Feb
24
2025
What Is Max Pain in Options Trading?

What Is Max Pain in Options Trading?

By | Growing Wealth, invest, Investing | Comments Off on What Is Max Pain in Options Trading?

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

In options trading, the term “max pain” is short for “maximum pain price,” and refers to the strike price where the most open interest exists — open interest being the total number of active options contracts that haven’t been settled or closed.This max pain figure combines both puts and calls, representing the price at which option buyers face the highest potential losses at expiration.

Although max pain theory’s price movement predictions aren’t guaranteed, understanding how it works can help traders understand market dynamics at an option’s expiration.

Key Points

•   Max pain is the strike price resulting in the highest losses for option buyers at expiration.

•   Stock prices might move toward the max pain price as expiration approaches.

•   Calculating max pain involves assessing the dollar value of open interest for calls and puts at each strike.

•   Advantages include systematic trading and potential benefits from market behavior, but disadvantages exist.

•   Controversies arise from potential market manipulation by large institutions to influence stock prices.

What Is Max Pain?

Max pain, or the maximum pain price, is the strike price with the most open options contracts combining puts and calls.It is the strike price where the greatest number of options will expire out of the money, or worthless, causing the highest dollar value of losses among option buyers on a given stock at a specific expiration.

Some large institutional options sellers see an investment opportunity in writing options that eventually expire worthless, according to max pain theory. If options expire worthless, the seller of those options keeps the entire premium as profit. Option sellers face significant risk with this strategy, as they are obligated to fulfill the contract’s terms if exercised.

Max pain options trading stems from the Maximum Pain Theory. The theory contends that option sellers seek to hedge portfolios with options expiration. The Maximum Pain Theory also suggests an option’s price will arrive at a max pain price where the most options contracts held through expiration will experience losses. Bear in mind that an options contract that is not “in the money” at expiration is worthless.

Recommended: Popular Options Trading Terminology to Know

How Max Pain Works

The Maximum Pain Theory asserts that the price of the underlying asset is likely to converge at the maximum pain strike price. The max pain price is the strike with the greatest dollar value of calls and puts. As the expiration date approaches, the underlying stock price might “pin” to that option strike price.

Some day traders closely monitor the max pain price on the afternoon of expiration – usually the third Friday of the month for monthly options or each Friday for weekly options contracts.

Max Pain trading can be controversial, with some critics suggesting that attempts to influence stock prices near expiration could raise regulatory concerns (or even be considered market manipulation). Market participants disagree about whether or not Max Pain Theory works in practice. If a trader can predict which strike price will feature the greatest combination of dollar value between calls and puts, the theory states that they could profit from using that information.

Some market makers may consider Max Pain Price Theory when hedging their portfolios. Delta hedging is a strategy used by options traders — often market makers — to reduce the directional risk of price movements in the security underlying the options contracts. A market maker is often the seller of options contracts, and they seek to hedge the risk of options price movements by buying or selling underlying shares of stock.

This activity can cause the stock price to converge at the max pain price. Delta hedging plays a significant role in max pain trading.

How to Calculate the Max Point

Calculating the max pain options price is relatively straightforward if you have the data. Follow these steps to determine the max pain strike:

•   Step 1: Calculate the difference between each strike price and the underlying stock price.

•   Step 2: Multiply the difference calculated in Step 1 by the open interest for calls and puts at each strike price, determining the dollar value at that strike.

•   Step 3: Add the dollar value for both the put and the call at each strike.

•   Step 4: Repeat Steps 1 through 3 for each strike price on the option chain.

•   Step 5: The strike price with the highest dollar value of puts and calls is the max pain price.

Since the stock price constantly changes and open interest in the options market rises and falls, the max pain price can change daily. An options trader might be interested to see if there is a high amount of open interest at a specific price as that price could be where the underlying share price gravitates toward at expiration, at least according to Max Pain Theory.

Max Pain Point Example

Let’s imagine that a stock trades at $96 a week before options expiration. A trader researches the option chain on the stock and notices a high amount of open interest at the $100 strike. The trader performs the steps mentioned earlier to calculate the max pain price.

It turns out that $100 is, in fact, the max pain price. Since the trader believes in Max Pain Theory, they go long on shares of the stock, assuming that it will rise to $100 by the next week’s options expiration. Another options trading strategy could be to put on a bullish options position instead of buying shares of the underlying stock.

This hypothetical example looks simple on paper but many factors influence the price of a stock. For instance, there could be company-specific news issued during the final days before expiration that sends a stock price significantly higher or lower.

Macro factors and overall market momentum may affect stock prices, potentially reducing the influence of max pain dynamics. Finally, stock price volatility could cause the max pain price to shift in the hours and even minutes leading up to expiration.

Pros and Cons of Using Max Pain Theory When Trading

Max Pain Options Theory can be an effective strategy for options traders looking for a systematic approach for their options strategy. That said, not everyone agrees that Max Pain Theory works in practice. Here are some of the pros and cons of Max Pain Theory.

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Pros:

•   A systematic approach to trading options

•   Trades the most liquid areas of the options market

•   May benefit from price trends tied to behavior of other market participants

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Cons:

•   Lack of agreement supporting the theory

•   Stock prices don’t always gravitate to a max pain price

•   Other factors, such as market momentum or company news, could move the stock price

Options trading has become more accessible today due to low or no commission online investing. Previously, higher transaction costs made options trading less feasible for retail traders with smaller account sizes. It was not economical for average retail traders with small account sizes to buy and sell options using max pain theory.

Critics contend that there should be more regulatory oversight on max pain price trading — particularly on large institutions that could be manipulating prices. The regulatory future for these practices remains uncertain.

The Takeaway

Max Pain Theory is a framework in options trading that focuses on strike price, which may potentially result in the most losses for buyers at expiration. Options traders who calculate the max pain price, can use that information to inform their investing strategy, but outcomes are not guaranteed. 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.

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®.

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

What does max pain indicate?

Max pain indicates a specific strike price — specifically, It is the strike price that causes the highest dollar value of losses among option buyers on a given stock at a specific expiration.

What is max pain manipulation?

Some suggest that the max pain theory is related to market makers manipulating the overall options market, in an attempt to make the most number of options possible expire worthless.

Photo credit: iStock/valentinrussanov

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.

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.

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.
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.

SOIN-Q125-107

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Feb
24
2025
Exercising in Options? What Does It Mean & When to Exercise

Exercising in Options Trading: What It Means

By | Growing Wealth, invest, Investing | Comments Off on Exercising in Options Trading: What It Means

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

Investors in stock option contracts have the right to buy or sell underlying stocks (or other assets) at a predetermined price within a certain time period. When an investor decides they want to take action on their right to buy or sell, it’s called exercising. There are a number of ways investors can choose to exercise their options contract, depending on their individual goals and financial situation.

Option contracts are complex investment vehicles. They’re a multi-faceted tool that involves precise timing and strategizing. While options are not for all investors, if handled by experienced traders, options could be beneficial for those who understand the risks involved.

Key Points

•   Exercising an option involves buying or selling the underlying security at the strike price.

•   Call options allow underlying assets to be purchased at a potentially lower price; put options allow underlying assets to be sold at a potentially higher price.

•   Options contracts have a limited lifespan; unexercised options contracts expire without value.

•   Consider transaction costs, time value, intrinsic value, and risk tolerance before exercising.

•   Many options are sold before expiration to capture remaining time value or to avoid exercise costs, but those that remain unexercised by expiration will expire worthless.

What Does Exercise Mean in Options Trading?

Exercising a stock option means that a trader purchases or sells the underlying stock associated with the options contract at the price set by the contract, which is called the strike price. This price may differ from the current market price of the stock.

Options contracts are valid for a certain amount of time in options trading. So if the owner doesn’t exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.

There is also an upfront fee in options trading, called a premium, that gets paid when a trader enters into an options contract. If the trader doesn’t exercise the contract, they forfeit that fee along with any other brokerage fees. Most options contracts never get exercised. Some contracts are sold instead of exercised, because the contract itself has value if it has the potential to be exercised later.

There are two main choices of types of options contracts, call options and put options. Purchasing a call option gives the buyer the right, but not the obligation, to purchase the underlying security at the strike price. Purchasing a put option gives the buyer the right, but not the obligation, to sell the underlying security at the strike price.

Each contract is different, and there are also different types of options. American-style options let traders exercise them at any time up until and on the contract’s expiration date, while European-style options can only be exercised on the expiration date itself.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the
OCC Options Disclosure Document.

How Exercising a Call or Put Option Works

Generally, traders have several choices when it comes to exercising their stock options. When a trader is ready to exercise an option, they can let their brokerage firm know. The broker will create an exercise notice to the Options Clearing Corporation (OCC) to let the individual or entity buying or selling the underlying stock know that the trader wants to execute a trade on a particular date. The option seller is required to fulfill the obligations of the contract.

The OCC assigns the exercise notice to one of their clearing members, often the trader’s brokerage firm. The broker then assigns the option to one of their customers who has written an option contract that they have not yet covered. Depending on the broker, the customer they choose may either be chosen randomly or picked on a first-in-first-out (FIFO) principle.

Exercise a Call


Exercising a call option means buying the underlying stock at the option’s strike price. If the stock’s market price is higher than the strike price, you can purchase it at a discounted rate. The key benefit of exercising a call is potential access to those lower rates, especially if the stock has risen significantly. Transaction costs, such as brokerage commissions, can erode potential profits — so consider these factors when deciding to exercise.

For example, say that an investor buys a call option with a strike price of $50. If the stock’s market price rises to $60, they can exercise the option to buy shares at $50 instead of the higher market price. This gives them a $10 per share gain before factoring in the cost of the option and fees. If they don’t want to buy the shares, they could sell the option for a profit instead.

Exercise a Put


Exercising a put option means selling the underlying stock at the strike price. This can be beneficial if the market price falls below the strike price. You can then sell the stock at a higher price than the market price in order to see a profit. Bear in mind that selling a put obligates the seller to buy the underlying asset at the strike price if the option is exercised. There are also brokerage fees associated with exercising a put to consider, as there are with calls.

Say an investor buys a call option with a strike price of $50. If the stock’s market price rises to $60, they can exercise the option to buy shares at $50 instead of the higher market price. This gives them a $10 per share gain before factoring in the cost of the option and fees. If they don’t want to buy the shares, they could sell the option for a profit instead.

How Do You Know Whether to Hold or Exercise an Option?

It can be difficult to know when and whether to exercise an option. There are different options trading strategies that can prove beneficial to exercising early, or to waiting or even selling the option contract itself. Many factors come into play when making the decision to exercise an option, such as:

•   Time Value: Understanding how options pricing works is essential, as time value plays a key role in deciding whether to hold or exercise an option. Time value is a critical aspect of options pricing and significantly impacts the decision to. Options may lose value as they approach expiration due to the time decay. If there’s still significant time left on the option, it may be beneficial to hold the option rather than exercising it since it has the potential to be profitable over time. On the other hand, selling could help you capitalize on the remaining time value, since an option with, say, two months left to expiration would have more time value than an option with two weeks left to expiration.

•   Intrinsic Value (In-the-Money or Out-of-the-Money): The decision to exercise is often influenced by whether the option is in-the-money. A call option, for example, is in-the-money when the underlying asset’s price is above the strike price. Exercising in such a case allows the trader to buy the underlying asset at a discount. On the other hand, out-of-the-money options hold no intrinsic value and are unlikely to be exercised.

•   Transaction Costs and Fees: Exercising an option comes with transaction costs, which can include brokerage commissions and fees. These fees can erode profits, so it’s important to weigh them against potential gains from exercising. In some cases, the cost of exercising an option may outweigh the benefit, especially when the option is close to expiration and there are minimal profits to be gained.

•   Risk and Margin Exposure: There can be a significant amount of capital needed to purchase underlying assets, especially with high-priced stocks. This may also involve using a margin account, which increases your exposure to risk and any potential costs associated with holding the position. Be sure to assess your risk tolerance and available capital before deciding to exercise an option.

The Takeaway

When deciding to hold or exercise an option, the top factors are time value, intrinsic value, and your appetite for risk. Holding options could offer the potential for greater returns, but exercising options can provide profits if they are in-the-money. There are also fees and capital gains to consider.

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.

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®.

Explore SoFi’s user-friendly options trading platform.

FAQ

How are early-exercise options different from exercise options?

Early-exercise options refer to American-style option contracts only, which can be exercised on and at any point before their expiration date. European-style options can only be exercised on their expiration date.

What is a cashless exercise in options?

A cashless exercise occurs when an investor purchases stock without paying cash to do so. The option holder pulls from some of the exercised shares to cover the cost of purchasing the stock. This is more common with employees exercising stock options, rather than in options trading.

What happens when you exercise an option?

Exercising an option means taking action on the right granted by your options contract. For call options, this means buying the underlying stock at the strike price. For put options, this means selling the underlying stock at the strike price. Exercising an option is a commitment to follow through with the contract’s terms: If you choose not to exercise the option, it will expire worthless, and you lose the premium paid to acquire it.

What happens to premium when you exercise a call option?

You do not keep your option premium when you sell a call option. The premium is part of the cost of acquiring the option, and is considered a sunk cost once the option is exercised.

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.

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.

Photo credit: iStock/whyframestudio
SOIN-Q125-094

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Feb
24
2025
Guide to Options Spreads: Definition & Types

Guide to Options Spreads: Definition & Types

By | Growing Wealth, invest, Investing | Comments Off on Guide to Options Spreads: Definition & Types


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

Options spreads are trading strategies that involve two or more options designed to manage risk while providing opportunities for profit. Traders using an option spread simultaneously buy multiple options on the same underlying asset with different strike prices, different expiration dates, or both.

Understanding options spreads can help you decide whether these strategies could work for your portfolio, and which one to use in a given situation.

Key Points

•   Options spreads are strategies using multiple options to manage risk and enhance profit potential.

•   Vertical spreads involve options with the same expiration but different strike prices.

•   Horizontal spreads use the same strike prices but different expiration dates, capitalizing on time decay.

•   Diagonal spreads combine different strike prices and expiration dates, offering versatile market positioning.

•   These strategies can be implemented with calls or puts, tailored to bullish or bearish market outlooks.

Credit and Debit Spreads

The difference between credit and debit spreads in options investing is that, in a credit spread, a trader sells one option (receiving a premium) and buys another (paying a lower premium), with the net result being a credit to their account. Conversely, when they buy an option and sell an option with a lower premium, they pay a net premium to open the position, resulting in a debit to their account.

Recommended: What Investors Should Know About Spread

3 Common Option Spread Strategies

Spread strategies occur when a trader buys and sells multiple call or put options pegged to the same underlying asset or security, but with different strike prices or expiration dates.

There are several types of option spreads. Here’s a look at a few common ones:

1. Vertical Spread Options

A vertical spread is an options strategy in which the options have the same expiration date but different strike prices. There are four types of vertical spread options that investors use depending on whether they are bullish or bearish, and whether the spread is a debit or credit.

Bull Call Spreads

A bull call spread strategy involves buying a call option at a lower strike price and selling another call option at a higher strike price. The call spread options have the same underlying asset and expiration date.

Traders may use this strategy when they expect the price of the underlying asset to increase, but want to limit potential loss by capping both their gains and losses.The trader caps their potential losses to the net premium they paid for the options. Their maximum gain is capped at the differences in strike prices, minus the net premium paid.

For example, a trader buys a call option on a stock at a strike price of $10, for a premium of $2. They then sell a call option with the same expiration date but at a strike price of $12, receiving a premium of $1. Conversely, if the stock price falls below $10 by expiration, the option would expire worthless and the trader’s loss is limited to the $1 premium.

This strategy limits the trader’s maximum loss to the net premium paid for the options. If the stock price rises above the higher strike price, the potential gain is capped at the difference between the strike prices, minus net premium paid. Although this cap limits the upside, it also provides protection against potential losses beyond the premium paid.

Bear Call Spreads

The opposite of a bull call spread, a bear call spread benefits from an underlying asset’s decrease in value.

For example, if a trader using a bear call spread anticipates a stock’s value is going to decrease, they would set up a spread by selling a call option and buying another call option at a higher strike price — the inverse of the bull call spread method. This is a credit spread, meaning the trader maximum gain is limited by the net premium received for the position. Their potential loss is capped at the difference in strike price. For example, a trader sells a call option on a stock at a strike price of $10, and buys another call at a strike price of $12.

Bull Put Spreads

A bull put spread is similar to a bull call spread, but it involves puts rather than calls. Using a bull put spread, a trader anticipates an increase in the underlying asset’s value. In our example, the trader would sell a put option at a strike price of $10, and simultaneously buy another at a lower strike price, which in this example is $8.

If the stock price remains above $10, both options expire worthless. The trader retains the full premium received as their maximum gain. If the stock price falls below $8, the trader incurs the maximum loss. This is capped at the difference between the strike prices minus the premium received.

Bear Put Spreads

A bear put spread is the inverse of a bull put spread. In our example, the trader would buy one put option at a $10 strike price, and simultaneously sell another put at a lower strike price, like $8.

The trader cannot lose more than the net premium the trader paid to take the position (as this is a debit spread) or gain more than the difference in strike prices.

2. Horizontal Spreads

Horizontal spreads (also called “calendar spread options”) involve options with the same underlying asset and same strike prices, but with different expiration dates. The main goal of this strategy is to generate income from the effects of time decay or the volatility of the two options.

There are also two main types of horizontal spreads.

Call Horizontal Spreads

A call horizontal spread is a strategy which a trader would employ if they believed that the underlying asset’s price would hold steady. In this case, the trader would buy a call with an expiration date on January 15th, for example, and sell another call with a different expiration date, like January 30th.

The trader can also reverse these positions by selling a call option that expires on January 15th, and another that expires on January 30th. The two positions’ differing expiration dates act as buffers, limiting potential losses (the premium paid) and gains.

Put Horizontal Spreads

Put horizontal spreads similar to call horizontal spreads except that traders use puts instead of calls.

3. Diagonal Spreads

Diagonal spreads incorporate elements from both vertical and horizontal spread strategies. These spreads involve the same option types and underlying asset (the same as before), but with differing strike prices and differing expiration dates.

Diagonal spreads — with different strike prices and expiration dates — allow for a variety of options combinations, and can be used under different market conditions. For example, they can be bearish and bullish, use calls or puts, and use different time horizons (long or short).

Other Options Spreads

While we’ve covered the main types of options spread strategies, there are a few more you may run into.

Butterfly Spread Options

A butterfly spread incorporates multiple strike prices, and can utilize either calls or puts. It also combines a bull and bear spread across four different options.

An example would be a trader buying a call at a certain strike price, selling two more calls at a higher strike price, and then buying another call at yet an even higher strike price—of equal distance, or value, from the two central calls. This results in a cap on losses and gains, and the trader could realize gains depending on the volatility levels of the underlying asset.

Box Spread Options

A box spread option strategy involves a bear put and a bull call with identical strike prices and expiration dates. Under very specific circumstances, traders employ box spreads when they are looking to capitalize on arbitrage opportunities.

The Takeaway


There are several spread strategies for options trading that traders use to limit their losses and position themselves for potential gains based on their projections about the price of a specific asset.

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®.

Explore SoFi’s user-friendly options trading platform.

🛈 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.

Photo credit: iStock/damircudic

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.

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.

SOIN-Q125-095

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Feb
24
2025
How to Start Investing in Stocks

How to Invest in Stocks: A Beginner’s Guide

By | Growing Wealth, invest, Investing | Comments Off on How to Invest in Stocks: A Beginner’s Guide

Stocks are shares of ownership in a company. To start investing in stocks, you would find a company that you believe may grow or appreciate in value over time, then purchase its stock through a brokerage account. If the stock price rises, you could sell your shares and potentially make a profit — or suffer a loss, if share prices decline.

Of course, when it comes to investing in stocks as a beginner, you’ll want to learn the basics so that you’re confident and comfortable with the decisions you make. Here is a step-by-step guide for those who want to start investing in stocks now.

Key Points

•   Stocks represent shares of ownership in a company and can be purchased through a brokerage account.

•   Before investing in stocks, it may be wise to determine your investing approach and consider your time horizon.

•   Different ways to invest in stocks include self-managed investing, using a financial advisor, or utilizing robo-advisors.

•   The amount you invest in stocks will likely depend on your budget and financial goals.

•   Investors may want to choose stocks based on thorough research, including analyzing a company’s financial statements and valuation metrics.

How to Start Investing in Stocks: 5 Steps

It’s not terribly difficult to start investing in stocks or other securities. But it may be a good idea to sit down and think through your approach, strategy, goals, and more, before actually throwing some money into the markets. Here is a broad, basic rundown of how to start investing in stocks:

▶️ Watch the video: How to Trade Stocks

1. Determine Your Investing Approach

As noted, before you get started investing in stocks, you need to determine your investing approach. Because every person has unique financial goals and risk tolerances, there is no one-size-fits-all strategy to begin investing in the stock market.

Most people will need to decide whether they want a hands-on approach to investing or whether they’d like to outsource their wealth building to some sort of financial professional, or service.

Additionally, investors need to consider their time horizons before investing in stocks. Some investors want to invest long-term — buying and holding assets to build wealth for retirement. In contrast, other investors are more interested in short-term trading, buying and selling stocks daily or weekly to try and make a quick profit. The type of investor you want to be will help determine what kind of stocks you should buy and your investing approach.

2. Decide How Much You Want to Invest in Stocks

How much you invest will likely depend on your budget and financial goals. You may decide to invest with whatever you can comfortably afford, even if that doesn’t amount to much.

Fortunately, it’s fairly easy to start investing even with relatively little money. Many brokerage firms offer low or no trading fees or commissions, so you can make stock trades without worrying about investment fees eating into the money you decide to invest.

Additionally, many brokerage firms offer fractional share investing, which allows investors to buy smaller amounts of a stock they like. Instead of purchasing one stock at the value for which the stock is currently trading — which could be $1,000 or more — fractional share investing makes it possible to buy a portion of one stock. Investors can utilize fractional investing to use whatever dollar amount they have available to purchase stocks.

For example, if you only have $50 available to invest and want to buy stock XYZ trading at $500 per share, fractional share investing allows you to buy 10% of XYZ for $50.

3. Open an Investment Account

Once you’ve determined your investing approach and how much money you can invest, you’ll need to open a brokerage account to buy and sell stocks and other securities.

Several investment accounts might make sense for you, depending on your comfort level in managing your investments and your long-term financial goals. But in a general sense, there are a few options for investors: Full-service brokerages, online brokerages, and robo-advisors. But you can also invest using a retirement account, too.

Full-service brokerages

Many investors may use traditional brokerage firms, also known as full-service brokerages, to buy and sell stocks and other securities. A full-service brokerage offers additional services beyond just buying and selling stocks, such as investment advice, wealth management, and estate planning. Typically, full-service brokerages provide these services at high overall costs, while discount and online brokerages maintain scaled-down services with lower overall costs.

A full-service brokerage account may not be the best option for investors just getting started investing in stocks. These firms often require substantial account minimum balances to open an account. This option may be out of reach for most in the early stages of their investing journey.

Online brokerage

An online brokerage account may be ideal for most beginning investors looking to have a hands-on approach to trading stocks and building a financial portfolio. Many online brokers offer services with the convenience of an app, which can make investing more streamlined. If you feel confident or curious about how to start investing at a lower cost than a full-service brokerage firm, opening an account with an online broker could be a great place to start.

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

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

*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.

Robo-advisor

If you’re interested in investing but want some help setting up a basic portfolio, opening an investment account with a robo-advisor might be best for you. A robo-advisor uses a sophisticated computer algorithm to help you pick and manage investments. These automated accounts generally don’t offer individual stocks; instead, they build a portfolio with a mix of exchange-traded funds (ETFs). Nonetheless, it’s a way to become more familiar with investing.

Retirement option: 401(k) and IRAs

Retirement accounts like employer-sponsored 401(k)s or individual retirement accounts (IRAs) are tax-advantaged investment accounts that can be great for the beginning investor trying to build a retirement nest egg. These accounts offer investors a range of investment choices, including individual stocks. You may also have access to tutorials, advisors, or other resources to help you learn how to start investing in these accounts.

💡 Ready to start retirement investing? Consider opening an IRA online.

4. Choose Your Stocks

Deciding what individual stocks to invest in can be challenging for most investors. There are countless ways to evaluate stocks before you buy.

Before choosing your stocks, you generally want to do some homework into a company’s inner workings to understand the company’s overall valuation and the stock’s share price.

As a beginning investor, you want to get comfortable reading a company’s balance sheet and other financial statements. All publicly-traded companies must file this information with the Securities and Exchange Commission (SEC), so it shouldn’t be difficult to track those statements and filings down.

One of the most fundamental metrics for understanding a stock’s value compared to company profits is its price-to-earnings (PE) ratio. Others include the price-to-sales (PS) ratio and the price/earnings-to-growth (PEG) ratio, which may be helpful for companies that have little to no profits but are expanding their businesses quickly.

These metrics, and other financial ratios, may help you determine what stocks to buy. And the advantage of owning individual stocks is that you can get direct exposure to a company you believe has the potential to grow based on your research. The downside, of course, is that investing doesn’t come with guarantees, and your stock’s value could decline.

💡 Recommended: 7 Technical Indicators for Stock Trading

5. Continue Building Your Portfolio

After you’ve decided what stocks to invest in, you generally want to continue building a portfolio that will help you meet your financial goals.

One way to bolster your portfolio is by buying mutual funds and ETFs, rather than individual stocks. A potential benefit to investing in funds that hold stocks is that you may avoid some of the risks of being invested in individual stocks that may not perform well.

Whether investing in individual stocks or funds, you may want to consider the level of diversification in your portfolio that feels right for you. There is no consensus about the right way to diversify investments. For one person, ideal diversification could mean owning 20 stocks in different industries. For another, it could mean owning the “whole” market via a handful of mutual funds.

Once you get more comfortable investing in stocks and funds, you may employ other investing strategies. 

Stock Tips for Beginners

As you wade into the markets, it can be a good idea to keep a few things in mind.

•   Consider Your Approach Carefully: As mentioned, some investors like to have a hands-on approach to investing (active), while others prefer a more passive approach. Active investors want to make decisions on their own, picking what stocks are right for them and building a portfolio from the ground up. This self-managed strategy can be time-consuming but an excellent option for investors who have a general understanding of the markets or would like to learn more about them. Take some time to think about the pros and cons of each approach.

•   Think About Asset Allocation: Asset allocation involves spreading your money across different types of investments, like stock, bonds, and cash, in order to balance risk and reward. Determining a portfolio’s asset allocation can vary from person to person, based on financial goals and risk tolerance.

•   Compare Account Costs and Features: No matter where you decide to open your investment account, be sure to research and compare costs and features within the account. For example, many brokerage accounts charge investment fees and commissions for making trades, while some do not, though other fees may apply. You should check with your brokerage’s fee schedule to get a good idea of what costs may be applicable.

Test your understanding of what you just read.

The Takeaway

Historically, investing in the stock market has been a way for some individuals to build personal wealth. These days, it’s never been easier for new investors considering getting into stocks to start. Whether you choose to work with a financial advisor or use an online broker or app, there are several ways to find a method that makes stock investing approachable, fun, and potentially profitable. 

Of course, there are no guarantees, so it’s wise to take a step-by-step approach, start small if you prefer, do some research using the many resources available, and see what comes as you gain experience and confidence.

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

Do you need a lot of money to start investing in stocks?

You don’t need a lot of money to start investing in stocks. Many brokerages allow investors to start investing with relatively little money, and many also offer fractional investing features and options.

Are there fees when investing in stocks?

There may be fees involved with investing in stocks, such as commissions or trading fees. Whether an investor is charged a fee will ultimately come down to the specific brokerage or platform they’re using to invest.

Is stock trading good for a beginner?

Stock trading, or day-trading, is generally for more advanced investors. But stock trading over longer periods of time may be good for investors to learn to get a hang of the markets. Beginners who are interested in stock trading may want to consult with a financial professional to get a better idea of a suitable trading strategy.

Should beginner investors buy individual stocks or stock funds?

Many financial professionals would likely recommend that beginner investors buy funds rather than individual stocks, as they offer some built-in diversification, in many cases. That said, what an investor ultimately decides to do should be dictated by their overall strategy and goals.

Is stock investing safe for beginners?

Stock investing is not necessarily safe for beginners or veteran investors. Investing has its risks, and there are investment types with different levels of risk that investors should familiarize themselves with.

Photo credit: iStock/

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.
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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.

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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