25+ Potential Ways to Invest in a Carbon-free Future

27 Potential Ways to Invest in a Carbon-free Future

Impact investing and socially responsible investing has been growing in popularity in recent years, and will continue to grow for the foreseeable future.

Investing in a carbon-free future is one of the most powerful ways for individuals to help restore the climate. Studies have shown that investing in climate mitigation and adaptation now will prevent trillions of dollars in future losses from disaster relief, GDP decreases, and property losses, and it will cost far less to act now than to deal with future damages.

Another reason to start investing in a carbon-free future now: Since there will be a worldwide focus on the transition to a carbon-free economy in the coming years and decades, some investors might consider investing in green stocks to be one way to build a strong long-term portfolio. As with all investing, it’s essential to carefully consider the risks involved in your chosen investment strategies. Some, all, or none of the below strategies may be appropriate for you.

How Carbon Impacts Our Planet

Current carbon dioxide (CO2) levels in the atmosphere are higher than they have been in at least 800,000 years, and likely higher than they have been in the past 3 million years.

Human activities ranging from automobile use and building construction to agriculture results in greenhouse gas emissions. Over millions of years prior to the Industrial Revolution, carbon was removed from the atmosphere naturally through plant photosynthesis and other processes—but by fossil fuels like coal and oil, humans have put that carbon back into the atmosphere in just a few hundred years. Once emitted, that CO2 stays in the air for centuries.

Changing the concentration of greenhouse gases in the atmosphere changes the Earth’s carbon cycles and results in global climate change. Some effects of climate change are already visible: rising sea levels, more intense hurricanes and fires, disappearing glaciers, and more. Around half of the CO2 emitted since 1850 is still in the atmosphere, and the rest of it is in the oceans causing ocean acidification, which interferes with the ability of marine life to grow skeletons and shells.

Currently, CO2 emissions continue to increase yearly—so it’s just as important for us to scale up the removal of CO2 from the atmosphere as it is to continue working on reducing emissions.

There are ways companies can do construction, agriculture, and all other industrial activity without emitting greenhouse gases into the atmosphere, but scaling up these solutions will require a massive amount of investment. That’s where individual investors can make a difference—by putting money behind companies that are working to create a carbon-free planet.

Climate-Friendly Industries and Companies to Invest In

Ready to make a difference by supporting climate visionaries? Here are 25+ ways to invest in a carbon-free future.

1. Carbon Offsets

Individuals and companies can purchase carbon offsets to zero out their carbon emissions. How they work: You can calculate your estimated emissions from air or car travel or other activities, and invest in local or international projects that contribute to the reduction of emissions. For instance, an individual could invest in a solar energy project in Africa to offset their annual emissions.

Although carbon offsets are controversial because they don’t directly work to reduce one’s emissions, they do help to build out renewable energy infrastructure, regenerative agriculture, and other important initiatives. They are also helpful for offsetting certain activities that are often unavoidable and have no carbon neutral option, such as flying in a plane.

2. Carbon Credits

Carbon credits give a company the right to emit only a certain amount of carbon dioxide or other greenhouse gases.

They create a cap on the amount of emissions that can occur, and then the right to those emissions can be bought and sold in the market. Caps may be placed on nations, states, companies, or industries.

Carbon credits are controversial because larger companies can afford more credits which they can either use or sell for a profit, and some believe the program may lower the incentive for companies to reduce their emissions.

However, companies may be incentivized to reduce emissions in two different ways:

1. They can sell any extra credits they don’t use, thus making money.
2. Generally, limits are lowered over time, and companies that exceed their limits are fined—therefore, transitioning to lower emissions practices is in their best interest.

Although carbon credits are used by companies, individuals can invest in carbon credits through ETFs, or consider carbon emissions alternative investments.

3. ESG Indices and Impact Investing ETFs

Individuals can invest in ESG (environmental social governance) and impact investing ETFs, which are funds made up of companies focused on socially and environmentally responsible practices. Companies included in these funds may be working on renewable energy, sustainable agriculture, plastics alternatives, or other important areas.

4. Climate and Low-Carbon ETFs

Within the impact investing and ESG investing space, there are ETFs specifically focused on climate change and carbon reduction. These exclude companies that rely on fossil fuels, focusing exclusively on companies deemed as climate-friendly.

5. Carbon Capture, Sequestration, and Storage

There are many ways that carbon can be removed from the atmosphere, including through trees and other plants, or by machinery. CO2 can also be captured at the source of emission before it is released into the atmosphere. Once captured, the carbon needs to be stored in the ground or in long-lasting products, so it doesn’t get leaked into the air. Interested investors might want to consider buying stocks in companies that sequester millions of tons of CO2 each year.

6. Products and Materials Made from Captured Carbon

Once removed from the atmosphere, carbon can be used to make many products and materials, including carbon fiber, graphene, and cement. The construction industry is one of the biggest emitters of carbon dioxide, so replacing standard materials with ones made from sequestered CO2 would have a huge impact. All of these materials industries are poised to see huge growth in the coming years, and investing in them helps promote market growth, which can lower the cost of materials and make them more accessible to customers.

7. Tree-Planting Companies and Sustainable Forestry

The business of planting trees is growing. Newer tree planting companies are currently private, but investors can buy stocks, REITs (Real Estate Investment Trusts) and ETFs in companies that practice sustainable forestry and land management, as well as companies that allow investors to purchase a tree.

8. Regenerative Agriculture

The way the majority of agriculture is currently practiced worldwide depletes the soil and land over time. This not only makes it harder to grow food, it also decreases the amount of CO2 that gets removed from the atmosphere and stored in the soil. But with regenerative agricultural practices, the quality of soil improves over time. Spreading the knowledge and use of regenerative farming is extremely important to both food security and greenhouse gas management. Individuals can invest in regenerative agriculture through REITs, or even by investing in individual farms.

9. Green Bonds and Climate Bonds

Green bonds function the same way as other types of bonds, but they are specifically used to raise money to finance projects that have environmental benefits. Projects could include biodiversity, rewilding, renewable energy, clean transportation, and many other areas in the realm of sustainable development. In addition to buying individual bonds, investors can buy into bond funds.

10. Blue Bonds

Blue bonds focus on protecting the oceans by addressing plastic pollution, marine conservation, and more.

11. Refrigerant Management and Alternatives

Refrigerants used for cooling are among the top five highest emitters in the world, according to nonprofit org Project Drawdown . There are several ways to invest in improvements in the refrigerant industry:

•  Invest in alternative refrigerants such as ammonia and captured carbon dioxide.
•  Invest in companies making new types of cooling devices.
•  Invest in refrigerant management companies that reclaim refrigerants.

Other companies are working to retrofit old buildings and provide new buildings with more efficient HVAC systems.

12. Plant-based Foods

Raising livestock for food has a huge environmental footprint: It leads to huge amounts of deforestation, and cows emit methane when they burp, which is a much stronger greenhouse gas than CO2. Raising cows also uses a lot of water, transportation, chemicals, and energy. Replacing meat and materials with plant-based options can significantly reduce emissions and resource use.

13. Food Waste Solutions

Food waste in landfills does not biodegrade naturally—instead it gets buried under more layers of refuse and biodegrades anaerobically, emitting greenhouse gases into the atmosphere for centuries. Landfills are one of the biggest contributors to global emissions, with food waste contributing 8% of greenhouse gas emissions worldwide.

Some companies are heavily investing in waste-to-energy and landfill gas-to-energy facilities, which turn landfill waste into a useful energy source—essentially making products out of food ingredients and byproducts that would otherwise have gone to waste. One has developed a promising food waste recycling unit that could help reduce the amount of waste that sits in landfills as well.

14. Biodiversity and Conservation

Protecting biodiversity is key to creating a carbon-free future. Biodiversity includes crucial forest and ocean ecosystems that sequester and store carbon while also maintaining a planetary balance of nutrient and food cycles.

Interest in biodiversity investments has been growing, and there is even an ETF focused on habitat preservation.

15. Sustainable Aquaculture

The demand for fish rises every year, in part because eating fish is better for the planet and emissions than eating livestock. But a lot of work goes into making sure fishing is done sustainably to avoid overfishing and species depletion, and prevent widespread disease and wasted seafood. Investors may choose to support sustainable aquaculture by seeking out new and established businesses in the industry, or by investing in ETFs that include companies involved in responsible use and protection of ocean resources.

16. Green Building Materials

Creating construction materials such as steel and concrete results in a significant amount of CO2 emissions. There is currently a race in the materials industry to develop new materials and improve the processes of making existing ones. Both new and established businesses are part of this race. Besides steel and concrete, other key building materials that can contribute to a carbon-free future include bamboo and hemp.

17. Water

Clean water systems are essential to the health of the planet and human life. As the population grows, there will be more demand for water, which requires increased infrastructure and management. Proper water management can have a huge impact on emissions as well.

There are three main ways for individuals to invest in the future of water. One is to invest in public water stocks such as water utilities, equipment, metering, and services companies. Another is to invest in water ETFs or in ESG funds that focus on water.

18. Green Shipping

The transportation of goods around the globe is a huge contributor to greenhouse gas emissions. In order to improve shipping practices, a massive shift is underway. The future of green shipping includes battery-operated vessels, carbon-neutral shipping, and wind-powered ships. Other technologies that play into green shipping including self-driving vehicle technology and AI. Investing in any of these areas can help the shift towards a carbon-free future.

19. Electric cars and bicycles

The use of electric cars and bicycles can significantly reduce the amount of CO2 emissions that go into the atmosphere. Interested investors might want to research stocks in the electric vehicle, charging, and battery space.

20. Telepresence

As has been proven during the COVID-19 pandemic, the reduction of work-related travel can significantly reduce global CO2 emissions. Video conferencing and telepresence tools continue to improve over time, which reduces the need for people to fly and drive to different locations for business meetings. Investing in companies working on these technologies may help solidify and continue the trend of remote work.

21. Bioplastics

Bioplastics include plastics that are completely biodegradable as well as plastics that are made partially or entirely out of biological matter. Currently bioplastics make up a very small portion of global plastic use, but increasing their use can greatly help to reduce waste and emissions.

22. Energy Storage

One of the biggest hurdles to scaling up renewable energy is creating the technology and infrastructure to store the energy, as well as reducing the costs of energy storage to make it more accessible. Investing in energy storage can help develop and improve the industry to help hasten the transition away from fossil fuels.

23. Green Building

Making the construction industry carbon-free goes beyond the creation and use of green building materials to include LED lighting, smart thermostats, smart glass, and more. These technologies can drastically reduce the energy used in buildings. There are many companies to invest in in the green building industry, as well as ETFs that include green building stocks.

24. Recycling and Waste Management

As the world’s population grows and becomes more urbanized, waste management and recycling will become even more important. Preventing waste from going to landfills is key to reducing emissions, as is the reuse of materials. For interested investors, there are many companies to invest in within waste management.

25. Sustainable Food

Food production is heavily resource-intensive, with many moving parts. In addition to companies working to improve soil health, refrigeration, plant-based foods, and food waste, there are also companies working on sustainable fertilizers, pesticides, irrigation, seeds, and other areas. One way to invest in sustainable food is through an ETF.

26. Sustainable Fashion

The fashion industry is one of the world’s worst polluters. In fact, the fashion industry produces about 10% of global carbon emissions, in addition to its huge water use and polluting the ocean with plastics. Several of the world’s most well-known sustainable fashion brands are privately held, but increasingly, public companies are also making big strides in sustainability. Individuals can also support sustainable fashion by investing in material companies and agricultural producers that make bioplastics, bamboo, hemp, and sustainable leather alternatives.

27. Renewable and Alternative Energy

Energy is another important area to invest in for a carbon-free future. Within the renewable and alternative energy space, individuals can invest in companies working on wind, solar, biomass, hydrogen, geothermal, nuclear, or hydropower. There are countless companies and ETFs to invest in within renewable energy.

Recommended: How to Invest in Wind Energy for Beginners

The Takeaway

Every industry around the world needs to make big shifts in the coming years to reduce emissions and build a carbon-free future. As an individual, investors can make their voices and their choices heard with their dollars, by investing in companies leading the way in sustainability.

Looking to start building your investment portfolio? SoFi Invest® is a great place to start. Using the investing platform, you can research and track stocks and ETFs, view your financial information in one simple dashboard, and buy and sell stocks right from your phone.

Find out how to get started with SoFi Invest.


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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.



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.


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.

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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Everything You Need to Know About Insider Trading

Everything You Ever Wanted to Know About Insider Trading

Insider trading is illegal trading in financial markets using confidential (or “insider”) information to the investor’s own advantage—and it can be a criminal offense in the investments market.

Trading specialists have outlined the term “confidential information” as material information about an investment vehicle (like a stock) that is not available to other investors. That insider knowledge can tilt the playing field in favor of the recipient, leading to an imbalanced trading landscape that investment industry regulators rigorously attempt to keep fair and balanced.

History of U.S. Insider Trading Laws

Insider trading rules and regulations in the U.S. date back to the early 1900s, when the U.S Supreme Court ruled against a corporate executive who bought company stock based on insider information. The ruling, based on common law statutes long used by the United Kingdom, laid the path for Congress to pass a law prohibiting sales security fraud (the 1933 Securities Act of 1933) that was further solidified by the Securities Exchange Act of 1934.

Those laws not only prohibited the profit of securities invested tied to insider information, they also largely blocked quick turnaround trading profits by an investor who owned more than 10 percent of a company stock.

Fast forward to 1984, when Congress passed the Trading Sanctions Act, and 1988, and the passage of the Securities Fraud Enforcement Act of 1988, which set financial penalties of three times the amount of income accumulated from insider trading, further clarifying the definition and rules surrounding insider trading.

Examples of Insider Trading

Despite the blanket term of “insider trading”, the practice can manifest itself in myriad ways. Broadly, anyone at all who steals, misappropriates, or otherwise gathers confidential data or information, and uses it to profit on changes in a company’s stock price, might be investigated for insider trading.

Here are some common examples:

•  A company executive, employee, or board member who trades a corporation’s stock after being made aware of a particular business development could be engaging in insider trading. “Insider” developments like the sale of the firm, positive or negative earnings numbers, a company scandal or significant data breach, or other piece of information that would likely sway the company’s stock price could be construed by regulators as insider trading.
•  Any associates—like friends, family, or co-workers—of the above execs employees, or board members, who also trade on private information not available to the investing public, may be targeted for insider trading.
•  Executives and staffers of any company that provided products or services to a company that obtains information about a significant corporate move that would likely sway the firm’s stock price could be trading on “inside” news. Think of a bank, brokerage firm, or printing company that might have knowledge of company news before it is released to the investing public, and who uses that knowledge to profit from the information.
•  Local, city, state, or federal government managers and employees who may come across sensitive and private information on a company that’s not available publicly, and use that knowledge to profit from a change in the company’s stock price, could be involved with insider trading.

The above examples are among the most egregious insider trading scenarios, and are also more likely to become an enforcement priority for government regulators.

Is Insider Trading Ever Legal?

There are scenarios where what is technically considered “insider trading” is in fact legal under federal regulatory statutes.

For instance, anyone employed by a company falls under the definition of an insider trader. But as long as all stock transactions involving the company are registered with the U.S. Securities and Exchange Commission in advance, any employee stock transaction is perfectly legal.

That’s the case whether a rank-and-file employee buys 100 shares of company stock or if the chief executive officer buys back shares of the firm’s stock—even if that more high-profile trading activity significantly swings the company’s share price.

Who Enforces Insider Trading Rules?

Insider trading enforcement measures operate under the larger umbrella of the U.S. government.

Like any criminal case, the sequence of enforcement events may begin with an investigation, a review of the investigation’s results by government regulators, an arrest and arraignment, a court case in front of a judge, and incarceration in the penal system (or regular review by a probation officer if the charge results in a more lenient sentence).

How Insider Trading is Investigated

Insider trading investigations usually start on the firm level before the SEC gets involved. Self-regulating industry organizations like the Financial Industry Regulatory Authority (FINRA) or the National Association of Financial Planners (NAPF), for example, may also come across illegal trading practices and pass the lead on to federal authorities.

It’s also not uncommon for insider trading practices to be revealed by government agencies other than the SEC. For example, the FBI may run into insider trading activity while pursuing a completely separate investigation, and pass on the tip to the SEC.

When the U.S. Securities and Exchange Commission (SEC) investigates potential insider trading cases, they do so using multiple investigatory methods:

Surveillance. The SEC has multiple surveillance tools to root out insider trading violations. Tracking big variations in a company’s trading history (especially around key dates like earnings calls, changes in executive leadership, and when a company buys another firm or is bought out itself) is a common way for federal regulators to uncover insider trading.

Tipsters. Investors aware of insider information, especially those who lose money on insider trades, often provide valuable leads and tips on insider trading occurrences. This often occurs in the equity options market, where trade values increase significantly with each transaction, and where stock prices can especially be vulnerable to big price swings after suspicious trading activity in the stock options marketplace.

If, for example, a trader with inside information uses it to buy company stock or to buy an option call for profit, the party on the other side of the trade, who may stand to lose significant cash on the trade, may alert the SEC that profiteering via inside information may be taking place. In that scenario, the SEC will likely appoint an investigator to follow up on the tip and see if insider trading did occur.

Company whistleblowers. Another common alert that insider trading is occurring comes from company whistleblowers who speak up when company employees or managers with unique access to company trading patterns seem to be benefitting from those price swings.

What Happens in an Insider Trading Investigation

When federal regulators are made aware of securities fraud from insider trading, they may launch an investigation run by the SEC’s Division of Enforcement. In that investigation . . .

•  Witnesses are contacted and interviewed.
•  Trading records are reviewed, with a close eye on trading patterns around the time of potential insider trading activity.
•  Phone and computer records are subpoenaed, and if needed, wiretaps are used to gain information from potential insider trading targets.
•  Once the investigation is complete, the investigation team presents its findings to an SEC review board, which can decide on a fine and other penalties (like suspension of trading privileges and cease-and-desist orders) or opt to take its case to federal court.
•  After the court hears the case and decides on the merits, any party accused of insider trading is expected to abide by the court ruling and the case is ended.

Penalties for Insider Trading

An individual convicted of insider trading can face both a prison sentence and civil and criminal fines—up to 20 years and as much as $5 million. Additionally, civil penalties may include fines of up to three times the profit gained or loss avoided as a result of the insider trading violation.

Companies that commit insider trading can face civil and criminal fines. The maximum fine for an entity whose securities are publicly traded that has been found guilty of insider trading is $25 million.

The Takeaway

Insider trading—executing a trade based on knowledge that has not been made public—is a serious offense and can lead to severe punishment, including jail time and heavy fines.

That’s all for good reason, as restrictions on insider trading help ensure a balanced financial trading market environment—one that accommodates fair trading opportunities for all market participants.

Investing shouldn’t be complicated. SoFi Invest® online trading accounts offer an active investing solution that allow members to choose assets such as stocks and ETFs, as well as an automated investing solution that invests around your goals and risk.

Find out how to get started with SoFi Invest.


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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.



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.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Pros & Cons of Momentum Trading

Pros & Cons of Momentum Trading

Momentum trading is a type of short-term, high-risk trading strategy that requires a lot of skill and practice. While momentum trades can be held for longer periods when trends continue, the term generally refers to trades that are held for a day or several days, on average.

Momentum traders strive to chase the market by identifying the trend in price action of a specific security and extract profit by predicting its near-term future movement.

Looking for a good entry point when prices fall and then determining a profitable exit point when prices become overbought is the method to momentum trading madness. Momentum trading can also involve using various short strategies to profit from market downturns.

In a sense, this kind of trading is that simple. But of course, things can be much more difficult in practice. If it were easy, then everyone would do it.

The fact of the matter is this—the vast majority of individuals who attempt short-term trading strategies like this are not successful.

History of Momentum Trading

Momentum trading is a relatively new phenomenon. This kind of trading style has been made much more readily accessible with modern technology that makes trading easier in general.

An investor named Richard Driehaus has sometimes been referred to as “the father of momentum trading.” His strategy was at odds with the old stock market mantra of “buy low, sell high.”

Driehaus theorized that more money could be made by buying high and then selling at even higher prices. This idea aligns with the overarching theme of following a trend.

During the late 2000s as computers got faster, many different varieties of this type of trading began to spring up. Some of them were driven by computer models, sometimes trading on very small timeframes.

High-frequency trading algorithms, for example, can execute hundreds of trades per second. With this type of trading, humans don’t actually do anything beyond managing the system. It’s believed that about 90% of all trades that occur on Wall Street today are executed by high-frequency trading bots.

Momentum trading has become more popular in recent years with the advent of digital brokerage accounts. There have also been a number of new investment vehicles created that are well-suited to this style of trading, such as certain exchange-traded funds (ETFs).

Ever since the widespread elimination of many commission fees back in Q4 2019, it’s possible that even more retail investors might be inclined to try their hand at momentum trading. Transaction costs and brokerage fees were also a very big disadvantage for short-term traders, as the fees could reduce profits by a wide margin.

Why are some people interested in this kind of trading? The answer is simple.

While the risks are high, so are the potential rewards.

How Momentum Trading Works

In essence, momentum trading involves picking a security (such as a stock or ETF), identifying a trend, and then executing a plan to capitalize on the trend based on the assumption that it will continue in the near-term.

There are many things that can be taken into consideration to this end. Among these are factors like volatility, volume, time, and technical indicators.

Volatility

Volatility refers to the size and frequency of price changes in a particular asset. Short-term traders tend to like volatility because wild market swings can create opportunities for large profits in short amounts of time. Of course, volatility also increases risk. In fact, one of the biggest indications that an asset has high risk is often that it has high volatility.

Recommended: Understanding Stock Volatility

Volume

Volume represents the quantity of units of a particular asset being sold and bought during a certain period (e.g., the number of shares of a stock or ETF). Traders need assets with adequate volume to keep their trades profitable. Without enough volume, traders can fall victim to something known as slippage.

Slippage occurs when there aren’t enough shares being sold at a trader’s price point to fulfill the order all at once. A trade then winds up being executed across multiple orders, each of them being slightly lower than the last, resulting in a smaller profit overall. When volume is high enough, this won’t happen, as most orders can be filled all at once at a single price point.

Time Frame

Having a plan is part of what separates successful traders from unsuccessful ones. As discussed, momentum trading usually takes place on a short time-frame, although not always as short as some day trading strategies. While day traders might hold a position for hours or even minutes, momentum traders might hold positions for a day, several days, or longer.

Technical Indicators

Technical analysis is the art of trying to predict future price movements by analyzing charts. Charting software provides traders with a long list of tools that use different mathematical formulas to indicate how the price of an asset has performed in a specific timeframe. These tools are referred to as technical indicators.

Based on one or more of these indicators, traders try to infer what the near future holds for a security. This process is far from perfect, and technical analysis might best be described as only slightly predictive. Still, it’s an important part of a short-term trader’s arsenal. What do these indicators look like?

One of the simplest technical indicators is called the Relative Strength Index (RSI). This indicator is supposed to chart the recent strength of a stock based on closing prices during a given period.

The RSI provides a simple numerical value on a scale from 0–100. The higher the value, the more overbought a security might be, while a lower value indicates a security might be oversold. In other words, a low RSI can be a buy signal, while a high RSI can be a sell signal.

The topic of technical analysis goes far beyond the scope of what can be covered here in this article. For a more detailed look at the subject, take a look at this SoFi resource.

Advantages of Momentum Trading

The main advantage of momentum trading is that it can be profitable in a relatively short amount of time when executed correctly and consistently.

Whereas buy-and-hold investors tend to wait months, years, or even decades before seeing significant profits, successful momentum traders have the potential to turn out profits on a weekly or daily basis.

While investing for the long-term requires a good understanding of the fundamental factors that go into each investment, momentum trading tends to be focused around technical analysis of charts.

While this method of trying to predict price movements is by no means infallible, it does keep things simple. Traders are focused through a single lens rather than trying to comprehend the bigger picture.

In this sense, momentum trading may be simpler. But compared to long-term investing, short-term trading involves a lot more buying and selling, and that creates additional opportunities to make mistakes.

Disadvantages of Momentum Trading

As mentioned, there are a lot of risks involved in momentum trading. Momentum traders try to make inferences about future price movement based on the recent actions of other market participants. This can work, but it can also be thrown off balance completely by a single press release or fundamental development.

For example, imagine a momentum trader identifies a strong upward trend in a stock of a telecommunications company we will call Company A.

This imaginary trader develops a plan and begins executing it, placing a buy order at a select price point when the stock dips. The plan is to sell once the stock reaches a long-term resistance level that was established months ago, let’s say.

Our hypothetical trader has done this same trade before many times and made a nice profit each time, so she thinks this time will be no different.

But then something unexpected happens. The next trading day, when profits were to be booked on a continued rising price trend, a rival telecommunications company, Company B, issues a press release.

Company B has pulled ahead of Company A, implementing a new technology that will benefit customers greatly. As a result, investors begin selling stock in company A, expecting them to lose customers to competitors like Company B.

In this imaginary case, any trends that might have been identified using technical analysis would have been invalidated quickly. Hypothetical scenarios like this play out every day in the real markets.

Tax Implications to Know

Those interested in momentum trading or other short-term trading strategies may want to review the tax implications associated with this style of trading. It can be worth reviewing how taxes will impact an investor, since they could take a chunk of an investor’s profits.

Know that the IRS makes a distinction between traders and investors, for tax purposes, and it’s important to understand where you fall. A trader is someone considered by law to be in the investment business while an investor is someone buying and selling securities for personal gain.

The IRS also differentiations between short-term and long-term investments when evaluating capital gains and losses. In general, long-term investments are those held for a year or more, while those held for less than a year are considered short-term investments. Long-term investments may benefit from a lower tax rate, while short-term capital gains are taxed at the same rate as ordinary income.

Another rule worth understanding is the wash sale rule . While some capital losses can be taken as a tax deduction, there are certain regulations in place to stop investors from taking advantage of this benefit. The wash sale rule restricts investors from benefiting from selling a security at a loss and then buying a substantially identical security within 30 days. A wash sale occurs if you sell a security and then your spouse or a corporation under our control buys a similar security within the 30 day period following the sale.

Investing With SoFi

Now you have some answers to the question, “what is momentum trading?”

In short, it involves a combination of techniques that attempt to predict and take advantage of short-term market fluctuations. This skill is hard to master, requires a lot of knowledge and experience, and carries high risk. This kind of trading is not for everyone.

No matter what kind of trading you’re into, the SoFi Invest® provides all the tools needed to get started.

Download the SoFi app to keep up with the latest market news and start investing today.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.


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.

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What is a Gamma Squeeze?

What Is a Gamma Squeeze?

The finance world is chock full of strange terminology. “Gamma squeeze” is a perfect example.

In general, when there’s a “squeeze” in the market, that usually describes an event when investors feel pressure to make a move that they otherwise would not have made. For instance, in “short squeezes,” investors who made bearish bets on a stock–known as short sellers–are forced to buy shares of the stock they’ve actually bet against.

This piece will dig into what a gamma squeeze is, what it has to do with options trading, and what it means for investors.

Overview of Options Trading

It’ll be helpful if we quickly recap how options trading works. Options can be bought and sold, just like stocks. In short, they’re contracts that give purchasers the right (but not the obligation) to buy or sell an asset—i.e., the option to transact.

Options can be used to speculate on price changes. For example, if an investor thinks the price of a stock is going to increase, they can purchase an options contract to put themselves in a position to profit if their prediction were to come true.

There are call and put options to take into account. A call gives purchasers the right to buy an asset at a certain time or price, whereas a put gives them the right to sell it. Buying these types of options allows them to effectively bet on a stock, without outright owning it. Purchasers typically pay a small “premium,” or the price of the contract.

Generally, if an investor thinks a stock’s price will increase, they buy calls. If they think it will decrease, they buy puts.

Recommended: Options Trading Terminology

Gamma Squeeze Definition

A gamma squeeze has to do with buying call options. Remember, purchasers buy calls when they think the price of a stock is going to increase. And as the price of that stock increases, so does the value of the call option. Now, when a stock’s price starts to increase, that can lead to more investors buying calls contracts. There’s a whole lot of call-buying going on.

But on the other side of those calls are the traders or institutions that sold them—remember that options are a contract between two parties, so for an investor betting on a stock price’s increase, there’s another that’s betting that it’ll fall. They’re taking a “short” position, in other words.

Market makers”–the trading firms that are selling the call options–are typically the party on the other side of the trade. They’re essentially “short” those call options that investors in the market are buying. These market makers face a good amount of risk if the price of the underlying stock rises, so they will buy some shares of the stock to hedge some of that risk.

Buying the shares also helps to ensure that they will be able to deliver the stock if they become “due,” or the investor exercises their call options.

However, if investors keep buying more and more calls, and the stock’s price increases, market makers need to buy more and more stock—increasing its price even further, and thus, creating a “squeeze.” The gains in share value cause the market makers to be more exposed, hence they need to hedge even more.

Part of this is also because the stock’s gains brings the options closer to the prices at which calls can be exercised.

Basically, the short positions held by some investors allows a gamma squeeze to happen. And if a stock’s price rises instead of falls, the shorters’ need to start buying the stock, further increasing its price, creating the feedback loop mentioned earlier.

Recommended: Shorting a Stock Explained

What’s Gamma in Options?

Okay, so you may have a grasp on how a gamma squeeze can occur. But we still need to talk about what gamma is, and how it fits into the picture.

Gamma is actually just one of a handful of Greek letters (gamma, delta, theta, and vega) that options traders use to refer to their positions. In a nutshell, “the Greeks” help traders determine if they’re in a good position or not.

For now, we’ll just focus on delta and gamma. Gamma is actually determined by delta. Delta measures the change of an option’s price relative to the change in the underlying stock’s price. For instance, a delta of 0.3 would mean that the option’s price would go up $0.30 for every $1 increase in the underlying stock’s price.

Gamma measures how delta changes based on a stock price’s change. It’s sort of a delta of deltas. In other words, gamma can tell you how much an option’s delta will change when the underlying stock’s price changes. Another way to think of it: If an option is a car, its delta is its speed. Its gamma, then, is its rate of acceleration.

When a gamma squeeze occurs, delta and gamma on options are in a state of flux, creating stock volatility and ultimately, squeezing some market players.

The Takeaway

When investors are making bullish bets on a stock, sometimes they use call options–contracts that allow them to buy a stock at a certain date in the future.

When brokers or market makers sell those call options to the investors, they buy shares of the underlying stock itself in order to try to offset the risk they’re exposing themselves to. This also helps them ensure they can deliver the shares if the options get exercised by the investor holding the call options.

Gamma squeezes occur when there’s rapid buying by the market makers of the stock, causing a dramatic surge in the share price. The sudden increase, in turn, causes greater exposure for the market makers, causing them to hedge themselves more by purchasing additional shares.

Options trading is complex and may not be for everyone. But if you want a simpler investing experience, then an online investing account with SoFi may be a good choice. SoFi Invest allows investors to buy and sell stocks, ETFs and fractional shares without commissions. Users can also start building a portfolio with as little as $5 on the Active Investing platform.

Check out SoFi Invest today.


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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Are Fractional Shares Worth Buying?

Fractional shares are a useful way to allow new investors to get their feet wet by investing small amounts of money into parts of a share of stock. For some investors, fractional shares are worth it because it means they can own a part of a stock from a company they are interested in, without committing to buying a whole share.

While fractional shares have much in common with whole shares, they don’t trade on the open market as a standalone product. Because of that, fractional shares must be sold through a major brokerage.

Recommended: How to Open a Brokerage Account

What Does It Mean to Buy Fractional Shares?

A fractional share is less than one whole equity share (e.g. 0.34 shares). Fractional shares appreciate or depreciate at the same rate as whole shares, and distribute dividends at the same yield proportionate to the fractional amount.

Fractional shares were previously only available to institutional investors at one-sixteenth intervals, but have recently become widely available to retail investors at exact decimals (in order to increase market pricing precision and lower trading costs).

This new capability offers another layer of financial inclusion to casual investors by lowering minimum investing requirements to thousands of stocks and assets and making them available in smaller quantities. According to Gallup, 45% of all Americans have no stock investments—but fractional shares provide an increasingly lower barrier to investing than in previous generations.

Why Fractional Shares Are Worth Buying

For some investors, these positives make buying fractional shares worth it.

Access to Unaffordable Stocks

Fractional shares can help build a portfolio made of select stocks, some of which may be too expensive for some investors to afford one whole share. With fractional shares, an investor can choose stocks based on more than just price per share.

Previously, new investors would face price discrimination for not having enough funds to buy one whole share. But with fractional shares, an investor with $1,000 to spend who wants to buy a stock that costs $2,000 per share, can buy 0.5 shares of that stock.

Fractional shares make it easier to spread a modest investment amount across a variety of stocks. Over time, it may be possible to buy more of each stock to total one or more whole shares. In the meantime, buying a fractional share allows an investor to immediately benefit from a stock’s gain, begin the countdown to qualify for long-term capital gains (if applicable), and receive dividends.

A Doorway to Investing

History has shown that the stock market typically outperforms fixed-income assets and interest-bearing savings accounts by a wide margin. If equities continue to provide returns comparable to the long-term average of 7%, even a small investment can outperform money market savings accounts, which typically yield 1-2%. (Though as always, it’s important to remember that past performance does not guarantee future success.)

By utilizing fractional shares, beginners can make small investments in the stock market with significantly more growth potential even with average market returns versus savings accounts that typically don’t even match inflation.

Maximized Dollar-Cost Averaging

Fractional shares help maximize dollar-cost averaging, in which investors invest a fixed amount of money at regular intervals.

Because stock shares trade at precise amounts down to the second decimal, it’s rare for flat investment amounts to buy perfectly-even amounts of shares. With fractional shares, the full investment amount can be invested down to the last cent.

For example, if an investor contributes $500 monthly to a mutual fund with shares each worth $30, they would receive 16.66 shares. This process then repeats next month and the same investment amount is used to purchase the maximum number of shares, with both new and old fractional shares pooled together to form a whole share whenever possible.

Maximized Dividend Reinvestment Plans

This same scenario applies to dividend reinvestment plans (also known as DRIP investing). In smaller dividend investment accounts, initial dividends received may be too small to afford one whole share. With fractional shares, the marginal dividend amount can be reinvested no matter how small the amount.

Fractional shares can be an important component in a dividend reinvestment strategy because of the power of compounding interest. If an investor automatically invests $500 per month at $30 per share but can’t buy fractional shares, only $480 of $500 can be invested that month, forfeiting the opportunity to buy 0.66 shares. While this doesn’t seem like much, not investing that extra $20 every month can diminish both investment gains and dividends over time.

Stock Splits

Stock splits occur when a company reduces its stock price by proportionately issuing more shares to shareholders at a reduced price. This process doesn’t affect the total value of an investment in the stock, but rather how the value is calculated.

For some investors, a stock split may cause a split of existing shares resulting in fractional shares. For example, if an investor owns 11 shares of a company stock worth $30 and that company undergoes a two-for-three stock split, the 15 shares would increase to 22.5 but each share’s price would decrease from $30 to $20. In this scenario, the stock split results in the same total of $450 but generated a fractional share.

Mergers or Acquisitions

If two (or more) companies merge, they often combine stocks using a predetermined ratio that may produce fractional shares. This ratio can be imprecise and generate fractional shares depending on how many shares a shareholder owns. Alternatively, shareholders are sometimes given the option of receiving cash in lieu of fractional shares following an impending stock split, merger, or acquisition.

Too expensive? Not your favorite stocks.

Own part of a stock with fractional share investing.

Invest with as little as $5.


Disadvantages of Buying Fractional Shares

Fractional shares can be a useful asset if permitted, but depending on where you buy them could have major implications on their value.

Order Type Limitations

Full stock shares are typically enabled for a variety of order types to accommodate different types of trading requests. However, depending on the brokerage, fractional shares can be limited to basic order types such as market buys and sells. This prevents an investor from setting limit orders to trigger at certain price conditions and from executing trades outside of regular market hours.

Transferability

Not all brokerages allow fractional shares to be transferred in or out, making it difficult to consolidate investment accounts without losing the principal investment or market gains from fractional shares. This can also force an investor to hold a position they no longer desire, or sell at an undesirable price to consolidate funds.

Liquidity

If the selling stock doesn’t have much demand in the market, selling fractional shares might take longer than hoped or come at a less advantageous price due to a wider spread. It may also be possible to come across a stock with full shares that are liquid but fractional shares that are not, providing difficulty in executing trades let alone at close to market price.

Commissions

Brokerages that charge trading commissions may charge a flat fee per trade, regardless of share price or quantity of shares traded. This can be disadvantageous for someone who can only afford to buy fractional shares, as they’re being charged the same fee as someone who can buy whole or even multiple shares. Over time, these trading fees can add up and siphon limited capital that could otherwise be used to buy additional fractional shares.

Higher transaction fees

Worse yet, some brokerages may even charge higher transaction fees for processing fractional shares, further increasing investor overhead despite investing smaller amounts.

What Happens to Fractional Shares When You Sell?

As with most brokerages that allow fractional shares, fractional shares can either be sold individually or with other shares of the same asset. Capital gains or losses are then calculated based on the buy and sell prices proportionate to the fractional share.

The Takeaway

Fractional shares are an innovative market concept recently made available to investors. They allow investors of all experience and income levels access to the broader stock market—making it worth buying fractional shares for many investors.

Fractional shares have many other benefits as well—including the potential to maximize both DRIP and dollar-cost averaging. Still, as always, it makes sense to pay attention to downsides as well, such as fees disproportionate to the investment, and order limitations.

For investors who are curious about fractional shares, SoFi Invest® online brokerage makes it easy to start investing in partial stocks with as little as $5.

Find out how to invest in fractional shares with SoFi Invest.


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.

Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.


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.

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