Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Cost of carry refers to the ongoing expenses tied to holding an investment, such as interest payments, storage fees, or missed potential gains from using the money elsewhere. These costs may impact the total return that an investor earns on a position. These costs can vary by asset type and financing method, but they often influence pricing and profit potential.
This guide breaks down how cost of carry works in futures and options trading, how to calculate it, and why it matters when assessing potential returns.
Key Points
• Cost of carry refers to the ongoing costs associated with holding an investment, such as interest, storage, or insurance.
• These carrying costs can reduce the net return of an investment if not properly accounted for.
• In options trading, cost of carry may include margin interest, opportunity costs, and missed dividends.
• The cost of carry in futures helps explain the difference between spot and futures prices.
• Cash-and-carry arbitrage strategies attempt to profit when futures prices exceed spot price plus carrying costs.
What Is Cost of Carry?
Cost of carry refers to the ongoing expenses associated with holding a given investment. Transaction costs, which are incurred upon the purchase or sale of the asset, are typically not considered a carrying cost.
Cost of carry can come in a variety of different forms — here are a few types of carrying costs that you’ll want to be aware of:
• Storage costs, if you are investing in the futures market for physical goods
• Interest paid on loans used for an investment
• Interest charged in margin accounts when borrowing to invest in stocks or options
• Costs to insure or transport physical goods
• The opportunity cost of investments
Most, if not all, investments have carrying costs, and many buyers factor these into their decisions. Even if a particular investment doesn’t have obvious carrying costs, there is always the opportunity cost of making one options trade over the other.
How Cost of Carry Works
The way that cost of carry works depends on the type of investment you are considering. If you are investing in the futures markets for tangible goods like coffee, oil, gold, or wheat, you may incur carrying costs related to storage, insurance, or delivery. For example, if you buy a commodity like crude oil, you must pay the costs for transporting, insuring and storing that oil until you sell it.
In a purely financial transaction like buying stock or trading options, there can still be carrying costs involved. You may have to pay interest if you are borrowing money with a margin account. You may also incur what are called opportunity costs. Opportunity costs refer to potential unrealized returns.
If you are holding $10,000 in your stock account waiting for an option assignment, you may be forgoing potential returns on other potential investments.
Which Markets Are Impacted by Cost of Carry?
Cost of carry is a factor in a variety of different types of investments. Options trading has carrying costs, including interest incurred through margin accounts and opportunity costs associated with capital allocation.
Investing in commodities may require a cost of storing, insuring, or transporting your goods. You should be aware that most types of investments also have opportunity costs.
Cost-of-Carry Calculation
The simplest cost-of-carry calculation just includes all of your carrying costs as a factor when you analyze the profitability of a particular investment. So, if
• P = Purchase price of an investment
• S = Sale price of the same investment
• C = carrying costs while holding the investment
The net return of this investment could be expressed as Profit = S – P – C. This formula highlights how holding costs directly influence potential gains.
Futures Cost of Carry
The futures market has two different prices for each type of commodity. The spot price refers to the price for immediate delivery (i.e., on the spot). A futures price is the price for goods at some specified time in the future.
Because most futures contracts incur carrying costs, the futures price is usually (but not always) higher than the spot price. This situation is called contango. When the futures price is lower than the spot price, often due to high demand or limited supply, it’s known as backwardation. (Contago and backwardation are key terms in commodity futures markets.)
Options Cost of Carry
When trading options the costs of carry fall into a few categories:
• Interest costs – Some investors borrow money to purchase options, i.e., a loan from a friend, a bank loan, or a brokerage margin account.
Whatever the source of the money, the interest paid on borrowed funds is a carrying cost.
• Opportunity costs – You’ve chosen to invest in options. But where else could you have invested that money? Because most alternative investments carry risk, as does investing in options, it’s difficult to make an apples-to-apples comparison.
Risk-free investing rates are typically used to assess opportunity cost. “Risk-free” is often approximated using the yield on short-term U.S. Treasury bills, such as the three-month T-bil. In the past, 30-year bonds were the standard, but 10-year returns and even the return on short-term Treasury notes may also be used.
• Forgoing Dividends – One of the disadvantages of owning options compared to owning stock, is that you are not eligible for dividends as an option holder. The market may price expected dividends into the option premium but, as interest rates can fluctuate over time, so can dividend rates.
Models like Black-Scholes and binomial option pricing incorporate cost of carry through adjustments to interest rates and dividends.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
Examples of Cost of Carry
Here is an example of cost of carry and how it might affect an investment in purchasing company XYZ commodity.
Say you buy a contract for 1,000 barrels of XYZ commodity at $80/barrel. Six months later, the price of the commodity has gone up to $90/unit, and you sell. At first glance, it may appear to yield a $10,000 profit, but that excludes the cost of carrying the oil.
If it cost you $3,000 to store and insure those units for the six months that you owned them, those carrying costs must be subtracted from your profit. You also are liable for delivering the commodity, which might cost another $1,000. Considering the cost to carry, your actual profit was only $6,000. While these costs may be easier to understand with physical goods like commodities, most types of investments have carrying costs.
Cash and Carry Arbitrage
Like crypto arbitrage, there sometimes exists a type of arbitrage called cash-and-carry arbitrage. In cash-and-carry arbitrage, an investor will purchase a position in a stock or commodity and simultaneously sell a futures contract for the same stock or commodity.
If the futures price is higher than the combined amount of the stock price plus carrying costs, it may be possible to achieve a limited arbitrage gain through cash and carry arbitrage. However, execution delays, financing charges, or delivery constraints may reduce or eliminate gains.
Cost of Carry and Net Return
As discussed already, the cost of carry can reduce the net return on investment. When determining your total profit and the return on investment (ROI), you need to account for any and all costs that you incur as part of the investment.
These might include transaction costs, like commissions, interest payment, and storage costs. Subtract these costs from gross profit to calculate the net return of your investment.
Can You Do Anything About Cost of Carry?
While cost of carry is difficult to eliminate entirely, investors can reduce its impact by choosing investments in line with their goals and resources. For example, if you do not have access to low-cost financing or storage, you may want to avoid trades that rely heavily on borrowed funds or physical delivery. On the other hand, if your specific situation gives you access to below-market financing or storage costs, you may be able to earn a profit with cash and carry arbitrage.
The Takeaway
The cost of carry isn’t just a theoretical concept: it directly affects net return by adding real, sometimes hidden, costs to holding an investment. Whether due to storage and insurance in futures or margin interest and missed dividends in options trading, these expenses can shift trade-related math. Understanding how carry works helps buyers assess risk, price contracts more effectively, and misjudge a position’s profit potential.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
*Risks associated with buying and selling options.
FAQ
How can you calculate cost of carry?
The cost of carry refers to any costs that you incur during the course of your investment. In commodities trading, this generally refers to costs like storage, insurance, or delivery of the commodity. In other types of investments, the cost of carry could include interest charges or the opportunity cost of using your money.
Do bonds have a cost of carry?
Yes, nearly all investments, including bonds, can involve costs associated with holding or financing the position. In the bond market, the cost of carry generally refers to the difference between the face value of the bond plus premiums minus applicable discounts.
How are ordering and carrying costs different?
Ordering costs are the costs that you pay as part of the ordering process. In a stock or option transaction, any broker’s commissions that you pay would be considered ordering costs. While ordering costs are usually incurred only once (at buy and/or sale), carrying costs are the costs that you must pay to hold an investment throughout its duration.
Photo credit: iStock/fizkes
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.
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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Options trading can appeal to traders who are interested in more advanced investment strategies and who wish to hedge against risk in their existing portfolios or attempt to benefit from different price movements and strategies. It’s important to know, however, that options trading is, in some ways, its own world, with its own jargon.
When an investor trades options, they aren’t trading individual shares of stock. Instead, they’re trading contracts to buy or sell stocks and other securities under specific conditions. Beyond this, there are a number of important options trading strategies that investors commonly use. In order to effectively deal in options, an investor should familiarize themselves with certain lingo and understand the potential risks involved in these strategies.
Key Points
• Options trading involves buying (or selling) contracts that allow traders to buy or sell assets under specific conditions.
• A call option gives the purchaser the right to buy shares at a fixed price, while a put option gives the buyer the right to sell shares at a fixed price.
• The strike price is crucial in options trading, determining whether an investor is “in the money” or “out of the money” based on the stock’s actual price.
• Options trading offers potential advantages such as a lower entry point, possible downside protection, and greater flexibility in investment strategies.
• Options trading also carries higher risk, particularly for sellers who may face significant losses from uncovered trades.
First, Understand What You Are Trading
Before learning the trading terms, it helps to have a firm grasp of what options trading is and what it involves. In layman’s terms, when you’re trading options, you’re investing in an option to buy or sell a stock, rather than the stock itself.
Options are a form of derivative trading, and there are many options trading strategies that traders can use, too. It’s not exactly the same as trading stocks, and is often more complicated. For that reason, investors should have a strong grasp of the various elements of options trading as well as the potential risks before they start trading options.
A call option is an options contract that gives the purchaser of the option the right, though not the obligation, to buy shares of a stock or another security at a fixed price. This price is called the “strike price.”
When an investor buys a call option, the option is open for a set time period. While the option buyer may choose whether or not to buy the underlying asset in that time period, the seller is obligated to fulfill the terms of the contract if the buyer chooses to exercise the option.
The expiration date is the date when the call option is voided — though some options positions are automatically exercised if they are in the money. Standard options contracts often expire within a few months, though durations can vary.
Put Option
A put option gives a purchaser the right to sell shares of a stock at the strike price by a specified day. When getting to know puts and calls definitions, it’s important to remember that each one has:
• A strike price
• An expiration date,
• And a premium.
Strike Price
With a call option or put option, the strike price is one of the most important trading terms to know.
In a call option, the strike price is the price at which an investor may buy the underlying stock associated with the contract. In a put option, the strike price is the price at which they may sell the underlying stock.
The gap between the strike price and the market price of a stock determines whether an option is “in the money” (ITM) or “out of the money” (OTM). More on this below.
Expiration
Every option contract comes with an expiration date, which is the last day that the contract is in effect. American options may be exercised up to and on the expiration date of an option. In contrast, European-style options can only be exercised on the expiration date.
Premium
The option premium is the current price of the option, and thus the amount that the buyer pays to the option seller for the contract. The premium is determined by intrinsic factors, including whether an option is currently in-the-money and how far, as well as extrinsic factors, including the time remaining until expiration and implied volatility.
Exercise
Exercising an option is when the buyer chooses to utilize their right to buy or sell the underlying security, depending on whether they hold a call or a put.
In the Money
When discussing stock movements, it’s typical to think in terms of whether a stock’s price is up, down, or flat. With options, on the other hand, there’s different language used to describe whether an investment may pay off or not, and it’s often described as “in the money” versus “out of the money.”
An option is in the money when the relationship between the strike price and the stock’s market price would make exercising the option financially beneficial to the buyer. Which way this movement needs to go depends on whether they have a call option or put option.
With a call option, a buyer is in the money if the strike price is below the stock’s actual price. Say, for example, you place a call option to purchase a stock at $50 per share (the strike price), but its market price is $60 per share. In this case, the option would be in the money by $10 per share.
Put options are the opposite. An option buyer is in the money with a put option if the strike price is higher than the actual stock price.
Out of the Money
Being out of the money with call or put options means the option buyer doesn’t stand to see any financial gain from exercising the option, based on the current market price. Whether a call or put option is out of the money depends on the relationship between the strike price and the actual stock price.
A call option is out of the money when the strike price is above the actual stock price. A put option is out of the money when the strike price is below the actual stock price.
At the Money
Being “at the money” is another scenario an options buyer could run into with options trading.
In an at-the-money situation, the strike price and the stock’s actual price are the same (or very nearly the same). If the buyer of the option sells the option, they could potentially make or lose money. If they exercise the option, they may lose money, since the strike price offers no financial advantage over the current market price, and they have already paid the premium.
Volatility is the degree and frequency of fluctuations in an asset’s price over a given time period. In options, higher volatility typically increases the option’s premium since increased volatility may raise the likelihood that the contract becomes profitable before expiration.
Implied volatility is a way of measuring or estimating the future volatility of an option’s underlying asset. Higher implied volatility suggests that the underlying asset may see bigger price swings in the future, which in turn influences the option’s premium.
Implied Volatility Crush
An implied volatility crush, also known as an IV crush, happens when there’s a sharp decline in a stock’s implied volatility that affects an option’s value. Specifically, this means a downward trend that can reduce a call or put option’s value.
Volatility crushes tend to occur after a major announcement that affects or could affect the implied volatility of a stock’s price. For example, investors might see a volatility crush after a company releases its latest earnings report or announces a merger with a competitor. The release may reduce uncertainty surrounding the company prior to the announcement, thereby lowering both the stock’s expected volatility and the option’s premium.
Time Decay
Time decay, also known as theta in the options Greeks, is the decrease in an option contract’s value as its expiration date approaches. The rate of time decay tends to increase when an option is close to expiration since there is little time left for an option to potentially move into the money.
The bid price is the highest price a buyer is willing to pay for an option. The ask price is the lowest price a seller is willing to accept for an option. The difference between the bid price and ask price is known as the spread.
Holder and Writer
Other trading terms investors may hear associated with options are “holder” and “writer.” The person or entity buying an options contract may be referred to as the holder. The seller of an options contract can also be referred to as the writer of that contract.
It’s crucial to know when trading options that the buyer (or holder) has the right, but not the obligation, to exercise the option contract they purchased. The seller (or writer), on the other hand, is obligated to fulfill the terms of the contract, whether that involves buying or selling the underlying asset, depending on whether the option is a call or a put.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
Pros and Cons of Options Trading
Options trading can offer both advantages and disadvantages for investors.
Pros of Options Trading
• Lower entry point. Unless an investor is able to purchase fractional shares, purchasing individual stock shares with higher price points can get expensive. Investing in certain options trades, on the other hand, may be more accessible for investors with a limited amount of money to put into the market. However, while option trading may amplify gains, it can also amplify losses, making them high risk.
• Downside protection for buyers. If the stock’s price isn’t moving in the direction a buyer anticipated, they don’t have to exercise their option to buy, in which case their maximum loss is the premium they paid. Note that this is not the case for option sellers, who must fulfill the terms of the contract if exercised.
• Greater flexibility. Options trading can offer an investor flexibility. A buyer may choose to exercise an option to buy or sell shares, or may be able to sell the option contract, depending on the market conditions and strategy. Advanced traders may implement different options trading strategies, such as spreads, to express a view on a stock’s potential movement or to manage risk.
Cons of Options Trading
Options trading can be high risk. Trading options offers leverage, or the ability to gain exposure to stocks’ price movements through relatively small premiums, but that also means options trading may amplify losses.
Options are particularly risky for sellers. While the maximum loss for an option buyer is the premium paid, the option seller could face substantial losses if the price of the underlying asset moves in an adverse direction and their trade is not protected, or covered, by owning sufficient shares of the underlying stock.
The Takeaway
Trading options may be attractive to investors who anticipate meaningful movement in an asset, or who want to offset risk from other holdings. But before an investor engages in options trading, it’s important to get familiar with put and call definitions and other options trading terms.
Knowing the specific jargon and terminology used by options traders can help investors cut through the noise and make better decisions. Of course, if you’re uneasy or unfamiliar with options terminology, you’d probably be better off learning more before starting to make trades. Options trading is typically best for experienced investors with a higher tolerance for risk.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
Some of the most common options terms include call option and put option, which are the two main types of contracts, as well as strike price (the price at which an option buyer may buy or sell an option’s underlying shares), expiration date (when the option contract expires), and premium (the price a buyer pays a seller for the option). Other common terms include exercise, in-the-money, out-of-the-money, at-the-money, time decay, and implied volatility.
What are the basics of options trading?
Options trading is a form of trading that can provide investors with leverage, meaning they can gain exposure to the price movements of the number of shares covered by the contract (typically 100) without having to buy those shares outright. While their gains may therefore be magnified, so too may their potential losses. Options traders may employ several different strategies to try to profit from stock movements and manage risk.
What’s the easiest option trade to make?
The most straightforward options trade would typically be buying a call or put option. A buyer of a call or a put may profit if the price of the underlying asset moves in their favor (above the strike price with a call or below the strike price with a put) and if gains exceed the premium paid. The most they would stand to lose is the premium they pay when they enter the trade.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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An investor in a SPAC, or special purpose acquisition company, typically buys something called units, which are like packages that include shares of common stock as well as warrants (or fractions of warrants).
SPAC warrants are similar to options in that these contracts give investors the right to purchase shares of common stock, for a certain price (the strike price), by a certain date in the future, when the warrant expires and can no longer be redeemed. Fractions of warrants must be combined in order to purchase the appropriate number of shares.
The terms of different SPAC warrants can vary widely, though, and have a direct bearing on how many shares of stock the investor can purchase, during what period, and the circumstances whereby a SPAC can redeem the warrants. Investors interested in investing in SPACs after the IPO need to verify whether they are buying common stock shares, warrants, or units.
Key Points
• A SPAC is a shell company that raises capital in order to go public, and then seeks a private company to acquire or merge with, thereby taking that company public as well.
• Investors in a SPAC purchase “units,” which include common stock shares as well as warrants.
• SPAC warrants are contracts that allow investors to buy more common stock shares as long as certain terms are met in terms of price, timing, and so on.
• The terms of one SPAC warrant can differ from another, so investors have to understand the conditions so they make the best choices.
• A SPAC can decide to redeem outstanding warrants, particularly if the stock is trading above a certain price. If investors miss the redemption period, their warrants can expire worthless.
How to Evaluate SPACs
When evaluating whether or not to invest in a SPAC IPO, potential investors often consider:
• Who is the sponsor?
• Have they launched other SPACs before?
• Have those SPACs found targets and completed a successful company merger?
• Do the board members have the experience and track records that you would expect to evaluate investment opportunities?
However, it’s just as important for investors to understand the quantitative aspect of a SPAC deal. All SPACs are typically priced at $10 per unit, but the makeup of the units can vary.
Warrants and their inclusion, or absence, in a SPAC unit can affect investor profits. A SPAC unit can have the following compositions:
These contracts give stock warrant holders the right, but not the obligation, to buy stocks online or through a brokerage, at a later date. But unlike traditional options, stock warrants are offered by the company itself as a way to raise capital.
Similar to stock warrants (and options), SPAC warrants also have an expiration date, so investors must pay attention if they want to exercise them. Another nuance worth noting is that when warrants get exercised, the action can be dilutive to shareholders, since a flood of new shares can enter the market, impacting the price when investors buy shares.
SPAC Warrant Details
But warrants have the potential to be lucrative for these early SPAC investors. This is because, as explained, essentially they’re paying $10 for one share, plus the right to buy additional shares at a set price — what’s known as the strike or exercise price.
Also, even if an early investor decides to redeem their shares in the SPAC before a merger is completed, they get to keep the warrants that were a part of the SPAC units.
If the company doesn’t want to issue additional shares, they may not include warrants in their SPAC units. Market conditions may also dictate whether warrants are unnecessary.
Remember: Warrants are meant to entice investors to put in their money early. If demand for the SPAC is strong enough, the company may not feel the need to issue units with warrants.
Can You Trade SPAC Warrants?
Generally, an investor can only trade stock warrants if there is a whole number of warrants. If partial warrants are issued, that fraction may not be sold. In order to sell, the investor would need to purchase additional units in order to make up a whole warrant.
Here’s an example: Let’s say a SPAC unit consists of one share and a partial warrant that’s one-third of a warrant. This means that to own a whole warrant and purchase a share of stock, the investor would need to purchase two more units.
If they were to do this, then they could trade the whole warrant, either on a stock exchange or in the over-the-counter market.
Converting SPAC Units Into Shares
Another thing likely on investors’ minds: How do SPAC units actually get converted into shares? Depending on the specifics of the SPAC, the process happens more or less automatically, and there’s no action needed on the part of the investor. That’s assuming that the SPAC does end up merging and going public.
Converting SPAC warrants into shares is a bit more involved, however. In the case an investor wants to convert SPAC warrants to shares, investors should get in touch with their broker to discuss their options.
SPAC Warrants: Merger vs No Merger
SPAC warrants can be traded after a merger — for years, in some cases. That’s somewhat theoretical, though, as there may be redemption clauses in contracts that require investors to redeem their warrants under certain conditions. It really all depends on the specific SPAC, and the guidelines outlined within the contracts governing them.
If there is no merger, however, SPACs typically liquidate the funds they raised. Investors get their money back, and warrants are more or less worthless.
Examples of SPAC Investments With Different Warrant Compositions
It’s important for investors to examine the deal structure of each SPAC closely, and investors can do this by reading the initial public offering (IPO) prospectus.
The information around the composition of the shares or units being offered is usually on one of the first few pages, but reading the entire prospectus is essential for investors to make the right investment decision for them.
In general, here are some other pertinent pieces of information relating to warrants that potential investors should be looking for when reading through the prospectus:
• The strike price
• Exercise window
• Expiration date
• Whether there are any specific conditions that can trigger an early redemption
Investors should also inspect the exact composition of a SPAC unit. Does it offer one whole warrant, no warrant, one-quarter, one-third, or one-half?
The strike price, or exercise price, of SPAC warrants is often $11.50 a share. Investors sometimes have until five years after the merger before the warrant expires. However, the terms of different SPAC deals can vary. It’s possible that the deal terms call for an early redemption period, and if investors miss exercising their contracts in that period, the warrants could expire worthless.
SPAC Unit With Whole Warrant
Let’s say an investor buys 1,000 units of a SPAC. In this case, each SPAC unit is composed of one whole share, plus one whole warrant. That means the investor now owns 1,000 shares of the merged company stock, plus 1,000 warrants to buy shares of stock at $11.50 each.
If the SPAC completes its merger or acquisition and the shares jump to $20, the investor can buy additional shares for just $11.50 each. This would be a significant discount compared to where the existing shares are trading.
Here’s a hypothetical step-by-step example of how an investor could potentially profit from exercising their whole warrants:
1. Investor buys 1,000 units at $10 each, spending a total of $10,000.
2. SPAC shares jump to $20 each.
3. Investor exercises warrants, purchasing 1,000 shares for $11.50 each and spending an additional total of $11,500.
4. Investor sells all 2,000 shares immediately for the market price of $20 each, for $40,000 total.
Now, imagine that same investor bought into a SPAC where the units had no warrants. That means, while the investor’s 1,000 shares doubled in value, they didn’t have the right to buy an additional 1,000 shares. Here’s an example of this scenario:
1. Investor buys 1,000 units at $10 each, spending a total of $10,000.
2. SPAC shares jump to $20 each.
3. Investor sells the 1,000 shares immediately for $20 each, for $20,000 total.
Let’s say our hypothetical SPAC has units with partial warrants. So in each unit, there’s one share attached to a ½ warrant. Here’s how this would look:
1. Investor buys 1,000 units at $10 each, spending a total of $10,000.
2. SPAC shares jump to $20 each.
3. Investor exercises warrants. Every two warrants converts to one share of stock, so the investor buys 500 shares for $11.50 each, spending $5,750.
4. Investor sells all 1,500 shares immediately for $20 each, for $30,000 total.
Here’s a hypothetical table that lays out different profit scenarios depending on the warrant composition, assuming that an investor has bought 1,000 units, that the exercise price of the warrants is $11.50, and the underlying shares hit $20 each.
Warrants Attached to Each SPAC Unit
1 Whole Warrant
½ Warrant
⅓ Warrant
¼ Warrant
No Warrant
Units Purchased
1,000
1,000
1,000
1,000
1,000
Number of Shares That Can Be Bought With Warrants in SPAC Unit
1,000
500
333
250
0
Cost of Exercising Warrants at $11.50 Strike Price
$11,500
$5,750
$3,829.50
$2,875
$0
Proceeds From Selling Shares Acquired Through Warrant Exercise
$20,000
$10,000
$6,660
$5,000
$0
Net Proceeds from Selling Shares Exercised From Warrants
$8,500
$4,250
$2,830.50
$2,125
$0
Net Proceeds From Selling All Shares
$18,500
$14,250
$12,830.50
$12,125
$10,000
Finding SPAC Warrants
Since SPAC warrants trade like shares of stocks, and are listed by many brokerages, investors can often look them up and execute a trade like they would many other securities.
One tricky thing to watch out for, though, is that SPAC warrants may trade under different ticker symbols on different brokerages or exchanges. So, you’ll want to make sure you’re looking for the SPAC warrant you want before executing a trade.
Using SPAC Warrants
SPAC warrants’ main utility is that they can be traded or executed — meaning they can be converted into shares and, under the right conditions, sold at a profit.
So, for investors, using a SPAC warrant typically comes down to one of the two in an attempt to generate a return. There may be times when a SPAC doesn’t merge and investors get their money back, but the true utility of warrants is that they can be executed or traded.
The Takeaway
With SPAC investments, whether units come with full warrants, no warrants, or partial warrants is a quantitative consideration. All else being equal, SPACs that provide full or partial warrants offer more potential profit than SPACs that offer no warrants.
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FAQ
How do you evaluate SPACs?
Investors can evaluate SPACs by looking at qualitative aspects, including who the sponsors are, their backgrounds, whether the SPAC has found a target, and what types of experiences the board members have.
What is an example of a SPAC unit with a whole warrant?
An example of a SPAC with a whole warrant means that the investor would have one share per unit, plus a warrant to buy an additional share per unit. So if they owned 500 units, they would have 500 shares and warrants for 500 more shares.
What is a partial warrant?
When an investor buys a SPAC unit, it typically includes a share of stock and a warrant or partial warrant to be applied to additional shares, at some point in the future, per the terms of the warrant contract. Partial warrants might include a ½ warrant or a ⅓ warrant. In order to redeem the warrants for a full share of stock, the investor would need to buy more units, in order to combine the partial warrants into a whole warrant that’s worth a full share.
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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.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Each year brings new challenges for investors in terms of their investment strategies. Given the level of uncertainty in the U.S. and globally in 2025 so far, investors may want to ensure their portfolio can ride the waves for the coming months and beyond.
While it’s smart to keep an eye on the current economic and market climate — e.g., inflation, interest rates, the impact of certain technologies, tariffs — it’s just as important to anchor your investing strategy in time-tested principles of good investing: by knowing your current financial situation, your goals, time horizon, and risk tolerance.
With those as a base, here are eight investments to consider now, as well as some different types of investment accounts to know about.
Key Points
• While every year brings a new set of considerations for investors, it’s worth keeping a few fundamentals in mind.
• Deciding where to invest your money will depend on your goals, risk tolerance, and time frame.
• Newer investors can consider several investments to get started, including stocks, bonds, and mutual funds or ETFs that invest in those asset classes.
• Whether you tilt toward higher risk/high reward investments or lower risk/lower reward is something to consider in light of your overall goals and situation.
• Your goals will also help determine the best type of account to use for your investments.
Before You Invest Your Money
If you’re wondering where to invest right now, there are several answers and investment opportunities out there. But before you do anything, though, you’ll need to make some key decisions.
Your Current Financial Situation
No one invests in a vacuum, and your current financial situation will not only inform your goals, but potentially your timeline, risk tolerance, and how much money you have to invest.
Your age, your income, how much money you hope to invest each week or each month, whether you’re in debt — these personal factors are important to consider as you begin the self-directed investing process.
Goals
When deciding where to invest your money, the next step is to understand your goals: Whether you hope to earn additional income, or you’re saving for college, or planning for your retirement, it’s essential to know the main purpose of your investment plan.
Knowing your investing goals will help determine your timeline, and from there your risk tolerance — which can help you narrow down the investments you finally choose for your portfolio.
Your Timeline and Risk Tolerance
The time frame in which you hope to accomplish your goal is also important. For example, a longer time horizon might allow you to take on more risk with your investments. A shorter time horizon, where there’s a smaller margin to recover from any volatility, could inspire you to select lower-risk investments.
However, these choices ultimately depend on your personal tolerance for risk. If you can stomach a greater possibility of losing money when you invest, you likely have a higher risk tolerance. If you dread the idea of losses, you may have a lower risk tolerance.
There’s no right or wrong way to make these decisions. It’s important to take each factor into account in order to decide where to invest your money right now.
Learning About Investment Options
Once you’ve identified the main ingredients in your investment plan, you can begin to consider the type of investment account that makes the most sense for you, as well as exploring the various asset classes you can invest in.
A Few Types of Accounts
Your goal will likely help you decide what type of investment account is best for you.
• If your goal is to earn additional income … you may want to consider an online investing account or taxable brokerage account.
• If your goal is to save and invest for retirement … you may want to open an IRA, or fund your workplace retirement account, if you have one. Sometimes it’s possible to do both.
• If you’re thinking about college for your kids … a 529 college savings plan might be the way to go.
Those are just a few of the choices to think about. Again, knowing your personal goals will guide you.
In order to determine the asset classes that might work for your investment plan, it helps to understand the risk profile of a given investment. For example, stocks are generally considered higher-risk assets because they’re more volatile, compared with bonds, CDs, or money market accounts, which are lower risk.
The advantage of higher-risk investments is the potential for seeing bigger returns (a.k.a., profits). The downside, though, is the risk of losing money. Conversely, investing in less risky assets can help minimize potential volatility and losses, but the gains here are typically smaller. As the saying goes: High risk, high reward; low risk, low reward.
8 Ways to Invest Your Money Now
As noted, there are many different assets that investors can add to their portfolio. Some make more sense in certain situations than others — again, depending on your goal, timeline, and risk preference. That said, the following eight investments are worth considering now.
1. Stocks
What it is:Investing in stocks means having shares of ownership in a company or companies. When an investor buys a share in a company, they own a small portion of that company. Shareholders may even receive voting rights. This is why stocks are sometimes referred to as equities; investors now own equity in that company.
How it works: A stock can earn money in two ways. The first way is through the value of shares appreciating over time; this is called capital appreciation. The second is through periodic cash payments made to shareholders, called dividends.
Stock prices can be influenced by both internal and external factors, such as a new product launch or broader national or global events like a political event or natural disaster. Because the nature of business is highly unpredictable, stock prices can be volatile.
2. Bonds
What it is: When buying a bond, investors essentially loan money to a government, company, or other entity for a set timeframe. The bond guarantees that the investor will get regular interest payments and a return of their principal when the bond matures.
How it works: Investors buy bonds for a specific amount (i.e., the face value) and for a certain time period, called the bond’s maturity. The bond pays a fixed amount of interest, the coupon rate, typically every six months or year, and the principal is repaid at the maturity date.
Bonds are generally categorized as fixed-income investments. And while there are bonds with different levels of risk, bonds are considered conservative because they are less volatile than stocks.
• Government bonds, also known as Treasury bonds, bills, and notes, are considered lower risk because they’re backed by the full faith and credit of the U.S. government.
• Municipal bonds, or muni bonds, are a type of local government bond: States, cities, and counties issue munis to finance capital projects like hospitals, schools, and roads.
• Corporate bonds, which are issued to do research, develop products, and other aims. These can pay higher interest, but corporate bonds can also be higher risk.
Generally, though, bonds are often considered a safer, more stable investment that may be more appropriate for investors who aren’t as comfortable with the volatility of the stock market. That said, bonds are not completely without risk, and it is possible for bonds to lose value.
What it is: Investing directly in stocks or bonds isn’t the only option available to investors. Mutual funds, which are pooled investments, present another way to invest in certain markets.
How it works: Think of these funds as baskets that hold an assortment of investments, such as stocks, bonds, real estate holdings, and much more. Funds provide investors with a basic level of diversification, and can be more affordable than buying individual securities. That said, mutual funds charge investment fees that can impact returns over time.
Some mutual funds only invest in stocks, or equities. Some only invest in bonds. Some invest in a mix of asset classes. There are thousands of mutual funds, and many brokerages or online investing platforms offer special screening tools to help you find the types of funds that suit your needs.
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4. Index Funds
What it is: A common type of mutual fund is something called an index fund. These are investment funds that track an index, which is usually a specific part of the broader market. For example, there are index funds that track the S&P 500 index or the Russell 2000 index of small U.S. companies — and thousands of other indices, as well.
How it works: Because index funds mirror market indices, and aren’t managed by live portfolio managers, they’re usually among the less expensive types of funds. This style is called passive management, and some investors like to include passive investments in their portfolio because, over time, these securities can add to portfolio returns.
That said, there is always a risk of loss, as market indices can also decline, bringing down the corresponding funds.
5. Exchange-Traded Funds (ETFs)
What it is:Exchange-traded funds, or ETFs, are similar to mutual funds in that they’re effectively a basket of different investments, combined into one security. Investors can buy shares of the fund, but unlike mutual funds, it’s possible to trade ETF shares throughout the day.
How it works: ETFs are a type of pooled investment fund, but owing to the way the underlying assets in the fund are created and redeemed, these funds can be more liquid than mutual funds. ETFs tend to be passively managed, and there are thousands of ETFs investors can choose from, encompassing all sorts of different market indexes, sectors, and asset classes.
6. Options
What it is: An option is a derivative contract that’s tied to an underlying asset, such as a stock. An option contract represents the right, but not always the obligation, to buy or sell a security at a fixed price by a specified date.
How it works: Instead of buying actual shares of a stock, trading options allows the investor to potentially profit from price changes in the underlying asset without actually owning it.
Options are used with leverage, and are a more sophisticated type of investment than, say, stocks or bonds. Options are fairly easy to trade, but they are complex and high risk.
You’d likely want to discuss options trading or investing with a financial professional before you get into it.
7. Real Estate
What it is:Real estate investing can include buying and managing physical property — houses, commercial buildings, etc. — or certain real estate-oriented investment vehicles.
How it works: While many investors may not have the capital laying around to buy a house for investing purposes, they can buy real estate stocks, mutual funds, ETFs, or consider REITs, or real estate investment trusts to get real estate exposure into their portfolios.
Real estate is sometimes considered an alternative investment, and as such it can be higher risk, but because real estate values don’t move in the same direction as the stock market, investing in real estate can provide diversification and a hedge against inflation.
8. Certificates of Deposit (CDs)
What it is:Certificates of deposit, or CDs, should also be on investors’ radar as part of the cash or cash-equivalent part of their asset allocation. CDs are bank products, and are somewhat like savings accounts, in which investors “lock up” their funds for a predetermined period of time in exchange for interest rate payments.
How it works: Functionally, CDs are similar to bonds in that you get a fixed rate of interest until the CD matures, at which time you get both principal and interest. But you may owe fees if you need to pull your money out of a CD before the maturity date.
On the upside, because these are bank products, when you open a CD at an FDIC-insured bank or NCUA-insured credit union, your deposits are covered up to $250,000, per depositor, for each ownership category (e.g., single, joint, etc.), at each insured institution.
Understanding Cash in Your Portfolio
In some instances, it may make the most sense to keep the money for a particular goal in cash, for easy access, and to minimize risk. Here are some traditional options that are generally available through banks and credit unions.
As such, these accounts are typically FDIC-insured at a bank, or NCUA-insured at a credit union. This means deposits are covered up to $250,000, per depositor, for each ownership category (e.g., single, joint, etc.), at each insured institution.
Savings accounts at a traditional bank or credit union: This is likely the most familiar option. Traditional and commercial banks remain popular for their large geographical footprint. Note that many traditional banks tend to pay a relatively low rate of interest on any cash holdings.
Online-only checking and savings accounts: Online-only banks and banking platforms may offer a slightly higher yield than a savings account at a commercial bank. Additionally, many do not require minimums or charge monthly maintenance or account fees.
Money market accounts (MMAs): A money market account (MMA) is a type of deposit account, like a savings account, typically offered by banks and credit unions. MMAs may offer higher interest rates than standard savings accounts, and they usually include some checking account features, i.e., a debit card or check-writing.
When considering cash as an asset class, consider the risk and reward tradeoff, just as you would for any other investment type. Although cash might not be risky when considered in terms of volatility, it does carry the risk of losing value over the long-term due to the effects of inflation, or prices rising over time.
Beginner-Friendly Places to Invest
If you’re a beginner investor looking for places to put your money, it may be beneficial to revisit some basic investing rules or guidelines. For instance, you’ll likely want to build an emergency savings fund before focusing on your stock portfolio.
But assuming you’re ready to put your money in the market, or otherwise start building your investment portfolio, many beginners start with some basic investment funds. ETFs are a popular choice, as are mutual funds — but your choices will depend on your goals and financial situation.
If you’re not sure where to turn or what to do, consider speaking with a financial professional for advice.
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Creating a Goals-Based Strategy
Contrary to the way some new investors are encouraged to think about investing, it rarely makes sense to try to pick “hot” stocks right out of the gates.
Instead, take a step back and consider the bigger picture of your life and finances in order to identify one or more investing goals. Now that you have a better understanding of the investing process and some solid investment choices, you can start to connect the dots to make your own investment plan.
For example, if your goal is to save for retirement, you might want to think about using lower-cost investments like mutual funds or ETFs, and using a mix of equity funds and bond funds in your portfolio. If you have many years until you retire, and you can stomach a little extra risk, you may want to tilt your portfolio toward equities to maximize potential returns.
But if the volatility of such a mix makes you uncomfortable, consider a different balance that includes more fixed-income and/or cash, which could help mitigate the risk of equities.
Risk vs Reward
The asset allocation decision really boils down to an examination of an investment’s risk and reward characteristics in order to determine whether it’s a good fit for you and your goals.
Risk and reward are two sides of the same coin. Investors cannot have one without the other. For more reward potential, an investor will have to take more risk. There is no such thing as an investment that produces returns with no risk.
Let’s consider two hypothetical investment goals: $1,000 for a down payment and $1,000 for retirement. How do goals lead one down the path of where to invest?
• First, the $1,000 for a down payment. If the money is designated for use in the next few years, the risk of losing any money in a volatile investment may outweigh the potential to earn investment returns. Therefore, it might be best to keep this money in a lower-risk investment or cash equivalent.
• Next, the $1,000 for retirement. Many retirement investors have the goal of seeing growth over the long-term. Because of this longer time horizon, there should be enough time to recover after spates of volatility. Therefore, it may be suitable to create a portfolio that is primarily invested in the stock market or a combination of stocks and bonds.
Retirement investors close to retiring may opt to consider some exposure to bonds for both diversification purposes and to lower the overall volatility of the portfolio.
Ultimately, a person’s comfort level with risk vs. reward will determine their specific allocations. And it’s worth noting that an investing strategy isn’t stagnant. As a person ages, their goals and investing strategy will likely need to evolve, too.
Opening the Right Account
Knowing how to invest your money is one step, knowing where to invest your money is the next.
Retirement Accounts
It is not uncommon to hear someone refer to a 401(k) or an IRA as if one of those is itself an investment. But retirement accounts are not investments — they are tax-advantaged accounts that can hold investments.
You contribute money to a retirement account, and then those funds are used to purchase investments: e.g., stocks, bonds, mutual funds, and so on.
While retirement account holders can select the investments for their account, in a plan sponsored by your employer like a 401(k), the investing might be automated — and your money could be invested by default into a money market fund or a target date fund. Hence the confusion about the 401(k) being an investment itself.
Retirement accounts offer a tax benefit, like tax-free growth on your investments, which make them suitable vehicles for long-term goals. But because they offer a tax benefit, they come with more restrictions. For example, some retirement accounts, like 401(k) and traditional IRAs, levy a 10% penalty on money withdrawn before age 59 ½, with some exceptions.
Also, there are limits to how much money can be contributed annually to retirement accounts.
Brokerage Accounts
It is also possible to invest in an account that is not designated for retirement. At a brokerage firm, these are often simply referred to as brokerage accounts.
Brokerage accounts are considered taxable accounts. You pay taxes on realized capital gains — meaning, when you sell investments and actually reap a gain or loss. Because dividends are typically paid in cash periodically, you would owe tax on the dividend amount.
In contrast, tax-advantaged retirement accounts only involve paying taxes when you make a contribution or withdraw your money, depending on the type of account.
It all comes down to the individual. You’ll need to look at your risk tolerance, time horizon, and personal preferences to determine the most suitable investing path or accounts.
For short-term goals that require more flexibility, a non-retirement account may be a better choice. Because there are no special taxation benefits, there are generally no rules about when money can be withdrawn or how much can be contributed. Because of this, non-retirement accounts can also be a good place to invest for those who have met their maximum contribution amount for the year in their retirement accounts.
The Takeaway
At any given time, there are a plethora of potential investments for your money. You can invest in stocks, bonds, real estate, commodities — the list is long. But each has its own considerations and risks that must be taken into account. Overall, your goals and financial situation are the most important things to keep in mind when deciding where to invest your money.
As for where to open an account, new investors may want to focus on an institution or platform where they are able to keep costs low. There’s not a lot that investors can control, like investment performance, but how much they pay in fees is one of them.
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FAQ
Which investment gives the highest returns?
Higher-risk investments tend to deliver the highest returns, but they can also deliver the biggest losses. These can include certain stocks or investment funds, particularly those focused on market segments that are risky or volatile. It’s important to invest with an eye to how much risk makes sense for you.
Where can you invest your money as a beginner?
Beginners can choose a number of investment vehicles to invest their money. Some choices include investment funds like ETFs or mutual funds, which tend to be lower cost and provide some basic diversification.
Where can you invest money to get good returns?
There are numerous investment vehicles that might provide returns, but those returns are never guaranteed, and can be thwarted by down markets. It might be wiser to consider an overall strategy that can help your money grow, so you can reach your goals, rather than looking for a single investment that might hit the jackpot.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
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.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
A key part of wrangling your personal finances can be building personal wealth and preparing for the future. There are various ways you can accumulate funds, such as putting your cash in a savings account or investing in the market. If you’re not sure which option is right for you (or are wondering if you should have both), then consider this deep dive into saving vs. investing accounts.
Key Points
• Savings accounts provide security and liquidity, ideal for short-term, low-risk goals.
• Investment portfolios, though riskier, can offer potential for significant long-term gains, suitable for long-term objectives.
• Multiple bank accounts simplify financial management, enhance privacy, and aid in budgeting and goal setting.
• A savings portfolio can combine savings and investments, offering flexibility and diversification for future goals.
• Starting a savings and investment plan involves setting goals, saving regularly, building an emergency fund, and learning about risk.
What’s the Difference Between Saving and Investing?
Savings accounts and investments can both help you get your finances on track for your future, but they can be used to meet very different goals. A big difference between savings vs. investing is risk.
When to Save
Think of savings as a nice safe place to park your cash and earn some interest.
You probably want lower risk on money you’ll need sooner, say for a fabulous vacation in two years. A savings account will fit the bill nicely for that goal because you want to be able to get to the money quickly, and savings accounts are highly liquid (they can be tapped on short notice).
When to Invest
With investing, you take on risk when you buy securities, but there’s also the potential for a return on investment.
For goals that are 10, 20, or even 40 years away, it might make sense to invest to meet those goals. Investments can make money in various ways, but when you invest, you are essentially buying assets on the open market; however, some investment vehicles are riskier than others.
Ways to Get Started Saving and Investing
So, what are some smart ways to start your savings and investment plan?
• First, if you’re not already saving, start today. Time works against savers and investors, so write out some of your goals and attach reasonable time frames to them. Saving for a really great vacation may take a year or two. Saving for the down payment of a house may take years, depending on your circumstances.
• One of the first goals to consider is an emergency fund. This money would ideally bail you out of an emergency, like having to pay a hefty medical bill or buying a last-minute plane ticket to see a sick loved one. Or paying your bills if you lost your job. You should save the equivalent of three to six months’ worth of expenses and debt payments available. You can use an online emergency fund calculator to help you do the math.
• When it comes to saving vs investing, investing shines in reaching long-term goals. Many Americans invest to provide for themselves in retirement, for example. They use a company-sponsored 401(k) or self-directed IRA to build a portfolio over several decades.
• Many retirement plans invest in mutual funds. Mutual funds are bundles of individual stocks or other securities, professionally managed. Because they have multiple stocks within, the account achieves diversification, which can help reduce some (but not all) investment risk.
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*Earn up to 4.00% Annual Percentage Yield (APY) on SoFi Savings with a 0.70% APY Boost (added to the 3.30% APY as of 12/23/25) for up to 6 months. Open a new SoFi Checking and Savings account and pay the $10 SoFi Plus subscription every 30 days OR receive eligible direct deposits OR qualifying deposits of $5,000 every 31 days by 3/30/26. Rates variable, subject to change. Terms apply here. SoFi Bank, N.A. Member FDIC.
Do Investments Count as Savings?
While there are similarities between saving and investing, there are also very important distinctions.
• When you save, you are putting your money in a secure place. A bank account that offers Federal Deposit Insurance Corporation, or FDIC, or NCUA (National Credit Union Administration) insurance is a great example of this. You will be insured for up to $250,000 per account holder, per account ownership category, per insured institution in the very rare instance of a bank failure. And in many cases, you will be earning some interest.
• With investments, you have the opportunity to grow your money significantly over time. For almost 100 years, the average return on the stock market has averaged 10%. However, it could be higher or it could be lower. And your funds are not insured, so you might wind up withdrawing funds at a moment where the economy is in a downturn and you experience a loss.
Because of this element of uncertainty, it’s wise to understand the distinction between saving and investing.
What Are the Different Bank Accounts I Should Own?
While some first-time savers think it’s either/or, savings account vs. investing, both have their role. Savings accounts can help you get to a spot in life where you can begin investing consistently.
There are two rules of thumb when it comes to savings and checking accounts.
• On the one hand, you should own as few as you need. That reduces the strain of keeping up with multiple accounts and all those login passwords (and possibly fees).
• On the other hand, don’t neglect the benefits of having an additional savings account that you set aside for a certain purpose, like a house down payment.
You might even want to have additional different kinds of savings accounts. One could be for your emergency fund, kept at the same bank as your checking account. Another might be a high-interest one for that big vacation you’re planning. And the third might come with a cash bonus when you open it and be used to salt away money for that down payment on a home.
Having Multiple Bank Accounts
It can be a good idea to have at least one savings and one checking account. If you’re married, consider owning a joint checking account for paying family bills like the rent, mortgage, groceries, and other monthly expenses. You may also want separate accounts for you and your spouse to allow for some privacy. Decide what is the right path for your family.
There are many good reasons to open a checking account. It can be the hub for your personal finances. Money rushes in from your paycheck, and then it is sent off to pay some bills. Savings accounts are more like long-term car storage, letting you stow away money for longer periods.
Both can be interest-bearing accounts, but don’t simply look for the highest rates. Shop around for low or no fees, too. You may find the right combination of these factors at online banks, which don’t have the overhead of brick-and-mortar branches and can pass the savings along to you.
Any income for regular expenses can be placed in a checking account. If you have a business or do freelance work, maybe create a completely different checking account for it.
A savings account can be a secure, liquid spot to stash an emergency fund. You might look for a high-yield savings account to earn a higher rate of interest. These are typically found at online banks and may charge lower or no fees.
A money-market account could also be good for an emergency fund since it’s an interest-bearing account. Unlike savings accounts, however, money-market accounts often have minimum deposit requirements. Keep an eye out for the lowest limits that suit your situation. The nice thing about money-market accounts is that they also offer such features as a debit card and checks. And typically, money market accounts are insured by the FDIC for up to $250,000.
What Is an Investment Portfolio?
The difference between saving and investing can be summed up with two words: safety and risk. A collection of bank accounts suggests liquidity. It’s where you keep cash so you can get hold of it in a hurry. A collection of investment assets doesn’t have as much liquidity, because you may not want to pull your money out at a particular moment, which could be due to the funds thriving or falling, depending on your scenario. It’s riskier, but also has the potential for long-term gains.
An investment portfolio can hold all manner of investments, including bonds, stocks, mutual funds, real estate, and even hard assets like gold bars. A mix can be a good way to diversify investments and help mitigate some market risk.
When you start building your savings and investment, it’s a good idea to learn all you can and start slow. Figure how much risk you can live with. That will dictate the kind of portfolio you own.
What Is a Savings Portfolio?
A savings portfolio can mean a couple of different things:
• A savings portfolio can refer to the different ways you hold money for the future, possibly a combination of savings accounts and/or investments.
• There are also savings portfolios which are investment vehicles for saving for college.
How Should I Start a Savings and Investment Plan?
A good way to start your savings and investment strategy could be to look into an investment account. These accounts offer services such as financial advice, retirement planning, and some combination of savings and investment vehicles, usually for one set fee, which may be discounted or waived in some situations.
In addition, you’ll likely want to make sure you have money in savings. A bank account can be a secure place for your funds, thanks to their being insured. Plus, they are liquid, meaning easily accessed, and may well earn you some interest as well.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.
FAQ
Is it better to have a savings account or invest?
Whether a savings or investing account is better depends on your specific needs and situation. You may want both. Investing can hold the promise of high returns, but it involves risk. A savings account can grow your money steadily and securely.
How much can investing $1,000 a month give me?
The amount you make from investing $1,000 a month will vary tremendously depending on your rate of return and fees involved. It’s wise to consider the risk involved in investing, historic returns, and how much of any growth will go to paying fees.
What is the 50/30/20 rule?
The 50/30/20 budget rule is a popular way of allocating your take-home pay. It says that 50% of your fund should go to necessities, 30% to discretionary (or “fun”) spending, and 20% to savings or additional debt payments.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet
Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.
See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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