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Sep

2025

Navigating the IPO Lock-up Period

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

Table of Contents

What Is an IPO Lock-up Period?
How the IPO Lock-Up Period Works
What Is the Purpose of a Lock-up Period?
What’s an Example of a Lock-up Period?
What Does the Lock-up Period Mean for Employees with Stock Options?
How Does the IPO Lock-Up Period Affect Investors?
FAQ

Following an initial public offering (IPO), there is frequently a lock-up period to prevent major stakeholders from selling their shares, which could potentially flood the market and cause the share price to drop.

IPO lock-up periods don’t pertain to all investors in an IPO, but they do apply to certain shareholders. Here’s what to know about lock-up periods and how they work in an IPO.

Key Points

• An IPO lock-up period is a period of time after a company goes public during which employees of the company and early investors are prohibited from selling their shares.

• Companies or investment banks impose the lock-up period, which usually lasts between 90 and 180 days.

• The purpose of the lock-up period is to stop company insiders and early investors from cashing out too quickly and to maintain a stable share price.

• Companies may use the lock-up period to avoid flooding the market with shares, create confidence in the company’s fundamentals, and help prevent insider trading.

• Investors may want to pay attention to the lock-up period when investing in IPOs, as it can affect the risk of investing in the company.

What Is an IPO Lock-up Period?

The IPO lock-up period is the time after a company goes public during which company insiders — such as founders, managers and employees — and early investors, including venture capitalists, are not allowed to sell their shares.

These restrictions are not mandated by the Securities and Exchange Commission (SEC), but instead are self-imposed by the company going public or they are contractually required by the investment banks that were hired as underwriters to advise and manage the IPO process.

Lock-up periods are usually between 90 and 180 days after the IPO. Companies may also decide to have staggered lock-up periods that end on different dates and allow various groups of shareholders to sell their shares at different times.

How the IPO Lock-Up Period Works

The IPO lock-up period is typically put into place by the company going public or the investment bank underwriting the IPO. An agreement is reached with company insiders and early investors specifying that they are prohibited from selling their shares for a specific period of time after the IPO.

The purpose of the lock-up period is to prevent a sudden flood of shares on the market that could reduce the stock price. The lock-up period also sends a signal to the market that company insiders are confident in the company’s prospects and committed to its success.

Once the lock-up period is over (typically in 90 to 180 days), insiders are allowed to sell their shares if they wish.

What Does “Going Public” Mean?

Going public with an IPO means that shares of a company are being offered on the public stock market for the first time. The company is shifting from a privately-held company to a publicly traded company.

When a company is private, ownership is limited and can be tightly controlled. But when a company goes public, investors can buy shares on the public market.

It’s worth noting that when a company first goes public, there may already be a series of shareholders in the company. Founders, employees, and even venture capitalists may already own shares or have stock options in the company.

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

What Is IPO Underwriting?

Before a company goes public, it generally goes through a process in which an underwriter — usually an investment bank — does IPO due diligence and helps come up with the valuation of the company, the share price of the stock, and the size of the stock offering on the market.

The underwriter also typically buys all of or a portion of the shares. They then allocate shares to institutional investors before the IPO.

The IPO underwriter will try to generate a lot of interest in the stock so that there will be high demand for it. This may lead to the stock being oversubscribed, which could lead to a higher trading price when it hits the market.

Recommended: How Are IPO Prices Set?

How IPO Lock-ups Get Used

A company or its underwriters might use the lock-up period as a tool to bolster the share price during the IPO, to prevent a sharp increase in shares from flooding the market, and to build confidence in the company’s future.

For instance, with tech startups, a great proportion of compensation may be paid out to employees through equity options or restricted trading units. In order to avoid flooding the market with shares when employees exercise these contracts, the lock-up restrictions prevent them from selling their stock until after the lock-up period is over.

Recommended: Guide to Tech IPOs

What Is the Purpose of a Lock-up Period?

A lock-up period typically has several different functions in an IPO, including the following:

Ensuring Share-Price Stability

Company insiders, like employees and angel investors, can own shares in a company before it goes public. Since share prices are set by supply and demand, extra shares can drive down the price of the stock. A lock-up period helps stabilize the stock price by preventing these extra shares from being sold for a certain amount of time.

Avoiding Insider Trading

To help avoid insider trading, company insiders may have extra restrictions regarding the lock-up period before selling their shares. That’s because company insiders might have information that is not available to the general public that could help them predict how their stock might do.

For example, if a company is about to report its earnings around the same time a lock-up period is set to end, insiders may be required to wait for that information to be public before they can sell any shares.

Public Image

Lock-up periods can also be a way for companies to build confidence in their future performance. When company insiders hold onto their shares, it can signal to investors that they have faith in the strength of the company.

On the other hand, if company insiders start to sell their stock, investors may get nervous and be tempted to sell as well. As demand falls, the price of the stock usually does, too, and the company’s reputation may be damaged.

The lock-up period can help keep this from happening while it’s in place.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

What’s an Example of a Lock-up Period?

To give a hypothetical example of how a lock-up period could work, let’s say Business X — a unicorn company — went public with an IPO in March. The company set a lock-up period of four months. In July, the lock-up period ended and early investors and insiders sold up to 400 million shares of the company. As the new shares hit the market, the stock dropped by as much as 5%, but ended the day down just 1%.

What Does the Lock-up Period Mean for Employees with Stock Options?

Restrictions imposed during a lock-up period usually apply to any stock options employees have been given by the company before an IPO. Stock options are essentially an agreement that allows employees to buy stock in the company at a predetermined price.

The idea behind this type of compensation is that the company is trying to align employees’ incentives with its own. Theoretically, by giving employees stock options, the employees will have an interest in seeing the company do well and increase in value.

There’s usually a vesting period before employees can exercise their stock options, during which the value of the stock can increase. At the end of the vesting period, employees are generally able to exercise their options, sell the stock, and keep the profits.

If their stock options vest before the IPO, employees may have to wait until after the lock-up period to exercise their options.

How Does the IPO Lock-Up Period Affect Investors?

Most public investors that buy IPO stocks won’t be directly affected by the lock-up period because they didn’t own shares of the company before it went public. However, the lock-up period can reduce the supply of available shares on the market, keeping the stock price relatively stable.

But when the lock-up period ends, if a surge in shares suddenly hits the market, this could lead to volatility and cause the price of the shares to drop. Investors should be aware of these possibilities, do thorough research and due diligence, and carefully consider the risks before buying shares in an IPO.

Reading the IPO Prospectus

You can find information on a company’s lock-up period in its prospectus, the detailed disclosure document filed with the SEC as part of the IPO process. Investors can locate a company’s prospectus by using the SEC’s EDGAR database and searching for the company by name. Then, on the company’s filing page, look for Form S-1, which is the initial registration statement. The prospectus should be included in that filing.

Waiting to Buy Until After Lock-ups End

Investors considering investing in an IPO may choose to hold off until the lock-up period is over. The reason: When the lock-up ends and company insiders are free to sell their shares, the stock price may experience volatility as the new shares enter the market. This could potentially cause a drop in a stock’s price.

Some investors may want to take advantage of the dip that could occur when a lock-up period ends, especially if they believe the long-term fundamentals of the company are strong. However, this type of timing-the-market strategy can be very risky. It depends on a number of variables, including the company itself and market conditions. In other words, there is no guarantee that it will produce good results.

The Takeaway

A lock-up period can follow an IPO. It’s a period of time during which company insiders and early investors are prohibited from selling shares of the company. One of the main purposes of a lock-up period is to keep these stakeholders’ shares from flooding the market, and to help stabilize the stock price of a newly public company.

Understanding how a lock-up period works — and how it might affect the price of a stock — can be helpful to investors who may be interested in buying shares of an IPO on the public market.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

FAQ

What is the purpose of a lock-up period?

The purpose of a lock-up period is to prevent company insiders and early investors from selling shares of stock right away, which could flood the market and cause the price of the stock to drop. A lock-up period can help stabilize the stock price and also send a message to the market that company insiders are committed to the company and confident in its future performance.

How do I know if an IPO has a lock-up period?

To find out if an IPO has a lock-up period, you can use the Securities and Exchange Commission’s EDGAR database. Search for the company by name, and on their listing page, look for a Form S-1, which is the company’s initial registration statement. In that filing, you should find the company’s prospectus, which will have information about the lock-up period if there is one.

What is the lock-up period for IPO employees?

A lock-up period is designed to prevent company insiders, including employees, from selling their stock quickly after a company goes public. That could cause the stock price to drop and might also signal that the employees don’t have confidence in the company. A lock-up period typically lasts 90 to 180 days.

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SOIN-Q325-068

Sep

2025

Testing the Waters: What It Means in an IPO

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Table of Contents

Testing the Waters During the IPO Process
Purpose of Testing the Waters
What the JOBS Act Meant for Testing the Waters
What Does This Mean for Investors?
Investing in IPO Stocks
FAQ

Testing the waters in the initial public offering (IPO) process allows companies that are considering going public to gauge how successful their prospective IPO would be — without going through the actual IPO process.

The Securities and Exchange Commission (SEC) voted in 2019 to adopt a new rule to allow companies interested in going public to test the waters (TTW). Specifically, the SEC formally rolled out Rule 163B under the Securities Act on December 3, 2019.

The IPO process can be long, costly, and risky, and some companies can be reluctant to try going public. But the ability to test the waters by communicating with potential investors, assessing their interest, and examining how an IPO would be received, is valuable before having to go all-in on a public offering.

Key Points

• Testing the Waters (TTW) is an SEC rule that allows companies to gauge the success of a prospective IPO without going through the actual process.

• The JOBS Act of 2012 allowed small businesses to communicate with Qualified Institutional Buyers (QIBs) and Institutional Accredited Investors (IAIs).

• Testing the Waters allows companies to assess investor interest, explain the direction of the company, and strengthen areas of weakness.

• The expanded rule for all issuers allows for greater transparency and communication between IPO-hopeful and the markets, as well as investors.

• Investors have access to additional information about a company’s expected IPO and more time to decide whether to invest.

Testing the Waters During the IPO Process

Starting in 2012, testing the waters was available only for emerging growth companies, also known as EGCs. In 2019, testing the waters was extended to all issuers to increase the chance of a company successfully completing an initial public offering (IPO), and to encourage issuers to enter the public equity markets.

So, what does testing the waters mean, and how does it work? Essentially, testing the waters is a way for issuers to dip their toes in the water, so to speak, and gauge the temperature before fully jumping into the IPO process.

When the new SEC rule was adopted in September 2019, Chairman Jay Clayton said, “Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.”

Details of the TTW rule

The TTW rule allows issuers to assess market interest in a possible IPO (or other registered securities offering) by being able to discuss the IPO with certain institutional investors before, or after, the filing of a registration statement.

Generally, issuers set up TWW meetings with investors after the issuer has filed with the SEC and received initial comments. They could potentially speak with specific issuers before filing with the SEC, but issuers typically want to align on the first round of SEC comments and then have a clear direction when speaking with potential investors.

Example of Testing the Waters

In late spring of 2022, a tech company that created a platform for grocery delivery, decided to test the waters for a potential IPO.

There were good reasons for the company to be cautious. The market had seen a steep drop since the beginning of the year, and investors had largely cooled on tech stocks, with tech IPOs taking a noticeable hit year-over-year.

Thanks to taking this step, the company was projected to IPO by the end of 2022, using the interim period to adjust their valuation and their path forward, given the competition in the space.

To sum it up, testing the waters allows companies to see what investors say, answer questions, and potentially identify areas of weakness that could be strengthened.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

Purpose of Testing the Waters

Testing the waters has two chief aims: The first is communicating with potential investors to explain the direction of the company and gathering their feedback. The second is to evaluate the market before having to invest large sums in an actual IPO.

Communication with Potential Investors

In addition to giving issuers a chance to see whether their offering will be successful, TWW allows companies to communicate highly specific information.

Some industries call for greater detail of information from investors, which makes testing the waters ever more critical.

For example, in the life sciences industry, testing the waters is popular because issuers tend to have a shorter operating history and also need to communicate detailed scientific information to their potential investors. For these types of industries and issuers, testing the waters is highly beneficial.

Cost-Effective Market Evaluation

Testing the waters allows issuers to determine whether it makes sense for them to devote the time and resources to filing an IPO. Before the TWW rule, many companies avoided the IPO process because of the cost and not having clarity around investor demand.

Testing the waters takes away some of those risks and provides more information as a company enters the IPO. In a sense, it allows for a company to evaluate the market, and for the market, in turn, to evaluate the company exploring an IPO.

Recommended: How Are IPO Prices Set?

What the JOBS Act Meant for Testing the Waters

In 2012, Congress under President Obama passed the Jumpstart Our Business Startups Act (also known as the JOBS Act) to revitalize the small business sector. The JOBS Act, which created Section 5(d) of the Securities Act, made it easier for small businesses, also known as emerging growth companies or EGCs, to gain access to funding. It removed certain barriers to capital and reduced regulation to companies with less than $1 billion in revenue.

The enactment of the JOBS Act also allowed small businesses to communicate with potential investors — qualified institutional buyers (also known as QIBs) and institutional accredited investors (or IAIs). By communicating with potential investors before or after filing a registration statement, EGCs were given the ability to get a sense for interest in a potential offering.

With the expansion of that rule in 2019 to include all issuers, not just EGCs, more opportunity opened up for a range of businesses.

What Does This Mean for Investors?

While it makes good business sense to expand regulations and allow all businesses considering an IPO to test the waters, just what does this all mean for the average retail investor?

First, the expanded test-the-waters rule for all issuers allows companies more flexibility when determining whether to move forward with an IPO. For investors, the expanded rule means that they have access to communication from issuers regarding upcoming IPOs. They also have more time to determine whether it’s the right investment for them.

This can be valuable for retail investors, who may benefit from having additional information about a company’s expected IPO. Investing in IPO stock can be highly risky, as IPO shares are typically quite volatile.

In short: Testing the waters gives more flexibility to both issuers and investors.

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Investing in IPO Stocks

IPOs have been popular among investors and certain IPOs can generate excitement in the investor community. Prices on the day of an IPO and immediately afterward tend to produce volatile price movements, which can produce large gains or losses. The 2019 SEC rule that allows any company to test the waters before committing to the IPO process can be helpful to businesses as well as investors.

TTW, as the rule is known, allows for greater transparency and communication between the IPO-hopeful and the markets, as well as investors, prior to the full-blown IPO process. This enables companies to adjust their strategy for the IPO, and it allows investors to assess whether they want to invest.

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

FAQ

Is testing the waters an offer?

No, testing the waters is not an offer. Testing the waters in the IPO process allows issuers, which are corporations, investment trusts, and so on, to gauge interest and investor demand for a potential IPO without actually having to go public.

What is the post-IPO quiet period?

The quiet period is a set amount of time when the company cannot share promotional publicity or forecasting, or express opinions about the value of the company. In an IPO, the quiet period begins when a company files registration with U.S. regulators and the registration becomes effective and extends for a mandated period of time after the stock starts trading.

What is an analyst day in an IPO?

When planning to go public, the issuer or company meets with syndicate analysts who do not work for the issuer or the company going public to give them a deeper understanding of the company. This type of meeting, also called an “analyst day,” is important because analysts create their own opinion about the issuer. They then help educate the market about the company once the transaction has launched.

Photo credit: iStock/LumiNola

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

SOIN-Q325-081

Sep

2025

What is an IPO Underwriter? What Do Underwriters Do?

What Is an IPO Underwriter and What Do They Do?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is an IPO Underwriter?
What Is IPO Underwriting?
What Does an IPO Underwriter Do?
What Qualifications Does an IPO Underwriter Need?
The IPO Underwriting Process
FAQ

An initial public offering (IPO) underwriter is typically a large investment bank that works closely with a company to issue stock on the public markets. The underwriters are usually IPO specialists who work for the investment bank.

In the world of equities, underwriters work with private companies to value their operations, connect with potential investors, and issue stock on a public exchange for the first time.

Key Points

• An IPO underwriter is typically a large investment bank that works closely with a company to issue stock on the public markets.

• An underwriter helps create the market for the stock by contacting potential investors and setting the IPO price.

• The underwriter also conducts due diligence, does regulatory filings, and issues a prospectus about the company.

• IPO underwriters need a Bachelor’s degree, but it also helps to have certain other skills and experience in economics and math.

• The IPO underwriting process takes as little as six months or more than a year from start to finish.

What Is an IPO Underwriter?

IPO underwriters guide the company that’s issuing stock through the IPO process, making sure they satisfy all of the regulatory requirements imposed by the Securities and Exchange Commission (SEC), as well as the rules imposed by the exchange, such as the Nasdaq and the New York Stock Exchange (NYSE).

Recommended: What Is an IPO?

Role and Benefits of an IPO Underwriter

Aside from the fact that an underwriter is required during the IPO process, there are many benefits to this role. An IPO’s underwriter helps create the market for the stock by contacting a wide range of institutional investors, including mutual funds, insurance companies, pension funds and more.

Key Functions of an IPO Underwriter

An IPO underwriter reaches out to this network of investors to gauge their interest in the company’s stock, and to see what those investors might be willing to pay. The underwriter uses those conversations to set the price of the IPO.

From there, the underwriter of an IPO works with the company issuing the stock through the many steps that lead up to its IPO. Depending on the type of deal the underwriter and the company issuing the IPO have, the underwriter may or may not be responsible for purchasing any unsold shares at the price it set for the IPO.

The way that IPO underwriters get paid depends on the structure of the deal. Typically, IPO underwriters buy the entire IPO issue and then resell the stocks, keeping any profits, though in some cases they receive a flat fee for their services.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Is IPO Underwriting?

An IPO is the process through which a private company “goes public”, and has its shares sold to regular investors on a public market. The company issuing stock works with the IPO underwriters throughout the process to determine how to price their stock and generate interest among potential investors.

Many companies find their way to the investing public through a group of underwriters who temporarily join forces to purchase the shares and then sell them to investors. These are groups of investment banks and broker-dealers. Some of these “underwriting syndicates,” as they’re known, sell exclusively to institutional investors.

What Does an IPO Underwriter Do?

In essence, an underwriter in an IPO is the intermediary between a company’s executives and owners (including venture capitalists) who are seeking to issue shares of stock and public-market investors.

When a company seeks funding from the capital markets, it must make dozens of decisions. How much money does the company want to raise? How much ownership will it cede to shareholders? What type of securities should it issue? The company must also determine what kind of relationship the company wants to have with its underwriter.

Underwriting agreements take different forms, but in the most common agreement, the underwriter agrees to purchase all the stock issued in the IPO, and sell those shares to the public at the price that the company and the underwriter mutually agree to. In this agreement, the underwriter assumes the risk that people won’t buy the company’s stock.

Sometimes a company works with a group of underwriters who assume the risk and help the company work through the many steps toward an IPO. This involves issuing an S-1 statement. This is the registration form that any company needs to file with the Securities and Exchange Commission (SEC) to issue new securities.

The S-1 statement is how companies introduce themselves to the investing public. S-1 requires companies to lay out plans for the money they hope to raise. The IPO underwriter also creates a draft prospectus for would-be investors.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

What Qualifications Does an IPO Underwriter Need?

Becoming an IPO underwriter, and bringing private companies into the public marketplace, requires understanding how businesses work, and how the equity markets function.

At minimum an IPO underwriter needs a Bachelor’s degree, but it helps to have certain other skills and experience. For example, would-be underwriters might consider a background in economics as well as math. Underwriters generally need good analytical, communication, and computer skills.

Educational and Professional Requirements

There are a number of certifications that apply in the underwriting field in general, but there isn’t a specific designation for IPO underwriters. It can be more common for someone who wants to work with IPOs to get their Masters in Business Administration (MBA), and from there to work at an investment bank.

The IPO Underwriting Process

Underwriting an IPO can take as little as six months from start to finish, though it often takes more than a year. While every IPO is unique, there are generally five steps that are common to every IPO underwriting process.

Step 1. Selecting an Investment Bank or Broker Dealer

The issuing company selects an underwriter, usually an investment bank. It may also select a group or syndicate of underwriters. In that case, one bank is selected as the lead underwriter known as the book runner.

One kind of agreement between the issuing company and the underwriter is called a “firm commitment,” which guarantees that the IPO will raise a certain sum of money. Or they may sign a “best efforts agreement,” in which the underwriter does not guarantee the amount of money they will raise. They may also sign an “all or none agreement.” In this agreement, the underwriter will sell all of the shares in the IPO, or call off the IPO altogether.

There is also an engagement letter, which often includes a reimbursement clause that requires the issuing company to cover all the underwriter’s out-of-the-pocket expenses if the IPO is withdrawn at any stage.

Step 2. Conduct Due Diligence and Start on Regulatory Filings

The underwriter and the issuing company then create an S-1 registration statement. The SEC then does its own due diligence on the required details in that document. While the SEC is reviewing it, the underwriter and the company will issue a draft prospectus that includes more details about the issuing company. They use this document to pitch the company’s shares to investors in meetings known as IPO roadshows. These roadshows usually last for three to four weeks, and are essential to gauging the demand for the shares.

Step 3. Pricing the IPO

Once the SEC approves the IPO, the underwriter decides the effective date of the shares. The day before that effective date, the issuing company and the underwriter meet to set the price of the shares. Underwriters often underprice IPOs to ensure that they sell all of their shares, even though that means less money for the issuing company.

Step 4. Aftermarket Stabilization

The underwriter’s work continues after the IPO. They will provide analyst recommendations, and create a secondary market for the stock. The underwriter’s stabilization responsibilities only last for a short period of time.

Step 5. Transition to Market Competition

This final stage of the process begins 25 days after the IPO date, which is the end of the “quiet period,” required by the SEC. During this period, company executives can not share any new information about the company, and investors go from trading based on the company’s regulatory disclosures to using market forces to make their decisions.

After the quiet period ends, underwriters can give estimates of the earnings and stock price of the company.

Some companies also have a lock-up period before and after they go public, in which early employees and investors are not allowed to sell or trade their shares.

The Takeaway

The IPO underwriter, typically a large investment bank, plays a vital role in the process of taking a company public.

They help to guide the company through the many hurdles required to go public, including making sure the fledgling company meets all the criteria required by regulators and by the public exchanges. The IPO underwriter helps drum up investor interest in the new company and in setting the initial valuation for the stock.

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

FAQ

What are the responsibilities and duties of an IPO underwriter?

IPO underwriters have numerous responsibilities. They not only shepherd the private company through the IPO process, they reach out to institutional investors including mutual funds to gauge interest and set the initial price of the stock. They buy the securities from the issuer, and sell the IPO stock to investors via their distribution network.

Can multiple underwriters be involved in an IPO?

Yes. Sometimes more than one underwriter is required to help a company meet all the criteria set by the SEC and by the public exchanges. There may even be groups of investment banks and broker-dealers working together on an IPO, depending how big it is. This is typically known as an underwriting syndicate.

What criteria do companies consider when selecting an IPO underwriter?

The experience and reputation of the underwriter are important criteria companies use when selecting an underwriter. Companies may also consider an underwriter’s distribution network as well as their fees and terms.

Can the performance of an IPO underwriter impact the success of the IPO?

Yes. Some industry data suggests that the better an underwriter’s reputation, the more accurate the initial pricing is, and the less likely there will be long-term underperformance.

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SOIN-Q325-067

Sep

2025

What is Buying Power? Definition & Formula

What Is Buying Power in Investing?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Stock Buying Power?
Buying Power vs Purchasing Power
Buying Power vs Consumer Buying Power
How Does Buying Power Work?
Buying Power Example
How To Calculate Buying Power
How To Use Buying Power
FAQ

Buying power refers to an investor’s total capacity to purchase securities. Buying power can be more than an investor’s available cash; it may also include the use of margin — i.e., leverage — that would increase their ability to buy assets.

Thus, buying power includes an investor’s available cash plus their available margin, as determined by their brokerage.

Generally speaking, a standard margin account allows the investor to borrow twice the amount of cash they have on hand. For example, if an investor has $10,000 in cash, their buying power is $20,000. But margin rules vary, depending on the type of security.

Note that not all investors qualify for a margin account, and therefore some investors’ buying power is limited to the cash they have available to purchase securities.

Key Points

• Buying power in investing refers to an investor’s total cash plus any margin, or leverage, available to purchase securities.

• An investor must meet certain criteria in order to open a margin account.

• The use of margin, i.e., borrowed funds, enhances an investor’s buying power and it also increases their exposure to risk.

• Different margin accounts may have different levels of buying power.

• Buying power is sometimes referred to as excess equity.

What Is Stock Buying Power?

Buying power, or excess equity, is a measure of how much capital an investor has available to trade stocks, options, and other securities.

There are different ways to measure buying power, depending on the type of account an investor has. Completing trades can reduce an investor’s ready capital, while selling securities and depositing the cash into their trading account can increase it.

There’s no standard buying power definition; it’s simply a way to gauge an investor’s ability to purchase securities, based on the total resources they have in their trading account, including cash and margin.

Buying Power vs Purchasing Power

Buying power is not the same thing as purchasing power, however. Purchasing power refers to the amount of goods or services a given unit of currency can purchase, when factoring in inflation.

Purchasing power comes up during discussions about how inflation may affect various industries. Purchasing power is an important factor in retirement planning, owing to the impact of inflation over time.

Buying Power vs Consumer Buying Power

Further, a consumer’s buying power, or purchasing power, is a measure of how much a consumer has on hand to buy goods or services. Thus, consumer purchasing power, as such, isn’t related to an investor’s buying power relating to financial securities.

How Does Buying Power Work?

To understand how buying power works, it helps to understand when this term comes into play. The types of accounts that use or reference buying power include:

• Cash brokerage accounts

• Margin accounts

• Pattern day trading accounts

What Are Cash Accounts?

Generally speaking, a standard brokerage account is a cash account. The investor can buy and sell securities with the funds they have in the account.

Retirement accounts, such as an IRA or 401(k) may have cash or cash equivalents as part of the portfolio, but these accounts are not considered cash accounts owing to how they are structured with regard to taxes and annual contribution limits.

Cash accounts and retirement accounts don’t use margin or leverage.

What Are Margin Accounts?

Margin trading involves using leverage, or borrowing cash, from a broker-dealer to purchase some securities (not all securities can be bought using margin). Investors must be approved by their broker to use margin.

In addition, margin accounts are closely regulated, and investors must understand the rules and restrictions pertaining to initial margin, maintenance margin, margin calls, and so on.

While trading on margin can double an investor’s buying power (or more, depending on the amount of allowable margin), it likewise increases the risk of loss if a trade moves in the wrong direction. In that case, an investor could lose money, plus they’d have to repay the margin loan with interest.

Pattern Day Trading Accounts

Pattern day trading can also increase buying power for margin investors who prefer active trading versus a buy-and-hold approach.

The Financial Industry Regulatory Authority (FINRA) defines a pattern day trader as any investor who executes four or more day trades within five business days, provided that the number of day trades represents more than 6% of the investor’s total trades in the margin account for that same five-day period.

Pattern day trading accounts have higher account minimums than standard margin accounts ($25,000 vs. $2,000). The initial margin is higher as well: Pattern day traders only need 25% cash equity to cover a trade versus 50% for standard accounts.

Recommended: Stock Market Basics

Buying Power Example

Assume that an investor has $10,000 in cash in a margin account. They want to use that $10,000 to buy stocks online. The brokerage has a 50% initial margin requirement, meaning the investor can take a position that’s twice what they have in cash. In that case, the investor’s buying power calculation looks like this:

$10,000 in cash multiplied by 50% initial margin requirement = $20,000 in total buying power.

How To Calculate Buying Power

The method of calculating buying power depends on the kind of account involved. With a standard brokerage account, this calculation is simple. An investor would simply add up the amount of cash they have available to trade. So if someone has $20,000 in cash in their brokerage account they’d have $20,000 in buying power.

With margin accounts, buying power is typically double the amount of equity they have in their accounts. So an investor who has $25,000 in a margin account would have $50,000 of stock buying power in that instance.

With pattern day trading, the buying power is four times the amount of equity. So, if an investor has $50,000 in cash or equity with which to trade, they could have up to $200,000 in buying power using pattern day trading rules. It’s important to note that if an investor exceeds their day trading margin limits, their brokerage may issue a margin call.

Margin Calls

A margin call can happen if the value of securities in a margin account drops below a set level, as determined by the brokerage. When that occurs, the investor may need to deposit cash or other securities in their account or sell securities to make up a shortfall. The more leverage a brokerage allows, the more difficult it can be for an investor to fill the gap when there’s a margin call.

What Happens If You Don’t Have Enough Buying Power?

If you lack buying power as an investor, you simply won’t be able to place trades on your chosen platform. If you try to execute a trade and lack the buying power, the trade will simply not execute. The specifics may depend on your chosen exchange or platform, of course, but generally speaking, a lack of buying power means that you lack the ability to buy.

How To Use Buying Power

If you’re interested in trading stocks, options, or other securities, having more buying power can work in your favor. Trading on margin can allow you to invest larger amounts of money and it has the potential to magnify your investment returns — but there’s also a much greater risk of loss.

Say you have only $5,000 to invest. If you qualify, you can open a margin account, which would provide an additional $5,000 in leverage (borrowed funds) for a total of $10,000. You then use this $10,000 to purchase 500 shares of stock which are trading at $20 each.

The stock’s price doubles to $40 per share. Now your shares are worth $20,000. You decide to sell, paying back the $5,000 margin loan to your broker. You also pay $50 in interest for the loan. And you pocket $14,050.

Now consider a different example: Say you used $5,000 cash to buy 250 shares of that same stock at $20 per share. When the stock’s price doubled to $40, you would sell them and pocket $10,000. You’re still coming out ahead, but trading on margin would have given you more buying power and thus bigger profits.

How Margin Amplified Losses

When using buying power to your advantage, you do have to consider the risks as well. Just as margin trading can increase your profits, it can also increase losses if the securities you purchase decline in value. With margin, it’s possible to lose more than the value of the initial trade, accounting for interest on the loan and any other costs.

Worse, there is a risk of a margin call if the cash and equities in the account fall below a certain level. In the event of a margin call, you’d have to liquidate some of your holdings or deposit extra cash to cover the difference — or the brokerage would do so on your behalf, to restore the proper maintenance level in the account.

The Takeaway

As noted, an investor’s buying power refers to how much they have at their disposal to purchase various investments and securities. Understanding how buying power works matters, especially if you’re a day trader or you’re trading on margin. And even if you’re a beginning investor, it’s still important to know what this means when it comes to your first brokerage account.

If you feel like you still need some guidance in calibrating your investment strategy, or furthering your understanding of buying power, it may be beneficial to speak with a financial professional.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

What is buying power in simple terms?

Buying power, as it relates to investing, refers to how much an investor has to spend on investments, and can include cash in their account as well as using margin (leverage).

Why is buying power important?

Buying power gives an investor an idea of what they have to work with, and how they can leverage their assets and holdings to reach their financial goals. Understanding buying power may be particularly important for day traders or margin traders.

What is buying power vs cash?

Cash could refer to the investments you can afford to make with your wholly-owned assets, whereas buying power can also incorporate what you can borrow (margin) to purchase investments.

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/solidcolours

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

SOIN-Q325-100

Sep

2025

Should You Ever Invest Your Emergency Fund?

By Pam O’Brien | Growing Wealth, invest, Investing | No Comments

Table of Contents

Should You Invest Your Emergency Fund?
The Risks of Investing an Emergency Fund
Considerations for Storing an Emergency Fund
3 Options for Keeping an Emergency Fund
FAQ

Life is unpredictable, and an emergency fund acts as your financial safety net. Whether it’s covering unexpected medical expenses or getting through a sudden job loss, an emergency fund gives you peace of mind and prevents you from relying on high-interest credit cards or loans during a crisis.

Experts generally recommend saving at least three to six months’ worth of living expenses for emergencies, which can add up to a sizable sum. With this much money sitting in an account, it’s natural to wonder: Should you invest your emergency fund to help it grow faster?

The answer is generally, no. Emergency funds should be readily available and liquid — meaning you can access them quickly without losing value. Riskier investments like stocks, mutual funds, or real estate, typically do not fit that profile. However, there are safe places where you can store your emergency fund while still earning a modest return.

Key Points

• Emergency funds should not be invested in volatile assets to avoid potential losses.

• Market fluctuations and withdrawal restrictions can pose significant risks to emergency funds.

• Liquidity ensures quick access to funds during emergencies.

• High-yield savings, money market accounts, and certain CDs are often recommended for emergency funds.

Should You Invest Your Emergency Fund?

It can be tempting to put your emergency fund to work. After all, if you’ve saved $10,000 or more, why not grow it in the stock market or tuck it into your retirement account? On the surface, it feels like a smart financial move.

However, your emergency fund serves a very different purpose from your investment accounts. Investments are meant to build wealth over time, while an emergency fund exists to protect you in the short term. That means safety and accessibility may matter more than potential growth.

Think of it this way: If you put $10,000 into a savings account, you’ll have that $10,000 several months from now. If you put that $10,000 in a brokerage account and invest in stocks, it might grow to $12,000 in a few months, but it could just as easily drop to $8,000 (or possibly even less) right when you need it most.

On top of that, certain investment accounts come with restrictions, taxes, and/or penalties that make it harder — and more expensive — to access your money quickly.

This doesn’t mean your emergency fund has to sit in a checking account earning little to no interest. The key is to find a balance: a place where your money remains safe, liquid, and accessible, while earning at least some return.

Recommended: Emergency Fund Calculator

The Risks of Investing an Emergency Fund

While investing can build wealth in other areas of your financial plan, it can undermine the purpose of your emergency fund. Here are the biggest risks you face when putting those savings into investments.

It Might Take You Longer to Get Your Money

Emergencies, by definition, require quick action. If your car breaks down or a pipe in your home bursts, you’ll likely need funds immediately. Some investments, however, are not designed for instant access. Stocks and mutual funds, for example, must be sold before you can access cash, and it can take a couple of business days for the transaction to settle. The longer it takes to access your money, the less effective your emergency fund becomes.

You Could Risk Losing Money

The stock market can be volatile. If you need to access your emergency fund during a market downturn, you could be forced to sell your investments at a loss. Even relatively stable assets like bonds or certain mutual funds can lose value when interest rates rise or market conditions shift. This makes them unreliable for something as crucial as an emergency fund.

You could also face taxes and penalties. Withdrawals from taxable accounts may trigger capital gains taxes, and pulling money early from retirement accounts often comes with penalties. What’s supposed to be a cushion could quickly turn into a financial headache.

Considerations for Storing an Emergency Fund

Instead of chasing returns, you’re usually better off putting your emergency fund in an account that is safe, yet not stagnant. The best places to keep an emergency fund allow you to:

Access Your Funds Easily

The most important feature of an emergency fund is liquidity. You need to be able to access the money quickly, ideally within minutes or hours, not two to three business days, or more. This means avoiding accounts where you might face delay, fees, or penalties for withdrawals.

Earn Potentials Returns on Your Money

While safety comes first, that doesn’t mean your emergency fund has to sit idle. Traditional savings accounts often earn a relatively low interest rate, but newer options such as high-yield savings accounts and money market accounts generally offer much better returns without sacrificing accessibility.

Even if the interest rate seems small compared to investment returns, earning 3.00% to 4.50% APY (Annual Percentage Yield) on your emergency fund can help combat inflation and ensure your money grows slowly over time instead of losing purchasing power.

3 Options for Keeping an Emergency Fund

If you want your emergency fund to be both safe and productive, here are three common options worth considering.

High-Yield Savings Account

A high-yield savings account (HYSA) can be a good choice for an emergency fund. Many HYSAs are offered by online banks, which generally have lower overhead costs and can pass those savings on to customers through higher interest rates and fewer (or no) fees.

HYSAs generally pay interest rates far above traditional savings accounts — often several times the national average. In addition, funds are typically FDIC-insured and accessible anytime.

Money Market Account

A money market account (MMA) blends features of savings and checking accounts. They typically offer higher interest rates than standard savings accounts while providing some of the conveniences of a checking account, such as checks or a debit card. Just keep in mind that some MMAs require high minimum balances and may charge monthly fees if balance requirements aren’t met.

Certificates of Deposit

Certificates of Deposit (CDs) offer a guaranteed return without risking your money, and rates are typically higher than traditional savings accounts. The tradeoff is that your funds are locked up for a specific term (which can range from a few months to several years), and early withdrawals typically trigger a penalty. However, there are two ways to make CDs work for your emergency fund:

• CD ladders: With this strategy, you spread your emergency fund across multiple CDs with staggered maturity dates (e.g., 3 months, 6 months, 12 months). This way, a portion of your funds becomes available regularly while still earning higher interest.

• No-penalty CDs: Some banks offer CDs that allow you to withdraw funds early without penalties. These can be a good compromise between higher interest and accessibility. Just keep in mind that no-penalty CD rates tend to be lower than traditional CDs with similar term lengths.

While CDs generally shouldn’t hold your entire emergency fund, they can work for a portion of it if you want to maximize returns without significant risk.

The Takeaway

An emergency fund isn’t meant to be an investment but, rather, a safety net. Putting your emergency savings in volatile investments like stocks or real estate can leave you vulnerable just when you need money the most.

That said, you don’t have to leave your emergency fund in a traditional savings account that may earn lower rates. High-yield savings accounts, money market accounts, and certain CDs can offer the perfect balance of safety, accessibility, and growth.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is it wise to invest your emergency fund?

Generally, it’s not wise to invest your emergency fund in risky assets like stocks, mutual funds, or real estate. The purpose of this fund is immediate accessibility and preservation of capital, not growth. Investments can fluctuate, and if you need cash during a downturn, you might be forced to sell at a loss. A safer option is keeping your fund in a high-yield savings account or money market account, where it earns more modest interest but remains secure and easily accessible.

How much of my emergency fund should be liquid?

Ideally, your entire emergency fund should be liquid, or at least the majority of it. Emergencies often require immediate cash access, so keeping funds in a savings account, checking account, or money market account is generally best.

If you have a larger emergency fund — say, more than six months’ living expenses — you might keep a small portion in short-term certificates of deposit (CDs). However, it’s generally a good idea to keep at least three to six months of essential expenses fully liquid and easily accessible without penalties.

What should an emergency fund not be used for?

An emergency fund should not be used for planned expenses, vacations, shopping, or investments. It exists specifically for unexpected, urgent financial needs such as medical bills, car repairs, or a sudden job loss. Using it for non-emergencies undermines its purpose and can leave you vulnerable when a real crisis comes up.

More from the emergency fund series:

Emergency Fund: What It Is and Why It’s Important

How Much Money Should Be in Your Emergency Fund?

How to Build an Emergency Fund

Emergency Fund Calculator

Where to Keep an Emergency Fund

When to Use Your Emergency Fund

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