Sep
23
2025
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What Are RSUs & How to Handle Them

By | Budgeting & Goals, Investing, Terminology | No Comments

When an employer offers restricted stock units, or RSUs, as part of a compensation package, these are effectively shares of stock in the company. But restricted stock units typically vest over time, and the employee must meet certain criteria before obtaining the actual stock.

Restricted stock options are similar to, but distinct from, employee stock options (ESOs). RSUs don’t have any value until they’re fully vested, but once they are, each share is given a fair market value. Once the employee takes ownership of the shares, have the right to sell their shares.

Key Points

•   Restricted stock units are a type of equity compensation.

•   RSUs aren’t available immediately, rather they vest according to a schedule.

•   Typically, an employee must meet certain performance metrics or requirements (e.g., time at the company) to obtain their allotted shares.

•   Once the RSUs have fully vested, the shares are given to the employee at a fair market valuation.

•   RSUs are considered a type of income, and typically a portion of the vested units are withheld to cover taxes.

•   The employee cannot sell their shares until they’re fully vested.

What Is a Restricted Stock Unit?

Restricted stock units are a type of equity compensation offered to employees. RSUs are not actual shares of stock that you can trade, as when you buy stocks online; they are a specific amount of promised stock shares that the employee will receive at a future date, assuming certain conditions are met.

Restricted stock units are a type of financial incentive for employees, similar to a bonus, since employees typically receive their shares only when they complete specific tasks or achieve significant work milestones or anniversaries.

RSUs vs Stock Options

Again, RSUs are different from employee stock options. Restricted stock options and employee stock options (ESOs) are both considered deferred compensation. They can be used as incentives to remain at the company, but employee stock options are structured differently.

ESOs are similar to a call option. They give employees the option to buy company stock at a certain price, by a certain date. But the employee must purchase their shares to get the stock.

Once RSUs are vested, the employee simply receives shares of stock on a given date from their employer, which they can then sell.

RSU Advantages and Disadvantages

Among the key advantages of RSUs are, as mentioned, that they provide an incentive for employees to remain with a company.

For employers, other advantages include relatively low administrative costs, and a delay in share dilution.

As for disadvantages, RSUs are considered taxable income for the employee in the year they vest (more on this below). In some cases, similar to a bonus, a 22% obligatory tax is withheld from the vested share amount.

When the employee later sells their shares, any gains or losses based on the original fair market value assigned to the shares are treated according to capital gains rules.

RSUs don’t provide dividends to employees. They also don’t come with voting rights, which some employees may not like.

Know the Dates: Grant and Vesting

In the case of RSU stock, there are two important dates to keep in mind: the grant date and the vesting date.

Grant Date

A grant date refers to the exact day a company pledges to grant an employee company stock.

Employees don’t own shares of company stock starting on the grant date; rather, they must wait for the stock shares to vest before claiming full ownership and deciding to sell, hold, or diversify stock earnings.

Vesting Date

The vesting date refers to the exact day that the promised company stock shares vest. Employees receive their RSUs according to a vesting schedule determined by the employer. Factors such as employment length and job performance goals are taken into consideration, as well as the vesting schedule.

The employer that wants to incentivize a long-term commitment to the company, for example, might tailor the RSU vesting schedule to reward the employee’s tenure. In other words, RSUs would only vest after an employee has pledged their time and hard work to the company for a certain number of years; or, the vested percentage of total RSUs could increase over time.

If there are tangible milestones that the employee must achieve, the employer could organize the vesting schedule around those specific accomplishments, too.

RSU Vesting Examples

Typically, the vesting schedule of RSU stock occurs on either a cliff schedule or a graded schedule. If you leave your position at the company before your RSU shares vest, you generally forfeit the right to collect on the remaining restricted stock units.

•   On a graded or time-based vesting schedule, an employee would keep the amount of RSUs already vested, but would forfeit leftover shares.

•   If an employee is on a cliff vesting schedule and their shares have not yet vested, then they no longer have the right to their restricted stock units.

Cliff Schedule

A cliff schedule means that the bulk of RSUs vest at once. For example, if you receive 4,000 RSUs at the beginning of your job, on a cliff vesting schedule you would receive 3,000 shares, say, after a one-year waiting period, with the rest made available at specific intervals. Again, once shares are vested, you could then consider trading stocks.

Graded Vesting Schedule

With a graded or time-based vesting schedule, you would only receive a portion of those 4,000 RSUs at a time. For example, you could receive 25% of your RSUs once you’ve hit your one-year company anniversary, 25% more after two years, and so on.

Alternatively, a graded vesting schedule might include varying intervals between vesting dates. For example, you could receive 50% of your 4,000 total RSUs after three years at the company, and then the remainder of your shares (2,000) could vest every month over the next three years at 100 per month.

Are Restricted Stock Units Risky?

As with any investment, there is always a degree of risk associated with RSUs. Even companies that are rapidly growing and have appreciating stock values can underperform. While you do not have to spend money to purchase RSUs, the stock will eventually become part of your portfolio (as long as you stay with the company until they vest), and their value could change significantly up or down over time.

If you end up owning a lot of stock in your company through your RSUs, you may also face concentration risk. Changes to your company can not only impact your salary but the RSU stock performance. Therefore, if the company is struggling, you could lose value in your portfolio at the same time that your income becomes less secure.

Diversifying your portfolio can help you minimize the risk of overexposure to your company. A good rule of thumb is to consider diversifying your holdings if more than 10% of your net worth is tied up with your company. Holding over 10% of your assets with your firm exposes you to more risk of loss.

Are Restricted Stock Units Reported on My W-2?

Yes, restricted stock units are reported on your W-2 as income in the year the shares vest.

When your RSUs vest according to their fair market value, your employer will withhold taxes on them, often the same 22% rate applied to company bonuses. The fair market value of the shares at the time of vesting appears on your W-2, meaning that you must pay normal income taxes, such as Social Security and Medicare, on them.

In some cases, your employer will withhold a smaller percentage on your RSU stock than what they withhold on your wages. What’s more, this taxation is only at the federal level and doesn’t account for any state taxes.

Since vested RSUs are considered supplemental income, they could bump you up to a higher income tax bracket, which would subject you to higher taxes. If your company does not withhold enough money at the time of vesting, you may have to make up the difference at tax time, to either the IRS or your state.

So, it might be beneficial to plan ahead and come up with a strategy to manage the consequences of your RSUs on your taxes. It may be wise to consult a professional.

RSU Tax Implications

When your RSUs vest, your employer will withhold taxes on them, just as they withhold taxes on your income during every pay period. The market value of the shares at the time of vesting appears on your W-2, meaning that you must pay normal payroll taxes, such as Social Security and Medicare, on them.

In some cases, your employer will withhold a smaller percentage on your RSU stock than what they withhold on your wages. What’s more, this taxation is only at the federal level and doesn’t account for any state taxes.

Since vested RSUs are considered supplemental income, they could bump you up to a higher income tax bracket and make you subject to higher taxes. If your company does not withhold enough money at the time of vesting, you may have to make up the difference at tax time, to either the IRS or your state.

So, it might be beneficial to plan ahead and come up with a strategy to manage the consequences of your RSUs on your taxes. Talking to a tax or financial professional before or right after your RSU shares vest could help you anticipate future complications and set yourself up for success come tax season.

How to Handle RSUs

If you work for a public company, that means that you can decide whether to sell or hold them. There are advantages to both options, depending on your individual financial profile.

Sell

Selling your vested RSU stock shares might help you minimize the investment risk of stock concentration. A concentrated stock position occurs when you invest a substantial portion of your assets in one investment or sector, rather than spreading out your investments and diversifying your portfolio.

Even if you are confident your company will continue to grow, stock market volatility means there’s always a risk that you could lose a portion of your portfolio in the event of a sudden downturn.

There is added risk when concentration occurs with RSU stock, since both your regular income and your stock depend on the success of the same company. If you lose your job and your company’s stock starts to depreciate at the same time, you could find yourself in a tight spot.

Selling some or all of your vested RSU shares and investing the cash elsewhere in different types of investments could minimize your overall risk.

Another option is to sell your vested RSU shares and keep the cash proceeds. This might be a good choice if you have a financial goal that requires a large sum of money right away, like a car or house down payment, or maybe you’d like to pay off a big chunk of debt. You can also sell some of your RSUs to cover the tax bill that they create.

Hold

Holding onto your vested RSU shares might be a good strategy if you believe your company’s stock value will increase, especially in the short term. By holding out for a better price in the future, you could receive higher proceeds when you sell later, and grow the value of your portfolio in the meantime.

RSUs and Private Companies

How to handle RSUs at private companies can be more complicated, since there’s not always a liquid market where you can buy or sell your shares. Some private companies also use a “double-trigger” vesting schedule, in which shares don’t vest until the company has a liquidity event, such as an initial public offering or a buyout.

The Takeaway

Receiving restricted stock units as part of your employee compensation can be a boon. Even though you don’t get actual shares of stock right away, once they vest they can provide extra income. But it’s important to understand how your company handles the vesting of these shares, and what the tax implications might be.

Perhaps the most pertinent thing to keep in mind, though, is that everyone’s financial situation is different — as so is their respective investing strategy. If you have RSU shares, it may be worthwhile to speak with a financial professional for advice and guidance.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

FAQ

What is the difference between restricted stock units and stock options?

Restricted shares or restricted stock is stock that is under some sort of sales restriction, whereas stock options grant the holder the choice as to whether or not to buy a stock.

Do restricted stock units carry voting rights?

Restricted stock units do not carry voting rights, but the shares or stock itself may carry voting rights once the units vest.

How do RSUs work at private vs public companies?

One example of how RSUs may differ from private rather than public companies is in the vesting requirements. While public companies may have a single vesting requirement for RSUs, private companies may have two or more.

About the author

Rebecca Lake

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

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.

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Sep
23
2025
Is Stock Market Timing a Smart Investment Strategy?

Is Stock Market Timing a Smart Investment Strategy?

By | Growing Wealth, invest, Investing | No Comments

Timing the market, as it relates to trading and investing, requires a whole lot of luck. In effect, it means waiting for ideal market conditions, and then making a move to try and capitalize on the best market outcome. But nobody can predict the future, and it’s a high-risk strategy.

When seeing stock market charts and business news headlines, it can be tempting to imagine striking it rich by timing investments perfectly. In reality, figuring out when to buy or sell stocks is extremely difficult. Both professional and at-home investors may make serious mistakes when trying to time their market entrance or exit.

Key Points

•   Timing the market is highly complex and unpredictable, influenced by various global and local factors.

•   Most investors, including professionals, fail to beat the market consistently.

•   Emotional investing, driven by fear or greed, often leads to poor financial decisions.

•   A diversified buy-and-hold strategy is generally more effective for long-term wealth building.

•   Starting to invest early may allow for more time to save and invest.

Why Timing the Stock Market Doesn’t Work

Waiting to start investing could cost an individual thousands of dollars over their lifetime. It’s also important to know that by leaving money in a checking or savings account, a person may not be protecting their money from inflation risk. That’s because the value of that cash in a checking or savings account erodes if the prices of goods and services increase.

Meanwhile, stock market timing is incredibly complex. Stock prices can be influenced by global macroeconomic events, political events in a country, developments in specific industries or companies, as well as the sentiment of investors as a collective.

Even professional investors struggle to “beat the market,” which often means trying to outperform a benchmark stock index. In fact, most investors can’t beat the market, and are likely better off sticking to index investing.

Fear and Greed in Investing

When investing, it’s also important not to let two key emotions — fear and greed — drive decisions. That means if the stock market is plummeting, investors may be fearful, but they can’t let those feelings push them toward a decision to sell. That could cause them to “lock in” losses. There’s even a Fear and Greed Index that investors sometimes use to make contrarian decisions.

Take for instance what happened during the 2008 financial crisis. After Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, the stock market entered a tumultuous stretch. The S&P 500 finally bottomed on March 9, 2009. However, the index eventually regained all its losses in the course of roughly the next four years. Investors who had hung on likely may have recovered their losses.

Meanwhile, greed can cause investors to make poor decisions as well. For instance, during the dotcom bubble, investors bought into many newly public Internet companies without always doing the research. Some of these stocks weren’t even turning a profit, making their businesses vulnerable to going belly up. Ultimately, many at-home investors suffered losses when the dot-com bubble burst.

Of course there are no guarantees when it comes to investing. There’s always risk and volatility involved. However, one of the most tried and true methods for building wealth has been a buy-and-hold strategy when it comes to stock investing.

Why It May Be a Good Idea to Invest Immediately

One of the most important predictors of your returns is the length of time you’ve invested in the stock market. While it’s difficult to predict what the market will do in the near future, an investor can get a better sense over the long term.

When an investor lets their money grow, it has the chance to weather short-term ups and downs and grow over time. On average, the S&P 500, often used as a market benchmark, has grown about 7% per year after adjusting for inflation. That doesn’t mean a person can predict what will happen this year, or even in the next 10 years, but looking at long term trends can give them a better sense of market dynamics.

An individual might put off investing because they want to pay off all debts first or achieve other goals, like buying a house. In some cases, that might be true, like paying off high-interest credit cards or saving for a short-term goal, such as a three to six-month emergency fund.

But once a person has an emergency fund and is out of credit card debt, they should consider investing, even if they have a mortgage or student loan debt. Even if they’re only investing for retirement, it’s a good idea to start as soon as possible.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Consider Investing as Early as Possible

The younger you are when you invest, the better the chances are that you’ll reach your financial goals. For example, imagine Person A invests $200 a month in a retirement account starting at age 25.

Person B invests the same amount starting at age 35. They both continue to add $200 a month to their account. When they both retire at age 65, Person A will have almost twice as much as Person B: $306,689, compared to $167,550, assuming a 6% rate of return, 2% inflation rate, and 15% tax rate.

That’s true even though Person A only contributed 33% more to her account. This is the power of how compound returns may help investors see cumulative gains on their investments over time, helping them build long-term wealth.

Percentage of Retail Investors in Stock Market

As mentioned, after the 2008 financial crisis, many people were reluctant to invest in the stock market. But in recent years, that’s changed. Retail investor participation in the U.S. stock market increased considerably in 2020 and 2021, for a variety of reasons.

As of 2025, retail inventors comprise about a quarter of all total trading volume in the stock market. That may change in the future, too, as younger investors — with quicker, easier access to investing tools, in many cases — look at getting into the markets.

The Takeaway

Timing the market is difficult, if not impossible, and involves trying to “time” trading or investing moves to coincide with an increase or decrease in the stock market. Nobody can tell what the future holds, so it’s generally hard to accurately pick the right investments at the right time. That’s not to say that some investors don’t get it right from time to time, but as an overall strategy, it’s likely not advisable.

If an individual is skittish about investing, their anxiety makes sense in light of the dramatic market ups and downs many have witnessed in the past two decades. But trying to time the market doesn’t work. Instead, investing in a diversified portfolio can be a good step toward building individual wealth.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

What does it mean to try and beat the market?

Generally, trying to “beat the market” means an investor is attempting to outperform a market index, such as the S&P 500.

How many retail investors are in the market?

Retail investors comprise around a quarter, or 25%, of overall investors in the market.

Why is it a bad idea to try and time the market?

It may be a bad idea to try and time the market because nobody knows what’s going to happen in the future, and what the ramifications could be on the market. Accordingly, it’s risky to try and time the market.

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

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

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

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

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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.

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

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

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Sep
23
2025
What Happens When a Public Company Goes Private?

What Happens When A Company Goes Private?

By | Growing Wealth, invest, Investing | Comments Off on What Happens When A Company Goes Private?

While there are plenty of benefits to going public, there are also some downsides to being listed on a major stock exchange. Public companies must abide by strict government compliance and corporate government statutes and answer to shareholders and regulatory bodies. Plus they’re subject to the whims of the broader stock market on a regular basis.

So, public companies can opt to go private and delist from a public stock exchange. What happens when a public company goes private? Here’s what you need to know about that process.

Key Points

•   When a company transitions from public to private, it is delisted from stock exchanges and its shares are no longer publicly traded.

•   This change means the company is exempt from the Sarbanes-Oxley Act and other stringent public compliance requirements.

•   Going private can reduce financial and pricing stability due to decreased liquidity and fewer financing options.

•   The process involves a buyout through a tender offer, often funded by private equity and requiring shareholder approval.

•   Privatization allows for more autonomous control over business decisions and operations by reducing public and governmental scrutiny.

What Is Going Private?

When a company goes from public to private, the company is delisted from a stock exchange and its shareholders can no longer trade their shares in a public market. It also means that a private company no longer has to abide by the Sarbanes-Oxley Act of 2002. That legislation required publicly-traded companies to accommodate expansive and costly regulatory requirements, especially in the compliance risk management and financial reporting areas. (The legislation was created by lawmakers to help protect investors from fraudulent financial practices by corporations.)

Going private may also mean less pricing and financial stability, as private company shares typically have less liquidity than a public company traded on a stock exchange. That can leave a private company with fewer financing options to fund operations.

Going private also changes the way a company operates. Without public shareholders to satisfy, the company’s founders or owners can control both the firm’s business decisions and any shares of private stock. Private companies can consolidate power among one or a few owners. That can lead to quicker business decisions and a clear path to take advantage of new business opportunities.

By definition, a private company, or a company that has been “privatized”, may be owned by an individual or a group of individuals (i.e., a consortium) that also has a specific number of shareholders.

Unlike traditional stocks, investors in a private company do not purchase shares through a stock broker or through an online investment platform. Instead, investors purchase private equity shares from the company itself or from existing shareholders.

What Is Privatization?

Privatization is the opposite of an initial public offering. It’s the process by which a company goes from being a publicly traded company to being a private one. A private company may still offer shares of stock, but those shares aren’t available on public market exchanges. There’s no need to satisfy public shareholders and the company has less governmental oversight into its governance and documents.

(Note that privatization is also a term used to describe when a public or government organization switches to ownership by a private, non-governmental group.)

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What Happens if You Own Shares of a Company That Goes Private?

If shareholders approve a tender offer to take a public company private, they’ll each receive a payment for the number of shares that they’re giving up. Typically, private investors pay a premium that exceeds the current share price and shareholders receive that money in exchange for giving up ownership in the company.

This is the opposite of IPO investing, in which the public buys stock in a newly listed company, and private owners have a chance to cash out.

💡 Recommended: Partner Buyout Financing

Why a Company May Go Private

Likely the biggest reason why a company would choose to go private are the costs associated with being a public company (largely to accommodate regulatory demands from local, state, and federal governments).

Those costs may include the following potential corporate budget challenges:

•   The legal, accounting, and compliance costs needed to accommodate company financial filings and associated corporate governance oversight obligations.

•   The costs needed to pay compliance, investor relations, and other staffing needs – or the hiring of third-party specialty firms to handle these obligations.

•   The costs associated with paying strict attention to company share price – a public company always has to keep its eye on maximizing its stock performance and on keeping shareholders satisfied with the firm’s stock performance.

In addition, going private enables companies to free up management and staff to turn their attention to firm financial growth, instead of regulatory and compliance issues or shareholder concerns. Some public companies struggle to invest for the long-term because they’re worried about meeting short-term targets to keep their stock price up.

Going private also enables companies to keep critical financial and operational data away out of the public record — and the hands of competitors. Privatization could also help companies avoid lawsuits from shareholders and curb some litigation risk.

How to Take a Company Private

Typically, companies that go private work with either a private-equity group or a private-equity firm pooling funds to “buy out” a public company’s entire amount of publicly-traded stock. This typically requires a group of investors since, in most cases, it takes an enormous amount of financial capital to buy out a company with hundreds of millions (or even billions) of dollars linked to its publicly-traded stock.

Often a consortium of private equity investors gets help financing with a privatization campaign from an investment bank or other large financial institution. The fund usually comes in the form of a massive loan — with interest — that the consortium can use to buy out a public company’s shares.

With the funding needed to close the deal on hand, the private equity consortium makes a tender offer to purchase all outstanding shares in the public company, which existing shareholders vote on. If approved, existing shareholders sell their stock to the private investors who become the new owners of the company.

The goal is that the private investors will take the gains accrued through stronger company revenues and rejuvenated stock, to pay down the investment banking loan, pay off any investment banking fees accrued, and begin managing the income and capital gains garnered from their investment in the company. While this can take some time, the process of going private is much less intensive than the IPO process.

Company executives, meanwhile, can focus on growing the company. In many instances, newly-minted private companies may roll out a new business plan and prospectus that firm executives can share with potential shareholders, hopefully bringing more capital into the company. Sometimes private owners will plan to IPO the business again in the future.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

Pros and Cons of Going Private

Taking a company private has both benefits and drawbacks for the company.

The Pros

In addition to lower costs, there are several other advantages to delisting a company.

•   Establishing privacy. When a company goes public, it relinquishes the right to keep the company private. By taking a company private, it makes it easier to operate outside of the public eye.

•   Fewer shareholders. Public companies don’t have to deal with external company sources that may make life difficult for company executives and may result in a loss of operational independence. Once a company goes private, the founders or new owners retain full control over the business and have the last word on all company decisions.

•   A private company doesn’t have to deal with financial regulators. A private company doesn’t need to file financial disclosures with the U.S. Securities and Exchange Commission and other government regulatory bodies. While a private company may have to file an annual report with the state where it operates, the information is limited and financial information remains private.

The Cons

There are some disadvantages to taking a company private.

•   Capital funding challenges. When a company goes private, it loses the ability to raise funds through the publicly-traded financial markets, which can be an easy and efficient way to boost company revenues. Yet by privatizing the company, publicly-funded capital is no longer an option. Such companies may have to borrow funds from a bank or private lender, or sell stock based on a state’s specific regulatory requirements.

•   The owner may have more legal liability. Private companies, especially sole proprietorships or general partnerships, aren’t protected from legal actions or creditors. If a private company is successfully sued in court, the court can garnish the business owner’s personal assets if necessary.

•   More powerful shareholders. While there are not as many shareholders at a private company, new owners, such as venture capitalists or private equity funds, may have strong feelings about the operational business decisions, and as owners, they may have more power over seeing their wishes carried out.

The Takeaway

Going private can be an advantage for companies that want more control at the executive level, and no longer want their shares listed on a public exchange. However, taking a company private may impact the company’s bottom line as corporate financing options thin out when public shareholders can no longer buy the company’s stock.

If a company you own stock in goes private, you will no longer own shares in that company or be able to buy them through a traditional broker. For investors, having different types of assets in an investment portfolio may be helpful in case something happens to or changes with one of them.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

FAQ

Is it good for a public company to go private?

Going private can have benefits for a public company, including lower costs related to legal, accounting, and compliance obligations, as well as costs associated with maximizing stock performance and keeping shareholders happy. In addition, going private may allow a company’s staff to focus more fully on financial growth, and keep critical company data out of the public record (and the hands of competitors).

However, there are potential drawbacks as well. For instance, a company may face capital funding challenges once it goes private since it can no longer raise funds through publicly-traded financial markets.

What happens to my private shares when a company goes public?

Once a company goes public (typically done through a process called an IPO, or initial public offering), your private shares become public shares, and they become worth the public trading price of the shares.

How long does it take for a public company to be private?

How long it takes for a public company to become private depends on the time it takes to complete the steps involved. For instance, the company has to buy out all of its publicly-traded stock; it usually works with a group of private investors to do this since the process is costly. Once they have the founding secured, a tender offer is made to purchase all outstanding shares in the public company, which the existing shareholders vote on. If that is approved, the shareholders sell their stock to the owners of the company. How long all this takes generally depends on the company and the specific situation.

Photo credit: iStock/Olezzo

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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.

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

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.

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Sep
23
2025
A Walkthrough of What Leverage Trading Is

Understanding Leverage Trading

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

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

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

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

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

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

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

Key Points

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

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

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

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

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

What Is Leverage Trading?

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

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

What Is Margin, How Does It Work?

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

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

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

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

Which Securities Are Eligible for Margin?

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

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

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

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

Leverage Risks and Rewards

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

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

What Is Pattern Day Trading?

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

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

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

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

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10.50%* and start margin trading.

*For full margin details, see terms.

History of Leverage Trading

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

Ancient Uses of Leverage

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

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

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

Leverage in the 20th-Century

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

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

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

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

How Leverage Works in Trading

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

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

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


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

Example of Leverage Trading

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

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

Understanding Leverage Ratio

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

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

Maximum Leverage

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

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

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

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

Pros and Cons of Leveraged Trading

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

Pros

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

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

Cons

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

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

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Pros of Leverage:

•   Increases buying power

•   Potential to earn higher returns

•   Relatively easy to use, if you qualify

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Cons of Leverage:

•   Leverage funds must be repaid, with interest

•   Potential to lose more than your initial investment

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

Types of Leverage Trading

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

Trading on Margin

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

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

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

Leveraged ETFs

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

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

Derivatives

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

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

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

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

Forex Leverage

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

Recommended: Options Trading 101

Leverage Trading Terms to Know

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

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

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

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

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

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

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

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

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

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

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

Tips for Helping to Manage the Risks of Leveraged Trading

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

Hedge Your Bets

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

Limit Potential Loss of Capital

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

Decide Whether Leverage Trading Is Right for You

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

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

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

The Takeaway

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

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


Get one of the most competitive margin loan rates with SoFi, 10.50%*

FAQ

How much leverage is too high?

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

What is the safest way to use leverage in trading?

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

Can you lose more than you invest with leverage?

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

Why is leverage not recommended for beginners?

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

Photo credit: iStock/ljubaphoto

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

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

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

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

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

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

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

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

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

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Sep
23
2025

What Happens If a Stock Goes to Zero?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Happens If a Stock Goes to Zero?

Stocks can lose all of their value, or fall all the way to zero. When that happens, they’re effectively worthless, and in all likelihood, the company will declare bankruptcy. It’s possible that investors lose their investment, in that case.

Sometimes when a stock goes down in value it can present an investment opportunity, but in other cases the stock could fall to zero and never recover. In the latter case, it may benefit investors to sell before the stock price falls all the way down to zero.

Key Points

•   A stock reaching zero means total loss of investment value, leaving shareholders with nothing.

•   Shares may be delisted from stock exchanges if prices fall below specific thresholds.

•   Companies typically file for bankruptcy protection before stock hits zero.

•   Margin trading or short selling can result in additional financial losses for investors beyond the initial investment.

•   Shareholders often receive no compensation during the liquidation of company assets.

What Causes a Stock to Fall to Zero?

When a stock falls to zero, it doesn’t mean that the company is worth nothing. Some companies with very low stock values are still earning money or possess assets. And, some investors buy penny stocks that have extremely low prices.

What happens to a company when stock prices fall to zero? If a company continuously spends more money than it earns, and investors sell off the stock, ultimately, that can lead to the company going bankrupt. Most companies file for either Chapter 7 or Chapter 11 bankruptcy before their stock reaches $0.00.

Chapter 7 Bankruptcy

With a Chapter 7 bankruptcy filing, the company must sell off its assets until it can repay lenders and creditors. The order that stakeholders get paid is: creditors, bondholders, preferred stockholders, common stockholders.

This means that if the asset sale doesn’t bring in enough money to pay everyone, it’s likely that common shareholders won’t receive a dime. In this case, stockholders lose all the money they had invested in that stock.

Under Chapter 7, stock trading and all business activities must be put on hold.

Chapter 11 Bankruptcy

Under a Chapter 11 bankruptcy, the company negotiates loan terms with its creditors in order to avoid selling off assets. With Chapter 11, companies can still conduct business and their stock can be traded.

Once a company files for Chapter 11, it is likely that the stock will continue to fall, since many investors won’t have much faith in the business. Sometimes shares are canceled with a Chapter 11 filing. In that case, investors lose all the money they had put into the stock.

Even if a company files for bankruptcy before its stock falls to zero, their attempts to salvage the business may ultimately fail and the stock could become worthless. However, it can take a strong team and business model to go public and get listed on stock exchanges in the first place, so some bankrupt companies may have the potential to make a comeback.

Some companies with very low stock prices get acquired by larger companies before their stock falls to zero. Even a company with a low stock might have a promising product or service that a larger company is able to sell successfully. One example of this is when Alphabet acquired FitBit in 2021.


💡 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.

What Happens to a Company When Stock Prices Fall to Zero?

Some stock exchanges delist stocks if they fall below a certain level. For example, the New York Stock Exchange will remove a stock if its share price falls below $1 for 30 days in a row.

And, as mentioned above, if a company files for Chapter 7 bankruptcy, its stock will be delisted temporarily. Fortunately, it is not possible for a stock’s price to go into the negative territory — under zero dollars in value, that is.

Still, if an investor short sells or uses margin trading, they may lose more than they invested. For this reason, margin trading and short selling are risky investment strategies.

Short selling is when an investor predicts that a stock is going to decrease in value. So, rather than buying the stock, they ‘bet’ that it will go down. If the stock does in fact go down, they make money.

But, if the stock ends up increasing in value, they lose money. Potentially, an investor in this scenario could lose more money than they put into the initial short sell.

Margin trading is when an investor borrows money from the brokerage firm to trade stocks. If the investor makes a trade that doesn’t go in their favor, they can end up owing the brokerage firm money.

How Low Can a Stock Go?

Stock prices can fall all the way down to zero. That means the stock loses all of its value and a shareholder’s earnings are typically worthless. In this case, the investor loses what they invested in the stock.

Reasons for a Stock Losing Value Down to Zero

There are a number of reasons that may come into play to make a stock fall to zero, including:

•   Losses in the company’s revenue or earnings, especially if the losses are persistent

•   A perception in the market that the stock is overvalued

•   Management issues, shake-ups in the company’s leadership positions, scandal, fraud — in short, anything that can make investor sentiment turn negative

For investors, these are all signs a stock is underperforming and red flags to watch out for.

Types of Stocks More Likely to Fall to Zero

What is a stock that falls to zero? Every stock comes with risks, but some are more risky than others. Besides companies on the brink of bankruptcy, there are certain types of businesses that may have a higher chance of becoming worthless.

Knowing what to look for and researching and evaluating stocks before buying is key to building a resilient portfolio. Some of these higher risk stocks might include:

Companies With Weak Business Models

Even if a stock is currently performing well, it may fall in the future if the business model is fundamentally flawed. For this reason, many investors prefer to research a company’s practices, team composition, and business model before investing in its stock.

Penny Stocks

Stocks that trade below $5 are known as penny stocks. These low price stocks tend to be very volatile, as the companies that issue them have low or no profit.

Sometimes penny stocks can even turn out to be scams.

Buying the Dip

Rather than selling stocks when the market declines, some investors believe it can be a good idea to buy while the market is low. By buying the dip, as it’s known, investors pay less for stocks.

And, since these stocks still have the potential to go up in value as the market recovers after the decline, they can be preferred by long-term investors who may have more time to let their portfolio go back up in value.

However, if a company is going bankrupt or otherwise likely to fall to zero, it’s unlikely to offer a strong return on investment.

It’s also very difficult to time the market, so a trader might buy in when they think the market has hit bottom, only to watch it continue to go down.

Generally, building a diversified portfolio can offer higher returns on average over time than trying to time the market based on shorter-term trends or dips.

Examples of Stocks That Fell to Zero

There are two particularly infamous examples of stocks that fell to zero or close to it:

Enron

In the 1990s, Enron, an energy company, hid massive losses by using accounting tricks. At one point, its stock price was over $90. In 2001, analysts and investors became suspicious and began asking questions. That same year, the company reported huge losses, and its stock plummeted to $0.26 right before it declared bankruptcy.

World Com

This telecom company falsely inflated its cash flow and net income by listing expenses as investments to hide losses. Its stock price fell from more than $60 a share to less than $1 before the company declared bankruptcy in 2002.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

How to Help Avoid Holding a Stock That’s Falling to Zero

While it’s true that the market is impossible to predict, there are some measures that investors can take to protect themselves from losses — especially in the case of a stock spiraling towards zero. Below are some common preventative investment measures.

Stop Losses

Knowing when to sell a stock is important. Investors can set up a trade to automatically sell shares if a stock reaches a specific price. This type of trade is called a stop loss. It’s a strategy that could help prevent losses in the case of an individual stock or overall market drop.

There are multiple types of stop losses, including trailing stops and hard stops. Trailing stops move the stop level up as the stock rises in value, but stay in place if the stock falls. Hard stops are fixed at a specific price and will execute if the stock falls to that price.

Limit Orders

Limit orders allow investors to set the price at which they want to buy a stock. An investor selects the price and the number of shares they wish to buy. In practice, the order only executes if the stock then hits that price.

This is one way for traders to step away without worrying that they’ll be buying in at a price they didn’t want.

Put Options

A put option is a type of order that gives traders the option to sell or short-sell a specific amount of stock at a specific price, within a certain time frame. If a stock decreases in value in this case, the trader can still sell it at a higher price than it previously held. Note that options are high risk investments for more experienced investors.

Diversifying Asset Holdings

In an effort to try to prevent bigger losses, investors may want to diversify their portfolios into a mix of non-correlated assets — dividing their holdings between assets at a higher and lower risk of fluctuating in value.

In a diversified portfolio, if one asset class decreases in value, the other types may not. Over time, the ups and downs of each asset could possibly balance the losses in each.

The Takeaway

Stocks can lose all of their value, or fall all the way to zero. When that happens, they’re effectively worthless, and in all likelihood, the company will declare bankruptcy. It’s possible that investors lose their investment, in that case.

By researching companies and setting up a portfolio according to one’s personal risk tolerance, and then keeping tabs on the assets in that portfolio to monitor their performance, it may be possible to help hedge against a stock sinking down to zero.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

At what point does a stock become worthless?

A stock becomes worthless when it falls to zero and has no value. In this case, an investor typically loses the money they invested in the stock.

How low can a stock go before being removed?

Some stock exchanges delist stocks if they fall below a certain level. The New York Stock Exchange will remove a stock if its share price falls below $1 for 30 days in a row, for instance.

Do you owe money if a stock goes negative?

No. A stock price can’t go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, usually lose whatever money they invested in the stock if the stock falls to zero, especially as the company may declare bankruptcy.

Image credit: iStock/MicroStockHub

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