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Employee stock options (ESOs) may be included in an employee’s compensation package, as a way of giving an employee the opportunity to buy stock in the company at a certain price — and as an incentive to stay with the company for a period of time.

Employee stock options give employees the right to buy company stock at an established grant price once certain terms are met. But there’s no obligation to do so.

Exercising stock options means choosing to purchase the stock at the grant price, after a predetermined waiting period. If an employee doesn’t purchase the stock, the option will eventually expire.

Employee stock options may also give employees a sense of ownership (and, to a degree, actual ownership) in the company they work for. That can have benefits and drawbacks. But if you’re working in an industry in which employee stock options are common, it’s important to know how they work, the different types, and the tax implications.

What Are Employee Stock Options?

Employee stock options give an employee the chance to purchase a set number of shares in the company at a set price — often called the exercise price — over a set amount of time.

Typically, the exercise price is a way to lock in a lower price for the shares, although there are no guarantees.

This potentially gives an employee the chance to exercise their ESOs at a point when the exercise price may be lower than the market price — with the potential to make a profit on the shares.

Sometimes, an employer may offer both ESOs and restricted stock units (RSUs). RSUs are different from ESOs in that they are generally a promise of stock at a later date.

Employee Stock Option Basics

When discussing stock options, there are some essential terms to know in order to understand how these options work. (For investors who are familiar with options trading, some of these terms may sound similar. But options trading, which involves derivatives contracts, doesn’t have any bearing on employee stock options.)

•   Exercise price/grant price/strike price: This is the given set price at which employees may purchase the stock options.

•   Market price: This is the current price of the stock on the market (which may be lower or higher than the exercise price). Typically an employee would only choose to exercise and purchase the options if the market price is higher than the grant price.

•   Issue date: This is the date on which the employee is given the stock options.

•   Vesting date: This is the date after which an employee can exercise their stock options per the original terms or vesting schedule.

•   Exercise date: This is the date an employee actually chooses to exercise their employee stock options.

•   Expiration date: This is the date on which the employee’s ability to exercise their stock options expires.

How Do Employee Stock Option Plans Work?

When you’re given employee stock options, that means you have the option to buy stock in the company at the grant price. If you don’t use the options to purchase the stock within the specified period, they expire.

ESO Vesting Periods

Typically, employee stock options follow a vesting schedule, which is basically a waiting period after which you can exercise them. This means an employee must stay at the company a certain amount of time before they can exercise their stock options.

The stock options they’re offered may be fully vested on a certain date, or just partially vested over multiple years, meaning some of the options can be exercised at one date and others at a later date.

ESO Example

For example, imagine an employee was issued employee stock options on February 1 of 2026, with the option of buying 100 shares of the company at $10/share. They can exercise their options starting on February 1, 2027 (the vesting date) for 10 years, until February 1, 2037 (the expiration date).

If they chose not to exercise these options by February 1, 2037, the options would expire and the employee would no longer have the option to buy the stock at $10/share.

Now, let’s say the market price of shares in the company goes up to $20 at some point after they’ve vested in 2027, and the employee decides to exercise their options.

They would buy 100 shares at $10/share for $1,000 total — while the market value of those shares is actually $2,000. In this scenario, the vesting period allowed the stock to grow and deliver a profit. But the reverse could also occur: The share price could drop to $8, in which case the employee wouldn’t exercise their options because they’d lose money. Instead, they might choose to wait and see if the share price rebounds.

Exercising Employee Stock Options

You don’t need to exercise your employee stock options unless it makes sense for you. You’re under no obligation to do so. Whether you choose to do so or not will likely depend on your financial situation and financial goals, the forecasted value of the company, and what you expect to do with the shares after you purchase them.

If you plan to exercise your ESOs, there are a few different ways to do so. The shares you get are effectively the same as the shares available on online investing platforms and brokerages, but some companies have specifications about when the shares can be sold, typically because they don’t want employees to exercise their options and then sell off all their stock in the company immediately.

Buy and Hold

Once you own shares in the company, you may choose to hold onto them — effectively, a buy-and-hold strategy. To continue the example above, you could buy the 100 shares with $1,000 cash and you would then own that amount of stock in the company — until you decide to sell your shares (if you do).

Cashless Exercise

Another way to exercise your ESOs is with a cashless exercise, which means you sell off enough of the shares at the market price to pay for the total purchase.

For example, you would sell off 50 of your purchased shares at $20/share to cover the $1,000 that exercising the options cost you. You would be left with 50 shares. Most companies offering brokerage accounts may do this buying and selling simultaneously.

Stock Swap

A third way to exercise options is if you already own shares. A stock swap allows you to swap in existing shares of the company at the market price of those shares and trade for shares at the exercise price.

For example, you might trade in 50 shares that you already own, worth $1,000 at the market price, and then purchase 100 shares at $10/share.

When the market price is higher than the exercise price — often referred to as options being “in the money” — you may be able to gain value for those shares because they’re worth more than you pay for them.

Why Do Companies Offer Stock Options?

The idea behind employee stock options is generally that if employees are financially invested in the success of the company, then they’re more likely to be emotionally invested in its success as well, and this may increase employee productivity and loyalty.

From an employee’s point of view, stock options may offer a way to see some financial benefit of their own hard work. In theory, if the company is successful, then the market stock price could rise and the stock options could be worth more.

The financial prospects of the company typically influence whether people want to buy or sell shares in that company, but there are a number of factors that can determine stock price, including investor behavior, company news, world events, and primary and secondary markets.

Tax Implications of Employee Stock Options

There are two main kinds of employee stock options: qualified and non-qualified, each of which has different tax implications. These are also known as incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs).

Incentive Stock Options (ISO)

When you buy shares in a company below the market price, you could be taxed on the difference between what you pay and what the market price is. ISOs are “qualified” for preferential tax treatment, meaning no taxes are due at the time you exercise your options — unless you’re subject to an alternative minimum tax.

Instead, taxes are due at the time you sell the stock and make a profit. If you sell the stock more than one year after you exercise the option and two years after they were granted, then you will likely only be subject to capital gains tax.

If you sell the shares prior to meeting that holding period, you will likely pay additional taxes on the difference between the price you paid and the market price as if your company had just given you that amount outright. For this reason, it may often be financially beneficial to hold onto ESO shares for at least one year after exercising, and two years after your exercise date.

Non-qualified Stock Options (NSOs or NQSOs)

NSOs do not qualify for preferential tax treatment. That means that exercising stock options subjects them to ordinary income tax on the difference between the exercise price and the market price at the time you purchase the stock. Unlike ISOs, NSOs will always be taxed as ordinary income.

Taxes may be specific to your individual circumstances and vary based on how the company has set up its employee stock option program, so it may be a good idea to consult a financial advisor or tax professional for specifics.

Should You Exercise Employee Stock Options?

While it’s impossible to know if the market price of the shares will go up or down in the future, there are a number of things to consider when deciding if you should exercise options:

•   The type of option — ISO or NSO — and related tax implications

•   The financial prospects of the company

•   Your own investment portfolio, and how these company shares might fit into your overall investment strategy

You also might want to consider how many shares are being made available, to whom, and on what timeline — especially when weighing what stock options are worth to you as part of a job offer. For example, if you’re offered shares worth 1% of the company, but then the next year more shares are made available, you could find your ownership diluted and the stock would then be worth less.

The Takeaway

Employee stock options (ESOs) can be an incentive that companies may offer their employees. They present the opportunity to invest in the company directly, and possibly profit from doing so. There are certain rules around ESOs, including timing of exercising the stock options, as well as different tax implications depending on the type of ESO a company offers its employees.

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Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

What happens to my stock options if I leave the company?

It depends on whether the stock options are vested or unvested. Employee stock options typically have a vesting schedule, or period of time, after which you can exercise them. If the options are not vested when you leave the company, you forfeit the stock options. If the options are partially or fully vested, your employer will typically give you a specific window of time — typically between 30 to 90 days — in which to exercise them. After that window, you typically lose the options. If you’ve already bought vested options, they are yours to keep when you leave the company.

What is the difference between ISOs and NSOs?

With ISOs, or incentive stock options, you are not taxed when you exercise your options. Instead, you pay taxes when you sell the options and make a profit. If you wait at least two years after the grant date, and at least one year after exercising the ISOs before selling them, you will typically be subject to the lower capital gains tax rate instead of the ordinary income tax rate. With NSOs, or non-qualified stock options, you are taxed at your ordinary income tax rate as soon as you exercise the options.

Do I have to exercise my stock options right away?

No. You can choose not to exercise your stock options if you wish. However, there is typically an expiration date — often, about 10 years — by which time an employee must exercise their options. After that date, you generally lose the opportunity to exercise them.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
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.

SOIN-Q426-053

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Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges throughout the day. They typically hold a basket of assets, such as stocks or bonds, and may track an underlying index or follow another investment strategy. Since the first ETFs launched in the early 1990s, the industry has grown substantially, giving investors thousands of funds to choose from.

But not every ETF is a good fit for every investor or portfolio. ETFs can vary widely in their holdings, investment objectives, risk levels, and costs. Understanding how to evaluate these differences can help investors identify funds that align with their financial goals and investment strategies.

How Do I Pick an ETF?

There’s no single right way to choose an exchange-traded fund (ETF), but following a process can help investors narrow their options and evaluate their choices.

Step 1: Identify the Asset Class

Investors might start by deciding which asset class they want exposure to. The main asset classes include stocks, bonds, cash and cash equivalents, and commodities. Some ETFs also provide exposure to currencies or other types of assets.

Each asset class has different characteristics, including its potential risks and returns.

•   Stocks: Stocks represent ownership in companies. Stock ETFs can offer exposure to individual companies, industries, or broad markets. Stock prices can fluctuate significantly, and investors may lose money.

•   Bonds: Bonds are debt securities issued by governments, corporations, and other entities. Bond ETFs can provide exposure to different types of debt, which may offer income but also carry risks such as interest rate risk and credit risk.

•   Commodities: Commodity ETFs can provide exposure to assets such as gold, oil, or agricultural products. These investments can be volatile and may use futures contracts rather than directly holding the underlying commodity.

•   Cash and cash equivalents: Some ETFs invest in short-term, relatively liquid securities, such as Treasury bills. These funds may have different risk and return characteristics from stock or bond ETFs.

An asset class’s potential return depends in part on the risks involved, but higher risk doesn’t guarantee higher returns. It’s wise for investors to consider their time horizon, financial goals, and ability to tolerate losses when choosing an ETF.

Also keep in mind that choosing one asset class doesn’t preclude investing in others. In fact, holding investments across different asset classes is one way investors may diversify a portfolio. This approach is known as asset allocation.

Step 2: Narrow the Investment Focus

Once investors have chosen an asset class, they can narrow their options by deciding what type of exposure they want within that market.

For stock ETFs, this may mean choosing between funds that track a broad market and those focused on a particular industry, company size, or investment characteristic. For example:

•   Sector ETFs: Focus on a specific industry, such as technology, financial services, or health care.

•   Dividend ETFs : Hold stocks selected for their dividend payments or dividend-related characteristics.

•   Growth or value ETFs: Focus on stocks with characteristics associated with growth potential or relatively low valuations.

•   Small-cap or large-cap ETFs: Focus on companies of different sizes, based on their market capitalization.

Bond ETFs can also vary by investment focus. Investors may compare funds that hold government or corporate bonds, domestic or international debt, or investment-grade or high-yield bonds. These categories can have different risk and return characteristics.

Some ETFs take a narrower approach by focusing on a particular theme, such as artificial intelligence, robotics, or electric vehicles. These thematic ETFs may provide exposure to a specific trend, but their concentrated focus can also increase risk. Investors can review a fund’s holdings and investment objective to understand what exposure it actually provides.

Step 3: Understand the ETF’s Investment Strategy

ETFs can use different strategies to select and manage their holdings. Understanding how a fund operates can help investors evaluate its objectives, costs, and potential risks.

Some common ETF strategies include:

•   Index ETFs: These funds seek to track a market index, such as the S&P 500, and generally follow a passive investment approach.

•   Actively managed ETFs: Rather than tracking an index, these funds rely on portfolio managers to select and manage investments based on the fund’s objectives.

•   Factor ETFs: Also known as smart-beta ETFs, these funds use rules-based approaches to select or weight investments based on characteristics such as value, momentum, or volatility.

•   Leveraged and inverse ETFs: Leveraged ETFs seek to deliver a multiple of an underlying index’s daily return, while inverse ETFs seek to deliver the opposite of its daily performance. These funds typically use derivatives and can carry significant risks, particularly when held for longer than a single trading day.

•   Currency-hedged ETFs: These funds use strategies designed to reduce the impact of currency fluctuations on returns from international investments.

These strategies can affect an ETF’s performance, costs, and risk level. It’s a good idea to review a fund’s investment objective and prospectus to understand how it works before choosing it.

Step 4: Compare ETF Costs

One reason ETFs have become popular is that many offer relatively low costs, particularly those that track broad market indexes. However, ETF costs can vary considerably, and the expense ratio is only one factor to consider.

An ETF’s expense ratio represents its annual operating expenses as a percentage of its assets. These expenses are generally reflected in the fund’s net asset value rather than billed directly to investors. For example, an ETF with an expense ratio of 0.45% would have annual operating expenses equivalent to $4.50 for every $1,000 invested, assuming the investment amount remained unchanged.

Expense ratios can vary depending on the fund’s investment strategy, complexity, and management approach. Many broad-market index ETFs have relatively low expense ratios, while some actively managed or specialized funds charge more. When comparing ETFs with similar objectives, the expense ratio can help investors understand how much they may pay for the fund’s management and operation.

There may also be costs involved in buying or selling ETF shares. These include the bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. A wider spread can increase the cost of trading. Investors may also pay brokerage commissions, depending on their brokerage firm and account.

Considering both ongoing fund expenses and trading costs can provide a more complete picture of an ETF’s cost.

Step 5: Evaluate Performance, Tracking, and Liquidity

After narrowing down ETF options, investors may want to examine additional information to better understand how a fund operates and how it has performed.

Historical Performance

Historical performance can help investors understand how an ETF has behaved under different market conditions. However, past performance doesn’t guarantee future results. When comparing funds, it’s wise to look at performance over multiple periods and consider whether the funds have similar investment objectives and levels of risk.

It’s also important to distinguish between price returns and total returns. Total returns generally account for both changes in an investment’s price and distributions, such as dividends or interest.

Tracking Difference and Tracking Error

For index ETFs, tracking is another important consideration. Tracking difference measures how much an ETF’s return differs from the return of its underlying index over a particular period. Tracking error generally measures how much the ETF’s returns fluctuate relative to the index’s returns over time.

An ETF may not perfectly match its benchmark because of expenses, trading costs, cash holdings, sampling techniques, or the way it handles dividends and other distributions. These differences can be particularly important when comparing funds that track the same or similar indexes.

Liquidity

Liquidity refers to how easily an investor can buy or sell ETF shares without significantly affecting the price. A fund’s assets under management (AUM), trading volume, and bid-ask spread can all provide useful information about its trading characteristics.

A larger AUM may indicate that a fund has attracted more investor assets, but fund size alone doesn’t determine liquidity. The liquidity of the underlying securities and the ETF’s trading conditions can also matter.

Investors comparing similar ETFs may want to examine their typical bid-ask spreads and trading volume, as well as the liquidity of the assets they hold.

How to Find an ETF’s Holdings, Prospectus, and Fact Sheet

Researching an ETF’s holdings and official documents can help investors understand what they’re buying and the risks involved.

ETF Holdings

ETF providers typically publish information about a fund’s holdings on their websites. Many ETFs disclose their portfolio holdings daily, although disclosure practices can vary by fund structure and strategy. Reviewing holdings can help investors determine which securities a fund owns, how concentrated its portfolio is, and whether it overlaps with other investments they hold.

ETF Prospectus

An ETF’s prospectus provides detailed information about the fund, including:

•   Its investment objective and strategy

•   The types of securities it holds or may hold

•   Principal risks

•   Fees and expenses

•   Information about the fund’s management and operations

Investors can generally find a fund’s prospectus on the ETF provider’s website or through the SEC’s EDGAR database. Reading the prospectus can help investors understand the fund’s intended strategy and the risks associated with it.

ETF Fact Sheet

An ETF fact sheet provides a shorter overview of the fund. It may include information such as:

•   Investment objective and benchmark

•   Historical performance

•   Expense ratio

•   Top holdings

•   Sector or asset allocation

•   Other portfolio characteristics

ETF providers typically publish fact sheets periodically, often quarterly. Fact sheets can be useful for comparing funds, but investors will want to consult the prospectus and other official fund materials for more detailed information.

The Takeaway

Choosing an ETF from the thousands available can seem daunting, but a step-by-step approach can help simplify the process. Important considerations include the asset class, investment focus, and strategy of the fund, as well as its costs, historical performance, tracking characteristics, and liquidity.

An ETF’s prospectus and fact sheet can provide useful information about its investment objectives, holdings, expenses, and risks.

While an individual ETF may provide exposure to a range of securities, that doesn’t necessarily mean it offers broad diversification. Some investors use multiple ETFs to build a portfolio with exposure to different asset classes and markets. Understanding what each fund holds and how it operates can help investors evaluate how it may fit within their overall portfolio.

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Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

How Many ETFs Should I Own?

There’s no set number of ETFs an investor should own. Some ETFs provide broad exposure to hundreds or thousands of securities, while others focus on specific industries, asset classes, or investment strategies. An investor may be able to build a diversified portfolio with just a few ETFs, depending on their objectives and the funds’ holdings. Owning more ETFs doesn’t necessarily mean having greater diversification, particularly if the funds hold many of the same securities.

Are ETFs a Good Choice for Beginners?

ETFs can be relatively accessible for beginners because they offer exposure to a range of securities through a single fund and trade on stock exchanges like individual stocks. However, ETFs vary in their investment strategies, costs, and risk levels. Beginners will want to understand a fund’s holdings, investment objective, and potential risks before buying shares.

What Is a Good Expense Ratio for an ETF?

A good expense ratio depends on the type of ETF and its investment strategy. Broad-market index ETFs often have relatively low expense ratios, while specialized and actively managed funds may charge more. When comparing ETFs with similar objectives, investors can compare their expense ratios along with other costs, such as bid-ask spreads and brokerage commissions.

Can You Lose Money Investing in ETFs?

Yes. ETFs are subject to market risk, and their share prices can decline if the securities they hold lose value. Some ETFs, such as those focused on narrow market sectors or those using leveraged strategies, may carry additional risks. Even diversified ETFs can lose value during market downturns. An ETF’s diversification and investment strategy don’t guarantee against losses.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

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Wondering how much you’ll gain by investing in stocks? It helps to look at the average stock market return for the last 10, 20, and 30 years.

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Coattail investing, also known as copycat investing, is a strategy in which investors try to replicate the investment decisions of other investors they believe have a successful track record. The idea is to observe what experienced investors are buying and selling and use those decisions to inform their own portfolios.

For newer investors, coattail investing may offer a way to learn from more experienced market participants and better understand how they approach investing. However, the strategy has both potential benefits and drawbacks. It’s important for investors to carefully consider whom they follow, whether that person’s approach aligns with their own financial goals and risk tolerance, and the limitations of copying someone else’s investment decisions.

How Coattail Investing Works

Coattail investing involves observing the investment decisions of another investor and using that information to guide your own investment choices. For example, someone might research the stock holdings of a well-known money manager, follow an activist investor’s public disclosures, or monitor news about a prominent investor’s latest moves.

There are several ways to follow other investors. Public disclosures filed with the Securities and Exchange Commission (SEC), financial news coverage, interviews, and investors letters can provide information about their investment activity. For example, certain institutional investment managers with at least $100 million in qualifying securities must file quarterly form 13F reports with the SEC. These filings disclose specified holdings as of the end of the reporting quarter. However, they may not become public until 45 days after the quarter ends, so they don’t necessarily show what a manager owns today.

Some online platforms also track the portfolios or reported trades of prominent investors, making it easier to monitor their activity. However, tracking another investor’s holding is different from automatically copying their trades. The latter is generally known as copy trading and involves a platform or service that attempts to replicate another person’s transactions.

Not every investor’s activity is publicly available, and different disclosure requirements apply to different types of investors. As a result, the information available to copycat investors can vary.

Who Do Coattail Investors Follow?

Coattail investors can follow a wide range of market participants, from professional money managers to individual investors with a public track record. The investors they monitor may have different approaches, ranging from long-term stock ownership to more frequent buying and selling. The choice often depends on what information is publicly available and which investment strategies or market perspective interest them.

Here’s a look at some of the people and groups that copycat investors may monitor.

Activist Investors

Activist investors acquire significant stakes in companies and seek to influence their management, operations, or strategic direction. Their involvement can sometimes attract attention from other market participants and affect a company’s stock price.

Activist investors may disclose their positions through regulatory filings, public statements, or press releases. Financial news outlets also regularly report on their activities, making it easier for copycat investors to follow their moves.

However, by the time an activist investor’s position becomes public, the stock price may already have reacted to the news. An activist’s investment strategy may also depend on changes that take time to materialize or may never occur.

Money Managers

Professional money managers oversee assets on behalf of clients, institutions, or investment funds. Some institutional investment managers are required to report certain securities holdings to the SEC through quarterly Form 13F filings.

These filings can give copycat investors insight into the portfolios of large institutional investors. However, they have important limitations: Form 13F generally covers certain securities, not every asset a manager owns, and filings can be submitted up to 45 days after the end of a quarter.

As a result, the information may not reflect a manager’s current holdings or recent trades. Investors who use these filings to identify potential investments will want to account for the reporting delay and recognize that the manager may have already changed their position.

Large Corporations and CEOs

Some investors monitor the financial decisions of large corporations and their executives, particularly when those decisions involve significant acquisitions, strategic investments, or changes in business operations. Companies may use excess cash to fund operations, repay debt, acquire other businesses, or purchase financial assets. Their decisions can provide insight into how they view their business prospects and financial priorities.

However, a company’s financial decisions aren’t necessarily a useful model for an individual investor. Corporations have different objectives, resources, tax considerations, and risk exposures. In addition, a company’s cash holdings or strategic investments don’t necessarily reflect the personal investment decisions of its CEO.

Unlikely Visionaries

Some copycat investors look beyond the traditional financial world to follow individuals who have made notable investments in other industries. Professional athletes, celebrities, and social media personalities may have experience with business ownership, startups, or other financial ventures. Their activities can sometimes provide a different perspective on companies or industries that receive less attention from traditional market participants.

However, a successful investment doesn’t necessarily establish a consistent track record. Public figures may also have access to opportunities, resources, or financial advice that aren’t available to the average investor.

Following an athlete’s or influencer’s investment activity may provide an opportunity to learn about different businesses, but using it as a substitute for independent research is generally not advised. Building an entire portfolio around the decisions of a public figure could expose investors to risks they don’t fully understand.

What Are the Risks of Coattail Investing?

One of the main risks of coattail investing is that the investor being followed may make unsuccessful decisions. Even experienced money managers can experience losses, and a successful track record doesn’t guarantee future results.

Other risks include:

•   Delayed information: Public disclosures may not reflect an investor’s current holdings or most recent trades. By the time a copycat investor acts, the market price may have changed.

•   Different financial goals: The investor being followed may have a different time horizon, financial situation, or tolerance for risk.

•   Limited information: Knowing what another investor bought or sold doesn’t necessarily reveal why they made the decision or how it fits into their broader strategy.

•   Concentration risk: Copying a small number of investors may lead to a portfolio that is heavily concentrated in certain securities, industries, or asset classes.

•   False confidence: Following a successful investor may create the impression that a decision is less risky or requires less research than it actually does.

Coattail investing also doesn’t eliminate the need for ongoing portfolio management. Investors will still want to consider their own financial goals, diversification, and risk tolerance.

Some automated copy trading services may execute trades based on another investor’s activity, but automation doesn’t remove investment risk. Investors will want to understand how a service operates, including its fees, trading limitations, and potential tax consequences.

Ultimately, coattail investing may provide a way to learn from other market participants, but it doesn’t replace independent research or personal financial decision-making.

The Takeaway

Coattail investing, also known as copycat investing, involves following another investor’s investment decisions and using them to inform your own portfolio. Investors may monitor professional money managers, activist investors, corporations, or other individuals whose financial decisions interest them.

Although the strategy may offer insights into how experienced investors approach the market, copying their decisions comes with limitations. Public disclosures may be delayed, investment goals may differ, and even successful investors can make mistakes.

For those interested in coattail investing, learning about other investors’ strategies and researching their decisions independently may be more useful than attempting to replicate their portfolios exactly.

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.

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

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

What is coattail investing?

Coattail investing, also called copycat investing, is a strategy in which investors follow the buying and selling decisions of other investors, often those with an established track record. They may use public disclosures, financial news, or investment platforms to learn about another investor’s portfolio and use that information to guide their own investment decisions. However, copying another investor’s choices doesn’t guarantee similar results.

How do investors track what famous managers buy?

Investors can track the holdings of certain institutional money managers through quarterly Form 13F filings submitted to the Securities and Exchange Commission (SEC). These filings disclose certain securities holdings of institutional investment managers with at least $100 million in qualifying assets under management. Financial news outlets and online services also report on notable investment activity. However, Form 13F filings can be submitted up to 45 days after a quarter ends, so the information may not reflect current holdings.

What is the difference between coattail investing and copy trading?

Coattail investing generally involves researching another investor’s decisions and using them to inform your own portfolio. Copy trading takes this a step further by using an investment platform or service to automatically replicate another trader’s transactions, often in real time. Both approaches involve following someone else’s investment decisions, but copy trading typically requires less manual involvement. Neither approach eliminates investment risk.

What are the main benefits of coattail investing?

Coattail investing may help newer investors understand different investment strategies and discover how experienced market participants evaluate securities. It can also generate research ideas and highlight companies or industries that might otherwise be overlooked. However, following another investor’s moves does not guarantee similar results, and independent research remains important. In addition, another investor’s risk tolerance and timeline may not align with your own financial goals.

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A wash sale occurs when an investor sells a stock or other security at a loss and, within 30 days before or after the sale, buys or acquires the same or a “substantially identical” security. The wash-sale rule is an Internal Revenue Service (IRS) regulation that generally prevents investors from deducting losses on these transactions immediately for tax purposes.

Investors may sell securities at a loss as part of a tax strategy called tax-loss harvesting, which involves using investment losses to offset capital gains. However, if they repurchase the same or a substantially identical security within the wash-sale window, they may not be able to claim the loss as a tax deduction when they expect to.

Understanding the wash-sale rule can help investors account for potential tax consequences when selling securities at a loss.

Which Investments are Subject to the Wash-Sale Rule?

The wash-sale rule applies to most common stocks and securities, including:

•   Stocks

•   Bonds

•   Mutual funds

•   Exchange-traded funds (ETFs)

•   Options and certain other contracts to acquire securities

The rule can also apply to purchases made in an individual retirement account (IRA) or Roth IRA, as well as purchases made by a spouse. Certain securities futures contracts may also be subject to the rule.

The wash-sale rule generally does not apply to commodity futures or foreign currency trades. It also does not apply to sales of securities at a profit. For example, if an investor sells a stock at a gain and buys the same stock within 30 days, the transaction does not trigger a wash sale.

What Happens When You Trigger a Wash Sale?

Investors may sell securities at a loss as part of a tax-loss harvesting strategy, or they may decide to repurchase a security after selling it during a market downturn. The wash-sale rule is intended to prevent investors from claiming a tax deduction for a loss while maintaining substantially the same position in the security.

If an investor triggers a wash sale, the loss generally cannot be deducted immediately or used to offset capital gains on that year’s tax return. Instead, the disallowed loss is typically added to the cost basis of the replacement security, which can defer the tax benefit until the replacement security is sold.

There is an important exception: If an investor sells a security at a loss in a taxable account and purchases a substantially identical security in an IRA or Roth IRA within the wash-sale window, the loss is disallowed, but it generally is not added to the IRA’s cost basis. This means the tax benefit may be permanently lost.

The wash-sale rule can also apply if one spouse sells a security at a loss and the other spouse purchases a substantially identical security within the applicable window.

Understanding these rules can help investors account for potential tax consequences when making investment decisions. Investors with questions about how the wash-sale rule applies to their circumstances may want to consult a tax professional.

Avoiding a Wash Sale

The best way to avoid a wash sale is to understand how the rule applies to your transactions and keep track of purchases and sales across your accounts, whether you use a traditional brokerage or prefer online investing. The IRS generally considers a security a wash sale if you sell it at a loss and purchase or acquire the same or substantially identical security within 30 days before or after the sale.

Because the IRS does not provide a simple, universal definition of what makes two securities substantially identical, determining whether a particular transaction triggers a wash sale can be complicated. Investors who use tax-loss harvesting may want to review their transactions carefully and consult a tax professional when they’re unsure about a potential wash sale.

What to Do After Selling an Asset at a Loss

One straightforward way to avoid a wash sale is to wait at least 31 days after selling a security at a loss before purchasing the same or a substantially identical security.

Alternatively, an investor might choose to purchase a different security that provides similar, but not substantially identical, market exposure. However, determining whether two securities are substantially identical can be difficult, so investors may want to consult a tax professional before making the transaction.

Selling a security at a loss can potentially help investors offset capital gains and, subject to applicable limits, some ordinary income. However, if an investor wants to repurchase the same security shortly after selling it, the wash-sale rule may affect the timing or tax treatment of the transaction.

In some cases, selling stock in one corporation and purchasing stock in another corporation may not trigger a wash sale. Similarly, selling a company’s stock and purchasing its bonds may not trigger the rule. However, the tax treatment depends on the specific securities and transaction.

Investing in ETFs or Mutual Funds Instead

Investors who want to maintain exposure to a particular industry or market segment after selling a security at a loss may consider purchasing a different ETF or mutual fund.

For example, an investor who sells an individual technology stock at a loss might consider purchasing a diversified technology ETF. Because the fund holds multiple securities rather than just the stock that was sold, it may not be considered substantially identical to the individual stock. However, this is not a guarantee that the transaction will avoid a wash sale. The IRS considers whether securities are substantially identical, and the analysis depends on the specific investments involved.

Switching between two ETFs or mutual funds can also be complicated. Funds that track the same index or have nearly identical holdings may raise wash-sale concerns, even if they have different names or expense ratios.

Investors considering these transactions may want to review the funds’ underlying holdings and consult a tax professional before making a decision.

Wash-Sale Penalties and Benefits

If a transaction qualifies as a wash sale, the investor generally cannot deduct the disallowed loss immediately to reduce taxable income or offset capital gains. However, when a replacement security is purchased in a taxable account, the disallowed loss is generally added to its cost basis. This adjustment can defer the tax benefit until the replacement security is sold.

For example, suppose an investor purchases 10 shares of a stock for $1,000 and later sells them for $800, realizing a $200 loss. If the investor purchases 10 substantially identical shares for $850 within the wash-sale window, the $200 loss is disallowed.

The investor’s cost basis in the replacement shares becomes $1,050 ($850 purchase price + $200 disallowed loss). If the investor later sells the replacement shares for $1,200, the taxable capital gain would generally be $150 rather than $350, assuming no other adjustments apply.

The holding period of the original security is also generally added to the holding period of the replacement security. This may affect whether a future gain or loss is classified as short-term or long-term for tax purposes.

The treatment differs when the replacement security is purchased in an IRA or Roth IRA. In that case, the disallowed loss generally is not added to the IRA’s cost basis, so the tax benefit may be permanently lost.

The Takeaway

The wash-sale rule applies when an investor sells a stock or other security at a loss and buys or acquires the same or a substantially identical security within 30 days before or after the sale. The rule generally prevents investors from deducting the loss immediately, although the disallowed loss may be added to the cost basis of a replacement security in a taxable account.

Understanding the wash-sale rule can help investors account for potential tax consequences when selling securities at a loss. Because the rule can apply across multiple accounts and involves some uncertainty about what qualifies as substantially identical, investors may want to consult a tax professional when planning transactions.

Tax considerations are one part of managing an investment portfolio, and understanding how different transactions may affect a tax return can help investors make more informed decisions.

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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Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

How do I avoid a wash sale?

To avoid a wash sale, you need to wait at least 31 days after selling a security at a loss before purchasing the same or a substantially identical security. You can also consider purchasing a different security that provides similar market exposure but is not substantially identical. Keep in mind that the wash-sale rule applies across relevant accounts, including taxable accounts and IRAs, and can also apply to purchases made by a spouse. Since wash-sale rules can be complicated, you may want to consult a tax professional.

What is the wash-sale rule in the IRS?

The IRS wash-sale rule generally prevents investors from deducting a loss on a security if they purchase or acquire the same or a substantially identical security within 30 days before or after selling it at a loss. The rule is intended to prevent investors from claiming tax deductions for losses while maintaining substantially the same investment position. In a taxable account, the disallowed loss is generally added to the cost basis of the replacement security.

What happens if I sell a wash-sale stock?

If you sell a stock at a loss and trigger the wash-sale rule, you generally cannot deduct the loss immediately on your tax return. If you purchase the replacement stock in a taxable account, the disallowed loss is typically added to its cost basis, which may reduce a future taxable gain or increase a future deductible loss. However, if you purchase the replacement security in an IRA or Roth IRA, the loss generally cannot be added to the account’s cost basis.

What is the downside of a wash sale?

The main downside of a wash sale is that you may not be able to deduct an investment loss when you expected to. In a taxable account, the tax benefit is generally deferred until you sell the replacement security. If you purchase a substantially identical security in an IRA or Roth IRA, the loss may be permanently disallowed. Wash sales can also complicate tax reporting and make it more difficult to plan transactions around tax-loss harvesting.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
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.

SOIN-Q426-082

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