies like the Securities and Exchange Commission and Commodities and Futures Trading Commission highlight the susceptibility of futures markets to manipulation.
Some large financial institutions have been convicted of engaging in practices that artificially influence the price of futures contracts. Again, we can turn to the precious-metals markets for an example.
During the third quarter of 2020, JP Morgan was fined $920 million for “spoofing” trades and market manipulation in the precious metals and U.S. Treasury futures markets. Spoofing involves creating large numbers of buy or sell orders with no intention of fulfilling the orders.[1]
Because order book information is publicly available, traders can see these orders, and may act on the perception that big buying or selling pressure is coming down the pike. If many sell orders are on the books, traders may sell, hoping to get ahead of the trade before prices fall. If many buy orders are on the books, traders may buy, thinking the price is going to rise soon.
Cases like this show that futures markets can be heavily influenced by market participants with the means to do so.
Spot markets, on the other hand, are much more organic and more difficult to manipulate.
3 Tips for Spot Market Investing
For those interested in trying their hand in the spot market, here are a few things to keep in mind.
1. Know What’s Going On
Often, prices in the spot market can change or be volatile in relation to the news or other current events. For that reason, it’s important that investors know what’s happening in the world, and use that to assess what’s happening with prices for a given asset or commodity.
2. Keep Your Emotions in Check
Emotional investing or trading is a good way to get yourself into financial trouble, be it in the spot market, or any other type of trading or investing. You’d likely do well to keep your emotions in check when trading or investing on the spot market, as a result.
3. Understand the Market
It’s also a good idea to do some homework and make a solid attempt at trying to understand the market you’re trading in. There may be jargon to learn, terms to understand, price discovery mechanisms that could otherwise be foreign to even a seasoned investor — do your best to do your due diligence.
The Takeaway
Spot markets are where commodities are traded, instantly. There are numerous types of spot markets, and there are numerous types of commodities that might be traded on them. Investors would be wise to know the basics of how they work, and come armed with a bit of background knowledge about the given commodity they’re trading, in order to reach their goals.
Spot market trading can be a part of an overall trading strategy, but again, investors should know the ropes a bit before getting in over their heads. It may be a good idea to speak with a financial professional before investing.
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FAQ
What is spot market vs a futures market?
Trades on a spot market occur instantly, on the spot. Trades in the futures market involve contracts for commodities with prices outlined for some time in the future — if they occur at all.
What does spot market mean?
The term spot market refers to a financial market where assets or commodities are bought and sold by traders. The trades occur on the spot, or instantly, for immediate delivery.
What is the difference between spot market and forward market?
Forward markets involve trading of futures contracts, or transactions that take place at some point in the future, whereas spot market trades occur instantly, often for cash.
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Gifting stock can be a simple process, as long as your intended recipient has a brokerage account, too. You’ll just need their basic personal and account information. One reason to consider transferring shares of a stock, instead of selling them and gifting the proceeds, is that you’ll typically avoid realizing the capital gains and owing related taxes.
Key Points
• There are several ways to gift stocks, such as setting up a custodial account for kids, setting up a DRIP, virtual transfers, and physically handing over stock certificates.
• Gifting stocks can benefit the giver as well as the receiver, as the giver can take a tax deduction while avoiding capital gains tax.
• The annual gift tax exclusion for 2025 is $19,000 per year, per person.
• Gifting stocks to charities can benefit both the giver and the charity as the giver doesn’t have to pay capital gains taxes and the charity is tax-exempt.
• Gifts can also be made via investing apps and stock gift cards.
The Benefits of Gifting Stocks
Besides being a nice gift (who doesn’t like to give, or receive, a gift?), there are some potential financial benefits to gifting stocks.
There are tax benefits, for one, which allow the donor to deduct the fair market value of the stock on their tax return. You can also potentially avoid capital gains tax, as the receiver inherits a stock’s original cost basis from the donor.
There can be strategic benefits, too. If an investor is looking to rebalance their portfolio or make some reallocations, gifting stock may be an option to consider. And, again, it can allow them to do it while giving a gift, and potentially reducing their tax liabilities.
8 Ways to Gift Stocks
There are several ways that stocks can be gifted, including through custodial accounts, and even gift cards.
Parents can set up a custodial brokerage account for their kids and transfer stocks, mutual funds, and other assets into it. They can also buy assets directly for the account. When the child reaches a certain age they take ownership of it.
This can be a great way to get kids interested in their finances and educate them about investing or particular industries. Teaching kids about short and long term investments by giving them a stock that will grow over time is a great learning opportunity. However, keep in mind that there is a so-called “kiddie tax” imposed by the IRS if a child’s interest and dividend income is more than $2,600.
2. Set up a DRiP
Dividend Reinvestment Plans, or DRiPs, are another option for gifting stocks. These are plans that automatically reinvest dividends from stocks, which allows the stock to grow with compound interest.
3. Gifting to a Spouse
When gifting stocks to a spouse, there are generally no tax implications as long as both people are U.S. citizens. A spouse can either gift a present interest or a future interest in shares, meaning the recipient spouse gets the shares immediately or at a specified date in the future.
According to the IRS, If the recipient spouse is not a U.S. citizen, there is an annual gift tax exclusion of $190,000. Any amount above that would be taxed.
4. Virtual Transfers and Stock Certificates
Anyone can transfer shares of stock to someone else, if the receiver has a brokerage account. This type of gifting can be done with basic personal and account information. One can either transfer shares they already own, or buy them in their account and then transfer them. Some brokers also have the option to give stocks periodically.
Individuals can also buy a stock certificate and gift that to the recipient, but this is expensive and requires more effort for both the giver and receiver. To transfer a physical stock certificate, the owner needs to sign it in the presence of a guarantor, such as their bank or a stock broker.
5. Gifting Stock to Charity
Another option is to give the gift of stocks to a charity, as long as the charity is set up to receive them. This can benefit both the giver and the charity, because the giver doesn’t have to pay capital gains taxes, and as a tax-exempt entity, the charity doesn’t either. The giver may also be able to deduct the amount the stock was worth from their taxes.
For givers who don’t know which charity to give to, one option is a donor-advised fund, or DAF. While the giver can take a tax deduction on their gift in the calendar year in which they give it, the fund will distribute the gift to the charities over multiple years.
6. Passing Down Wealth
Gifting stocks to family members can be a better way to transfer wealth than selling them and paying taxes. For 2025, up to $19,000 per year, per person, can be transferred through gifting of cash, stocks, or a combination.
If a person wants to transfer stocks upon their death, they have a few options, including:
• Make it part of their will.
• Go through a beneficiary designation in a trust.
• Arrange a transfer on death designation in a brokerage account.
It’s important to look into each option and one’s individual circumstances to figure out the taxes and cost basis for this option.
7. Gifting Through a Roth IRA
Gifting stock through an IRA is not technically possible, as you can’t transfer stock from your Roth IRA to another person. But what you can do is gift the recipient funds that they can use to contribute to their own Roth IRA, with some stipulations. And there are thresholds, too, above which a gift could trigger a gift tax.
8. Gifting to Friends Through a Brokerage Account
Finally, you can gift your friends or another recipient via a brokerage account in a fairly straightforward way, assuming the recipient has a brokerage account of their own. Brokerages may have different processes for this, so you may need to get in touch with yours to see what the precise protocol is. But you’ll need the details of their brokerage account, at a bare minimum, and there could be tax implications following the transfer, too.
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Things to Consider When Giving a Stock Gift
Gifting stocks is relatively straightforward, but there are some things to keep in mind. In addition to the $19,000 per year gifting limit and the capital gains tax implications of gifting, timing of gifts is important, and gifting may not always be the best choice.
For instance, when gifting to heirs, it may be better to wait and allow them to inherit stocks rather than gifting them during life. This may reduce or eliminate the capital gains they owe.
Also, there is a lifetime gift exclusion for federal estate taxes, which is $13.99 million in 2025, which can be used to shelter giving that goes over $19,000. However, this is not a great tax option, due to the ways gifts and inherited stocks are taxed.
Generally, an option to give a substantial amount of money to someone is to establish a trust fund.
Tax Implications of Gifting Stocks
There are some tax ramifications of giving stock as a gift.
Capital Gains Tax
There are a few things to be aware of with the capital gains taxes. If the stock is gifted at a lower value than it was originally purchased at, and sold at a loss, the cost basis for the recipient is based on the fair market value of the stock on the date they received it.
However, if the price of the stock increases above the price that the giver originally paid, the capital gains are based on the value of the stock when the giver bought it. In a third scenario, if the stock is sold on the date of the gift at a higher than fair market value, but at a lower value than the giver’s cost basis, no gain or loss needs to be recorded by the recipient.
• Tax implications for giving: When gifting stocks, the giver can avoid paying capital gains tax. can sometimes be a way for the giver and the receiver to avoid paying capital gains taxes.
• Tax implications for receiving: The recipient won’t pay taxes upon receiving the stock. When they sell it, they may be exempt from capital gains taxes if they’re in a lower tax bracket (consider, for example, a minor or retired individual). Otherwise, if they sell at a profit, they should expect to pay capital gains tax. If the annual gifting limit is exceeded, there may be taxes associated with that and the giver will need to file an estate and gift tax return.
How to Choose the Right Stock to Gift
If you choose to give a stock to someone, you might be wondering: Which stock do I actually give them?
There is no right or wrong answer, and perhaps the most important thing to do is give some thought to what the recipient may want or what they think is important. For example, you may not want to gift someone stocks from a fossil fuel company that is passionate about green or renewable energy. Or vice versa.
You may also want to do some basic research as to a stock’s recent performance, so that the recipient doesn’t think that you’re offloading a stinker that’s lost significant value in recent years.
It may be best to simply ask the recipient first; let them know your plans, and ask if they have a preference.
Selecting Blue-Chip vs. Growth Stocks
Assuming you have chosen to gift a stock, you may want to keep things relatively simple and choose a blue-chip or growth stock. These, typically, are stocks of well-known companies that the recipient should recognize.
How to Choose the Right Stock to Gift
As discussed, there may be some personal considerations to think about when choosing a blue-chip or growth stock to give. Ask some questions to get a feel for what the recipient may like, appreciate, or get jazzed about, and then see which stocks may fit the bill. Again: there may not be a right or wrong stock to give!
Understanding Dividend Stocks and Their Impact
If you decide to gift a so-called “dividend stock,” which could be a stock of a company that’s known for dishing out dividends to shareholders, you may want to be aware of the potential tax implications those dividends may have. And, accordingly, let the recipient know, if they’re unfamiliar with investing and the potential tax liabilities they could generate.
In short: Dividends are a form of income, which will generate a tax liability, and if they choose to sell the stock, capital gains taxes could come into play, too.
Gifting stocks is a unique idea that may have benefits for both the giver and the receiver. As you plan for your future, you may decide to build up a portfolio of stocks that you intend to give to your children, parents, or others as you grow older.
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.
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FAQ
Who can I gift a stock to?
In general, you can gift a stock to anyone who has a brokerage account. It’s also possible to gift stock to charitable organizations, or children and minors through a custodial brokerage account.
How do I transfer stocks as a gift?
While the exact steps and protocols for transferring a stock as a gift may vary depending on your brokerage, in general, investors can contact their brokerage and give them the required information to initiate a transfer or transaction.
Are there limits on how much stock I can gift?
Not necessarily, but investors should know that if they gift more than the gift tax exclusion, which is $19,000 for 2025, it could trigger tax liabilities.
Do I need to pay taxes when gifting stocks?
If you gift more than the gift tax exclusion of $19,000 for 2025, gift tax liabilities could come into play. There’s also a lifetime gift tax exemption of $13.99 million for 2025.
What happens if the recipient sells the gifted stock?
If or when a recipient sells their gifted stock, they’ll likely be on the hook for capital gains taxes, as they’ll inherit the gifter’s original cost basis. There could be other tax implications as well, such as the “kiddie tax” or income taxes.
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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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Volatility is a measure of how much and how often a security’s price or a market index moves up or down over time. Higher volatility can mean higher risk, but it also has the potential to generate bigger rewards for investors. Meanwhile, lower volatility is typically correlated with lower risk and lower returns.
Developing a volatility investing strategy can make it easier to maximize returns while managing risk as the market moves from bullish to bearish and back again. Understanding the various stock market sectors and how they react to volatility is a good place to start. This can help with building a portfolio that’s designed with the goal of withstanding occasional market dips or in the worst-case scenario, a recession.
Key Points
• Volatility measures price fluctuations, correlating with risk and potential rewards.
• Defensive stocks, including utilities, consumer staples, and health care, tend to perform well during market downturns.
• Cyclical sectors, such as consumer discretionary and financials, are viewed or tend to be more sensitive to economic changes.
• The Cboe Volatility Index (VIX) can be used to try and predict market volatility.
• Diversifying investments across sectors can help manage risk.
What Causes Volatility in the Stock Market?
To implement a volatility investing plan it helps to first understand what causes fluctuations in stock prices to begin with. Stock market volatility can ebb and flow over time, and how high or low it is can depend on a number of factors. Some of the things that can push volatility levels higher include:
A global pandemic can also spark volatility, which occurred during the pandemic in 2020. That prompted the end of the longest bull market in history, sending stocks into a bear market.
The downturn was significant enough that the National Bureau of Economic Research Business Cycle Dating Committee dubbed it a recession. It was, however, the shortest on record, lasting just two months. (By comparison, it took 18 months for the stock market to go from peak to trough during the Great Recession).
Predicting volatility can be difficult, though there is a tool that attempts it. The Cboe Volatility Index (VIX) is a market index designed to measure expected volatility in the stock market. The VIX uses real-time stock quotes to calculate projected volatility over the coming 30 days.
The VIX is one factor that goes into the Fear and Greed Index, which is used to gauge the emotions driving the stock market.
Market Sectors and Volatility
The stock market could be divided into 11 different sectors. These sectors represent the various segments of the market, based on the industries and companies they represent. The 11 sectors identified by the Global Industry Classification Standard (GICS) are:
• Information technology
• Health care
• Financials
• Consumer discretionary
• Consumer staples
• Communication services
• Industrials
• Materials
• Energy
• Utilities
• Real estate
Some of these sectors include more volatile industries than others, and the share of stocks in those industries within a given portfolio can impact how the portfolio reacts during times of volatility.
Stocks that tend to bear up under the pressure of a downturn or recession are generally categorized as defensive. You may also hear the terms “cyclical” and “non-cyclical” used in reference to different market sectors. A cyclical sector or stock is one that’s volatile and tends to follow economic trends at any given time. Non-cyclical sectors or stocks, on the other hand, may outperform when the market experiences a downturn.
Which Stock Sectors Perform More Favorably During Market Volatility?
Defensive stock market sectors tend to do better when the market is in decline for one reason: they represent things that consumers still need to spend money on, even when the economy is weakening. That means they may be of interest if you’re investing during a recession.
The following sectors tend to do the best during times of volatility:
• Utilities
• Consumer staples
• Health care
Here’s a closer look at how each sector works.
Utilities
The utilities sector represents companies and industries that provide utility services. That includes gas, electric, and water utilities. It can also include power producers, energy traders, and companies related to renewable energy production or distribution.
Since people still need running water, electricity and heat during a recession, utilities stocks tend to be a safe defensive bet.
Consumer Staples
The consumer staples sector covers companies and industries that are less sensitive to a changing economic or business cycle. That includes things like food and beverage manufacturers and distributors, food and drug retailing companies, tobacco producers, companies that produce household or personal care items and consumer super centers.
In simpler terms, the consumer staples sector means things like grocery stores, drugstores, and the manufacturers of everyday products. Since people still need to buy food and basic household or personal care items in a recession, stocks from these sectors can do well when volatility is high.
Health Care
The health care sector includes health care service providers, companies that manufacture health care equipment, distributors of that equipment, health care technology companies, research and development companies and pharmaceutical companies.
Health care is a defensive sector since a recession usually doesn’t disrupt the need for medical care or medications.
💡 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.
Which Sectors and Stocks Tend to be More Volatile?
When a recession sets in, defensive sector stocks may provide a favorable buy option. The period before a recession begins is often marked by increased volatility and declining stock prices. The impacts of that volatility may be more deeply felt in these sectors:
• Consumer discretionary
• Financials
• Communication services
• Energy
• Information technology
• Commodities
• Industrials
• Materials
These sectors represent more volatile industries that are more likely to be affected by large-scale market trends. For example, the financial sector suffered a serious blow leading up to the Great Recession. A decline in home prices paired with faulty lending practices prompted widespread defaults on mortgage-backed securities, leading a number of financial institutions to seek government bailout funding.
On the other hand, some of these same sectors do well when the economy is coming out of a recession and entering the early stage of the business cycle. For example, the consumer discretionary sector, which includes things like travel and entertainment, typically rebounds as consumers ease their purse strings and start spending on “fun” again. The industrials and materials sectors may also pick up if there’s an increase in manufacturing and production activity.
Understanding the relationships between individual sectors and the business cycle can make it easier to implement a sector investing approach. With sector investing, you’re adjusting your asset allocation over time to try and stay ahead of the economic cycle.
If you suspect a recession might be coming, for example, a sector investing strategy would dictate shifting some of your assets to defensive stocks. On the other hand, if you believe a recession is about to end and stocks are set to bounce back, you may shift your allocation to include more volatile industries that tend to do better in the early stages of the business cycle.
Identifying volatile industries generally means considering which sectors or stocks are most sensitive to changes in the economic cycle. Aside from recessionary periods, the business cycle has three other stages:
Early Stage
The early stage of the business cycle typically represents the initial recovery period following a recession. Consumers may begin spending more money on non essentials as the economy begins to strengthen. This is also called the expansion phase, and it may coincide with periods of inflation.
Mid Stage
During the mid stage, the economy begins to hit a peak or plateau with growth leveling off. People are still spending money but the pace may begin slowing down.
Late Stage
The late stage is also called the contraction stage, as economic growth lags. The late stage of the business cycle is usually a precursor to the trough or recession stage.
The Takeaway
Volatility is unavoidable but there are things investors can do to help minimize the impact to their portfolio. Diversifying with assets such as stocks, exchange-traded funds (ETFs), or IPOs could help create volatility hedges. But remember that certain securities or market sectors perform differently depending on overall market conditions. That means that when the market is volatile, some stocks will overperform while others underperform.
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 market volatility?
Market volatility is a measure of how much and how often a security’s price or a market index moves up or down over time. Higher volatility can mean higher risk, but it also has the potential to generate returns for investors.
What are the sectors of the stock market?
The 11 sectors of the stock market are information technology, health care, financials, consumer discretionary, consumer staples, communication services, industrials, materials, energy, utilities, and real estate.
Which stocks perform favorably during market volatility?
Utilities, consumer staples, and health care stocks tend to overperform during times of volatility, as consumers generally need the products and services produced by those industries no matter what. That said, there’s no guarantee that they would necessarily outperform other types of stocks.
About the author
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/Serdarbayraktar
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.
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.
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Limit orders are a type of market order that gives investors the opportunity to trade stocks or other securities at a specified price. Doing so allows traders or investors to garner some form of price protection — it allows them to sell only at a price at which they won’t take a loss, or purchase securities at a price they’re comfortable with.
Limit orders can be used as a part of a broader investment or trading strategy, but can be fairly advanced for some investors.
Key Points
• Limit orders allow investors to buy or sell securities at a specific price or better, ensuring price protection.
• Buy limit orders set a maximum price; sell limit orders set a minimum price.
• Advantages of limit orders include price protection, convenience, and reduced risk of emotional trading.
• Disadvantages involve the risk of non-execution and missing out on better prices.
• Stop-limit orders combine stop and limit features, offering additional control over trade execution.
Limit Order Defined
As noted, a limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.
When you set a buy limit order, for example, the trade will only be executed at that price or lower. For sell limit orders, the order will be executed at the price you set or higher. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.
How Do Limit Orders Work?
In the simplest terms, limit orders work as a sort of restriction that an investor can choose (to either buy or sell) with “limits” on a minimum or maximum price. An investor places an order to buy a stock at a minimum price, for instance, or places an order to sell at a maximum price, in an effort to seek returns, while limiting losses.
There are two types of limit orders investors can execute: buy limit orders and limit sell orders. An important thing to know is that while a limit order specifies a desired price, it doesn’t guarantee the trade will occur at that price — or at all.
When you set a limit order, the trade will only be executed if and when the security meets the terms of the order — which may or may not happen, depending on the overall market conditions. So, when an investor sets a limit order, it’s possible to miss out on other investing opportunities.
Types of Limit Orders
As mentioned, there are two types of limit orders investors can execute: buy limit orders and limit sell orders. But there’s another, a sort of combination of the two, to be aware of.
1. Buy Limit Order
For buy limit orders, you’re essentially setting a ceiling for the trade — i.e., the highest price you’d be willing to pay for each share. If a trader places a buy limit order, the intention is to buy shares of stock. The order will be triggered when the stock hits the limit price or lower.
For example, you may want to buy shares of XYZ stock at $15 each. You could place a buy limit order that would allow the trade to be carried out automatically if the stock reaches that purchase price or better.
2. Sell Limit Order
For sell limit orders, you’re setting a price floor — i.e., the lowest amount you’d be willing to accept per share. If a trader places a limit order to sell, the order will be triggered when the stock hits the limit price or higher. So you could set a sell limit order to sell XYZ stock once its share price hits $20 or higher.
3. Stop-Limit Order
A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve setting two prices. For example: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a buy stop order of $33.
When the stock hits $33, a market order to buy will be triggered. But with a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share — say, $35 per share. Using a stop-limit order gives traders an additional level of control when they’re executing a strategy.
Stop-limit orders can also help traders make sure they sell stocks before they go down significantly in value. Let’s say a trader purchased stock XYZ at $40 per share, and now anticipates the price will drop. The trader doesn’t want to lose more than $5 per share, so they set a stop order for $35.
If the stock hits $35 — the stop price — the stock will be triggered to sell. However, the price could continue to drop before the trade is fully executed. To prevent selling at a much lower price than $35, the trader can set a limit order to only sell between $32 and $35.
How to Set a Limit Order
When placing a limit order with your brokerage firm, the broker or trading platform might ask for the following information:
• The stock or security
• Is it a buy or sell order
• Number of shares to buy or sell
• Stock order type (limit order, market order, or another type of order)
• Price
When setting up a limit order, the trader can set it to remain open indefinitely, (until the stock reaches the limit price), or they can set an expiration date.
Limit Order Example
Here’s an example of how a limit order might work: Say a trader would like to purchase 100 shares of stock XYZ. The highest price they want to pay per share is $26.75. They would set up a limit buy order like this:
Buy 100 shares XYZ limit 26.75.
As noted above, the main upside of using limit orders is that traders get to name a desired price; they generally end up paying a price they expect; and they can set an order to execute a trade that can be executed even if they are doing other things.
In this way, setting limit orders can help traders seize opportunities they might otherwise miss because limit orders can stay open for months or in some cases indefinitely (the industry term is “good ‘til canceled,’ or GTC). The limit order will still execute the trade once the terms are met.
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When a Trader Might Use a Limit Order
There are several reasons why a trader or investor might want to use a limit order.
• Price protection. When a stock is experiencing volatility, you may not want to risk placing a market order and getting a bad price. Although it’s unlikely that the price will change drastically within a few seconds or minutes after placing an order, it can happen, and setting a limit order can set a floor or a ceiling for the price you want.
• Convenience. Another occasion to use a limit order might be when you’re interested in buying or selling a stock, but you don’t want to keep a constant eye on the price. By setting a limit order, you can walk away and wait for it to be executed. This might also be a good choice for longer-term positions, since in some cases traders can place a limit order with no expiration date.
• Volatility. Third, an investor may choose to set a limit order if they are buying or selling at the end of the market day or after the stock market has closed. Company or world news could be announced while the market is closed, which could affect the stock’s price when the market reopens. If the investor isn’t able to cancel a market order while the market is still closed, they may not be happy with the results of the trade. A limit order can help prevent that.
Limit orders can also be useful when the stock being traded doesn’t have a lot of liquidity. If there aren’t many people trading the stock, one order could affect the price. When entering a market order, that trade could cause the price to go up or down significantly, and a trader could end up with a different price than intended.
Pros and Cons of Using Limit Orders
Each type of order has pros and cons depending on the particular situation.
Pros of Limit Orders
Some advantages of limit orders include naming your price, and taking a set-it-and-forget-it approach.
• The trader gets to name their price. One of the chief reasons traders rely on limit orders is to set baselines for profits and losses. They won’t end up paying a price they didn’t expect when they buy or get a price below their target when it’s time to sell.
• The trader can set the order and walk away. Day trading can be time-consuming, and it requires a significant amount of knowledge. Investors who use limit orders don’t have to continuously watch the market to get the price they want.
• Insulate against volatility. Volatility can cause you to make emotional decisions. Limit orders can give traders more control over their portfolio and ward off panic-buying or selling.
• Ride the gaps. Stock prices can fluctuate overnight due to after-hours trading. It’s possible to benefit from price differences from one day to another when using limit orders.
For example, if a trader places a buy limit order for a stock at $3.50, but the order doesn’t get triggered while the market is open, the price could change overnight. If the market opens at $3.30 the next morning, they’ll get a better price, since the buy limit order gets triggered if the stock is at or below the specified price.
Cons of Limit Orders
Conversely, limit orders can have some disadvantages.
• The order may never be executed. There may not be enough supply or demand to fulfill the order even if it reaches the limit price, since there could be hundreds or even thousands of other traders wanting to buy or sell at the specified price.
• The stock may never reach the limit price. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute. In this case, they would miss out on potential gains.
• The market can change significantly. If a trader sets a shorter-term limit order, they might miss out on a better price. For example, if a stock a trader owns is currently priced at $150, the trader may choose to set a sell limit order at $154 within four weeks. If the company then makes a big announcement about a new product after that period, and the stock’s price spikes to $170, the trader would miss out on selling at that higher price.
• It takes experience to understand the market and set limit orders. New investors can miss out on opportunities and experience unwanted losses, as with any type of investment.
Limit Order vs Market Order
Limit orders differ from market orders, which are, essentially, orders to buy a security immediately at its given price. These are the most common types of orders. So, while a market order is executed immediately regardless of terms, limit orders only execute under certain circumstances.
Limit orders can also be set for pre-market and after-hours trading sessions. Market orders, by contrast, are limited to standard trading hours (9:30am to 4pm ET).
Remember: Even though limit orders are geared to a specific price, that price isn’t guaranteed. First, limit orders are generally executed on a first-come-first-served basis. So there may be orders ahead of yours that eliminate the availability of shares at your limit price.
And it bears repeating: There is also the potential for missed opportunities: The limit order you set could trigger a trade. But then the stock or other security might hit an even better price.
In other words, time is a factor. In today’s market, computer algorithms execute the majority of stock market trades. In this high-tech trading environment, it can be hard as an individual trader to know when to buy and sell. By using certain types of orders, like limit orders, traders can potentially limit their losses, lock in gains, and avoid swings in the market.
Though limit orders are commonly used as a part of day trading strategies, they can be useful for any investor who wants some price protection around their trades. For example, if you think a stock is currently undervalued, you could purchase it at the current market price, then set a sell limit order to automatically sell it when the price goes up. Again, the limit order can stay open until the security meets your desired price — or you cancel the order.
If you’re trying to parse out when a market order or a limit order is the best tool to use, consider the following.
A trader might want to use a market order if:
• Executing the trade immediately is a priority
• The stock is highly liquid
• They’re only trading a small number of shares
• The stock has a narrow bid-ask spread (about a penny)
A trader might want to use a limit order if:
• They want to specify their price
• They are trading an illiquid stock
• They want to set a long-term trade (or even walk away for their lunch break and still have the trade execute)
• They feel a stock is currently over- or undervalued
• The stock has a large bid-ask spread
• They are trading a larger number of shares
Limit Orders vs Stop Orders
There is another type of order that can come into play when you’re trying to control the price of a trade: a stop order. A stop order is similar to a limit order in that you set your desired price for a stock, say, and once the stock hits that price or goes past it, a market order is triggered to execute the purchase or sale.
The terms of a limit order are different in that a trade will be executed if the stock hits the specified price or better. So if you want to sell XYZ stock for $50 a share, a sell limit order will be triggered once the stock hits $50 or higher.
A stop order triggers a market order once XYZ stock hits $50, period. By the time the order is executed, the actual stock price could be higher or lower.
Thus with a stop order there’s also no guarantee that you’ll get the specified price. A market order is submitted once the stop price is hit, but in fast-moving markets, the actual price you pay might end up being higher or lower.
Stop orders are generally used to exit a position and to minimize losses, whereas limit orders are used to capture gains. But two can also be used in conjunction with each other with something called a stop-limit order.
What Happens If a Limit Order Is Not Filled?
A limit order can only be filled if the stock’s price reaches the limit price or better. If this doesn’t happen, then the order is not executed, and it expires according to the terms of the contract. An order can be good just for a single trading day, for a certain period of time, or in some cases it’s possible to leave the limit order open-ended using a GTC (good ‘til canceled) provision.
So if you placed a buy limit order, but the stock does not reach the specified price or lower, the purchase would not be completed and the order would expire within the specified time frame.
And if you’re using a sell limit order, but the security never reaches the specified sell price or higher, the shares would remain in your trading account and the order would expire.
Limit Orders and Price Gaps
Price gaps can occur when stocks close at one price then open at a different price on the next trading day. This can be attributed to after-market or pre-market trading that occurs after the regular market hours have ended. After-hours trading can impact stock price minimally or more substantially, depending on what’s spurring trades.
For example, say news of a large tech company’s planned merger with another tech giant leaks after hours. That could send the aftermarket trading markets into a frenzy, resulting in a radically different price for both companies’ stocks when the market reopens. Pricing gaps don’t necessarily have to be wide, but large pricing swings are possible with overnight trading.
Limit orders can help to downplay the potential for losses associated with pricing gaps. Placing a buy limit order or limit sell order may not close the gap entirely. But it may help to mitigate the losses you may experience when gaps in pricing exist. Whether the gap is moving up or down can determine what type of limit order to place and where to cap your limit price.
Advanced Strategies for Using Limit Orders
Seasoned investors may utilize more advanced strategies with limit orders. But note that it takes some practice and a solid understanding of what you’re doing to ensure you’re not taking undue risk.
Combining Limit Orders With Technical Analysis
Utilizing technical analysis strategies — which involve analyzing chart movements to try and get a sense of what a stock might do next — is one advanced strategy that investors can utilize. It’s fairly advanced, and requires some homework and analysis skills, but paired with limit orders, it may be a way for investors to incorporate new methods into their overall strategy.
Again, though: This is advanced, and doesn’t guarantee results.
Setting Conditional Limit Orders
Investors may also want to look at the possibility of using conditional limit orders to fine-tune their strategy. Conditional limit orders allow investors to set order “triggers” based on price movements, and there are several types: Contingent, one-triggers-the other, one-cancels-the-other, and one-triggers-a-one-cancels-the-other. So, they all sort of relate and can rely on each other.
The Takeaway
Limit orders can be an effective and efficient way for investors to set price caps on their trades, and also give them some protection against market swings. Limit orders offer other advantages as well, including giving traders the ability to place longer- or shorter-term trades that will be executed even if they’re not continuously watching the market. This can potentially protect investors against losses and potentially lock in gains.
That said, limit orders are complicated because they don’t guarantee that the trade will be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.
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FAQ
Can I specify the price for a limit order?
Yes, investors can specify the price for a limit order. In fact, the price typically is the limit in a limit order, representing either a price ceiling or a price floor.
How long does a limit order stay active?
Generally, a limit order will stay active indefinitely, unless an investor cancels it or specifies otherwise. That means that if the limit is never reached, the order will not execute, and the limit order will remain active until the limit is reached.
Can I cancel a limit order once it’s placed?
Investors can cancel standing limit orders as long as conditions haven’t arrived that have led to the order being actively executed. The cancellation process will depend on the specific exchange an investor is using, however.
What happens if the market price doesn’t reach my limit price?
If the market price of a stock does not reach the limit price — either a price floor or price ceiling — then the limit order will not execute, and the limit order will remain active until it does.
Can I place a limit order outside of regular trading hours?
It’s possible to place limit orders outside of regular trading hours, depending on the rules of a given exchange, and what market conditions dictate. The order itself, of course, won’t execute until the market opens, assuming that the limit is reached.
Are there any fees associated with limit orders?
There may or may not be fees associated with limit orders, and it’ll depend on the specific exchange or brokerage an investor is using. Note that some brokerages may charge higher fees for limit orders than market orders — but some may charge no fees at all.
Are limit orders guaranteed to be executed?
No, there is no guarantee that a limit order will be executed, as it will only execute if the limit price is reached. If the limit is not reached, the order will remain active but not execute.
About the author
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.
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