EBIT and EBITDA are two common ways to calculate a company’s profits, and investors may come across both terms when reviewing a company’s financial statements. Though they appear similar, they can present two very different views of a company’s income and expenses.
If you’re an investor or you own a business, it’s important to understand the difference between EBIT and EBITDA and know why the distinction matters.
What Is EBIT?
EBIT is a way to measure a company’s operating income. So, what does EBIT stand for in finance? It’s an acronym that stands for “earnings before interest and taxes”.
Here’s a look at what each of those components means:
• Earnings: This is the net income of a company over a specified period of time, such as a quarter or fiscal year.
• Interest: This refers to interest payments made to any liabilities owed by the company, including loans or lines of credit.
• Taxes: This refers to any taxes a company must pay under federal and state laws.
The formula for calculating EBIT is simple.
EBIT = Net income + Interest + Taxes
The EBIT calculation assumes you know a company’s net income. To determine net income, you would use this formula:
Net income = Revenue – Cost of Goods Sold – Expenses
In this formula, revenue means the total amount of income generated by goods or services the company sells. Cost of goods sold refers to the cost of making or acquiring any goods the company sells, including labor or raw materials. Expenses include operating costs such as rent, utilities or payroll.
EBIT should not be confused with EBT, or earnings before tax. Earnings before tax is used to measure profits with taxes factored in, but not any interest payments the company owes. You may use this metric to evaluate companies that are subject to different taxation rules at the state level.
You can find EBIT listed on a company’s income or profit and loss statement alongside other important financial ratios, such as earnings per share (EPS).
Is Depreciation Included in EBIT?
The short answer is no, depreciation is not included in the context of the EBIT formula. But you will see depreciation factored in when calculating EBITDA.
What EBIT Tells Investors
Knowing the EBIT for a company can tell you how financially healthy that company is based on its business operations. Specifically, EBIT can tell you things like:
• How much operating income a company needs to stay in business
• What level of earnings a company generates
• How efficiently the company uses earnings when debt obligations aren’t factored in
EBIT can be useful in determining how well a company manages business operations before external factors like debt and taxes come into play. It can also help to create a framework for evaluating whether certain actions, such as a stock buyback, are a true sign that a company is struggling financially.
You can also use EBIT to determine interest coverage ratio. This ratio can tell you how easily a company is able to pay interest on outstanding debt obligations. To find the interest coverage ratio, you’d divide a company’s earnings before interest and taxes by any interest paid toward debt for the specific time period you’re measuring. As an investor, this ratio can give you insight into how well a company is able to keep up with its current debts and any debts it may take on down the line.
What Is EBITDA?
EBITDA is another acronym you may see on financial statements that stands for “earnings before interest, taxes, depreciation, and amortization”. In terms of the first three terms, the breakdown is exactly the same as for EBIT. Plus there are two new additions:
• Depreciation: This term is used to refer to the decline in an asset’s value over time due to things like regular use, wear and tear or becoming obsolete.
• Amortization: This term also applies to a decline in value but instead of a tangible asset, it can be used for intangible assets. Amortization can also be referred to in the context of borrowing. For example, a business loan amortization schedule would show how the balance declines over time as payments are made.
So what is the EBITDA formula? It looks like this:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Alternately, you can substitute this formula instead:
In this formula, operating profit is the same thing as EBIT. So to calculate EBITDA, you’d first need to calculate earnings before interest and taxes.
You should be able to find all the information you need to calculate EBITDA on a company’s income statement, though you may also need a cash flow statement for an accurate calculation.
EBIT vs EBITDA: Which is Better?
Compared to EBIT, EBITDA offers a clearer snapshot of a company’s net cash flow and how money is moving in or out of the business.
Calculating the earnings before interest, taxes, depreciation, and amortization can offer a fuller picture of a company’s financial health in terms of how operational decision-making affects profitability. It can also be useful when calculating valuations for different companies and/or comparing a business to its competitors.
While EBIT and EBITDA can be a starting point for choosing where to put your money, it’s also helpful to consider other fundamental ratios such as earnings per share or price-to-earnings ratio. Active traders who are interested in benefiting from market momentum, may consider technical analysis indicators instead.
Drawbacks of EBIT vs EBITDA
While EBIT and EBITDA can be useful, there are some potential issues to be aware of. Chiefly, neither formula is considered part of Generally Accepted Account Principles (GAAP). This is a uniform set of standards that’s designed to encourage transparency and accuracy in accounting for corporations, governments and other entities.
In other words, EBIT and EBITDA don’t have any official seal of approval from an accounting authority. That means companies can manipulate the numbers in their favor, if they choose to.
Here’s why: The better a company looks on paper, the easier it may be to attract investors or qualify for financing. Companies that are struggling behind the scenes may use inflated numbers or leave out critical information when calculating EBIT or EBITDA to appear more financially stable than they are.
That could potentially lead to losses for investors who choose to put money into a company because they accepted EBIT or EBITDA calculations at face value. So it’s important to dig deeper when deciding where to invest, as these numbers may not provide a full picture of a company’s financial situation.
The Takeaway
EBIT, or earnings before interest and tax, and EBITDA, or earnings before interest, tax, depreciation and amortization, are two ways to assess the financial health of a company. To recap, EBIT measures operating income, and EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.”
But note that these figures can be manipulated by companies looking to present a rosy outlook to investors, so as always, it’s a good idea to research a company from a variety of different angles before investing in it.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), 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.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/Vertigo3d
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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A number of investors trade stocks and bonds through an investment broker. What is a broker? A broker, or brokerage firm, is the middleman between the buyer and seller and can help make a transaction go smoothly. But an investment broker is not strictly necessary. Some companies offer a direct stock plan, allowing investors to purchase shares straight from the company without a broker.
In order to decide if you need an investment broker, it’s essential to know how a broker works, what exactly they do, and how to shop around for one that fits your needs.
Key Points
• Investment brokers assist with buying and selling securities, ensuring transactions are legitimate and handling necessary documentation.
• Brokers include full-service, discount, online, and robo-advisors, each with unique features.
• Using a broker provides accessibility and expertise but involves fees and potential conflicts of interest.
• Investment accounts vary, including taxable brokerage, retirement, and college savings plans.
• Choosing a broker requires comparing fees, account minimums, and the level of guidance offered.
What Is an Investment Broker?
Investment brokers enable individuals to buy and sell financial securities, like stocks or bonds, on an exchange market. It’s really as simple as that. Though brokers do have several varying roles and responsibilities, and can offer a number of services to their clients.
Roles and Responsibilities
Reputable brokers act as a boon to both buyers and sellers: They ensure that each party actually has the money to buy assets or the assets to sell.
Brokers settle trades by delivering securities and payments to each party, while also taking care of all the bookkeeping and tax-related documentation required. In many cases, going through a brokerage firm may be the easiest and most accessible way for individuals to get started with investing.
Types of Brokerage Accounts
There are many kinds of brokerage accounts to choose from. For instance, you may want to choose between a brokerage account vs. a cash management account, both of which are offered by brokerages.
The best product or service for you will depend on your individual financial goals and your budget. Here’s what you need to know to help make an informed decision.
Full-service Brokers
Along with the ability to buy and sell assets, a full-service brokerage account might also include advice from human financial planners and portfolio management to help you make the best investment decisions possible.
However, these perks often don’t come cheap. Full-service brokerage accounts and wealth-management companies usually calculate their charges as a percentage of your total portfolio, and may have account minimums as high as $250,000. They may also collect trade commissions and annual management fees.
Discount Brokerages
Discount brokers offer less consultation and guidance, allowing you to DIY your investment portfolio cheaply. Many have $0 account minimums and may charge less than $10 per trade, or even offer commission-free assets trading.
Both full-service and discount brokerages typically offer both cash and margin accounts. In a cash account, you’ll need the actual cash to buy your assets. In contrast, in a margin account, the broker will lend you some capital to make purchases, using the securities you already own as collateral.
Online Brokers
Many investors today are likely familiar with online brokerages, as there are numerous platforms that allow users to buy and sell stocks or other securities. Many of them don’t charge commissions, either. Online brokers often offer the ability to buy or sell securities, and in some cases, trade derivatives, too.
Robo-Advisors
Robo-advisors aren’t really “brokerages” per se, but more of a service that may be provided by brokers. They’re effectively highly sophisticated robot brokers — they may conduct trades automatically for users or clients, rebalancing their portfolios or allocating their money based on the investor’s risk tolerance and other factors. Some brokerages offer robo-advisory services, and some do not. In some cases, there may be humans in the mix that help with portfolio curation, but it may be a good idea to explore the specifics depending on which broker you’re thinking of using to make sure.
Pros and Cons of Using an Investment Broker
As with any financial service, there are both benefits and drawbacks to using a brokerage firm to facilitate your trades.
Pros of Using a Broker
Some of the pros of using a broker include accessibility, simplicity, and expertise.
Accessibility
Thanks to the internet, you can open a brokerage account in minutes and start trading stocks as soon as your account is funded. That means employing a financial broker is one of the easiest ways to start an investment journey as quickly as possible.
Simplicity
When you buy and sell through a broker, a lot of the tedious footwork — like keeping tabs on your interest earnings for tax purposes — is taken care of for you. Depending on the type of brokerage firm you go with, you may also have access to professional financial advice and other advisory services that could help you make the most of your portfolio.
Expertise and Guidance
Brokers are professionals, and have experience in the market. That is, they may be able to offer a helping hand at times, which may be worthwhile to new or beginning investors who are still getting their sea legs.
Cons of Using a Broker
There can also be drawbacks to using a broker, such as fees and required minimums.
Fees and Commissions
Although they’ll vary based on the specifics you choose and the type of account you open, some brokers charge maintenance fees and trade fees — also known as commissions — which can eat away at your nest egg. In fact, the average stock broker commission charged by brokerage firms is usually 1% to 2% of the value of the total transaction.
That said, you can minimize your investment fees, or even eliminate them, by shopping around for brokers with the lowest costs. For example, many online brokers offer no commission trading.
Required Portfolio Minimums
Although it’s not true of every brokerage firm, some require you to keep a minimum amount of money in your account to use their services. These minimums might be $1,000 or more, which can be a barrier to entry for some beginner investors.
Potential Conflicts of Interest
It’s possible that a broker may have conflicts of interest, in that they may be a part of a broad organization or large company that has many clients. As such, they could have an interest in having investors invest in certain companies, assets, or more — and it may not even be intentional. The point is, it’s possible that these conflicts could exist, and investors should be aware of them.
How to Choose the Right Investment Broker
There’s no one way to choose the right investment broker, as it’ll largely depend on your specific needs and financial situation. That said, you can keep some general guidelines in mind when making a choice. That can include:
• What your needs are (what are you looking to trade, specifically?)
• What your financial goals are
• Any fees or commissions that the broker may charge
• Which specific products and services the broker offers
• How easy they are to work with
• How much guidance you want or need as an investor.
Different Types of Investment Accounts
Aside from deciding what type of brokerage you’d like to do business with (and how much you’re willing to pay for financial services), you’ll also need to decide what type of investment account works best for your goals.
Maybe you’re investing for a shorter-term objective, like purchasing a house, or perhaps you’re trying to ensure you’ll have a comfortable retirement. Either way, specific investment account types, or “vehicles,” are designed to help you get there.
Think of this as a default investment vehicle. It may be a good choice if you’re looking to grow wealth and want to be able to add or withdraw funds on your own terms without waiting to reach a certain age or life circumstance. However, you pay taxes on earnings, so there are no tax advantages to this type of account. If you don’t make any specific investment vehicle choices when you open your brokerage account, this is most likely the one you’re getting.
Individual Retirement Account (IRA)
An individual retirement account, or IRA, is a type of investment account designed specifically for retirement goals and is available to self-employed people and those working for a company. IRAs carry specific tax incentives; for example, contributions to traditional IRAs are deductible. While Roth IRAs allow for tax-free distributions. However, you can’t access the funds without paying a penalty until you reach age 59 ½ or meet certain circumstantial requirements, such as purchasing your first home.
Roth IRA
Roth IRAs are similar to traditional IRAs, with the key difference being that contributions are made with after-tax dollars, meaning that the money in them can be withdrawn tax-free. As such, there may be some advantages for investors to use a Roth IRA versus a traditional IRA, though it may be best to confer with a financial professional to get a sense of which may be a better investment vehicle given your situation.
401(k) Accounts
There are also 401(k) accounts, which are employer-sponsored retirement plans that are similar to IRAs, in some ways. Employees can contribute a portion of their paychecks to a 401(k), and some employers will even match their contributions up to a certain percentage. There may be tax advantages, too.
Regulations for Investment Brokers
Investment brokers need to abide by some rules, most notably, those set forth by regulators like the Securities and Exchange Commission (SEC), and FINRA.
FINRA and SEC Oversight
Investment brokers are regulated by the Financial Industry Regulatory Authority (FINRA). Brokers must register with FINRA, and they are required to follow a standard of conduct known as the suitability rule. Under this rule, brokers need to have suitable grounds for recommending particular investments to clients.
Brokers also need to register with the SEC, which oversees regulatory efforts for the industry.
Fiduciary Responsibility
Brokers also have a fiduciary responsibility, which means they are required to act in their client’s best interest. So, if a broker can talk a client into buying a bunch of assets, which may be to their detriment, while raking in commission fees, they could find themselves in trouble.
Alternatives to Investing With a Broker
Although using a broker to invest in the stock market might be a smart money move for some, there are other ways to get started with investing, including the following options.
Automated investment products, or robo-advisors, are platforms that utilize a combination of computer algorithms and human financial planners to create and manage diversified portfolios at low costs to users.
Your funds will be invested in a diversified portfolio, and the platform typically offers goal-planning tools and rebalancing services to help keep your funds moving in the right direction.
If you don’t want to pay the high prices for a full-service broker, but self-managing your portfolio makes you more than a little nervous, a robo-advisor may be right for you.
Buying Stocks and Fractional Shares Directly
Depending on whose stocks you’re interested in purchasing, you may be able to buy them directly from the issuer without needing to go through a brokerage firm.
It pays to read the fine print, however: Buying stocks directly may save you money on trade commissions, but you may also be subject to proprietary fees from the company or minimum purchase amounts. And if you’re buying fractional shares (fractions of shares of stock), you need to have an investment account, such as one with an online broker or robo-adviser.
Diversifying your assets can still be helpful for investors who buy stocks directly. If all of your investments are tied up in a single company, you may not be in a great position if that company begins to falter. In contrast, if you’ve invested in several different firms and other asset classes, you will likely have a wider margin for error.
Choosing Alternative Investments
Although the stock market is one of the most popular ways to invest, there are plenty of other ways to try turning your money into more money.
You might consider exploring alternative investments. For example, you could invest in real estate and sell the property at a profit or turn a condo into a passive income source by putting it up for rent. Or you might invest in art; the value of paintings is not necessarily correlated with the behavior of the stock market, giving it the potential to rise even during a stock market crash.
That said, many alternative investments require significantly more time, work, and know-how than crafting a diversified portfolio of stock market assets. And as always, every investment involves risk. There’s no such thing as a sure thing.
Direct Stock Purchase Plans (DSPPs)
Further, investors can check out whether they can participate in a direct stock purchase plan, or DSPP, which allows investors to buy stock directly from the stock-issuing entity. This way, investors don’t need to deal with a broker at all, they can go directly to the source and purchase stock.
The Future of Investment Brokerage
What does the future hold for investment brokers? Nobody knows for sure, but it’s likely that the entire field will evolve in the coming years, as much of the financial space has. Technology keeps evolving and rapidly changing, and the introduction of artificial intelligence and perhaps, in the future, quantum computing capabilities, may give investors new abilities that were unimaginable a few years ago.
We’re not sure exactly what that will look like, but it’s likely a safe bet that the field will continue to see rapid change
The Takeaway
If you’ve decided stock market investments are the right move for you and your money, going through a broker can be a relatively simple and low-cost way to gain access to the market. However, if you’d rather avoid potential downsides, like fees or required account minimums, you may want to consider the option to invest directly. The choice is yours.
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 role of a stock broker?
A stock broker is a financial professional who buys and sells stocks on behalf of clients. A broker generally earns a fee or commission for their services.
How do brokers make money?
Brokers typically work on commission. The average stock broker commission is usually 1% to 2% of the value of the total transaction.
Why do people use brokers?
People use brokers to help them buy and sell stocks and bonds. For many individuals, using a broker is the easiest way to start investing.
How much money do I need to start investing with a broker?
How much you need to start investing with a broker depends on the specific broker or brokerage. Some may not have minimum amounts, while others may have relatively large or high balance requirements.
Are online brokers safe to use?
While there’s no guarantees in the financial world, and there’s certainly nothing that’s “safe,” most brokers are relatively low-risk, so long as they abide by regulatory standards and are registered with the proper authorities. That said, it may be a good idea to do some research before signing up.
Can I switch brokers easily if I’m not satisfied?
Yes, you can open up new or different brokerage accounts with other brokers.
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.
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.
Markets are often described as being either bullish vs. bearish. These are common terms used to refer to how a market is performing over a shorter or longer period of time. Investors can also be bullish or bearish on a specific stock, a sector, an asset class, or on the economy in general.
Read on to learn more about the definitions of bearish vs. bullish, where the terms bullish and bearish come from, and the bullish and bearish meaning for investors in stocks or other markets.
Key Points
• A bull market features rising stock prices and high investor confidence.
• Bear markets are generally marked by a 20% drop in stock prices and sustained low investor confidence.
• Investor behavior in bull markets includes increased buying and holding of stocks.
• In bear markets, investors tend to move to safer investments and may sell assets.
• Diversifying investments and dollar cost averaging may help manage risks in bear and bull markets.
What Does Bullish Mean?
Bullish refers to stock market sentiment that the direction of the overall market will go up. A market that is increasing in value over a long period of time is said to be in a bull market. A bullish trend means that there may be an upward trend in prices for an asset.
For investors, being bullish means they feel positive about a stock, index, or the overall stock market. For example, if an investor says they are bullish on Stock X, the investor expects the market value of Stock X to increase in the long-term. That bullishness may even compel the investor to buy more shares of the company.
A bullish market is generally one where prices go up by 20% from a previous low for a sustained period.
What Does Bearish Mean?
Bearish refers to a sentiment that the direction of securities or the overall market will move down in price. An investor characterized as a bear believes the stock market will decrease in value, even if current prices are going up. An investor investing in a bearish market may even sell shares of their portfolio if they believe the market will turn negative.
A bear market is one that has fallen 20% from recent highs and remains below that threshold for at least two months. Since investors are bearish during this period, there may be lower trading activity.
Where Do the Terms Bullish and Bearish Come From?
While there are several theories as to the origins of bullish vs. bearish. The consensus believes the difference between bullish and bearish reflects the way each animal responds when they attack. When a bull goes into attack mode, it races at its target with confidence. In a bull market, investors are confident that stock prices will rise and correspondingly, the value of the market will trend upward.
When bears attack, they swipe their paws in a downward motion and often in fear. That is why in a bear market, prices drop. When investors are bearish, they do not have confidence in stocks and usually end up selling off some of their investments.
How Bullish Markets Can Impact Investors
In a bull market, demand is greater than supply. There are many investors who want to buy stocks while only a few are willing to sell. Bullish traders tend to have long positions in stocks or other assets.
How Bearish Markets Can Impact Investors
In a bear market, supply is greater than demand — and investors may look to offload their shares when there is not a lot of demand for market participants to buy. As a result, share prices decrease. A bear market is challenging for investors because stock prices keep falling, and that means more losses in an investment portfolio.
Your first instinct may be to sell in a bear market, but to increase chances of securing a profit in the long-term, it may make more sense to remain invested. Bear markets do not last forever.
Still, some investors prefer to adjust their investments in a bear market, turning to defensive stocks like consumer staples, healthcare, or utilities. They also may consider going into safer investments like bonds that offer stable fixed-income.
Bear markets can also present a good buying opportunity for investors who use dollar-cost averaging. This involves investing a fixed amount of money consistently. This way, investors can purchase stocks at a more affordable price.
Tips on Withstanding Bullish vs Bearish Markets
One of the best investing strategies during a bull or bear market is diversification. Diversifying your investment portfolio with different securities in a variety of different industries — along with various asset classes that may fare better in bear vs. bull markets — can help protect a portfolio by potentially minimizing losses and maximizing gains over the long-term.
Diversification means buying shares of companies in different sectors and companies of different sizes, rather than just investing in a select few of stocks, and also investing in different types of assets, such as low-risk bonds as well as stocks.
Stock Market
Investors who are not sure how to pick individual stocks can purchase an exchange-traded fund (ETF) or index fund, which are pre-selected baskets of securities all in one investment vehicle. For example, investors who own a fund that follows the S&P 500 will see their investments perform in line with that index.
In an ETF, investors own hundreds of companies, which means they don’t need to painstakingly choose one or two companies, rather, they own the entire index. Investing in these types of securities may be a strategy that utilizes diversification principles to help protect value.
The Takeaway
A market doesn’t necessarily have to be either bearish or bullish. It can actually be neither. The stock market can be in a state that is relatively flat. This may mean there are normal market fluctuations leading to either small gains or small losses.
Even if markets experience a sharp decline or rise in the short-term, this still cannot be defined as bearish or bullish because bull and bear markets are maintained over a period of time.
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
Does being bearish mean that you want to sell your assets?
“Bearish” means general pessimism about the direction of the market. In some cases, people are not even aware of a bear market until it’s over because it’s difficult to predict the direction of the markets. Investors who are invested for the long run do not pay attention to the peaks and troughs of the market and may take a dollar-cost averaging approach by investing consistently over time in both bear and bull markets.
How can you tell if a market is bearish or bullish?
Predicting and timing the markets is a challenging task. However, if stock prices have fallen by more than 20% from their recent peaks, and remained there for more than two months, that’s typically considered a bear market. A sustained increase in prices is a bull market.
Photo credit: iStock/NoSystem images
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.
Saving is an important part of your financial health and building wealth, but it can be confusing to understand all the different vehicles out there. For instance, if you want to stash cash away for a good long while, should you open a Roth IRA or a savings account?
A Roth Individual Retirement Account (IRA) offers a tax-advantaged way to invest money for retirement. Brokerages and banks can offer Roth IRAs for investors who want to set aside money that they don’t anticipate spending for the near future.
Savings accounts can also be used to hold money you plan to spend at a later date. The main difference between a Roth IRA and savings account, however, lies in what they’re intended to be used for.
If you’re debating whether to keep your money in a Roth IRA or savings account, it’s helpful to understand how they work, their similarities and differences, and the pros and cons of each option.
Key Points
• Roth IRAs are designed for retirement savings, offering tax-free growth and tax-free withdrawals in retirement.
• Savings accounts are ideal for short-term goals and emergency funds, offering more accessibility and flexibility.
• Roth IRAs can potentially yield higher returns through investments, while savings accounts provide safety and liquidity.
• Both account types can be opened with low initial deposits and are insured if held at banks.
• Choosing between them depends on financial goals, with Roth IRAs generally being better for long-term growth.
What Is a Savings Account?
A savings account is a type of deposit account that can be opened at a bank, credit union, or another financial institution. Savings accounts are designed to help you separate money you plan to spend later from money you plan to spend now.
Here’s how a savings account works:
• You open the account and make an initial deposit.
• Money in your account can earn interest over time, at a rate set by the bank.
• When you need to spend the money in your savings account, you can withdraw it.
Previously, savers were limited to making six withdrawals from a savings account per month under Federal Reserve rules. In 2020, the Federal Reserve lifted that restriction, though banks can still impose monthly withdrawal limits on savings accounts. Exceeding the allowed number of withdrawals per month could trigger a fee or could lead to the account being converted to a checking account.
Types of Savings Accounts
Banks can offer more than one kind of savings account. The range of savings accounts available can depend on whether you’re dealing with a traditional bank, an online bank, or a credit union.
Typically, these accounts will be insured up to $250,000 by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
• Traditional savings. Traditional savings accounts, also called regular, basic, or standard savings accounts, allow you to deposit money and earn interest. Rates for traditional savings may be on the low side, and you might pay a monthly fee for these accounts at brick-and-mortar banks.
• High-yield savings. The main benefits of high-yield savings accounts include above-average interest rates and low or no monthly fees. For example, online banks may offer high-yield savings accounts with rates that are many times higher than the national average savings rate, with no monthly fee.
• Money market savings. Money market savings accounts, or money market accounts, combine features of both savings accounts and checking accounts. For example, you can earn interest on deposits but have access to your money via paper checks or a debit card.
• Specialty savings. Some types of savings accounts are created with a specific purpose in mind. For example, Christmas Club accounts are designed to help you save money for the holidays. A Health Savings Account (HSA) is a tax-advantaged specialty savings account that’s meant to be used for health care expenses.
You could also add certificates of deposit (CDs) to this list, though a CD works differently than a savings account. CDs are time deposit accounts, meaning that when you put money in the account, you agree to leave it there for a set term. If you take the funds out before then, you will likely be charged a fee.
Once the CD matures, you can withdraw your initial deposit and the interest earned. For that reason, CDs offer less flexibility than other types of savings accounts.
Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.
Pros and Cons of Using a Savings Account for Retirement Savings
Savings accounts can be used to save for a variety of financial goals, including retirement. You might be wondering whether it makes a difference if you use, say, a high yield savings account vs. Roth IRA or other retirement account to save, as long as you’re setting money aside consistently.
While savings accounts can offer convenience and earn interest, they’re not necessarily ideal when saving for retirement if your primary goal. Here are some of the advantages and disadvantages of using a savings account to plan for retirement.
Pros
Cons
Savings accounts are easy to open and typically don’t require a large initial deposit.
A savings account does not offer any tax benefits or incentives for use as a retirement account.
Banks and credit unions can pay interest on savings account deposits, allowing you to grow your money over time.
Interest rates for savings accounts can be low and may not outpace inflation.
You can withdraw money as needed and don’t have to reach a specific age in order to use your savings.
Banks can impose fees or even convert your savings account to checking if you’re making frequent withdrawals.
Savings accounts are safe and secure; deposits are protected up to $250,000 when held at an FDIC member bank.
If you’re putting all of your retirement funds into the same savings account, it’s possible that your balance might exceed the insured limit.
A Roth IRA is a type of individual retirement account that works somewhat differently than a traditional IRA. Traditional IRAs are funded with pre-tax dollars and allow for tax-deductible contributions when doing taxes. Once you turn 72, you’re required to begin taking money from this kind of account.
The way a Roth IRA works is that you set aside money using after-tax dollars, up to the annual contribution limit. That means you can’t deduct contributions to a Roth IRA. However, you won’t pay taxes on account earnings and will be able to withdraw funds tax-free in retirement.
You can leave money in your Roth IRA until you need it, which may allow it even more time to grow. Unlike traditional IRAs, there are no required minimum distributions for Roth IRAs. If you don’t use all of the money in your Roth IRA in retirement, you can pass it on to anyone you’d like to name as your beneficiary.
The IRS allows you to make a full contribution to a Roth IRA if you’re within certain income thresholds, based on your tax filing status. The full contribution limit for 2024 and 2025 is $7,000, or $8,000 for those 50 and up. You can make a full contribution if your tax status is:
• Married filing jointly or a qualified widow(er) with a modified adjusted gross income of up to $230,000 in 2024 (up to $236,000 in 2025)
• Single, head of household, or married filing separately and did not live with your spouse during the year with a modified adjusted gross income of up to $146,000 in 2024 (up to $150,000 in 2025)
Contributions are reduced once you exceed these income thresholds. They eventually phase out completely for higher earners.
Pros and Cons of Using a Roth IRA for Retirement Savings
Roth IRAs are specifically designed to be used for retirement saving. Again, that’s the chief difference between a Roth IRA and savings account. That doesn’t mean, however, that a Roth IRA is necessarily right for everyone. For example, you may need to weigh whether a Roth IRA or traditional IRA is better, based on your income and tax situation.
Here are some of the advantages and disadvantages associated with choosing a Roth IRA for retirement savings.
Pros
Cons
Money in a Roth IRA can be invested in stocks, mutual funds, and other securities, potentially allowing your money to grow faster.
Investing money in the market is riskier than stashing it in a savings account; there’s no guarantee that you won’t lose money in a Roth IRA.
You may be able to open a Roth IRA with as little as $500 or $1,000, depending on the brokerage or bank you choose.
Brokerages can charge various fees for Roth IRAs. Individual investments may also carry fees of their own.
Earnings grow tax-free and you can withdraw original contributions at any time, without a penalty.
You can’t withdraw earnings tax-free until age 59 ½ and the account is at least 5 years old.
You can save money in a Roth IRA in addition to contributing money to a 401(k) plan at work.
Not everyone is eligible to open a Roth IRA, and there are annual contribution limits.
Similarities Between a Roth IRA and a Savings Account
Roth IRAs and savings accounts do have some things in common. For example:
• Both can be used to save money for the long-term and both can earn interest. So you could use either one or both as part of a retirement savings strategy.
• You can open a Roth IRA or savings account at a bank and initial deposits for either one may be relatively low. Some banks also offer Roth IRA CDs, which are CD accounts that follow Roth IRA tax rules.
• Savings accounts and Roth IRAs held at banks are also FDIC-insured. The FDIC insures certain types of retirement accounts, including Roth IRAs, when those accounts are self-directed and the investment decisions are made by the account owner, not a plan administrator.
• It’s possible to open a savings account for yourself or for a child. Somewhat similarly, you can also open a Roth IRA for a child if they have income of their own but haven’t turned 18 yet.
When comparing the benefits of Roth IRAs vs. savings accounts, however, Roth accounts have an edge for retirement planning. Whether it makes sense to choose something like a high-yield savings account vs. a Roth IRA can depend on what you want to set money aside for.
Roth IRA vs Savings Account: Key Differences
To understand how savings accounts and Roth IRAs compare, it helps to look at some of the key differences between them.
Roth IRA
Savings Account
Purpose
A Roth IRA is designed to save for retirement.
Savings accounts can fund virtually any short- or long-term goal.
Who Can Open
Taxpayers who are within certain income thresholds can open a Roth IRA.
Adults with valid proof of ID can open a savings account, regardless of income or tax status.
Interest
Money in a Roth IRA earns compounding interest based on the value of underlying investments.
Savings accounts earn interest at a rate set by the bank.
Tax Benefits
Roth IRAs grow tax-free and allow for tax-free qualified distributions, with no required minimum distributions.
Savings accounts don’t offer any tax benefits; interest earned is considered taxable income.
Contribution Limits
Roth IRAs have an annual contribution limit. For 2024 and 2025, the limit is $7,000 ($8,000 if you’re 50 or older.)
There are no contribution limits, though FDIC protection only applies to the first $250,000 per depositor, per account ownership type, per financial institution.
Withdrawals
Generally, you can’t withdraw earnings without paying a penalty before age 59 ½ (though there are some exceptions). Original contributions can be withdrawn at any time without a penalty.
Banks can limit the number of withdrawals you’re allowed to make from a savings account each month and impose a fee for exceeding that limit.
Risk
Investing money in a Roth IRA can be risky; you may lose money.
Your deposits are protected (up to the insured limit).
How to Decide If a Roth IRA or Savings Account Is Right for You
If you’re unsure whether to open a Roth IRA vs. a high-yield savings account, it’s helpful to consider your goals and what you want to do with your money.
You might decide to open a Roth IRA if you:
• Specifically want to save for retirement and potentially earn a higher rate of return
• Would like to be able to withdraw money tax-free to buy a home or pay higher education expenses (the IRS allows you to avoid a tax penalty for these distributions)
• Want to supplement the money you’re contributing to a 401(k) at work
• Expect to be in a higher tax bracket at retirement and want to be able to withdraw savings tax-free
• Don’t want to be required to make minimum distributions at age 72
On the other hand, you might open a savings account if you:
• Have a short- or medium-term goal you’re saving for
• Want a safe place to keep your money
• Are satisfied with earning a lower rate of return on savings
• Need to be able to keep some of your money liquid and accessible
• Aren’t concerned with getting any type of tax break for your savings
The good news is that you don’t have to choose between a high-interest savings account vs. a Roth IRA. You can open one of each type of account to save for both retirement and other financial goals.
The Takeaway
Opening a retirement account can be a smart move if you’d like to save money for your later years while enjoying some tax breaks. A Roth IRA could be a good fit if you’re eligible to open one and you’d like to be able to make tax-free withdrawals once you retire.
Having a savings account is also a good idea if you’re building an emergency fund, saving for a vacation, or have another money goal that is a few months or years away. Your deposits will earn interest and you’ll be able to easily access your funds (penalty-free) when you need them.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
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FAQ
Is it better to put money in savings or a Roth IRA?
A savings account can be better for setting aside cash you know you’ll need in the next few months or years. A Roth IRA, on the other hand, is better suited for saving for retirement, since it has greater growth potential (though returns are not guaranteed), while also providing tax benefits.
Should I use a Roth IRA as a savings account?
While you could use a Roth IRA as a savings account, you generally can’t access earnings on the account until age 59 ½ without paying a penalty. Another downside of using a Roth IRA as a savings account is that funds are typically invested for long-term growth. If you withdraw money in the short-term, you could lose money due to fluctuations in the value of your assets.
What is the downside of a Roth IRA?
One of the main disadvantages to a Roth IRA is that contributions are made with after-tax money, which means you don’t get a tax deduction in the years you contribute. Another drawback is that not everyone can take advantage of a Roth IRA, since there are income limits on contributions.
Also keep in mind that the maximum annual contribution to Roth IRA is relatively low compared with a 401(k). As a result, you will likely need other accounts to adequately save for retirement.
Can I move money from savings to a Roth IRA?
You can link a savings account to a Roth IRA to transfer funds. If you’d like to move money from savings to your Roth account, you’d just log into your brokerage account and schedule the transfer. Keep in mind that Roth IRAs do have annual limits on how much you can contribute.
Are Roth IRAs Insured?
The FDIC insures Roth IRAs held at banks when those accounts are self-directed, meaning the owner, not a plan administrator, directs how the funds are invested. The same FDIC insurance limits that apply to savings accounts apply to these Roth IRAs.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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A short put spread, sometimes called a bull put spread or short put vertical spread, is an options trading strategy that investors may use when they expect a slight rise in the price of an underlying asset. This strategy, which involves a short put and a long put with the same expiration, but different strike prices, allows an investor to profit from an increase in the underlying asset’s price while also limiting losses from downward price movement. An investor using this spread can also determine their maximum potential profit and loss upfront.
When trading options, you have various strategies, like short put spreads, from which you can choose. The short put spread strategy can be a valuable trade for investors with a neutral-to-bullish outlook on an asset. Which options trading strategy is right for you will depend on several factors, like your risk tolerance, cash reserves, and perspective on the underlying asset.
Key Points
• A short put spread is a neutral-to-bullish options trading strategy.
• Short put spreads involve selling a put with a higher strike price (the short put) and buying a put at a lower strike price (the long put), with the same expiration.
• Time decay benefits this strategy, reducing the value of the sold put more than the bought put.
• Maximum profit is achieved if the underlying asset’s price increases or remains stable.
• A short put spread has both limited risk and lower profit potential compared to buying the asset outright.
What Is a Short Put Spread?
A short put spread is an options trading strategy that involves buying one put option contract and selling another put option on the same underlying asset with the same expiration date but at different strike prices. This strategy is a neutral-to-bullish trading play, meaning that the investor believes the underlying asset’s price will stay flat or increase during the life of the trade.
A short put spread is a credit spread in which the investor receives a credit when they open a position. The trader buys a put option with a lower strike price and sells a put option with a higher strike price. The difference between the price of the two put options is the net credit the trader receives, which is the maximum potential profit in the trade, after any commissions and fees.
The maximum loss in a short put spread is the difference between the strike prices of the two puts minus the net credit received. This gives the trading strategy a defined downside risk.
Although the strategy has limited upside risk, external factors, such as fees and the possibility of early assignment, can still impact profitability.
A short put spread is also known as a short put vertical spread because of how the strike prices are positioned — one lower and the other higher — even though they have the same expiration date.
How Short Put Spreads Work
With a short put spread, the investor uses put options, which give the investor the right — but not always the obligation — to sell a security at a given price during a set period of time.
An investor using a short put spread strategy will sell a put option at a given strike price and expiration date, receiving a premium for the sale. This option is known as the short leg of the trade.
Simultaneously, the trader will also buy a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg since the lower strike put is further out of the money. Because of the difference in premiums, the trader receives a net credit for setting up the trade.
Say stock ABC is trading around $72. You feel neutral to bullish toward the stock, so you open a short put spread by selling a put option with a $72 strike price and buying a put with a $70 strike. Both put options have the same expiration date. You sell the put with a $72 strike price for a $1.75 premium and buy the put with a $70 strike for a $0.86 premium.
You collect the difference between the two premiums, which is $0.89 ($1.75 – $0.86), less any fees. Since each option contract is usually for 100 shares of stock, you’d collect an $89 credit before considering costs or margin requirements.
The credit collected up front is the maximum profit in a short put spread. In a short put spread, you can achieve your maximum profit when the stock price remains at or above the strike price of the option you sold. Both put options expire worthless in this scenario.
In our example, as long as stock ABC closes at or above $72 at expiration, both puts will expire worthless and you will keep the $89 credit you received when you opened the position.
Maximum Loss
The maximum loss in a short put spread is the difference between the strike prices of the two put options minus the credit you receive initially, plus any commissions and fees incurred. You will realize the maximum loss in a short put spread if the underlying asset’s price expires below the strike price of the put option you bought.
In our example, you will see the maximum loss if stock ABC trades below $70, the strike price of the put option you bought, at expiration. The maximum loss will be $111 in this scenario, not including commissions and fees.
Maximum loss: ($72 – $70) – ($1.75 – $0.86) = $1.11 x 100 shares = $111
Breakeven
The breakeven on a short put spread trade is the price the underlying asset must close at for the investor to come away even. They neither make nor lose money on the trade, not including commissions and investment fees.
To calculate the breakeven on a short put spread trade, you subtract the net credit you receive upfront from the strike price of the short put contract you sold, which is the option with the higher strike price.
In our example, you subtract the $0.89 credit from $72 to get a breakeven of $71.11. If stock ABC closes at $71.11 at expiration, you will lose $89 from the short leg of the trade with a $72 strike price, which will be balanced out by the $89 cash credit you received when you opened the position.
Set-Up
To set up a short put spread, you first need to find a security that you are neutral to bullish on. Once you have found a reasonable candidate, you’ll want to set it up by entering your put transactions.
You first sell to open a put option contract with a strike price near where the asset is currently trading. You then buy to open a put option with a strike price that’s out-of-the-money; the strike price of this contract will be below the strike price of the put you are selling. Both of these contracts will have the same expiration date.
Maintenance
The short put spread does not require much ongoing maintenance since your risk is defined to both upside and downside.
However, you may want to pay attention to the possibility of early assignment, especially with the short leg position of your trade — the put with the higher strike price. You might want to close your position before expiration so you don’t have to pay any potential assignment fees or trigger a margin call. Early assignment occurs when the holder of a short position is required to fulfill their obligation before expiration, typically when the option is in the money. Investors may choose to close their position before expiration to avoid the risk of early assignment, especially if the underlying asset is approaching (or has surpassed) the short option’s strike price.
Exit Strategy
If the stock’s price is above the higher strike price at expiration, there is nothing you have to do; both puts will expire worthless, and you will walk away with the maximum profit of the credit you received.
If the stock’s price is below the lower strike price of the long leg of the trade at expiration, both options will be in the money. The short put will be assigned, requiring the investor to buy shares at the higher strike price, while the long put offsets some of the loss by allowing the sale of shares at the lower strike price.This results in the maximum loss, which is the difference in strike prices minus the net credit received.
Before expiration, however, you can exit the trade to avoid having to buy shares that you may be obligated to purchase since you sold a put option. To exit the trade, you can buy the short put contract to close and sell the long put contract to close.
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Impacts of Time, Volatility, and Price Change
Changes in the price and volatility of the underlying stock and the passage of time can affect a short put spread strategy in various ways.
Time
Time decay benefits this strategy because the value of the sold put declines faster than the bought put. As expiration gets closer, the difference in time value erosion allows the trader to keep more of the initial credit received.
Volatility
Because the strategy consists of both a long and a short put, changes in volatility tend to have a limited effect on the overall spread. While each leg may respond differently to volatility shifts, the combined position mitigates much of this impact.
Price
A short put spread is a bullish option strategy. You have no risk to the upside and will achieve your maximum profit if the underlying stock closes above the strike price of the higher put option. You are sensitive to price decreases of the underlying stock and will suffer the maximum loss if the stock closes below the strike price of the lower put option.
Pros and Cons of Short Put Spreads
Here are some of the advantages and disadvantages of using short put spreads:
thumb_up
Short Put Spread Pros:
• No risk to the upside
• Limited risk to the downside; maximum loss is known upfront
• Can earn a positive return even if the underlying does not move significantly
thumb_down
Short Put Spread Cons:
• Lower profit potential compared to buying the underlying security outright
• Maximum loss is generally larger than the maximum potential profit
• Difficult trading strategy for beginning investors
Short Put Calendar Spreads
A short put calendar spread is another type of spread that uses two different put options. With a short put calendar spread, the two options have the same strike price but different expiration dates. You sell a put with a further out expiration and buy a put with a closer expiration date.
Traders may use a short put calendar spread when they expect minimal price movement in the underlying asset, but anticipate a decline in implied volatility. This strategy differs from a short put spread, which benefits more from directional price movement rather than volatility shifts. The short put calendar spread seeks to profit from the faster decay of the near-term option relative to the longer-term option.
Alternatives to Short Put Spreads
Short put vertical spreads are just one of the several options spread strategies investors can use to bolster a portfolio.
Bull Put Spreads
A bull put spread is another name for the short put spread. The short put spread is considered a bullish investment since you’ll get your maximum profit if the stock’s price increases.
Bear Put Spread
As the name suggests, a bear put spread is the opposite of a bull put spread; investors will implement the trade when they have a bearish outlook on a particular underlying asset. With a bear put spread, you buy a put option near the money and then sell a put option on the same underlying asset at a lower strike price.
Call Spreads
Investors can also use call spreads to achieve the same profit profile as either a bull put spread or a bear put spread. With a bull call spread, you buy a call at one strike price (usually near or at the money) and simultaneously sell a call option on the same underlying with the same expiration date further out of the money.
Conversely, with a bear call spread, an investor sells a call option at a lower strike price and buys a call option at a higher strike price, both with the same expiration date. This strategy is used when the trader expects the underlying asset’s price to decline or remain below the sold call’s strike price, aiming to profit from the initial net credit they received.
The Takeaway
A short put spread is an options strategy that allows you to collect a credit by selling an at-the-money put option and buying an out-of-the-money put with the same expiration on the same underlying security. A short put spread is a bullish strategy where you achieve your maximum profit if the stock closes at or above the strike price of the put option you sold.
While this trading strategy has a limited downside risk, it provides defined risks and rewards, which may differ significantly from owning the underlying security outright.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.
FAQ
Is a short put spread bullish or bearish?
A short put spread is a neutral to bullish options strategy, meaning you believe the price of an underlying asset will increase during the life of the trade. You will make your maximum profit if the stock closes at or above the strike price of the higher-priced option at expiration.
How would you close a short put spread?
To close a short put spread, you enter a trade order opposite to the one you entered to open your position. This would mean buying to close the put you initially sold and selling to close the put you bought to open.
What does shorting a put mean?
Shorting a put means selling a put contract. When you sell a put option contract, you collect a premium from the put option buyer. You’ll get your maximum profit if the underlying stock closes at or above the put’s strike price, meaning it will expire worthless, allowing you to keep the initial premium you received when you opened the position.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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