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Sep

2025

What Is Volume in Stock Trading? How Investors Can Use It

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Volume in Stocks?
What Does Stock Volume Tell You?
Where Can You Find Stock Volume on a Chart?
How Traders Can Use Volume
Types of Indicators to Measure Stock Volume
FAQ

In stock trading, volume refers to the number of shares traded in a specific time period. When demand is high and the number of shares traded goes up, the volume goes up. Similarly, when sales are down, that stock’s trading volume drops.

Some investors may analyze volume as a part of a technical analysis strategy to help them make decisions about when to buy and sell a particular stock. Here’s a closer look at volume and how investors may be able to use it.

Key Points

• Stock trading volume is the number of shares traded in a specific time period.

• High trading volume can indicate strong interest in a stock, and high liquidity.

• Low trading volume can signal less enthusiasm, market uncertainty, or lower liquidity.

• Analyzing volume helps investors understand the strength of price trends and potential reversals.

• Various technical indicators, like On Balance Volume (OBV) and Volume Price Trend (VPT), use trading volume to aid investment decisions.

What Is Volume in Stocks?

Trade volume for stock and other securities tells investors how frequently shares in a company are being bought and sold.

Every buy and sell transaction of a particular stock helps contribute to its trade volume. A transaction takes place when a buyer agrees to purchase the shares a seller has put up for sale. If this type of transaction takes place 100 times during a day for a particular stock, that stock has a trade volume of 100.

For stock futures and options trading, volume is based on how many contracts change hands during the set period.

Volume doesn’t tell the whole story of a stock. There are a couple of terms that can help give investors a better idea of the size of a company and how many shares are actually available, including “float” and market capitalization, or market cap.

Volume vs Float

While volume is the number of shares that are being actively traded during a given period, float is the number of shares that are actually available to trade. This total does not include restricted shares, which are not registered and are usually given to corporate leaders as part of a compensation package. Outstanding shares refers to all of the stock a company has issued, including restricted shares.

Stocks that have a small number of shares — usually between 10 million and 20 million — available to trade are what is known as “low-float” stocks. Large corporations, by contrast, could have floats of billions of shares.

In certain circumstances when trade volume is very high, volume can surpass float or even number of outstanding shares.

Volume vs Market Cap

Market cap is the total number of outstanding shares multiplied by the current public market price. In other words, it’s the dollar amount required to buy up all outstanding shares of a company, including restricted shares.

Market cap helps investors understand the size of one company relative to another. For example, large-cap stocks tend to be companies worth $10 billion to $200 billion, while small-cap stocks tend to be companies worth $250 million to $2 billion.

Investors can calculate free-float market cap by excluding restricted shares.

What Does Stock Volume Tell You?

Stock volume tells investors how much demand there is for a stock. The greater the volume, the more demand there is, while smaller volume translates to lower demand

High trade volume can also indicate that stock orders are being executed quickly and that the market is highly liquid. In other words, high volume can mean that buying and selling the stock is relatively easy.

What It Means When Stock Volume Goes Up

When stock volume is on the rise, it typically means that prices are on the move, either in the upward or downward direction. As volume increases, it can mean that investors are committing to the price change; a trend may be gathering strength.

Generally speaking, higher volume means that there’s increased interest in buying a stock, and that the market for that stock is more liquid, making it easier to buy and sell shares.

What It Means When Stock Volume Goes Down

When stock volume starts to decrease, it can signal that investors are less enthusiastic about a company. Volumes can decrease even as stock prices increase.

Low volume can be a signal for investors to be cautious about a stock. It can signal market uncertainty, the possibility of stock volatility on the horizon, and lower liquidity.

Recommended: Stock Market Basics

Where Can You Find Stock Volume on a Chart?

Investors can usually find information about volume next to or below the stock chart provided by trading platforms or media sources, like Yahoo Finance or the Wall Street Journal.

Often, volume is tracked using a candlestick chart, in which investors look for patterns to help make investment decisions. Normally, candlestick charts measure a stock’s price, including highs, lows, and opening and closing prices over a given period.

The resulting figure looks a bit like a candle with a line, or “wick,” that represents highs and lows and a rectangle that marks opening and closing prices. Volume candlestick charts use the width of the rectangle to indicate volume. The higher the volume, the wider the candle.

How Traders Can Use Volume

We’ve already seen that volume can help investors understand when a price trend is picking up steam. There are a few other basic guidelines investors may want to consider as they’re deciding when to buy and sell stocks.

Exhaustion Moves

Exhaustion moves occur when there is a sharp movement in the price of stock coupled with a sharp increase in trading volume. This potentially signals the end of a current price trend. These moments can be accompanied by a period of volatility.

Price Reversals

If the price of a stock has moved in one direction for a long time and volume begins to increase at the same time that prices start to move very little, it can signal a reversal. So if stock prices were on an upward trajectory, changes start to slow and volume increases, it might mean the trend is about to reverse.

Breakouts

A breakout is a point at which changes in market trends occur. Changes in volume can clue investors into the strength of the breakout. Little change in volume suggests investors are paying the breakout little heed, while big changes in volume indicate a strong new trend.

Bullish Signals

Volume can also help investors identify bullish signs that suggest prices are likely to rise. For example, say stock prices increase and then decline. At the same time there is an increase in volume which drives prices up again. The stock again declines, but if it doesn’t decline the second time as much as it did the first time, it may be a bullish signal that prices will continue to rise.

Types of Indicators to Measure Stock Volume

There are a number of volume indicators that could help traders make investment decisions based on their approach and goals. Here are a few examples.

On Balance Volume (OBV)

On balance volume (OBV) is a cumulative technical indicator in which volume is added on days when overall volume is up and subtracted on days when overall volume is down. The direction of the indicator is what is most important to investors. When price and OBV are moving up or down together, it is likely the trend will increase in strength.

Volume Price Trend (VPT)

Similar to OBV, volume price trend measures cumulative volume. However, it differs in that it considers a percentage increase or decrease in price. VPT helps investors relate share price to trading volume. If the price of a stock increases, so does the value of the indicator. If prices fall, the indicator value falls, too.

Ease of Movement

This indicator helps traders see how easy it is for a stock price to move between levels based on trading volumes. Stocks that continue along a trend for a given period are considered “easy.” This indicator is used over longer time periods and in volatile markets in which it can be hard to spot trends.

The Takeaway

Stock trading volume measures the amount of shares traded in a given day or time period. Trading volume can also apply to other types of securities and derivatives, where contracts are traded. Examining volume and other tools in technical analysis can help investors make decisions about when to buy and sell stocks.

When buying any individual security, investors should be sure to consider how it fits into their overall financial plan, including their goals, risk tolerance, and time horizon.

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

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

FAQ

Is high trading volume good?

High trading volume indicates an uptrend in a stock’s shares being traded, which is often a sign of investor interest. This may lead to higher prices, but trading volume is only one indicator that investors should consider when buying and selling stocks or other securities.

Can trading volume rise, but prices fall?

Yes. If trading volume is high, but prices are dropping, that could indicate that there is downward pressure on that stock price — or it could be a bullish signal, that there might be a price reversal. Again, it’s wise to use more than one indicator to assess price trends.

What does low trading volume mean?

Low trading volume often indicates a lack of liquidity, which means that it can be harder to buy and sell shares. Low volume also indicates a lack of interest or demand for the stock.

Photo credit: iStock/shapecharge

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

SOIN-Q325-103

Sep

2025

How Often Are Dividends Paid?

By Pam O’Brien | Growing Wealth, invest, Investing | Comments Off

Dividends are a portion of earnings that a company pays to certain shareholders who own dividend-paying stock. Dividends are generally paid quarterly, although the timing of dividend payments can vary depending on the company: some dividends might be monthly, or twice a year.

Most companies pay dividends in cash, or as additional shares of stock. Investors can take dividend payouts to supplement income or savings (or other goals). They can also reinvest their dividends as part of a dividend reinvestment plan, or DRIP.

Not all companies pay dividends, however. And just because a company pays dividends now doesn’t mean it will continue to do so. A company can stop paying dividends at any time.

Investors may be qualified to receive dividends depending on when they purchase shares of stock. It’s important to understand the key dates regarding dividend payouts.

Key Points

• Dividends are a portion of a company’s earnings paid to qualified shareholders typically each quarter.

• Some stocks may pay dividends monthly, semi-annually, annually, or on an irregular schedule.

• Dividends can be paid in cash, company stock (often through dividend reinvestment plans), or, rarely, as property.

• Key dates involved in dividend payments include the declaration date, date of record, ex-dividend date, and payment date.

• Dividend income is taxable, with the tax rate depending on whether it’s a qualified or nonqualified dividend and the investor’s tax situation.

What Are Dividends?

Companies will sometimes share a portion of their profits with shareholders, and this is called a dividend. Dividends are typically distributed as cash, although it’s also possible to receive a dividend in the form of stock (or some other asset).

Typically, dividends work on a per-share basis. Investors who buy stocks online or through a traditional brokerage can look for dividend-paying stocks. For example, if Company A pays a quarterly cash dividend of 50 cents per share, and an investor owns 50 shares, they would receive $25 in cash every quarter.

If a company pays a stock dividend, it’s usually a percentage increase in the number of shares an investor owns. So if Company A awards a 5% stock dividend and an investor owns 100 shares of Company A, they would have 105 shares after the dividend payout.

Remember that dividend income is taxable (see below), and dividends are not guaranteed. A company may start or stop paying dividends at any time.

Recommended: Stock Market Basics

How Often Are Dividends Paid Out?

In most cases in the U.S., dividends are paid quarterly, on the same schedule as the company must report earnings.

If you’re wondering why companies generally pay quarterly vs. monthly dividends, it makes sense that dividends would come only after a company has finalized its income statement and its board of directors has reviewed (and approved) the numbers.

Some investments pay dividends on other schedules, such as twice a year, once a year, or monthly, for monthly dividend stocks, or on no schedule at all (called “irregular” dividends, though this isn’t typical in the United States). Ultimately, the dividend payout schedule is up to a company’s board of directors.

It’s also possible for a company to pay a special one-time dividend. Usually a special dividend is paid out when a company has had a stronger-than-usual earnings period or has excess cash on hand — from the sale of a business, perhaps, or the liquidation of an investment, or a major litigation win. These special one-time dividends may be paid as cash, stock, or property dividends.

When it comes to mutual funds that invest in dividend-paying companies, they may pay dividends on a more frequent basis, such as monthly or even weekly. It may be possible to invest in dividend funds, or even dividend stocks, when you open an IRA.

Important Dividend Dates

There are four essential dates involved in the payment of dividends. It’s important for investors to pay attention to these dates, to ensure they’re getting the dividend payout they hope for.

1. Declaration date. Also called the announcement date, this is the day that a company’s board of directors states their intention to pay a dividend. It’s typically announced every quarter.

2. Date of record and ex-dividend date. The record date and the ex-dividend date used to be separate dates. Now owing to the T+1 settlement rule, whereby trades must settle within one business day, they are typically the same in the U.S.

Nonetheless, they signify two different actions by the company which can impact investors. The first is the date of record: shareholders must be on the company books before this date in order to get the dividend. Shareholders who buy stock on or after this date, which is also the ex-dividend date (i.e., the date that quarter’s dividend expires), will not qualify for the dividend and it will go to the seller for that quarter.

Note that if the date of record falls on a weekend or holiday, the ex-dividend date in that case is the business day before.

3. Payment date: This is when dividends are paid to company shareholders.

IMPORTANT DIVIDEND DATES for 5 Companies in the S&P 500 Dividend Aristocrats Index, paying qualified dividends, as of 9/03/25
Company	Dividend Payout	Declaration Date	Record Date / Ex-Dividend Date	Payment Date
Kimberly-Clark Corp (KMB)	$1.26	Aug. 1, 2025	Sept. 5, 2025	Oct. 2, 2025
Leggett and Platt (LEG)	$0.05	Aug. 7, 2025	Sept. 15, 2025	Oct. 15, 2025
Farmers & Merchants Bancorp (FMCB)*	$5.00	Aug. 2, 2025	Sept. 11, 2025	Oct. 1, 2025
3M Company (MMM)	$0.73	Nov. 5, 2025	Nov. 14, 2025	Dec. 12, 2025
Gorman-Rupp Company (GRC)	$0.19	Oct. 24, 2025	Nov. 14, 2025	Dec. 10, 2025

Source: dividend.com, as of 9/03/25.
*Semi-annual dividend

Typically, investors can get information about a company’s dividend dates by visiting its investor relations page. To find this, search for the company’s name and “investor relations” online. Or check a company’s dividend history online. Many investment websites, including Nasdaq.com, track this information.

When Are Dividends Paid?

Once a company’s board of directors approves a plan to pay out dividends, the company announces the dividend payment information, including: the dividend amount to be paid, the date it will be paid, and the date of record and the ex-dividend date (which typically occur together, unless the record date falls on a weekend or holiday).

On the payment date, the dividend is paid to investors who owned the stock before the ex-dividend date. Consider the following hypothetical example:

• Company A announces its dividend payout on September 1, 2025. This is the declaration date for a dividend payout on Sept. 17.

• Sunday, Sept. 14 is the record date. Shareholders must be on record as owning the company stock before September 14, in order to get the dividend.

• The ex-dividend date cannot fall on a weekend or holiday, so it’s set to the business day before the record date: Friday, September 12, 2025. In order to get the dividend, an investor must buy shares before the ex-dividend date.

• The dividend itself will be paid on Wednesday, Sept. 17, 2025.

Different Dividend Payout Methods

These are some of the ways dividends may be paid to investors.

Cash Dividends

Dividends are often paid in cash. Companies typically send cash dividends directly to an investor’s brokerage, where the money is deposited into their account. The company might also mail a check to stockholders.

Company Stock Dividends

In other cases, investors will be paid in company stocks. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares for an investor with their dividends. This provides the advantages of both simplifying the process (since investors won’t have to receive the cash and buy more shares themselves) and potentially being more cost effective, since many DRIP programs don’t charge commissions.

Additionally, some DRIP programs discount the purchase of additional shares. For this and other reasons, some investors may specifically look to find dividend reinvestment stocks.

Property Dividends

More rarely, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company, or physical assets the company owns.

Are Dividends Taxable?

Dividend income is always taxable, but tax treatment depends on the type of dividend the shareholder gets (qualified or nonqualified dividends), as well as the type of account in which the dividend stock is held.

The Type of Account Impacts How Dividends Are Taxed

For instance, if an investor is holding the investment in a retirement account such as a 401(k) or IRA, the dividend isn’t taxable the year it’s paid because it’s deposited in a tax-deferred account.

In this case, though, any dividend income would be taxed along with any other funds upon withdrawal in retirement.

If an investor holds dividend funds or dividend-paying stocks in a Roth IRA, the tax treatment is different. Here, contributions are after tax, and withdrawals are tax free.

If the investment is held in a taxable account, like a brokerage account, then a dividend is considered income, and the tax rate will depend on whether it’s a qualified dividend or nonqualified (ordinary) dividend.

Tax Rate for Qualified Dividends

These are dividends paid by a U.S. corporation or a qualified foreign corporation on stock that an investor has held for a certain period of time — generally more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.

For some preferred stock, the investor must have held it for 91 days out of the 181-day period starting 90 days before the ex-dividend date. Taxes on qualified dividends (vs. ordinary dividends) are paid at long-term capital gains rates, which range from 0% to 20% based on an individual’s modified adjusted gross income.

In other words, the taxes investors pay on qualified dividends are based on their overall income tax bracket, and they could pay 0%, depending on their income. Because the long-term capital gains tax rate is lower than ordinary income tax rate, qualified dividends are preferable to nonqualified dividends.

2025 Tax Rates for Long-Term Capital Gains

Following are long-term capital-gains tax rates for the 2025 tax year, according to the IRS.

Capital Gains Tax Rate	Income — Single	Married, Filing Jointly	Married, Filing Separately	Head of Household
0%	Up to $48,350	Up to $96,700	Up to $48,350	Up to $64,750
15%	$48,351 to $533,400	$96,701 to $600,050	$48,351 to $300,000	$64,751 – $566,700
20%	Over $533,400	Over $600,050	Over $300,000	Over $566,700

Additionally, note that those who have net investment income and modified adjusted gross incomes (MAGIs) over $200,000 — or couples filing jointly with MAGIs over $250,000 — may have to pay the Net Investment Income Tax (NIIT). This is 3.8% on either net investment income or the excess over the MAGI limits, whichever is less.

Tax Rate for Nonqualified Dividends

The more common type of dividend is a nonqualified — or ordinary — dividend. When companies pay ordinary dividends, they’re considered ordinary income, so an investor will be taxed at ordinary income tax rates.

In general, investors should assume that any dividend they receive is an ordinary dividend unless told otherwise. (The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.)

Can You Live on Dividends?

In general, retirees may want to to live off a combination of Social Security, interest income from bonds, and selling a small portion of their investments each year. The 4% retirement rule maintains that if one withdraws no more than 4% of their portfolio each year, they’ll be able to make their nest egg last — although some financial professionals believe this formula is too conservative.

Investments that pay regular dividends may shift an individual’s retirement equation by providing steady income over time that may allow them to sell fewer investments — or no investments at all.

The amount of dividends a stock pays may grow over time as companies get larger and continue to increase their profits. But the reverse is also possible; a company could stop paying dividends, choosing to reinvest its cash in business operations.

Investing with an eye toward dividend income may allow an investor to create an income stream that could supplement their Social Security and other income in retirement.

The Takeaway

Dividends — cash or stock payments from a company to qualified shareholders — are typically paid quarterly. These financial rewards can be attractive to investors, who may seek out dividend-paying companies in hopes of boosting their income or savings.

Dividends may provide a source of consistent and predictable income, which may be a helpful addition to an individual’s portfolio, depending on their investing goals. Investors may choose to use dividend income to supplement other income or to reinvest in their portfolio.

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

FAQ

How long do you have to hold a stock to get a dividend?

Investors must buy, or already own, shares of the stock before the ex-dividend date, which is now the same as the date of record. The date of record is when the company reviews its records to determine who its shareholders are, and who qualifies for a dividend payout. If the date of record falls on a weekend or holiday, the ex-dividend date is the business day prior, and shareholders who buy stock on or after that date will not receive a dividend until the following quarter (or relevant time period).

Are dividends taxed if they are reinvested?

Yes. Dividends that are reinvested are considered income, just like cash dividends, and must be reported on your tax return. The way you are taxed on dividends depends on whether your dividends are qualified or nonqualified. The more common type of dividend is nonqualified, and these dividends are taxed at ordinary income tax rates. Qualified dividends are taxed at long-term capital gains rates.

What happens if you see more dividends than profit?

Typically, a portion of a company’s earnings may go to paying dividends. This is known as the dividend payout ratio. Investors typically look for payout ratios that are 80% or less — meaning that the company is not paying all of its earnings in dividends.

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

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

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

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

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S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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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-Q325-096

Sep

2025

How to Buy Bonds: A Guide for Beginners

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Table of Contents

Why Invest in Bonds
Where Can You Buy Bonds?
What Type of Bonds Can You Buy?
How to Invest in Bonds
FAQ

Bonds are issued by governments, municipalities, and companies as a way to raise money. By investing in bonds, an investor is giving the issuer of the bond a loan for a set period of time. In exchange, the bond issuer pays the investor interest and returns the principal to them when the bond matures at the end of a predetermined period.

Investing in bonds might seem a little mystifying, but bonds can be a way for beginning investors — or any investors for that matter — to help achieve financial goals such as portfolio diversification and earning income. Read on to learn about the different types of bonds and how to invest in them.

Key Points

• Bonds function as loans to entities like the government, municipalities and companies, and they offer regular interest payments and eventual principal repayment.

• Credit ratings are a way to gauge the creditworthiness of the bond issuer and the likelihood that they will repay the debt and not default.

• Bond duration reflects how sensitive bond prices are to interest rate fluctuations.

• Investors can purchase bonds directly from the government or brokerages, or get exposure via mutual funds and ETFs.

• Before investing, investors can assess risks of bonds, including credit risk, interest rate risk, inflation risk, and liquidity risk.

Why Invest in Bonds

Essentially, investing in bonds is a method of lending money to a company or government. As investors choose between the different types of investments, there are several reasons they might opt for bonds. Bonds, which are typically fixed income investments, pay interest at regular intervals, such as twice a year, which provides investors with a predictable stream of income. Also, if investors hold the bond to maturity, they receive the entire principal amount (or par value) of the bond. In this way, investors may preserve their savings while investing.

Bonds are also an important tool for building a diversified portfolio. Compared with stocks, bonds are less volatile, so they can potentially help offset some of the risk inherent to stock investing.

However, while bonds are typically considered a less risky investment, it’s still possible to lose money when investing in them if the issuer is unable to fulfill its obligation. In addition, inflation can eat away at bond returns, since fixed returns tend to be worth less during periods of high inflation.

Where Can You Buy Bonds?

You can buy bonds in a variety from a variety of different sources, depending on the type of bond you’re interested in.

Federal Government

If you’re 18 or older, you can buy government bonds directly from the federal government through the TreasuryDirect website. The site gives investors access to Treasury bills, notes, bonds, Floating Rate Notes, Treasury Inflation-Protected Securities, and savings bonds.

Brokerage Account

Investors can buy a variety of bonds, including corporate, municipal, and government bonds, through their brokerage account. Bond prices vary depending on transaction fees and markups.

Exchange-traded Fund (ETF) or Mutual Fund

Rather than buying bonds outright, investors can gain access to them by buying shares of ETFs or mutual funds that invest in bonds.

Diversification is one main reason for investing in funds. Because issuers typically sell individual bonds in large units (a single bond might cost $1,000 or more, for instance) the average investor may only be able to purchase a few of them on their own, making it tricky to put together a diversified bond portfolio.

Meanwhile, funds typically hold a diversified basket of bonds that tracks a bond index or a certain sector of the bond market, making it much easier for individuals to diversify. It’s important to note that while the yield of individual bonds is fixed, the yield on bond mutual funds or ETFs can fluctuate over time.

💡 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 Type of Bonds Can You Buy?

There are a few basic types of bonds you may consider buying:

Corporate Bonds

Corporate bonds are a type of debt security issued by public and private corporations. Investment banks typically underwrite the debt and issue it on the entity’s behalf. Companies use the money they raise through bond sales for a variety of purposes, such as investing in new equipment, research and development, paying investor dividends, and stock buybacks.

Municipal Bonds

States, cities, and counties issue municipal bonds, sometimes called “munis,” to finance capital expenditures like the building of new roads or bridges. There are three general types of municipal bonds:

• General obligation bonds aren’t backed by assets, but rather the “full faith and credit” of the issuer. Governments have the power to tax residents to pay bondholders back.

• Revenue bonds are backed by revenue from a specific source, such as highway tolls. That said, some revenue bonds are “non-recourse” meaning that if the revenue source disappears, bondholders have no claim to it.

• Conduit bonds are issued on behalf of private entities like hospitals.

US Treasurys

The Department of the Treasury issues U.S. Treasury bonds for the federal government. Investors typically consider Treasurys one of the safest investments, since they have the full faith and credit of the U.S. government backing them.

• Treasury bills are short-term debt obligations that mature within one year or less. They are sold to investors for less than their face value but they pay their full value at maturity.

• Treasury notes are longer-term debt securities that mature within 2, 3, 5, 7, or 10 years and pay interest every six months.

• Treasury bonds mature in 20 or 30 years and pay bondholders interest every six months.

• Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy TIPS with maturities of five, 10 and 30 years, and they pay interest every six months.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Bond Mutual Funds

A mutual fund is a pool of money that’s invested by an investment firm according to a set of stated objectives. A bond mutual fund focuses specifically on bonds. They may concentrate on one type, such as corporate bonds, or they may contain all types. Unlike traditional bonds, investors do not hold the bond funds for a set period or receive a principal payment at maturity. Rather, the value of the bond fund can fluctuate with market demand. There may also be ongoing fees and expenses associated with owning shares of the mutual fund.

Bond ETFs

Like bond mutual funds, bond ETFs represent a way for investors to pool their money and spread it across many different investments. While investors can only trade mutual funds once a day, they can trade ETFs throughout the day. ETFs may have lower fees than mutual funds.

How to Invest in Bonds

As investors are exploring investing in bonds, it’s important to consider the following factors:

Credit Ratings

Credit ratings are a way to gauge the creditworthiness of companies or governments that issue bonds. The ratings give investors an idea of how likely the bond issuer is to default. Standard & Poor’s, Moody’s, and Fitch are the three private companies that control most bond ratings. The rating system is slightly different at each company, but generally speaking, a mark of AAA represents the highest rated and least likely to default issuers, while C or D denotes the riskiest issuers.

Duration

A bond’s duration is not the same at its term, or maturity. Rather it is a measure of how sensitive a bond’s price will be to changing interest rates. The longer a bond’s duration, the more likely its value will fall as interest rates rise.

Fees

If you buy bonds through a broker, you should expect to pay transaction fees. Brokers typically markup the price of a bond when they sell it to you in lieu of charging a commission. Markups may be anywhere from 1% to 5% of the bond’s original value, though the exact amount can vary based on the type of bond, the size of the transaction, and market conditions. Look for brokerages that have low fees and markups.

Risk Level

Before buying a bond, investors should understand the associated risks, including:

• Credit risk: The risk that issuers may fail to make interest payments and default on the bond.

• Interest rate risk: The possibility that changes in interest rate will raise or lower a bond’s value if sold before maturity.

• Inflation risk: The risk that inflation will decrease the value of bond returns.

• Liquidity risk: The risk an investor won’t be able to sell their bond when they want to due to low or no demand.

Timing

You might consider matching the maturity date to your investment timeline. For example, if you need your principal in five years to make a down payment on a house, you may not want to buy a 10-year bond. While you could sell the 10-year bond after five years, market conditions could make it less valuable than if you waited until maturity.

The Takeaway

Whether purchased individually or accessed through mutual funds or ETFs, bonds provide a way for investors to diversify their portfolios. They may also be able to help investors develop a stream of income, which can become increasingly important as they move toward retirement.

Before buying a bond, it’s important to research issuers and credit ratings to be sure you aren’t taking on undue risk. In addition, investors will want to make sure that whatever they buy fits into their long-term investment plan.

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

🛈 While SoFi does not offer direct purchases of bonds, you can gain exposure to the bond market by purchasing bond funds through our online investment platform.

FAQ

Are bonds a safe investment?

Bonds are generally considered a less volatile investment than stocks. However, investing in bonds does involve risk. How sound a bond is depends on such factors as the issuer of the bond and whether they are able to fulfill their payment obligations, and the bond’s credit rating. Different types of bonds involve different levels of risk. For instance, U.S. Treasury bonds are considered the safest bonds because they are backed by the U.S. government and have a minimal risk of default.

Is it better to hold cash or bonds?

Whether it’s better to hold cash or bonds depends on your timeline, risk tolerance, and goals. Cash is typically better for short-term needs, while bonds may be better as longer-term investments. Both have pros and cons. Cash could lose its buying power due to inflation, but it’s a completely liquid asset and offers protection against volatile markets. Bonds can provide consistent income through regular interest payments, but they carry the risk of default — if the bond issuer defaults, you could lose some or all of your investment. Consider all these factors to decide what’s right for you.

Will you lose money on a bond if you hold it to maturity?

Generally speaking, when an investor holds onto a bond until maturity, they receive the face value of the bond, which is the amount the issuer agrees to pay at maturity, in addition to the interest received. Those planning to hold until maturity, rather than sell beforehand, may be less concerned about interest rate risk, which is when changes in the interest rate increase or decrease a bond’s value. However, holding a bond to maturity is not risk-free — there is a possibility that the bond issuer could default on the bond or that rising inflation could erode the purchasing power of the bond’s return.

Photo credit: iStock/ILIA KALINKIN

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

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

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

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

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN-Q325-086

Sep

2025

What Is IPO Due Diligence?

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

Table of Contents

IPO Due Diligence Process
Objective of IPO Due Diligence
Benefits of Due Diligence Process
Next Steps in Filing an IPO
FAQ

As part of the IPO process, private companies must perform due diligence to ensure that they’ve met all the requirements for being listed on a public exchange. This ensures that the company follows all registration and disclosure guidelines established by the Securities Act of 1933.

Broadly speaking, IPO due diligence is similar to the due diligence performed in other situations involving large amounts of capital. Just as an investor may research certain aspects of a company before deciding to purchase shares, a company that’s planning an IPO must have an understanding of the various factors that could positively or negatively affect its success.

If you’re interested in IPOs, it’s helpful to know what goes on behind the scenes and how the IPO due diligence process works, given that IPO stocks are considered high-risk securities.

Key Points

• IPO due diligence is a process of researching a private company to make sure it meets the requirements for being listed on a public exchange.

• The due diligence process involves gathering information about the company’s organizational structure, licensing and taxes, board and employee information, financial information, customer/service information, and company property.

• Benefits of IPO due diligence include an opportunity to explore the viability of an IPO for the company and more information for investors on the company and its risks.

• Steps to filing an IPO include SEC review, IPO roadshow, pricing, launch, stabilization, and transition to market.

• Due diligence can help inform investors whether the company complies with all relevant SEC regulations.

IPO Due Diligence Process

During the IPO due diligence process, the IPO underwriters and IPO attorneys will work together to perform the necessary background research to gain a better understanding of the company, its management, and its financials. This involves gathering the following information:

1. Organizational Data

During the first stage of the IPO due diligence process, the underwriters and attorneys gather information about the company’s organizational structure. This may include requesting copies of any or all of the following:

• Articles of incorporation

• A list of the company’s shareholders and committees

• An overview of the number of shares owned per individual shareholder

• Annual business reports for the previous three years

• Company business plans or strategic plans

• A breakdown of the company’s organizational structure, including board members, directors, and employees

The underwriting team may also request a copy of a certificate in good standing from the state’s Secretary of State, along with information on organizational decision-making.

💡 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.

2. Licensing and Taxation

The next step in IPO due diligence involves collecting information about the company’s licensing and taxes. At this stage, the IPO underwriter and/or attorneys may request copies of:

• All business licenses currently issued to the company

• Annual tax returns

• Government licenses and permits held by the company

• Employment tax filings

• Comprehensive reports of the company’s tax filing data

The underwriting team may look back three years or more when analyzing income tax returns and tax filing information.

Recommended: The IPO Process

3. Board and Employee Information

Due diligence can also extend to information about the company’s board of directors, its managers, and its employees. At this phase of IPO due diligence, underwriters and attorney may request:

• A list of all individuals it employees

• Information about employee status, including each employee’s position and salary

• Details regarding employee benefits and bonuses, according to position

• A copy of company policies relating to sick leave or conflict resolution

• Details about employee insurance benefits, including health, disability and life insurance

• Copies of resumes for leading personnel

• Copies of employee audits

With regard to employee audits, underwriters may look back two to three years.

💡 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.

4. Financial Information

A company’s finances can come under close scrutiny during the IPO due diligence process. When considering financial information, the IPO underwriting and legal team may review:

• Copies of broker or investment banking arrangements

• Company financial statements records, including previous financial audits

• A list of all financial accounts held by the company

• Copies of financial analyst reports

• Information about the company’s inventory holdings

• Details regarding the company’s accounting and amortization methods

• A list of all fixed and variable expenses

The timeframe for which underwriters can review financial information can stretch from the previous three to five years, depending on what they’re examining.

Recommended: How to Read Financial Statements

5. Customer/Service Information

Due diligence also takes into account interactions with customers and service practices. During this step, the underwriting team may request:

• Reports or information about the products and services offered by the company

• Details about consumer complaints filed against the company

• Information about legal approvals for the company’s products and services

• Copies of the company’s trading policies

• Details regarding the company’s marketing strategies as well as copies of marketing materials

The underwriters may also need to see copies of customer supply or service agreements.

6. Company Property

Last but not least, IPO underwriters will examine property holdings owned by the company. This can include reviewing information about:

• Business locations

• Real estate agreements and/or franchise licenses

• Trademarks and copyrights held by the company

• Approved patents held by the company

• Trademark complaints, if applicable

• Official contracts showing the purchase of real estate

The underwriters may also ask for a full inventory of any physical or real property the company owns.

Objective of IPO Due Diligence

During due diligence, the underwriting team is working to gain a full understanding of how the company operates, how it’s structured, how healthy it is financially, and whether there are any potential issues that could be a roadblock to going public. The due diligence process effectively clears the way for the next steps in the IPO process.

The IPO due diligence process ensures that there are no surprises waiting to crop up that could derail a company’s progress. It’s also an opportunity for the underwriting team, the IPO attorneys, and the company itself to assess any potential risk factors that may affect the IPO’s outcome.

Benefits of Due Diligence Process

IPO due diligence has benefits for both the company and investors.

IPO Due Diligence Benefits for the Company

• Due diligence offers an opportunity to explore the viability of an IPO, based on the company’s business model, financials, capital needs, and anticipated demand for its shares.

• Due diligence also allows the company to avoid going afoul of regulatory guidelines, and it can help to identify any issues the company may need to address before going public.

IPO Due Diligence Benefits to Investors

• The due diligence process can reveal more about a company than the information in the initial red herring prospectus. In IPO investing, a red herring refers to the initial prospectus compiled for SEC registration purposes.

• If investors feel confident about the information they have, that could help to fuel the success of the IPO which could mean more capital raised for the company and better returns for those who purchase its shares.

Note that an investor’s eligibility or suitability for trading IPO shares is usually determined by their brokerage firm.

Next Steps in Filing an IPO

Once the underwriting team has completed its due diligence, the company can move on to the next steps involved in how to file an Initial Public Offering (IPO). Again, that includes:

• SEC review

• IPO roadshow

• Pricing

• Launch

• Stabilization

• Transition to market

The SEC review typically takes between 90 and 150 days to complete. At this point, it’s up to the SEC to determine that all regulatory requirements have been met. Usually, the team conducting the review includes one or more attorneys and one or more accountants.

Next, comes the roadshow. During the roadshow, the company presents details about the IPO to potential investors. This step of the IPO process allows the company and underwriters to gauge interest in the offering and attract investors.

IPO pricing usually involves a closer look at the company’s financials, including its valuation and cash flow. Underwriters may also consider valuations for similar competitors when determining the appropriate IPO price.

After setting the IPO price, the underwriters and the company will schedule the IPO launch. Once the IPO launches, investors can purchase shares of the company. The underwriter can take action to stabilize the IPO price for a period of time following the launch. After that, the company transitions to market competition, concluding the IPO process.

The Takeaway

IPO due diligence is an important part of the IPO process. Due diligence ensures that a company about to go public complies with all relevant SEC regulations. Then, it’s up to qualified individual investors to decide whether trading IPO shares suits their goals and risk tolerance.

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 due diligence for an IPO?

Due diligence for an IPO refers to the process of investigating a private company’s financial, legal, operational, and regulatory status to make sure that it meets public listing requirements. Due diligence can also identify any potential risks or problems that could affect the company’s IPO. The goal of due diligence is to verify that the company is ready to go public.

What is IPO compliance?

IPO compliance refers to a company’s compliance with regulatory requirements in order to proceed with an initial public offering. Compliance helps ensure that a company meets financial reporting, adheres to strong governance, and has strong internal controls as required by the Sarbanes-Oxley Act, which was passed in 2002 to help protect investors from corporate fraud.

What are the types of IPO due diligence?

The main types of IPO due diligence include financial, legal, commercial, and operational due diligence. During the due diligence process, IPO underwriters and attorneys will also look at a company’s licensing, tax obligations and history, and board of directors and employees, among other factors. The purpose of due diligence is to verify information in all areas to identify and assess any risks and ensure the company’s readiness for going public.

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/porcorex

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

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

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

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

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

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.

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

This article is not intended to be legal advice. Please consult an attorney for advice.

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

SOIN-Q325-077

Sep

2025

What Investors Should Know About Spread

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

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.

Table of Contents

What Is Spread in Finance?
What Does Spread Mean?
Bid-Ask Price and Stocks Spread
Why Pay Attention to a Stock’s Spread?
Difference Between a Tight Spread and a Wide Spread
Other Types of Spreads
FAQ

In finance, the term spread refers to the difference between two related financial metrics: often a stock price or the differential between bond yields.

While its meaning can vary depending on the asset, understanding spreads is crucial for investors aiming to optimize their strategies. For example, the bid-ask spread of a stock — the gap between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept — is a key indicator of liquidity and supply-demand dynamics for that stock.

For bonds, the spread captures differences in yields between bonds of varying maturity lengths or quality. Meanwhile, in more complex areas like options trading, spreads can involve differences in strike prices or expiration dates, helping traders form sophisticated strategies.

Key Points

• A spread is the difference between any two financial metrics, such as a stock price or bond yield.

• The bid-ask spread refers to the gap between a stock’s bid price (the highest price a buyer will pay) and the ask price (the lowest price a seller will accept)

• Several factors can affect a stock’s spread, including supply and demand, liquidity, trading volume, and volatility.

• A tight spread suggests buyers and sellers generally agree on a stock’s value, while a wide spread may signal a lack of consensus on its value.

• Investors may also consider the spread between bond yields, and when using certain options-trading strategies.

What Is Spread in Finance?

A good way to visualize spread may be to think of buying a home. As a home buyer, you may have a set price that you’re willing to pay for a property.

When you find a home and check the listing price, you see that the seller has it priced $10,000 above your budget. In terms of spread, the maximum amount you’re willing to offer for the home represents the bid price, while the seller’s listing price represents the ask.

When talking specifically about a stock spread, it is the difference between the bid and ask price. The bid price is the highest price a buyer will pay to purchase one or more shares of a specific stock. The ask price is the lowest price at which a seller will agree to sell shares of that stock.

A wide bid-ask spread may indicate less liquidity and higher costs for a particular stock; a narrow bid-ask spread may indicate more liquidity and lower transaction fees.

The spread between bond yields can highlight the difference between the yields for bonds of different qualities (e.g., Treasurys vs. corporate bonds) or maturities.

Thus, the spread can have a material impact on trading decisions.

What Does Spread Mean?

Spread can have a variety of applications and meanings in the financial world, whether for trading stocks or other types of assets.

• Bonds. As mentioned earlier, bond spread typically refers to differences in yield. But if you’re trading futures, the spread can measure the gap between buy and sell positions for a particular commodity.

• Options. With options trading, it can refer to differences in strike prices when placing call or put options.

• Forex. Spread can also be used in foreign currency markets or forex (foreign exchange market) trades to represent the difference between the broker’s selling price for a currency, and the price at which they’re willing to buy the currency.

• Lending. With lending, spread is tied to a difference in interest rates. Specifically, it means the difference between a benchmark rate, such as the prime rate, and the rate that’s actually charged to a borrower. So for example, if you’re getting a mortgage there might be a 2% spread, meaning your rate is 2% higher than the benchmark rate.

Bid-Ask Price and Stocks Spread

Whether you buy stocks online or through a traditional broker, it’s important to understand how the bid-ask price spread works and how it can affect your investment outcomes. Since spread can help investors gauge supply and demand for a particular stock, investors can use that information to make informed decisions about trades and increase the odds of getting the best possible price.

Normally, a stock’s ask price is higher than the bid price. How far apart the ask price and bid price are can give you a sense of how the market views a particular security’s worth.

If the bid price and ask price are fairly close together, that suggests that buyers and sellers are more or less in agreement on what a stock is worth. On the other hand, if there’s a wider spread between the bid and ask price, that might signal that buyers and sellers don’t necessarily agree on a stock’s value.

What Influences Stock Spreads?

There are different factors that can affect a stock’s spread, including:

• Supply and demand. Spread can be impacted by the total number of outstanding shares of a particular stock and the amount of interest investors show in that stock.

• Liquidity. Generally, liquidity is a measure of how easily a stock or any other security can be bought and sold or converted to cash. The more liquid an investment is, the closer the bid and ask price may be, since it can be easier to gauge an asset’s worth.

• Trading volume. Trading volume means how many shares of a stock or security are traded on a given day. As with liquidity, the more trading volume a security has, the closer together the bid and ask price are likely to be.

• Volatility. Measuring volatility is a way of gauging price changes and how rapidly a stock’s price moves up or down. When there are wider swings in a stock’s price, i.e., more volatility, the bid-ask price spread can also be wider.

Why Pay Attention to a Stock’s Spread?

Learning to pay attention to a stock’s spread can be helpful for investors in that they may be able to use what they glean from the spread to make better decisions related to their portfolios.

In other words, when you understand how spread works for stocks, you can use that to invest strategically and manage the potential for risk. This means different things whether you are planning to buy, sell, or hold a stock. If you’re selling stocks, that means getting the best bid price; when you’re buying, it means paying the best ask price.

Essentially, the goal is the same as with any other investing strategy: to buy low and sell high.

Difference Between a Tight Spread and a Wide Spread

A tight spread could be a signal to investors that buyers and sellers are more or less in agreement that a stock is valued correctly. A wide spread, on the other hand, may signal that there isn’t necessarily a consensus on what the stock’s value should be.

Executing Stock Trades Using Spread

If you’re using the bid-ask spread to trade stocks, there are different types of stock orders you might place. Those include:

• Market orders. This is an order to buy or sell a security that’s executed immediately.

• Limit orders. This is an order to buy or sell a security at a certain price or better.

• Stop orders. A stop order, also called a stop-loss order, is an order to buy or sell a security once it hits a certain price. This is called the stop price and once that price is reached, the order is executed.

• Buy stop orders. Buy stop orders are used to execute buy orders only when the market reaches a certain stop price.

• Sell stop orders. A sell stop order is the opposite of a buy stop order. Sell stop orders are executed when the stop price falls below the current market price of a security.

Stop orders can help with limiting losses in your investment portfolio if you’re trading based on bid-ask price spreads. Knowing how to coordinate various types of orders together with stock spreads can help with getting the best possible price as you make trades.

Other Types of Spreads

Apart from the bid-ask spread pertaining to stocks, there are other types of spreads, too.

Options spreads, for instance, involve buying multiple options contracts with the same underlying asset, but different strike prices or expiration dates.

Under the options spread umbrella are several types of spreads as well. Box spreads are one example, and they are a type of arbitrage options trading strategy in which traders use some tricks of the trade to reduce their risk as much as possible.

There’s also the debit spread, which is an options trading strategy in which a trader buys and sells an option at the same time — it’s a high-level strategy, and one that may not be suited to investors who are mostly investing in stocks or bonds.

Note, too, that there is something called a credit spread (similar to a debit spread, but its inverse) and that there are some differences traders will need to learn about before deciding to utilize a credit spread vs. debit spread as a part of their strategy. Again, options trading requires a whole new level of market knowledge and know-how, and may not be for all investors.

The Takeaway

Spread is an important term in finance because it captures the difference between two related metrics for a given security. When it comes to equities, spread is the difference between the bid price and ask price of a given stock. Being able to assess what a spread might mean can help inform individual trading decisions.

As you learn more about stocks, including what is spread and how it works, you can use that knowledge to create a portfolio that reflects your financial needs and goals.

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

FAQ

How do you read a stock spread?

A stock spread is the difference between the bid and ask price, calculated by subtracting the bid from the ask price and typically expressed as a percentage.

What influences stock spreads?

Stock spreads are influenced by factors such as supply and demand, liquidity, trading volume, and volatility.

What’s the difference between a tight and wide spread?

A tight spread suggests buyers and sellers generally agree on a stock’s value, while a wide spread may indicate a lack of consensus.

About the author

Rebecca Lake

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

SOIN-Q325-113