Top 10 Fastest Growing Jobs

Top 10 Fastest-Growing Jobs

Job growth is an important consideration when choosing a career. Some of the fastest-growing jobs, according to the Bureau of Labor Statistics (BLS), include nurse practitioners, wind turbine service technicians, and data scientists.

Whether you’re preparing to enter the job market or switching careers, it’s good to know which industries and fields have the brightest hiring outlook. Keep reading for a breakdown of the fastest-growing jobs in 2024 and beyond.

Key Points

•   Energy, healthcare, computers, and data science sectors drive job growth in 2024.

•   Wind turbine service technicians and solar photovoltaic installers lead job growth due to renewable energy demand.

•   Healthcare roles like nurse practitioners and medical managers are expanding with high earning potential.

•   Data scientist and information security analyst roles are growing and are crucial for data management and cybersecurity.

•   Operations research analysts and computer scientists develop innovative solutions but jobs require advanced education.

What Is Considered a Fast-Growing Job?

The BLS regularly projects which occupations will see the highest growth. The most recent data available predicts changes from 2023 to 2033. Some occupations grow faster than others as demand for those jobs rises. A fast-growing job is one that’s expected to grow at an above-average rate. Our list includes both on-site roles and remote opportunities. (Here’s a great roundup of more work-at-home jobs for retirees and stay-at-home parents.)

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Who Should Consider a Fast-Growing Job?

Fast-growing jobs are appealing to a wide range of people because it can be easier to find a position when there are more openings to go around. Companies may also be more likely to offer signing bonuses to attract talent.

However, it’s important to consider whether the current demand is sustainable over the long term. After large numbers of people rush to fill jobs in a specific industry, hiring may then taper off.

The economy is another consideration. A job that’s fast-growing in a healthy economy may be less so in a downturn or recession. In-demand jobs that are connected to entertainment, travel, or recreation, for example, may be less attractive if people are cutting back their spending on trips to the movies, vacations, or costly hobbies.

Recommended: Does Net Worth Include Home Equity?

Pros and Cons of Being in a Fast-Growing Job

Every job has advantages and disadvantages, and fast-growing fields are no exception. Considering the potential benefits and drawbacks can help you to decide if pursuing a fast growing job makes sense for you.

Pros of Fast-Growing Jobs

Cons of Fast-Growing Jobs

More room for advancement at a faster pace Accelerated job growth in newer industries may not be sustainable over the long term
Higher salaries if demand for qualified workers outpaces supply Fast growth does not always translate to higher pay, especially in fields that don’t require higher education
Opportunity to get in on the ground floor of a new industry or sector that’s poised for long-term growth and development May be more demanding in terms of the time involved and scope of duties

What to Expect in a Fast-Growing Job

One of the main advantages of a fast-growing job is that it may be easier to get hired when demand is high. Employers may also offer higher pay or enhanced employee benefits to attract talent. If a high salary is important to you, check out this list of the highest paying jobs by state.

On the other hand, landing a bigger entry-level salary isn’t guaranteed. Fast-growing tech jobs, for instance, will pay more than food service jobs even if demand is at a similar level.

If you do manage to snag a higher salary with a fast-growing job, it’s important to think about what you’ll be required to do in exchange for those paychecks. For example, accepting a role with a clean energy startup could pay well, but if the company is small, you might be expected to work well beyond the standard 40-hour week.

No matter the size of your paycheck, it helps to stay on top of your budget. A spending app lets you see all of your money in one place.

Top 10 Fastest-Growing Jobs in 2024

The BLS collects data on job growth and employment outlook across a variety of occupations. We’re breaking down the fastest growing jobs through 2033.

You may also be interested in our list of trades that make the most money.

1. Wind Turbine Service Technician

Median annual pay: $61,770

Job growth outlook: 60%

Job description: Install, repair, and service wind turbines. May work full-time or on-call for emergency repairs.

Job duties:

•   Install wind turbines

•   Make necessary repairs to turbine equipment

•   Complete regular maintenance and service to keep turbines operating properly

Pros:

•   Technical or trade school degree may be the only required education

•   Opportunity to travel

•   Job growth should hold steady as the industry develops

Cons:

•   Long on-the-job training period

•   Candidates must be comfortable with heights

•   Higher potential for accidental injury

Recommended: Jobs That Don’t Require College

2. Solar Photovoltaic Installers

Median pay: $48,800/year

Job growth outlook: 48%

Job description: Also called PV installers, solar photovoltaic installers are responsible for assembling and maintaining systems that convert sunlight into energy. They may also connect the system’s solar panels to the electrical grid. This job may be salaried or hourly.

Job duties:

•   Measure, cut, and assemble the support structure for solar panels

•   Install solar modules, panels, and support structures, then activate and test the system.

•   Perform routine PV system maintenance

Pros:

•   Significant job growth is expected through 2033

•   Higher education may not be required

•   There may be opportunities for advancement in the field

Cons:

•   Requires lifting and handling heavy equipment

•   Candidates should have strong math and communication skills

•   Must be comfortable with heights

3. Nurse Practitioner

Median pay: $126,260

Job growth outlook: 46%

Job description: Nurse practitioner (NP) is one of the fastest-growing healthcare jobs. NPs can act as primary care providers or specialty care providers in doctor’s offices, hospitals, and other healthcare facilities. NPs may specialize in a particular type of care, such as geriatrics or pediatrics.

Job duties:

•   Assess patients to determine care needs

•   Determine how to improve or manage patient health

•   Develop strategies for implementing a plan of care

Pros:

•   High earning potential (an all-in-one money tracker tool can help you stay on top of your money game)

•   Well above-average job growth

•   Opportunity to specialize

Cons:

•   Potentially a highly stressful job

•   Requires advanced education

•   May require working long shifts

4. Data Scientist

Median pay: $108,020/year

Job growth outlook: 36%

Job description: Extract and analyze data. May collect or categorize data, offer interpretations of data, or create visual representations to showcase their findings. These individuals typically work in an office setting or from home. Because this role doesn’t require much interaction with customers or colleagues, it can be a good job for antisocial people.

Job duties:

•   Collect and organize data

•   Test data and use it to develop algorithmic models

•   Analyze data to create recommendations for business entities

Pros:

•   Competitive pay and outstanding earning potential

•   Opportunity to work a flexible schedule or remotely

•   May appeal to people looking for a creative-adjacent job

Cons:

•   Some aspects of the job may be tedious or boring

•   Hours can be long and require the completion of menial tasks

•   Master’s degree or higher may be required for certain jobs

5. Information Security Analyst

Median pay: $120,360/year

Job growth outlook: 33%

Job description: Information security analysts review an entity or organization’s security measures and develop strategies for protecting and safeguarding data. This is one of the fastest-growing IT jobs as more companies turn their focus to increasing cybersecurity in order to prevent fraud or data hacks. This is a strong option if you need a job that will pay off your student loans.

Job duties:

•   Analyze security measures in order to look for potential flaws or weak spots

•   Develop cybersecurity strategies to enhance a company or organization’s data safety

•   Maintain security software, including encryption and firewall services

Pros:

•   Job growth may be sustainable long term as more companies seek to step up their cybersecurity efforts

•   Salary ranges are competitive compared to other fast-growing jobs

•   May offer opportunity for remote work

Cons:

•   Some jobs may require a master’s degree or higher

•   May be required to complete tasks on short notice

•   Potentially stressful and high-pressure

6. Medical and Health Services Manager

Median pay: $110,680/year

Job growth outlook: 29%

Job description: Responsible for managing their facility and coordinating medical and health services for patients. Should be up to date on the latest laws, regulations, and technology in healthcare.

Job duties:

•   Create and execute policies, goals, and procedures for facility

•   Ensure facility complies with laws and regulations

•   Recruit, train, and manage staff

Pros:

•   Competitive salary

•   Flexible hours

•   Room for advancement for those interested in leadership roles

Cons:

•   Hours may be long

•   May be required to have a bachelor’s degree, a license, and/or work experience

•   The job has a high rate of injury and illness

7. Physician Assistant

Median pay: $130,020/year

Job growth outlook: 28%

Job description: Responsible for examining, diagnosing, and treating patients under the supervision of a physician. PAs can work in a variety of settings, including a hospital, doctor’s office, outpatient care center.

Job duties:

•   Examine and diagnose patients

•   Prescribe medication

•   Educate patients on their health issues

Pros:

•   Can be rewarding to help care for patients

•   Competitive pay, particularly for jobs at outpatient care centers and hospitals

•   Can work in a variety of specialized areas, such as dermatology, pathology, or emergency medicine

Cons:

•   Work can be physically and emotionally demanding

•   May be required to work nights, weekends, or holidays

•   Must have a bachelor’s degree or higher and be licensed

8. Computer and Information Research Scientist

Median pay: $145,080

Job growth outlook: 26%

Job description: Use expertise and experience to improve existing technologies and create new ones. The work can help fuel innovation and solve problems in science, medicine, and business, among other fields.

Job duties:

•   Develop and/or improve computer software and hardware

•   Create new computing languages and tools

•   Design and oversee experiments on software systems

Pros:

•   Opportunity to work on cutting-edge projects

•   Ability to help create innovations and improvements

•   Can specialize in various fields, including artificial intelligence or robotics

Cons:

•   Much of the work is online, which could be an issue for extroverted people

•   Most jobs typically require a master’s degree or Ph.D.

•   May work long hours

9. Physical Therapist Assistant

Median pay: $64,080/year

Job growth outlook: 25%

Job description: Collaborate with physician therapists to help patients regain their mobility and manage their pain. PTAs may also be responsible for cleaning and setting up treatment areas or moving patients around the facility.

Job duties:

•   Treat patients through exercise, massage, and other interventions, under the supervision of a physical therapist

•   Record the patient’s progress and share progress with the physical therapist

•   Help move patients in and/or out of treatment area

Pros:

•   Solid earning potential

•   May have the option to work part-time

•   Helping patients recover can be professionally rewarding

Cons:

•   Often requires standing for long periods of time

•   Moving patients could put strain on the body

•   May be required to work nights and weekends

10. Operations Research Analyst

Median pay: $83,640/year

Job growth outlook: 26%

Job description: Evaluate a company’s operations using advanced analytical and mathematical techniques, and recommend ways to increase efficiency and solve problems.

Job duties:

•   Analyze data to identify or solve operational problems

•   Provide recommendations to decision makers

•   Document and present finding to support recommendations

Pros:

•   May have opportunities for advancement

•   Often work on teams, which can be a good fit for extroverts

•   Can help businesses operate more efficiently

Cons:

•   Advanced education and training are often required

•   Role can be demanding

•   May be required to work in the office

Fastest-Growing Jobs by 2025 Outlook

The fastest growing jobs in 2024 include all of the options listed above. Other jobs projected to have above-average growth through 2033 include:

•   Occupational therapy assistants

•   Actuaries

•   Financial examiners

•   Home health and personal care aides

•   Veterinary assistants and laboratory animal caretakers

•   Veterinary technologists and technicians

•   Logisticians

•   Veterinarians

•   Substance abuse, behavioral disorder, and mental health counselors

•   Epidemiologists

Which job skills will be most in demand in the future? According to the World Economic Forum, the following skills will be highly sought after by employers within the next few years:

•   Analytical thinking

•   Creative thinking

•   Resilience, flexibility, and agility

•   Motivation and self-awareness

•   Curiosity and lifelong learning

•   Technological literacy

•   Dependability and attention to detail

Some of these are “soft skills,” meaning they’re based around communication and self-management. However, it’s clear that technological skills and computer skills will continue to be an important consideration for employers in the future.

The Takeaway

The Bureau of Labor Statistics regularly publishes lists of jobs with good potential for recent grads and career changers. This year’s list of the top fields for job growth include energy, healthcare, computers, and data science. It’s a wide range, with something for everyone. And while some roles require a college degree, others welcome high school grads.

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FAQ

What is the most needed job in 2024?

According to the Bureau of Labor Statistics, nurse practitioners are among the fastest growing jobs for 2024 and beyond. That’s due largely to increased demand for healthcare providers during the pandemic era, but it was also one of the fastest growing jobs pre-COVID.

What job has the highest future growth?

The Bureau of Labor Statistics projects that wind turbine service technicians are set to see the highest job growth through 2033. As the country looks to reduce carbon emissions — and demand for electricity increases — more wind turbines are expected to be built. This will likely create more job opportunities for qualified service technicians who can install and maintain the equipment.

Which jobs will be in demand in the next 10 years?

Some of the jobs that will be in the highest demand in the next 10 years include nurse practitioners, wind turbine service technicians, data analysts, information security analysts, and medical and health services managers.


About the author

Rebecca Lake

Rebecca Lake

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



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What Is the Arms Index (TRIN)? How to Use the Indicator

What Is the Arms Index (TRIN)? How to Use the Indicator

The Arms Index or Trading Index (TRIN) is a breadth indicator used to indicate when the stock market is overbought and oversold. In simpler terms, it measures how strong or weak the market is on any given day.

Technical analyst Richard W. Arms developed the Arms Index formula in 1967 as a tool for gauging market sentiment. Investors still use TRIN indicators to track volatility and price movements. By looking for upward or downward trends in the TRIN and comparing them to other technical indicators, investors can potentially identify buy or sell signals.

Key Points

•   The Arms Index, also known as TRIN, measures stock market strength or weakness.

•   It was developed by Richard W. Arms in 1967 to gauge market sentiment.

•   TRIN calculates by dividing the Advance/Decline ratio by the Advance/Decline volume ratio.

•   A TRIN value above 1.0 suggests a bearish market, while below 1.0 indicates bullish conditions.

•   Investors use TRIN alongside other indicators to identify potential buy or sell signals.

What Is the Arms Index (TRIN)?

The Arms Index, Trading Index or TRIN for short is a breadth oscillator used to identify pricing and value trends in the stock market. Specifically, the index looks at two things: Advance Decline ratio and Advance Decline volume ratio.

The former represents the number of advancing and declining stocks while the latter represents advancing and declining stock volume.

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The TRIN Formula

TRIN = (Advancing stocks/Declining stocks) / (Composite volume of advancing stocks/Composite volume of declining stocks)

In this formula:

•   Advancing stocks refers to the number stocks trading higher

•   Declining stocks refers to the number of stocks trading lower

•   Advancing volume is the total volume of all advancing stocks

•   Declining volume is the total volume of all declining stocks

Investors use moving averages to smooth out the data and understand the relationship between the supply and demand for stocks during a given time period. The Arms Index aims to highlight bearish or bullish trends based on the relationship between the number of stocks being traded and the volume.

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How to Calculate TRIN

To calculate TRIN, you’d simply apply the formula outlined earlier. Again, it looks like this:

TRIN = (Advancing stocks/Declining stocks) / (Composite volume of advancing stocks/Composite volume of declining stocks)

Here’s what calculating TRIN might look like in action:

•   Find AD ratio by dividing the number of advancing stocks by the number of declining stocks

•   Find AD volume ratio by dividing total advancing volume by total declining volume

•   Divide AD ratio by AD volume ratio

You’d perform these calculations over a set time period, recording each figure on a graph or chart as you go. For example, you might space the calculations out every few minutes, hourly or daily. You’d then connect each data point on your graph or chart to whether the TRIN is moving up or down.

Dive Deeper: How to Calculate AD Ratio

What Does TRIN Show You?

TRIN shows you the market’s volatility and the short-term direction of prices to help investors identify buying opportunities. When reading or interpreting TRIN data, you’re looking to see if it’s above 1.0 or below 1.0. This can tell you whether the market is bearish or bullish. A reading of exactly 1.0 is considered neutral.

For example, a reading below 1.0 is common when there are strong upward trends in price movements. Meanwhile, a reading above 1.0 is typical when there’s a strong downward trend. Here’s another way to think of it. When the reading is below 1.0 that means advancing stocks are driving volume but when it’s above 1.0, declining stocks are in the driver’s seat for generating volume.

You may also look at the direction TRIN is moving. A rising TRIN could indicate a weak market, while a falling TRIN may mean the market is getting stronger. Understanding how to read the data matters when determining whether the market is overbought or oversold at any given time.

Overbought

In stock trading, overbought means a stock is selling at a price above its intrinsic value. When the market is overbought, there’s generally a bullish attitude as investors keep buying in and driving up market capitalizations.

But a sell-off can happen if market sentiment turns negative. In that case, you get a reversal and prices begin to drop, potentially pushing market capitalizations down. Investors use the Arms Index or TRIN to spot this type of price movement trend and get ahead of a reversal before it happens.

Oversold

When an asset is oversold it means it’s trading below its intrinsic value. In other words, it’s trading for less than what it’s actually worth. This scenario can happen if an asset is undervalued for an extended period of time.

When investors assume the market is oversold, that can lead to an increase in buying activity. This, in turn, can drive stock prices up.

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Example of Using TRIN

If you wanted to apply the TRIN in real time, you could do that using stock charts that illustrate technical indicators. So, say you want to track the movements of the S&P 500 Index for a single day, looking at prices in five-minute intervals. You begin calculating TRIN at 10:00 am, at which time it’s 1.10. This sends a sell signal to the market and prices begin edging down.

An hour later, you see that TRIN has dropped to 0.85 sending a buy signal. At this point, prices begin to move upward again. By following TRIN throughout the day you could see whether the upward trend looks like it will continue or whether it will eventually reverse. If you’re following the rule of “buy low, sell high“, you might want to time trades to correlate with stock price movements based on the trends forecasted by the TRIN.

How Is TRIN Different Than TICK?

The TRIN measures the spread or gap between supply and demand in the markets. The Tick Index or Tick Indicator shows the number of stocks trading on an uptick minus the number of stocks trading on a downtick. This trend indicator measures all of the stocks that trade on an exchange such as the New York Stock Exchange (NYSE) or Nasdaq.

Unlike Arms Index or TRIN, the Tick indicator does not factor in volumes. Instead, Tick index aims to pinpoint extreme buying or extreme selling on an intraday basis.

Is TRIN a Good Indicator?

The TRIN has both good points and bad points when used as an investment decision-making tool. No technical analysis indicator can yield precise answers when determining the best time to buy or sell.

It’s important to keep in mind that the Trading Index is just one indicator analysts use to evaluate the stock market and stock volatility. The TRIN is most helpful when used with other indicators in order to create a more comprehensive snapshot of the markets at a particular moment in time.

Pros of TRIN

The Arms Index or TRIN closely analyzes trends between advancing and declining assets. By comparing net advances to volume, it provides a picture of price movements. Volume can be a useful indicator in itself, as higher volumes can suggest more significant shifts in stock pricing.

The TRIN is forward-looking so it can be useful in forecasting which way the market will head next. By pointing out stocks that may be overbought or oversold, the indicator can provide investors with some direction when trying to buy the bottom or sell the top to maximize profits in the market.

Cons of TRIN

If the TRIN has one big flaw it’s that it may generate inaccurate readings because of the way the index accounts for volume. Specifically, you can run into problems when advancing volume falls short of expectations.

For example, say that on a given day the number of stocks advancing significantly outpaces the number of stocks declining. Meanwhile, the same trend happens with volumes, with advancing volume outstripping declining volume. When you calculate TRIN, the numbers could effectively cancel one another out, resulting in a neutral reading.

This can make it difficult to figure out if the market is trending bearish or bullish. For that reason, it may be helpful to apply a 10-day moving average (MA) to help even out the numbers and provide a more accurate picture of pricing trends.

How Investors Can Use TRIN

Technical investors can use the TRIN to analyze the market, decide whether to buy or sell, and when to make those trades to produce the best results. When using the index, you’re looking for clear markers of strength or weakness in the markets. By gauging overall market sentiment, it may become easier to make predictions about future prices.

The TRIN is, by nature, designed to monitor short-term trading activity so it may not work as well for spotting longer term trends. But you can use it to get a feel for whether the market is leaning more on the bullish or bearish side and how likely that trend is to either continue or reverse.

The Takeaway

The Arms Index or TRIN is an important concept to understand if you’re an active day trader using technical analysis. With technical analysis, you’re trying to find trends in the near term so that you can take action to capitalize them.

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About the author

Rebecca Lake

Rebecca Lake

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



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Understanding the Different Types of Mutual Funds

Understanding the Different Types of Mutual Funds

A mutual fund is a portfolio or basket of securities (often stocks or bonds) where investors pool their money. Globally, there are more than 125,000 regulated funds investors can choose from, and they come in many different flavors — from equity funds to government bond funds, as well as growth funds, sector funds, index funds, and more.

While most mutual funds are actively managed (i.e. there is a team of portfolio managers that run the fund), many are passively managed and track an index.

How these types of funds differ typically comes down to their investment objectives and the strategies employed to achieve them.

Mutual Funds Recap

A mutual fund is an investment vehicle that pools money from many investors in order to invest in different securities. For example, mutual funds may hold any combination of stocks, bonds, money market instruments, or cash and cash equivalents. They may also include alternative investments, such as real estate, commodities, or investments in precious metals.

A mutual fund is considered an open-end fund, because its shares are available continuously, versus a closed-end fund which sells a set number of shares at once during an initial public offering.

Mutual fund shares can be purchased through the fund company, from a bank, a brokerage account or through a retirement plan at work. For example, you might hold mutual funds inside a taxable investment account or within an individual retirement account (IRA) with an online brokerage. Or you may invest in mutual funds through your 401(k) at work.

Investing in different types of mutual funds can help with diversification and managing risk in a portfolio. If one investment in a mutual fund underperforms, for example, the other investments in the fund are there to help balance that out.

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9 Types of Mutual Funds

It’s important to understand how and why a mutual fund’s type matters before adding it to your portfolio. Some types of funds may be designed for growth, for example, while others are designed to generate income through dividends. Certain mutual funds may carry a higher risk profile than others, though they may yield the potential for higher rewards.

Knowing more about the different mutual fund options can make it easier to choose investments that align with your goals and risk tolerance.

1. Equity Funds

•   Structure: Open-end

•   Risk Level: High

•   Investment Goals: Growth or income, depending on the fund

•   Asset Class: Equity (i.e. stocks)

Equity funds or stock funds primarily invest in stocks, with one of two goals in mind: capital appreciation or the generation of regular income through dividends. The types of companies an equity fund invests in can depend on the fund’s objectives.

For example, some equity funds may concentrate on blue-chip companies that offer consistent dividends while others may lean toward companies that have significant growth potential. These are often referred to as growth funds. Sector funds, meanwhile, may focus on companies from a single stock market sector. Equity funds can also be categorized based on whether they invest in large-cap, mid-cap or small-cap stocks.

Investing in equity funds can offer the opportunity to earn higher rewards but they tend to present greater risks. Since the prices of underlying equity investments can fluctuate day to day or even hour to hour, equity funds tend to be more volatile than other types of funds overall.

2. Bond Funds or Fixed-Income Funds

•   Structure: Typically open-end though some bond funds may be closed-end

•   Risk Level: Low

•   Investment Goals: To provide fixed income to investors

•   Asset Class: Fixed income/bonds

Bond funds or fixed-income funds are mutual funds that invest in bonds or other investments that are designed to provide consistent income. A bond is a type of debt instrument that pays interest to investors. Like equity funds, bond funds may target a specific type of investment. For example, there are funds that focus exclusively on government bonds while others hold municipal bonds or corporate bonds.

Generally speaking, bonds tend to be lower risk compared with other types of funds. But they’re not 100% risk-free and it’s still possible to lose money on bond fund investments. That’s because bonds tend to be sensitive to interest rate risk and credit risk.

For that reason, it’s important to compare credit ratings when choosing bonds for a portfolio. It’s also helpful to understand the inverse relationship between interest rates and bond yields when choosing different types of funds to invest in.

Recommended: How Do Bonds Work?

3. Money Market Funds

•   Structure: Open-end

•   Risk Level: Low

•   Investment Goals: Income generation

•   Asset Class: Short-term fixed-income securities

Money market funds or money market mutual funds invest in short-term fixed-income securities. For example, these funds may hold government bonds, municipal bonds, corporate bonds, bank debt securities (i.e. certificates of deposit, bankers’ acceptances, etc.), cash and cash equivalents.

Money market funds can be labeled according to what they invest in. For example, Treasury funds invest in U.S. Treasury securities, while government money market funds invest in government securities.

In terms of risk, money market funds are considered to be some of the safest types of mutual funds and some of the safest investments overall. That means, however, that money market mutual funds tend to produce lower returns compared to other mutual funds.

It’s also worth noting that money market funds are not the same thing as money market accounts (MMAs). Money market accounts are deposit accounts offered by banks and credit unions. While these accounts can pay interest to savers, they’re more akin to savings accounts than investment vehicles.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

4. Index Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Investment Goals: To replicate the performance of an underlying market index

•   Asset Class: Available in all asset classes

Index funds are a type of mutual fund that has a very specific goal: To match the performance of an underlying market index. For example, an index fund may attempt to mirror the returns of the S&P 500 Index or the Russell 2000 Index (or any other of the many market indices). The fund does this by investing in some or all of the securities included in that particular index.

Index funds are considered passively managed or unmanaged because there is no active portfolio manager at the helm. Also, the underlying shares of the companies in the fund rarely change, unlike an active fund, where the portfolio manager and management team may make frequent trades.

An index fund that tracks the S&P 500 index, for instance, primarily invests in large-cap U.S. companies represented in the index itself.

Market capitalization is a commonly used metric for determining the makeup of equity index funds. Market cap measures a company’s size based on the number of shares it has outstanding and the price of those shares. Mega-cap and large-cap companies have higher market capitalization or value than mid- or small-cap companies.

Investing in index funds might appeal to investors who prefer passive investments. These funds often have lower expense ratios, as they are unmanaged and tend to have lower turnover. While they’re not free from risk, index funds can be less risky than actively managed equity funds, where tracking error and underperformance can affect overall returns.

5. Balanced Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Investment Goals: Balancing risk and reward

•   Asset Class: Equity, fixed income, cash

Balanced funds, sometimes referred to as hybrid funds, include a mix of different asset classes. For example, balanced funds can hold stocks, bonds, and cash investments. The goal in doing so is to create balance between risk and reward. Specifically, these funds aim to provide above-average return potential while mitigating risk to investors as much as possible.

Balanced funds can be growth funds or income funds. Growth balanced funds focus on capital appreciation. Income balanced funds, on the other hand, aim to provide investors with steady income through dividends and/or interest.

Investing in balanced funds could appeal to investors who want to generate potentially higher returns without exposing themselves to more risk than they’re capable of tolerating. They can also be useful for adding diversification to a portfolio that may be stock or bond heavy.

6. Income Funds

•   Structure: Open-end

•   Risk Level: Low to moderate

•   Investment Goals: To provide income to investors

•   Asset Class: Bonds, income-generating assets

Income funds have a singular goal of providing income to investors. While they can sometimes be grouped with bond funds, income funds are their own mutual fund type. While these funds can invest in bonds, they can also hold a wide range of investments, including dividend-paying stocks, money market instruments and preferred stock.

Like bond funds, income funds are subject to many of the same risks including interest rate risk and credit risk. Those apply specifically to bond holdings. Investments in dividend stocks, preferred stock, and money market instruments carry separate risks.

For that reason, income funds are somewhere in the middle between bond funds and fixed-income funds and equity funds in terms of risk. While they can offer potentially higher returns and steady income to investors, it is still possible to lose money if underlying investments in the fund are affected by changing market conditions.

7. International Funds

•   Structure: Generally open-end, though some may be closed-end

•   Risk Level: High

•   Investment Goals: Capital appreciation or income, depending on the fund

•   Asset Class: Equity, though some international funds can include bonds or fixed-income securities

International mutual funds hold investments from securities markets around the world, excluding the United States. So, for example, an international mutual fund may invest in European companies, Asian companies or in companies from emerging markets. The key hallmark of these funds is that U.S. companies are not represented here. (Global funds, on the other hand, can hold a mix of both U.S. and international securities.)

Adding international funds to a portfolio can increase diversification if you’ve primarily invested in U.S. companies or bonds so far. But keep in mind that international funds can carry unique risks. For example, investing in an international fund that holds real estate could be tricky if the real estate market in a particular country experiences a downturn.

For that reason, investing experts often recommend limiting how much of your portfolio you commit to international funds.

8. Specialty Funds

•   Structure: Open or closed-end

•   Risk Level: Varies by fund

•   Investment Goals: Varies by fund

•   Asset Class: Equity, bonds, fixed-income, cash, alternatives

Specialty fund is a catch-all term to describe types of mutual funds that are built around a specific theme. For example, hedge funds are considered to be a specialty fund since they rely on hedge fund trading strategies to achieve their investment objectives. Sector funds could also fall under the specialty fund umbrella since they invest in securities from individual market sectors.

Investing in specialty funds can help diversify a portfolio because it offers an opportunity to look beyond stocks or bonds. Specialty funds can offer exposure to things like real estate, commodities, or even cryptocurrency. You could also use specialty funds to pursue specific investing goals, such as investing with environmental, social, and governance (ESG) principles in mind.

In terms of risk, specialty funds can be all over the spectrum, with some posing less risk and others carrying higher risk. That also translates to wide variations in the return potential of specialty funds. It’s important to do your research to understand what kind of risk/return profile a particular fund may have.

9. Target Date Funds

•   Structure: Typically a fund of funds

•   Risk Level: These funds are designed to become more conservative (i.e. less risky) over time.

•   Investment Goals: To provide returns and risk that align with a target retirement date

•   Asset Class: Equity, bonds, fixed-income

Target date funds are mutual funds that adjust their asset allocation automatically over time, based on a predetermined glide path. The glide path is simply an automated plan for how the fund will become more conservative over time.

Say you plan to retire in 2050. You could invest in a 2050 target date fund, and as you get closer to retirement the fund will automatically shift its asset allocation to become less aggressive (i.e. dialing back on equities) and more conservative as the target date approaches.

Like mutual funds, target date funds are offered by nearly every investment company. In most cases, they’re recognizable by the year in the fund name.

If you have a 401(k) at work, it’s likely you may have access to various target date funds for your portfolio. These funds have become increasingly popular among 401(k) plan administrators due to their simplicity. Workers can select a target date fund based on when they plan to retire, and the fund’s asset allocation will adjust over time to become more conservative. But there is still the possibility a target fund could lose money.

Also, because the mix of investments in a target fund is predetermined, it’s important to know you cannot change the underlying assets. That’s why it’s best to be cautious when combining target date funds with other mutual funds in your portfolio; you don’t want to inadvertently make your portfolio overweight in a certain asset class, or even a specific security, if there’s an overlap between funds.

What’s the Difference Between Mutual Funds and ETFs?

It might be easy to confuse exchange-traded funds or ETFs with mutual funds, but they are different animals.

•   ETFs are considered funds yet in many ways they behave more like stocks. ETFs trade on an exchange, like stocks, and investors buy and sell shares of the ETF throughout the day, which can cause the share price to fluctuate. By contrast, mutual funds are priced at the end of the day.

•   Some investors prefer ETFs because they are more liquid than mutual funds.

•   Though you can buy actively managed ETFs, the majority of these funds track an index and are passively managed. The reverse is true of mutual funds, where the majority are actively managed (though that balance is shifting toward passive strategies, which have been shown generally to deliver higher returns).

•   Because ETFs are largely passive (i.e. unmanaged), they are often cheaper than mutual funds.

Like mutual funds, though, ETFs provide investors with many different ways to invest in the market. Investors can choose between equity and bond ETFs, sustainable ETFs, ETFs that invest in foreign currency, precious metals ETFs, and more. Some ETFs are also known for using “themed” strategies that allow investors to invest in hyper-specific market segments, e.g. semiconductors, clean water technology, infrastructure, robotics, cloud computing, and so on.

Recommended: A Closer Look at ETFs vs Mutual Funds

The Takeaway

With tens of thousands of mutual funds available to investors, how do you choose the ones that suit your financial goals? Fortunately, mutual funds are among the most versatile and affordable investments, offering investors the ability to incorporate a range of asset classes in their portfolio: from equities and bonds to more specialized assets like dividend-paying stocks or foreign securities.

Investing in mutual funds may provide investors with the potential for higher returns or steady income — or even emerging market opportunities. Of course, all investments also carry the potential for risk, but here investors can also decide whether to invest in lower-risk funds, like bond funds and money market funds — or use a variety of mutual funds to create a well-balanced portfolio.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.


Invest in alts to take your portfolio beyond stocks and bonds.


About the author

Rebecca Lake

Rebecca Lake

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



Photo credit: iStock/simonapilolla


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


SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.

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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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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Unit Investment Trust (UIT) Explained Easily

What Is a Unit Investment Trust (UIT)?

A unit investment trust, or UIT, is similar to a mutual fund in that it’s a type of investment company that can hold a variety of securities, like stocks and bonds, that investors can buy as redeemable units. In fact, UITs belong to the same category as mutual funds and closed-end funds, in that they pool money together from different investors.

Similarly, unit investment trusts are designed to provide capital appreciation and/or dividend income, although without active trading of the securities in the portfolio. Unit investment trusts can offer some advantages to investors compared to mutual funds or exchange-traded funds (ETFs). There are, however, some potential downsides that could make them less attractive than other types of pooled investments.

Unit Investment Trust (UIT) Explained Clearly

A unit investment trust is a type of investment company that issues and invests in securities. The other two types of investment companies are open-end funds (i.e. mutual funds) and closed-end funds.

Similar to a closed-end fund, a UIT raises money from multiple investors, typically through an Initial Public Offering, or IPO. Each investor holds a unit in the trust that represents an ownership share and allows them to stake a claim to any capital appreciation or dividend income the trust generates. This type of trust can be established as a grantor trust or a regulated investment corporation.

Once the portfolio manager of a unit investment trust chooses which securities to invest in, the investment focus usually doesn’t change. That means there is typically no active investing management in terms of trading the underlying assets. The investments that a UIT chooses depend on its overall strategy and objectives. So, the risk and return profile of unit investment trusts can vary from one to another, based on the underlying holdings.

When a UIT matures, investors can do one of three things:

•  Wait for the trust to liquidate its portfolio and receive their share of the proceeds

•  Roll the investment over to a new UIT

•  Receive a like-kind distribution of stock from the trust’s underlying investments

It’s important to keep in mind that UITs are not guaranteed investments. So, it’s possible that returns could be lower than expected or even negative if the trust fails to meet its objectives.

UIT Advantages and Disadvantages

Like any investment UITs have their advantages and disadvantages. As for advantages, investors may like that UITs offer a relatively easy way to diversify their portfolios with a single investment. They’re relatively easy to understand, too, and offer a degree of transparency into their holdings, so that investors can make better decisions relating to their investing strategy.

As for disadvantages? Perhaps the most obvious is that UITs are more or less fixed investments that do not change their investment mixes in an effort to adjust to the whims of the market. Some investors may prefer a more active approach to management in an effort to increase their returns.

Types of Unit Investment Trusts

Unit investment trusts can invest in a variety of different securities, but they tend to concentrate holdings in stocks and bonds. UITs generally come in one of two forms: Stock trusts and bond trusts.

These assets are held in the trust for a set time period until the trust is dissolved. A typical holding period would be anywhere from 15 months to two years, though some UITs may have an end date that’s farther in the future.

Investors can sell their holdings back to the issuing company at any time, but they can’t trade UIT shares as they would shares of a mutual fund.


💡 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.

UIT vs. Mutual Fund

UITs differ from most mutual funds several ways, chiefly in that they sell a fixed number of shares or units when the UIT is first opened; and the trust has a set maturity date when the UIT is dissolved and investors can redeem their units.

As noted, a mutual fund is a company that pools money from investors and invests them in securities. There are many different types of mutual funds, including but not limited to bond funds, stock funds, blended funds, target-date funds, and index funds. Some mutual funds can be actively managed while index funds follow a passive investing strategy.

At first glance, a UIT and a mutual fund might seem like the same thing since they fall under the same investment company umbrella. And while they do have some features in common, there are other things that distinguish the two.

Recommended: Active vs Passive Investing: Key Differences

How Are UITs and Mutual Funds Similar?

UITs and mutual funds share common ground when it comes to diversification, regulation, and how they pass on capital gains or dividends to investors. A capital gain represents a gain between the price you initially paid for an investment and the price you receive when you sell it. A dividend is a percentage of an investment’s profits that are paid out to investors.

Since UITs and mutual funds are both types of investment companies, they’re subject to SEC regulation. This means they’re required to meet regular reporting requirements. While this can help to minimize the potential for fraud, investors are still encouraged to read each fund’s prospectus to ensure they understand what the fund invests in.

Recommended: How Do Dividends Work?

What Are the Differences Between UITs and Mutual Funds?

The biggest differences between UITs and mutual funds concerns their structure and management. A UIT has a set beginning when shares are issued, and an end date when it matures — while an open-end mutual fund typically allows investors to continually buy and sell shares. Additionally, a unit investment trust issues a certain number of units when the trust is created while mutual funds can issue new shares periodically.

With UITs, the underlying investments remain largely or entirely the same until they mature. Mutual funds, on the other hand, can buy and sell underlying assets as needed to stay aligned with the fund’s objectives. So, mutual funds can be more adaptable if an underlying investment doesn’t perform as expected.

How to Invest in UITs

If you’re interested in investing with a unit investment trust, it’s possible to buy them directly from the issuer. UITs can also trade on an exchange, so you could purchase them through an online brokerage account.

Before buying a unit investment trust, however, there are a few things to consider. Specifically, look at the following when comparing UITs:

• Duration of the UIT

• Minimum investment requirement

• Underlying investments

• Investment strategy and objectives

• Fees

Also, consider the investment risks. Again, there’s no guarantee that a unit investment trust will perform as expected. And since the trust investments are fixed, your returns (or losses) more or less hinge on whether those investments do well.

It’s also important to think about how well the underlying investments match up with the other investments in your portfolio. If you’re already heavily concentrated in equities, for example, it may not make sense to choose an equity UIT since that could increase your exposure to some of the same companies. A bond UIT, on the other hand, might help to balance out your asset allocation.

Investment Costs

Don’t forget that investments often have associated costs, and they can come in a variety of forms. For instance, investors may be on the hook for broker fees, trading fees, management fees, and more. The specifics will depend on the individual investment, but investors should do some homework to see what potential investment fees they’re up against.

Unexpected Taxes

Taxes often catch investors by surprise, too. Be sure to review what types of taxes you might be on the hook for – with investments, it’s generally either income taxes or capital gains taxes – and plan accordingly.

Are UITs a Good Investment?

Whether a unit investment trust is a good investment for you personally can depend on what you need and expect a pooled investment to do for you.

If you’re an active trader, for example, then a UIT likely wouldn’t be a good fit. On the other hand, if you tend to take the longer view when investing or you prefer a buy-and-hold approach, you may find a unit investment trust fits well in your investment portfolio.

While you could benefit from capital gains distributions and dividends, keep in mind that unit investment trusts offer less flexibility than mutual funds or ETFs. Dividends, for example, can’t be reinvested the way they could with a mutual fund or index fund.

And, as discussed, investment fees are another important consideration when investing in a UIT. Since investment costs can reduce total return amounts over time, it’s important to understand all the costs associated with buying units and redeeming them when the trust matures.

Should You Consider Investing in a Unit Investment Trust?

Given their less flexible structure and set maturity date, unit investment trusts may be appealing to investors who take a longer-term approach and tend to prefer a buy-and-hold strategy.

If you’d like more flexibility with your investments, you may consider mutual funds or ETFs in place of UITs, which have a set beginning and end date and little or no active trading of the securities within the trust. You also might want to explore alternatives to trusts or funds, like cryptocurrency or investing in IPOs.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

A unit investment trust, or UIT, are investment companies that are, in many ways, similar to a mutual fund. They can hold a variety of securities, like stocks and bonds, that investors can buy as redeemable units.

Given their less flexible structure and set maturity date, unit investment trusts may be appealing to investors who take a longer-term approach and tend to prefer a buy-and-hold strategy. If you’d like more flexibility with your investments, you may consider mutual funds or ETFs in place of UITs, which have a set beginning and end date and little or no active trading of the securities within the trust.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Are fixed unit investment trusts redeemable?

Unit investment trusts do issue redeemable shares or units, much like a mutual fund. As such, the UIT is able to purchase shares or units back from an investor at an appropriate valuation.

What is the difference between unit trust and investment trust?

A unit trust is a sort of investment fund that allows investors to pool their money for investment purposes. An investment trust is a company or entity that operates an investment fund.

Are UITs actively managed?

UITs are not actively managed, and have fixed investment holdings. Accordingly, investments are purchased at the onset, and held until the UIT matures.

Photo credit: iStock/Ridofranz


About the author

Rebecca Lake

Rebecca Lake

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



SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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How to Use a Trailing Stop Loss Properly

How to Use a Trailing Stop-Loss Properly

A trailing stop loss allows investors to create a built-in safety mechanism to insulate themselves against downward pricing trends. It’s an important exit strategy that day traders can use to manage their risk.

Understanding how a trailing stop order works and how to use it properly can help cap potential losses when day trading investments.

What Is a Trailing Stop-Loss?

A trailing stop-loss offers a flexible approach to minimizing investment losses. A trailing stop order trails the price of the underlying investment by a percentage or a specific dollar amount. So, if an investor buys shares at $50 each, they might impose a trailing stop limit of 10%. If the stock’s share price dipped by 10% they’d be sold automatically.

To understand trailing stop-loss, it helps to have a basic understanding of how limit orders and stop orders work.

A limit order is an order to buy or sell a security once it reaches a specific price. If the order is to buy, it only gets triggered at or below the limit price. If the order is to sell, the order can only get executed at or above the limit price. Limit orders are typically filled on a first-come, first-served basis in the market.

A stop order, also referred to as a stop-loss order (yet another of the stock order types), is also an order to buy or sell a particular investment. The difference is that the transaction occurs once a security’s market price reaches a certain point. For example, if you buy shares of stock for $50 each, you might create a stop order to sell those shares if the price dips to $40. Once a stop or limit order is executed, it becomes a market order.

Stop orders help you either lock in a set purchase price for an investment or cap the amount of losses you incur when you sell if the security’s price drops. While you can use them to manage investment risk, stop orders are fixed at a certain share price.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How a Trailing Stop Order Works

Using a trailing stop to manage investments can help you capitalize on stock market movements and momentum. You determine a preset price at which you want to sell a stock, based on how a particular investment is trending, rather than pinpointing an exact dollar amount.

You can decide where to set a trailing stop limit, based on your risk tolerance and what you expect an investment to do over time. What remains consistent is the percentage by which you can control losses as the investment’s price changes.

Example

So, assume that you purchase 100 shares of stock at $50 each. You set a trailing stop order at 10%. If the share price dips to $45, which reflects a 10% loss, those shares would be sold automatically capping your total loss on the investment at $500.

Now, assume that the stock takes off instead and the share price doubles to $100 with the same 10% trailing stop in place. Your stop order would only be triggered if the stock’s price falls to $90. If you had set a regular stop order at $40 instead, there’d be a much wider margin for losses since the stock’s price has further to fall before shares would be sold. Thus, trailing stops enhanced downside protection compared to a regular stop order.

3 Advantages of Using a Trailing Stop Order

There are several benefits that come with using a trailing stop limit to manage your investments.

1. Tandem Movements

First, trailing stops move in tandem with stock pricing. As a stock’s per share price increases, the trailing stop follows. In the previous example, when the stock’s price doubled from $50 to $90, the trailing stop price moved from $45 to $90. In effect, it’s a hands-off tool — which can be great for some investors.

2. Confidence

Implementing a trailing stop limit strategy can offer reassurance since you know shares will be sold automatically if the stop order is triggered. That can offer investors some confidence in what may be a chaotic market environment. That, for many, can be very valuable.

3. Take Emotion Out of the Equation

Trailing stop limits rely on math rather than emotions when making decisions. That can also help you avoid the temptation to try to time the market and either sell too quickly or hold on to a stock too long, impacting your profit potential.


💡 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.

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

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*Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

How Do You Set up a Trailing Stop Order?

If you’re day trading online, it’s relatively simple to set up a trailing stop loss order for individual securities. Because the orders are flexible, you can choose where you want to set the baseline percentage at which stocks should be sold. For example, if you’re less comfortable with risk you might set a trailing stop at 5% or less. But if you’re a more aggressive portfolio, you may bump the order up to 20% or 30%.

You can also control whether you want buy or sell actions to happen automatically or whether you want to place trades manually. Automating ensures that the trades happen as quickly as possible, but performing them manually may be preferable if you’re more of a hands-on trader.

Example of a Trailing Stop-Loss Order

Though we’ve already given some quick examples of how a trailing stop-loss order might work in a practical sense, let’s run through it again.

Say that you buy 100 shares of Company A stock for $10. You set up a trailing stop-loss order at 10%, meaning that if Company A stock falls to $9 or below, a sell order will automatically be executed. The next week, Company A stock’s value rises to $12 — the trailing stop loss order follows. The week after, Company A’s stock loses 15% of its value, falling from $12 to $10.20.

The stop-loss order kicked in when the stock lost 10%, so your shares were sold at $10.80, saving you $0.60 per share, for a total of $60.

Again, this can be helpful if investors want to “lock in” their gains and cash out stocks with a positive return.

Are There Any Downsides of Using a Trailing Stop?

Investing is risky by nature, and no strategy is foolproof. While trailing stops can help minimize losses without placing a cap on profits, there are some downsides to consider.

Accessibility

Depending on which brokerage account you’re using, you may face limits on which investments you can use trailing stop loss strategy with. Some online brokerages don’t allow any type of stop loss trading at all.

Potential to Lock-in Losses

If a stock you own experiences a two-day slide in price, your stop loss order might require your shares be sold. If on the third day, the stock rebounds with a 20% price increase, you’ve missed out on those gains and locked in your losses. If you want to repurchase the stock you’ll now have to do so at a higher price point, and you’ve missed your chance to buy the dip.

Velocity Challenges

If share prices drop too quickly there may be some lag time before your trailing stop order can be fulfilled. In that scenario, you might end up incurring bigger losses than expected, regardless of where you placed your stop price limit.

No Market for the Security

It’s possible an investor finds themselves holding a stock that nobody wants — meaning that it has no liquidity, and can’t be traded. This is unlikely, but in this case, a stop-loss order couldn’t execute as there’s no one to trade with.

Market Closure

If you’ve set up trailing stop-loss orders, they can’t and won’t execute when the market is closed. Security prices can go up and down after-hours, but market orders can only be executed during normal operating hours for stock exchanges.

Using a market-on-open order may be another tool to consider if investors are concerned about this scenario.

Gaps

On the same note as market closures, pricing gaps — which may occur due to after-hours pricing movements, for instance — can and do occur. A stop-loss order may not help in those cases, and investors may lose more than anticipated as a result.

How to Use a Trailing Stop-Loss Strategy

Using trailing stops is better suited as part of a short-term trading strategy, rather than long-term investing. Buy-and-hold investors focused on value don’t need to worry as much about day-to-day price movements.

With that in mind, there are a few things to consider before putting trailing stop orders to work. A good starting point is your personal risk tolerance and the level of loss you’d be comfortable accepting in your portfolio. This can help determine where to set your trailing stop loss limit.

Again, if you’re a more conservative investor then it might make sense to set the percentage threshold lower. But if you have a larger appetite for risk, you could go higher. You can also tailor thresholds to individual investments to balance out your overall risk exposure.

Technical Indicators

Becoming familiar with technical indicators could help you become more adept at reading the market so you can better gauge where to set trailing limits. Unlike fundamental analysis, technical analysis primarily focuses on decoding market signals regarding trends, momentum, volatility and trading volume.

This means taking a closer look at a security’s price movements and understanding how it’s trending. One indicator you might rely on is the Average True Range (ATR). The ATR measures how much a security moves up or down in price on any given day. This number can tell you where to set your trailing loss limit based on whether price momentum is moving in your favor.

In addition to ATR you might also study moving averages and standard deviation to understand where a stock’s price may be headed. Moving averages reflect the average price of a security over time while standard deviation measures volatility. Considering these variables, along with your risk tolerance and overall investment goals, can help you use trailing losses in your portfolio correctly.

Applying Your Stock Trading Knowledge With SoFi

Whether you plan to use trailing stop strategies in your portfolio or not, making sure you’re working with the right brokerage matters. Ideally, you’re using an online brokerage that offers access to the type of securities you want to invest in with minimal fees so you can keep more of your portfolio gains.

Keep in mind, though, that utilizing stop-loss orders isn’t foolproof, and that there can be pros and cons to doing so. It’s also a somewhat advanced tool to incorporate into your strategy — if you don’t feel like you fully understand it, it may be worth discussing with a financial professional.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How does a trailing stop-loss work?

A trailing stop-loss is a built-in mechanism that automatically sells an investor’s holdings when certain market conditions are met — specifically, when a stock loses a predetermined amount of value.

What is a disadvantage of a trailing stop-loss?

There are several potential disadvantages to using trailing stop-losses, including the fact that they won’t execute during market closures. Securities may lose value during that time, and traders could experience a pricing gap as a result.

What is a good trailing stop-loss percentage?

A good stop-loss percentage will depend on the individual investor’s risk tolerances, but many investors would likely be comfortable with a 5% or 10% trailing stop-loss.


About the author

Rebecca Lake

Rebecca Lake

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



Photo credit: iStock/akinbostanci

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