InvestGen Archives

Q: What Is Tax Loss Carryforward?

Tax loss carryforward is the process of carrying forward capital losses into future tax years. A capital loss occurs when you sell an asset for less than your adjusted basis.

Q: How Long Can Losses Be Carried Forward?

According to the IRS, tax loss carryforward rules allowed losses to be carried forward indefinitely. That includes both capital losses associated with the sale of investments or other assets, as well as net operating losses for a business.

Mar

2025

Tax Loss Tax Loss Carryforward: What Is It and How Does It Work?

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

The tax loss carryforward rule allows capital losses from the sale of assets to be carried over from one year to another. In other words, an investor can use capital losses realized in the current tax year to offset gains or profits in a future tax year, assuming certain restrictions are met.

Investors can use a capital loss carryforward to minimize their tax liability when reporting capital gains from investments. Business owners can also take advantage of loss carryforward rules when deducting losses each year.

Knowing how this tax provision works and when it can be applied is important from an investment tax-savings perspective.

Key Points

• Tax loss carryforward allows investors to offset capital losses against future gains, as well as taxable income.

• Investors who take advantage of the tax loss carryforward rule may reduce their overall tax liability.

• Capital loss carryforward rules prohibit violating the wash-sale rule and have limitations on deductions.

• Net operating loss carryforward is similar to capital loss carryforward for businesses operating at a loss.

• Losses can be carried forward indefinitely at the federal level, but capital losses must be used to offset capital gains in the same year.

What Is Tax Loss Carryforward?

Tax loss carryforward, sometimes called a capital loss carryover, is the process of carrying forward capital losses into future tax years. A capital loss occurs when you sell an asset, like a stock, for less than your adjusted basis.

Capital losses are the opposite of capital gains, which are realized when you sell an asset for more than your adjusted basis. In either case, taxes may come into play.

Adjusted basis means the cost of an asset, adjusted for various events (i.e., increases or decreases in value) through the course of ownership.

When you invest online or through a brokerage to purchase a stock or other security, knowing whether a capital gain or loss is short-term or long-term depends on how long you owned it before selling.

• Short-term capital losses and gains occur when an asset is held for one year or less.

• Long-term capital gains and losses are associated with assets held for longer than one year.

The Internal Revenue Service (IRS) allows certain capital losses, including losses associated with personal or business investments, to be deducted from taxable income.

There are limits on the amount that can be deducted each year, however, depending on the type of losses being reported.

For example, the IRS allows investors to deduct up to $3,000 from their taxable income if the capital loss is from the sales of assets like stocks, bonds, or real estate. If capital losses exceed $3,000 ($1,500 if you’re married, filing separately), the IRS allows investors to carry capital losses forward into future years and use them to reduce potential taxable income.

How Tax Loss Carryforwards Work

A tax loss carryforward generally allows you to report losses realized on assets in one tax year on a future year’s tax return. Realized losses differ from unrealized losses or gains, which are the change in an investment’s value compared to its purchase price before an investor sells it.

IRS loss carryforward rules apply to both personal and business assets. The main types of capital loss carryovers allowed by the Internal Revenue Code are capital loss carryforwards and net operating loss carryforwards.

Capital Loss Carryforward

Another way to describe the process of using capital losses to offset gains is that IRS rules allow investors to “harvest” tax losses, meaning they use capital losses to offset capital gains, assuming they don’t violate the wash-sale rule.

The wash-sale rule prohibits investors from buying substantially identical investments within the 30 days before or 30 days after the sale of a security for the purpose of tax-loss harvesting.

If capital losses are equal to capital gains, they will offset one another on your tax return, so there’d be nothing to carry over. For example, a $5,000 capital gain would cancel out a $5,000 capital loss and vice versa.

Remember that short-term capital losses must be applied to short-term gains, and long-term capital losses to long-term gains, owing to the difference in how capital gains are taxed.

However, if capital losses exceed capital gains, investors can deduct a portion of the losses from their ordinary income to reduce tax liability. Investors can deduct the lesser of $3,000 ($1,500 if married filing separately) or the total net loss shown on line 21 of Schedule D (Form 1040).

But any capital losses over $3,000 can be carried forward to future tax years, where investors can use capital losses to reduce future capital gains.

To figure out how to record a tax loss carryforward, you can use the Capital Loss Carryover Worksheet found on the IRS’ Instructions for Schedule D (Form 1040).

Recommended: A Guide to Tax-Efficient Investing

Net Operating Loss Carryforward

A net operating loss (NOL) occurs when a business has more deductions than income. Rather than posting a profit for the year, the company operates at a loss. Business owners may be able to claim a NOL deduction on their personal income taxes. Net operating loss carryforward rules work similarly to capital loss carryforward rules in that businesses can carry forward losses from one year to the next.

According to the IRS, for losses arising in tax years after December 31, 2020, the NOL deduction is limited to 80% of the excess of the business’s taxable income. To calculate net operating loss deductions for your business, you first have to omit items that could limit your loss, including:

• Capital losses that exceed capital gains

• Nonbusiness deductions that exceed nonbusiness income

• Qualified business income deductions

• The net operating loss deduction itself

These losses can be carried forward indefinitely at the federal level.

Note, however, that the rules for NOL carryforwards at the state level vary widely. Some states follow federal regulations, but others do not.

How Long Can Losses Be Carried Forward?

According to IRS tax loss carryforward rules, capital and net operating losses can be carried forward indefinitely. Note that the loss retains its short- or long-term characterization when carried forward.

It’s important to remember that capital loss carryforward rules don’t allow you to roll over losses without corresponding gains. IRS rules state that you must use capital losses to offset capital gains in the year they occur. You can only carry capital losses forward when and if they exceed your capital gains for the year.

As noted above, the IRS also requires you to use an apples-to-apples approach when applying capital losses against capital gains.

For example, you’d need to use short-term capital losses to offset short-term capital gains. You couldn’t use a short-term capital loss to balance out a long-term capital gain or a long-term capital loss to offset a short-term capital gain.

Example of Tax Loss Carryforward

Assume that you purchase 100 shares of XYZ stock at $50 each for a total of $5,000. Thirteen months after buying the shares, their value has doubled to $100 each, so you decide to sell, collecting a capital gain of $5,000.

Suppose you also hold 100 shares of ABC stock, which have decreased in value from $70 per share to $10 per share over that same period. If you decide to sell ABC stock, your capital losses will total $6,000 – the difference between the $7,000 you paid for the shares and the $1,000 you sold them for.

You could use $5,000 of the loss of ABC stock to offset the $5,000 gain associated with selling your shares in XYZ to reduce your capital gains tax. Per IRS rules, you could also apply the additional $1,000 loss to reduce your ordinary income for the year.

Now, say you also have another stock you sold for a $6,000 loss. Because you already have a $1,000 loss and there is a $3,000 limit on deductions, you could apply up to $2,000 to offset ordinary income in the current tax year, then carry the remaining $4,000 loss forward to a future tax year, per IRS rules.

This is an example of tax loss carryforward. All of this assumes that you don’t violate the wash-sale rule when timing the sale of losing stocks.

The Takeaway

If you’re investing in a taxable brokerage account, it’s wise to include tax planning as part of your strategy. Selling stocks to realize capital gains could result in a larger tax bill if you’re not deducting capital losses at the same time.

With tax-loss harvesting, assuming you don’t violate the wash sale rule, it’s possible to carry forward investment losses to help reduce the tax impact of gains over time. This applies to personal as well as business gains and losses. Thus, understanding the tax loss carryforward provision may help reduce your personal and investment taxes.

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About the author

Rebecca Lake

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

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About the author

Rebecca Lake

Photo credit: iStock/bymuratdeniz

SoFi Invest®

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

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

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Mar

2025

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

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

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

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

Key Points

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

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

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

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

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

What Is the Arms Index (TRIN)?

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

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

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The TRIN Formula

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

In this formula:

• Advancing stocks refers to the number stocks trading higher

• Declining stocks refers to the number of stocks trading lower

• Advancing volume is the total volume of all advancing stocks

• Declining volume is the total volume of all declining stocks

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

How to Calculate TRIN

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

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

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

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

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

• Divide AD ratio by AD volume ratio

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

Dive Deeper: How to Calculate AD Ratio

What Does TRIN Show You?

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

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

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

Overbought

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

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

Oversold

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

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

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Example of Using TRIN

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

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

How Is TRIN Different Than TICK?

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

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

Is TRIN a Good Indicator?

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

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

Pros of TRIN

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

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

Cons of TRIN

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

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

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

How Investors Can Use TRIN

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

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

The Takeaway

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

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

Photo credit: iStock/Delmaine Donson

About the author

Rebecca Lake

SoFi Invest®

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

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

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

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

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

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Mar

2025

Understanding the Different Types of Mutual Funds

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

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

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

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

Mutual Funds Recap

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

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

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

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

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9 Types of Mutual Funds

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

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

1. Equity Funds

• Structure: Open-end

• Risk Level: High

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

• Asset Class: Equity (i.e. stocks)

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

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

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

2. Bond Funds or Fixed-Income Funds

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

• Risk Level: Low

• Investment Goals: To provide fixed income to investors

• Asset Class: Fixed income/bonds

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

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

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

Recommended: How Do Bonds Work?

3. Money Market Funds

• Structure: Open-end

• Risk Level: Low

• Investment Goals: Income generation

• Asset Class: Short-term fixed-income securities

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

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

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

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

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4. Index Funds

• Structure: Open-end

• Risk Level: Moderate

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

• Asset Class: Available in all asset classes

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

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

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

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

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

5. Balanced Funds

• Structure: Open-end

• Risk Level: Moderate

• Investment Goals: Balancing risk and reward

• Asset Class: Equity, fixed income, cash

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

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

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

6. Income Funds

• Structure: Open-end

• Risk Level: Low to moderate

• Investment Goals: To provide income to investors

• Asset Class: Bonds, income-generating assets

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

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

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

7. International Funds

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

• Risk Level: High

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

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

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

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

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

8. Specialty Funds

• Structure: Open or closed-end

• Risk Level: Varies by fund

• Investment Goals: Varies by fund

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

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

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

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

9. Target Date Funds

• Structure: Typically a fund of funds

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

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

• Asset Class: Equity, bonds, fixed-income

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

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

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

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

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

What’s the Difference Between Mutual Funds and ETFs?

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

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

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

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

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

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

Recommended: A Closer Look at ETFs vs Mutual Funds

The Takeaway

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

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

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

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

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Rebecca Lake

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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.

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

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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Mar

2025

What Is the VIX Volatility Index? How Investors Can Use It

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

The Cboe Global Markets Volatility Index, known as the VIX for short, is a tool used to measure implied volatility in the market. In simple terms, the VIX index tells investors how professional investors feel about the market at any given time.

This can be helpful for gauging and assessing risk in order to capitalize on anticipated market movements. Depending on which way the VIX is trending, it may throw off buy or sell signals to investors.

The volatility index is sometimes referred to as the “fear index” or “fear gauge” because traders rely on it as an indicator of the fearfulness of sentiment surrounding the market. While not a crystal ball, understanding the VIX and how it works can provide a useful predictor of investor behavior.

What Is the VIX Index?

The VIX Index is a real-time calculation designed to measure expected volatility in the U.S. stock market. One of the most recognized barometers of fluctuations in financial markets, the VIX measures how much volatility investing experts expect to see in the market over the next 30 days. This measurement reflects real-time quotes of S&P 500 Index (SPX) call option and put option prices.

Stock volatility represents the up and down price movements of various financial instruments that occur over a set period of time. The larger and more frequent price swings, the higher the volatility.

Implied volatility reflects market sentiment and which way it expects a security or financial instrument’s price to move.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

How Does the VIX Work?

The VIX Index is a forward-looking trend indicator used to quantify expectations for future volatility. Cboe designed the index to estimate expected volatility by aggregating weighted prices of S&P 500 Index puts and calls over a wide range of strike prices.

In options trading, the strike price represents the price at which a trader can exercise an option. Call options give an investor the right to buy shares of an underlying security; put options give them the right to sell shares of an underlying security.

The Cboe Options Exchange (Cboe Options) calculates the VIX Index using standard SPX options and weekly SPX options listed on the exchange. Standard SPX options expire on the third Friday of every month. Weekly SPX options expire on all other Fridays. VIX index calculations include:

• SPX options with Friday expirations

• SPX options with more than 23 days and less than 37 days to their Friday expiration

The index weights these options to establish a constant-maturity, 30-day measure of the amount of volatility the S&P 500 Index is likely to produce. The VIX index works differently from the Black Scholes model, which estimates theoretical value for derivatives and other financial instruments based on a number of factors, including volatility, time, and the price of underlying assets.

The VIX is one of seven inputs used by CNN to determine its Fear and Greed Index.

What Does the VIX Tell You?

In securities trading, the VIX index is a measure of market sentiment. The volatility index has a negative correlation with stock market returns. If the VIX moves up that means investor fear is on the rise. The S&P 500 tends to see price drops in that scenario as investors may begin to sell off securities to hedge against expanded volatility that may be on the horizon.

On the other hand, when the VIX declines, that could signal a decline in investor fear as well. In that situation, the S&P may be experiencing lower levels of volatility and higher prices as investors buy and sell with confidence. This doesn’t necessarily mean that prices will remain high, however, as volatility is fluid and can increase or decrease sharply due to changing market conditions.

The volatility index can be read as a chart, with each day’s reading plotted out. Generally, a reading of 0 to 12 represents low volatility in the markets, while a range of 13 to 19 is normal volatility.

Once the VIX reaches 20 or above, that means you can typically expect volatility to be higher over the coming 30 days. For perspective, the VIX notched a 52-week high of 34.88 and a 52-week low of 12.73 as of August 11, 2023.

Example of VIX in Action

The beginning of 2020 saw a gradual rise in the level of concern surrounding the coronavirus and its potential to become a public health crisis. As more cases appeared in the United States, the financial markets began to react. The VIX index, which had hovered around 20 or below since January 2019, began to climb in the third week of February. By March 16, it had reached a peak of 82.69 and the Dow Jones had dropped 12.93%.

After the market crashed, the VIX began to slowly decline. By early November 2021, the volatility index was once again implying volatility on par with pre-pandemic levels, measuring 18.58 as of November 24.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

How Investors Can Trade the VIX

Investors interested in trading the VIX index have a few options for doing so. Cboe offers both VIX options and VIX futures as a starting point.

VIX options are not exactly the same as traditional stock options. They trade nearly 24 hours a day, five days a week during extended trading hours. Investors can trade a call option or put option to make speculative investments based on anticipated volatility in the markets.

Cboe introduced VIX futures in 2004 to allow investors to trade a liquid volatility product using the VIX index as a guide. The difference between options and futures lies largely in the execution.

With options trading, the investor has the right but not the obligation to buy or sell a particular investment. A futures contract, on the other hand, requires the buyer to purchase shares and the seller to sell them at an agreed-upon price.

With VIX options or VIX futures, you’re making investments based on what you expect to happen in the markets based on how the volatility index is trending. Options and futures are speculative investments that carry more risk than some other types of investments. If you’re looking for another way to trade the VIX, you might look to VIX exchange-traded funds (ETFs) or volatility ETFs instead.

Volatility ETFs

Exchange-traded funds hold a basket of securities but they trade on an exchange like a stock. VIX ETFs and volatility ETFs often hold futures contracts or track the movements of a volatility index.

Choosing volatility or VIX ETFs in lieu of trading VIX options or VIX futures directly doesn’t eliminate risk. But it can help you to spread the risk out over a diverse group of investments. If you’re already trading stocks and other securities through an online brokerage account, VIX or volatility ETFs may be included as an investment option.

The Takeaway

The volatility index or VIX is a highly useful tool for measuring market sentiment. While it’s impossible to predict exactly which way the market will move, the VIX index can help with interpreting implied volatility when making investment decisions.

That’s information you can use whether you’re trading options or less risky investments such as stocks or ETFs.

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

About the author

Rebecca Lake

Photo credit: iStock/dolgachov

SoFi Invest®

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

Mar

2025

Wash Trading: What Is It and How Does It Work?

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

Wash trading is a practice which involves entering into securities transactions for the express purpose of giving the appearance that a trade has taken place although their portfolio has not substantially changed. Also referred to as round-trip trading, wash trading is a prohibited activity under the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934.

In some cases, wash trading is a direct attempt at market manipulation. In others, wash trading may result from a lack of investor knowledge. This may be the case with wash sales, in which an investor sells one financial instrument then replaces it with a similar one right away. It’s important to understand the implications of making a wash trade and what one looks like in action.

Key Points

• Wash trading involves investors engaging in the simultaneous buying and selling of securities to create the illusion of trading activity.

• Wash trading involves the simultaneous buying and selling of the same or similar securities.

• This practice can be a form of market manipulation or result from a lack of investor knowledge.

• The goal of wash trading is to influence pricing or trading activity, often through collaboration between investors and brokers.

• Wash trading is illegal and can result in penalties, including the disallowance of tax deductions for losses.

What Is Wash Trading?

Wash trading occurs when an investor buys and sells the same or a similar security investment at the same time. The Internal Revenue Service (IRS) also refers to this as a wash sale, since buying the same security cancels out the sale of that security. It’s also called round-trip trading, since you’re essentially ending where you began — with shares of the same security in your portfolio.

Wash trades can be used as a form of market manipulation. Investors can buy and sell the same securities in an attempt to influence pricing or trading activity. The goal may be to spur buying activity to send prices up or encourage selling to drive prices down.

Investors and brokers might work together to influence trading volume, usually for the financial benefit of both sides. The broker, for example, may benefit from collecting commissions from other investors who want to purchase a stock being targeted for wash trading. The investor, on the other hand, may realize gains from the sale of securities through price manipulation.

Wash trading can be a subset of insider trading, which requires the parties involved to have some special knowledge about a security that the general public doesn’t. If an investor or broker possesses insider knowledge they can use it to complete wash trades.

How Does Wash Trading Work?

On the surface level, a wash trade means an investor is buying and selling shares of the same security at the same time. But the definition of wash trades goes one step further and takes the investor’s intent (and that of the broker they may be working with) into account. There are generally two conditions that must be met for a wash trade to exist:

• Intent. The intent of the parties involved in a wash trade (i.e. the broker or the investor) must be that at least one individual involved in the transaction must have entered into it specifically for that purpose.

• Result. The result of the transaction must be a wash trade, meaning the investors bought and sold the same asset was bought and sold at the same time or within a relatively short time span for accounts with the same or common beneficial ownership.

Beneficial ownership means accounts that are owned by the same individual or entity. Trades made between accounts with common beneficial ownership may draw the eye of financial regulators, as they can suggest wash trading activity is at work.

A telling indicator of wash trading activity is the level of risk conveyed to the investor. If a trade doesn’t change their overall market position in the security or expose them to any type of market risk, then it could be considered a wash.

Wash trades don’t necessarily have to involve actual trades, however. They can also happen if investors and traders appear to make a trade on paper without any assets changing hands.

Example of a Wash Trade

Here’s a simple wash trade example:

Say an investor who’s actively involved in day trading owns 100 shares of ABC stock and sells those shares at a $5,000 loss on September 1. On September 5, they purchase 100 shares of the same stock, then resell them for a $10,000 gain. This could be considered a wash trade if the investor engaged in the trading activity with the intent to manipulate the market or to unfairly claim a tax deduction for the loss.

Is Wash Trading Illegal?

Yes. The Commodity Exchange Act prohibits wash trading. Prior to the passage of the Act, traders commonly used wash trading to manipulate markets and stock prices. The Commodity Futures Trade Commission (CFTC) also enforces regulations regarding wash trading, including guidelines that bar brokers from profiting from wash trade activity.

The IRS has rules of its own regarding wash trades. The rules disallow investors from deducting capital losses on their taxes from sales or trades of stocks or other securities that are the result of a wash sale. Under the IRS rules, a wash sale occurs when you sell or trade stocks at a loss and within 30 days before or after the sale you:

• Purchase substantially identical stock or securities

• Acquire substantially identical stock or securities in a fully taxable trade

• Acquire a contract or option to buy substantially identical stock or securities, or

• Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

Wash sale rules also apply if you sell stock and your spouse or a corporation you control buys substantially identical stock. When a wash sale occurs, you’re no longer able to claim a tax deduction for those losses.

So, in short, yes, wash trading is illegal.

Difference Between Wash Trading & Market Making

Market making and wash trading are not the same thing. A market maker is a firm or individual that buys or sells securities at publicly quoted prices on-demand, and a market maker provides liquidity and facilitates trades between buyers and sellers. For example, if you’re trading through an online broker you’re using a market maker to complete the sale or purchase of securities.

Recommended: What Is a Brokerage Account?

Market making is not market manipulation. A market maker is, effectively, a middleman between investors and the markets. While they do profit from their role by maintaining spreads on the stocks they cover, this is secondary to fulfilling their purpose of keeping shares and capital moving. Without market makers, trades would take longer to execute and the markets could become sluggish.

How to Detect & Avoid Wash Trading

The simplest way to avoid wash trading as an investor is to be aware of what constitutes a wash trade or sale. Again, this can mean the intent to manipulate the markets by placing similar trades within a short time frame, or it can mean inadvertently executing a wash sale because you’re not familiar with the rules.

In the latter case, you can avoid wash trading or wash sales by being mindful of the securities you’re buying and selling and the time frame in which those transactions are completed. So selling XYZ stock at a loss, then buying it again 10 days later to sell it for a profit would likely constitute a wash sale, if you executed the trade in an attempt to be able to deduct the initial loss.

It’s also important to understand how the 30 days period works for timing wash sales. The 30 day rule extends to the 30 days prior to the sale and 30 days after the sale. So effectively, you could avoid the wash sale rule by waiting 61 days to replace assets that you sold in your portfolio to be on the safe side.

💡 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.

Wash Trading in Crypto Trading

Cryptocurrency can be a target for wash-trading activity. In the EOS case, wash trades were suspected of being used as a means of driving up investor interest surrounding the cryptocurrency during its initial offering. High-frequency trading has also been a target of scrutiny, as some believe it enables wash trading in the crypto markets. Whether wash trading rules and regulations specifically apply to crypto, however, is a bit murky.

The Takeaway

Wash trading involves selling certain securities and then replacing them in a portfolio with identical or very similar securities within a certain time period. This is done so as to avoid making substantial changes in your portfolio. Wash trading is illegal in practice but it’s also avoidable if you’re investing consciously and with a strategy in place.

Understanding when wash sale rules apply can help you to stay out of trouble with the IRS. If you’re unclear about it, you can consult with a financial professional for guidance.

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

Photo credit: iStock/mapodile

About the author

Rebecca Lake

SoFi Invest®

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

SOIN0723114

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Start trading funds that include commodities, private credit, real estate, venture capital, and more.

9 Types of Mutual Funds

1. Equity Funds

2. Bond Funds or Fixed-Income Funds

3. Money Market Funds

4. Index Funds

5. Balanced Funds

6. Income Funds

7. International Funds

8. Specialty Funds

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What Is Wash Trading?

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The Takeaway

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