MoneyHL Archives

Sep

2025

A Guide to Corporate Bonds and How They Work

What Are Corporate Bonds?

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

Table of Contents

What Is a Corporate Bond?
How Do Corporate Bonds Work?
Benefits and Drawbacks of Corporate Bonds
Types of Corporate Bonds
Difference Between Corporate Bonds and Stocks
How to Buy Corporate Bonds
FAQ

Corporate bonds are similar to government bonds: When investors buy corporate bonds they are loaning a company money for a specified period of time. The company agrees to pay interest for that time. When the bond reaches maturity, the company returns the principal.

Corporations typically issue bonds, usually in $1,000 increments, in order to raise funds for capital improvements, acquisitions, and other needs. Because corporate bonds carry more risk, these bonds typically offer a higher interest rate.

It’s also possible to invest in corporate bonds via exchange-traded funds (ETFs) or mutual funds.

Key Points

• Corporations issue bonds to raise funds for various needs.

• Investors typically receive semi-annual interest payments until the bond matures.

• Corporate bonds are usually issued in $1,000 blocks and generally offer higher rates than Treasurys due to higher risk.

• Some corporate bonds offer a fixed interest rate, while others pay a floating rate.

• Bond-focused mutual funds and ETFs are alternative ways to invest and may offer additional portfolio diversification.

What Is a Corporate Bond?

A bond is a debt security that functions much like an IOU. When an investor buys a corporate bond, they are effectively lending money to that company for a specified period of time, with the agreement that the company will pay interest until the bond matures, at which time the company repays the principal.

What Is the Purpose of Bonds?

Governments and companies issue bonds in order to raise funds for different needs. For example, a state might issue bonds to build a new bridge, and the U.S. Treasury issues Treasury Bills (T-Bills) to cover its expenses.

Corporations also sell bonds to raise capital. They might use the money raised through these financial securities to reinvest in their business, pay down debts, or even buy other companies.

The Size of the Bond Market

Bonds make up more of the global markets than equities, worth about $145.1 trillion in 2024 versus $126.7 trillion for global equity market capitalization, according to the Securities Industry and Financial Markets Association (SIFMA). The U.S. fixed income market is the biggest in the world, making up 58.2% of global securities.

How Do Corporate Bonds Work?

As noted, corporate bonds follow similar rules to other types of bonds. Say an investor buys $10,000 worth of bonds from Company A, at a certain interest or coupon rate, for a specified time period until maturity.

These bonds might have shorter terms (e.g, up to five years); medium terms (between five and 12 year maturities); or longer terms (more than 12 years).

The investor can expect interest payments, usually semi-annually, until the bond matures — at which point the company repays the original $10,000 in principal.

Bond Terminology

To understand the bond market and how bonds work, it helps to know a few important terms:

• Issuer: The entity issuing bonds to raise money (e.g., a government, municipality, or a corporation).

• Par Value or face value: Also known as the nominal value of the bond, the par value is the amount the investor pays for the bond (i.e., the dollar amount of the loan) — which the bond issuer promises to repay when the bond reaches maturity. It’s the principal amount. This amount does not fluctuate over the life of the bond.

• Coupon rate: This is the interest rate paid by the bond issuer on the principal amount (e.g., a $100 bond with a 2% coupon will pay $2 per year). Some coupon rates are fixed. Some can be variable.

• Maturity: The date at which a bond’s issuer must repay the original bond value to the bondholder.

• Price: A bond’s price can change based on a bond’s rating, its interest rate, and time left to maturity. The price is the amount an investor pays for a bond in the secondary market.

• Yield to maturity (YTM): Investors who buy and sell bonds on the secondary market often focus on a bond’s yield to maturity, which is different from the coupon rate. Bond yield represents the total return at maturity, incorporating the bond’s market price and the coupon rate.

Corporate Bond Ratings

Well-known ratings agencies, such as Moody’s, Standard & Poor’s, and Fitch, rate the creditworthiness of the bond issuer. The bond rating can influence the coupon rate, as it reflects the relative risk involved in purchasing the bond. More on ratings below.

The Potential for Diversification

Investors may find bonds appealing for a couple of reasons. The first is that bonds can provide a steady source of income from interest (i.e., coupon payments), which is why they are referred to as fixed-income securities. (That said, equities have historically outperformed bonds over time.)

Another reason is that bonds are generally not correlated with the stock market, and thereby may offer investors some portfolio diversification.

Benefits and Drawbacks of Corporate Bonds

While corporate bonds may offer some benefits to investors, it’s important to consider their drawbacks, as well.

Benefits	Drawbacks
Bonds can provide some portfolio diversification.	Bonds may offer lower returns than other securities, such as stocks.
Many investors consider corporate bonds to be a riskier investment than U.S. government bonds. As a result, they tend to offer higher interest rates.	Corporate bonds carry a higher risk of default than U.S. Treasurys.
Bonds are relatively liquid, meaning it is easy to buy and sell them on the market.	Some bonds are “callable”, which means issuers can pay them back early. When that happens, bond holders don’t earn as much interest and may have to reinvest.

Types of Corporate Bonds

There are three main ways to categorize corporate bonds:

Maturity Dates

This category reflects the bond’s maturity, which may range from one to 30 years. There are three maturity lengths:

• Short-term: Maturity of within five years.

• Medium-term: Maturity of five to 12 years.

• Long-term: Maturity of more than 12 years. Longer-term bonds typically offer the highest interest rates.

Risk

Every once in a while, a corporation defaults its bonds. The likelihood of default impacts a company’s creditworthiness, and investors should consider it before purchasing a bond. Bond ratings, assigned by credit rating agencies, can help investors understand this risk.

Bonds can be rated as:

• Investment grade: Companies and bonds rated investment grade are unlikely to default. High-rated corporate bonds — from AAA to BBB, depending on the agency — typically pay a slightly higher rate than government securities.

• Non-investment grade: Non-investment grade bonds are more likely to default. Because they are riskier, non-investment grade bonds tend to offer a higher interest rate and are often known as high-yield or junk bonds.

Coupon

Investors may also categorize bonds based on the type of interest rate they offer.

• Fixed rate: With a fixed-rate bond, the coupon rate stays the same over the life of the bond.

• Floating rate: Bonds that offer floating rates readjust interest rates periodically, such as every six months. The floating rate depends on market interest rates.

• Zero-coupon bonds: These bonds have no interest rate. Instead, the bond is sold at a discount. When the bond reaches maturity, the issuer makes a single payment that’s higher than purchase price (effectively paying interest).

• Convertible bonds: Convertible bonds act like regular bonds with a coupon payment and a promise to repay the principal. However, they also give bondholders the option to convert their bonds into company stock according to a given ratio.

Difference Between Corporate Bonds and Stocks

Bonds differ from other types of investments in a number of important ways.

When investors invest in stocks, they are buying ownership shares in the company. Share prices may fluctuate depending on the markets and the health of the company. If the company does well, the stock price may rise, and the investor can sell their shares at a profit. Additionally, some companies share profits with their shareholders in the form of dividends.

When an investor purchases a corporate bond, on the other hand, they do not own a piece of the company; they’ve given a loan to the company. The bondholder is therefore entitled to interest plus their original principal. Those amounts don’t change based on company profits or the stock price. When a company goes bankrupt, bondholders have priority over stockholders when it comes to claims on the issuer’s assets.

How to Buy Corporate Bonds

Investors interested in purchasing corporate bonds have a number of options to consider.

Direct Investment

Investors can buy individual corporate bonds directly through brokerage firms or banks. Corporations typically issue them in increments of $1,000. Much like investing in an initial public offering, or IPO, it can be tricky for retail investors to get in on newly issued bonds. Investors may need a relationship with the organization that’s managing the offering.

However, investors can also purchase individual bonds on the secondary market.

Bond Funds

Another way to gain access to the bond market is by purchasing bond funds, including mutual funds and exchange-traded funds (ETFs) that invest in bonds. These funds can be a good way to diversify a bond portfolio as they typically hold a diverse basket of bonds that tracks a bond index or a certain sector.

Retirement Accounts

Investors can also purchase bonds or bond funds through an Individual Retirement Account, or IRA, as well as an employer-sponsored retirement account such as a 401(k).

The Takeaway

Before buying bonds, it’s important that individuals consider how these securities might fit in with their financial goals, risk tolerance, and time horizon. For example, if you’re working toward retirement and have decades to save, you may want a portfolio that’s tilted toward stocks, since stocks generally tend to outperform bonds in the long run. If you’re close to your goal — or have a low appetite for risk — you may want to stick with bonds.

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FAQ

Are corporate bonds a good investment?

Corporate bonds generally pay a higher rate of interest than government bonds, but they come with a higher risk of default. While some investors may find the income potential from corporate bonds appealing, others may not want the added risk exposure.

What’s the difference between a Treasury bond and a corporate bond?

All types of U.S. Treasury bonds, bills, and notes are issued by the United States government and “backed by the full faith and credit” of the same. The United States has never defaulted on its debts. Corporate bonds carry more risk, and therefore offer higher interest rates.

Are bonds safe if the market crashes?

Generally speaking, bonds are less likely to be impacted by a stock market crash, and therefore can provide some ballast in a portfolio during times of market volatility. That said, no investment is 100% guaranteed to be “safe” under any circumstances.

Photo credit: iStock/Prostock-Studio

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

SOIN-Q325-092

Sep

2025

Comparing Stock Warrants vs Options

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

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

Table of Contents

What Are Stock Warrants?
What Are Options?
Similarities and Differences Between Warrants and Options
Pros and Cons of Warrants
Pros and Cons of Options
FAQ

Stock warrants give the holder the right to buy or sell shares of stock at a set price on or by a set date directly from the public company that issues them, whereas stock options convey the right to buy or sell shares on or before a specific date at a specific price.

The chief difference between stock warrants and stock options is that warrants are issued directly by a company that’s typically seeking to raise capital. Options are derivative contracts that investors can trade to take advantage of price fluctuations in the underlying security.

Key Points

• Stock warrants allow investors to buy shares at a specified price on a set date, directly from the issuing company, while stock options are derivative contracts traded among investors.

• Companies typically issue stock warrants to raise capital, whereas stock options are created and traded by investors, which may allow for more flexibility in trading.

• Exercising a warrant results in the issuance of new shares, which can lead to dilution, while exercising options does not typically create new shares and is settled between traders.

• Both stock warrants and options provide speculative opportunities, but differ in terms of issuance, market trading, and potential dilution effects.

• Understanding the differences between stock warrants and options is important for investors, as each serves distinct purposes and carries unique risks and potential benefits.

What Are Stock Warrants?

A stock warrant is a contract that allows the holder the right to buy shares of stock at a future date at a predetermined price. The terms of the stock warrant typically allow the holder to purchase shares at a price that is often set above the stock’s price at the time of issue. Warrants generally have longer expiration periods than standard options, often lasting up to 10 years or more.

Companies issue stock warrants directly to investors. The companies set the terms of the warrant, including the stock’s purchase price and the final date by which the investor can exercise the warrant. Warrant holders do not have an obligation to buy the shares, but if they decide to do so they would exercise the warrants via their brokerage account.

Stock warrants are typically call warrants, which give the holder the right to purchase the shares at the predetermined price, as noted above. However, there are also put warrants, which give holders the right to sell shares at a predetermined date by the expiration date.

Public companies may issue stock warrants as a means of raising capital to fund new expansion projects. A company may also issue stock warrants to investors if it faces financial trouble and needs to raise funds to potentially avoid a bankruptcy filing.

In some cases, warrants are issued by financial institutions rather than the company itself. These are called “covered warrants” and may be cash-settled, meaning they do not result in new shares or dilution of existing shares.

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What Are Options?

An option is a contract that gives holders the right, but not the obligation, to buy (in the case of a call option or sell, in the case of a put option, an underlying security on or before a specified date at a specified price. As with stock warrants, option holders do not have to buy or sell the underlying shares, but they have the right to do so. If they do, they would exercise the options through their brokerage account.

Exercising options means you use your right to buy or sell the option’s underlying shares. If an investor chooses not to exercise the option, it expires worthless. (Note that the seller, or writer, of an options contract is obligated to fulfill the terms of the contract if it’s exercised.) Investors can trade some options on a public exchange alongside stocks and other securities.

Recommended: How to Trade Options: An In-Depth Guide

Similarities and Differences Between Warrants and Options

Warrants and options sound alike and at first glance, they seem to imply the same thing: the right to buy or sell shares of a particular stock. But there are also important differences between these two contracts that investors should be aware of.

Similarities

Warrants and options both offer investors an opportunity to benefit from movements in a stock’s price, though options can be traded without exercising while warrants typically require exercising to acquire shares.

With both warrants and options, the investor must exercise the contract to actually acquire shares. Both have specific guidelines with regard to the price at which investors can purchase (or sell, in the case of puts) their shares and the deadline for exercising them.

Warrants and options are both speculative in nature, since investors are essentially making a directional bet on which way the underlying asset’s price may move. Neither instrument provides voting rights or dividend payments prior to exercise. Investors can use different strategies when trading options or exercising warrants to potentially improve profitability while attempting to reduce losses.

Differences

Warrants and options also have important differences. While companies issue stock warrants, traders typically buy and sell options with each other directly. Warrants create new shares when exercised, which can result in dilution. Exchange-traded stock options generally do not create new shares, aside from employee stock options, which are basically a type of call option that, when exercised, can also dilute existing shares by increasing the total amount.

When investors exercise a warrant, they receive the stock directly from the company, while options are typically settled between traders.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Stock Warrants vs Options: A Summary

Here’s a closer look at options vs. warrants.

Stock Warrants	Stock Options
Confers the right to purchase (or sell) shares of stock at a specified price on or before a specified date. Holders of the contract have the right, but not the obligation, to exercise the contract.	Confers the right to buy (or sell) shares of stock at a specified price on or before a specified date. Holders of the contract have the right, but not the obligation, to exercise the contract.
Warrants create new shares, which may result in dilution.	Options do not create new shares, so there’s no dilution (unless they are employee stock options).
Issued by the company directly to investors.	Issued by traders or market makers who write call or put options.
Original issue warrants are not listed on exchanges, but there is a secondary market for the securities.	Options can be traded on public exchanges alongside other securities.
Primarily used to raise capital for the company.	Traders can buy (or write) options to try to benefit from price movements.
Warrant holders may have a decade or more in which to exercise their right to buy shares.	Options tend to be shorter-term in nature, with expiration periods usually lasting anywhere from a few days up to 18 months.
Less commonly used in the U.S.	Options are regularly traded on public exchanges in the U.S.

Pros and Cons of Warrants

If you’re considering warrants versus options, it’s helpful to understand the advantages and disadvantages of each.

Stock warrants can offer both advantages and disadvantages to investors. Whether or not it makes sense to include stock warrants in a portfolio can depend on your individual goals, time horizon for investing and risk tolerance. Warrants are also considered geared instruments, meaning small moves in the underlying stock can produce amplified gains or losses. This leverage may increase risk.

Stock Warrant Pros	Stock Warrant Cons
Warrant holders have the right to purchase (or sell) shares of stock, but are not required to do so.	Price volatility can diminish the value of stock warrants over time.
Stocks may be offered to investors at a premium relative to the current market price.	When warrants are exercised, new shares are issued, which may result in dilution.

Pros and Cons of Options

As with stock warrants, trading options has both upsides and potential downsides. Beginning traders should have a thorough grasp of the essentials, prior to trading, to understand the complexities and risks involved. Here are some of the key points to know about trading options.

Stock Option Pros	Stock Option Cons
Options may amplify gains compared to trading in individual shares of stock.	Stock options are more sensitive to volatility which can mean higher risk for investors.
May be suited to active day traders who are hoping to capitalize on short-term price movements.	Frequent options trades can mean paying more in commissions, detracting from overall returns.
Traders can use options as a hedging tool to manage risk in uncertain market environments.	Time value decays the value of options over time.

The Takeaway

Understanding the difference between options and warrants matters if you’re considering either of these types of securities. While the language of stock warrants may sound similar to some of the terms used in options trading, these are in fact two different instruments.

Companies issue stock warrants primarily to raise capital, whereas traders typically buy and sell options with each other directly. Warrants create new shares of companies, while options do not typically cause any dilution.

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FAQ

Is a warrant the same thing as an option?

No. Warrants and options are not the same thing. Companies issue stock warrants to give investors the right to buy shares of stock at a specified price on a specified date. Stock warrants may allow investors to purchase shares of stock at a premium, while providing a longer window in which to decide whether to exercise the warrant.

Options are derivatives contracts that give buyers the right, but not the obligation to buy (in the case of a call) or sell (in the case of a put) an asset at a specific price within a certain period of time.

Can warrants exist in a SPAC?

Yes. A Special Purpose Acquisition Company (SPAC) is typically created for the purpose of acquiring or merging with an existing company. This type of arrangement may enable private companies to circumvent the traditional IPO process. A SPAC may use warrants to raise capital from investors. These warrants are generally good for up to five years following the completion of a merger or acquisition.

Why would you buy stock warrants?

Stock warrants may appeal to some investors seeking speculative exposure at a lower upfront cost than purchasing shares outright. Warrants offer the right, but not the obligation, to buy stock at a set price in the future, and this can be attractive if the stock’s price rises. Warrants may expire worthless if the share price does not exceed the strike price, however. They are generally considered higher-risk instruments and are not commonly used in traditional portfolios.

Can I sell my stock warrants?

Some stock warrants are transferable, and may be sold on a secondary market. This depends on the issuing company and the terms of the warrant terms. Liquidity can vary: while exchange-listed warrants may be easier to sell, others may have limited or no market activity. It’s important to check the specific warrant agreement to understand whether the security is tradable and what restrictions might apply.

About the author

Rebecca Lake

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

Photo credit: iStock/Inside Creative House

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

SOIN-Q325-016

Sep

2025

What Are Power Hour Stocks? What to Know When Trading

Power Hour Stocks: What Are They and How Do You Trade Them?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is the Stock Market Power Hour?
When Does Stock Power Hour Occur?
Red Flags and Triggers to Look for During Power Hour Trading
FAQ

The power hour is a period of active trading, high volume, and volatility that tends to occur when the market opens and again when it closes. Many short-term traders find the power hour appealing because of the trading opportunities it presents.

Power hour trading generally isn’t as compelling to buy-and-hold and longer-term investors, as these short-term trades come with much higher risk exposure, despite the opportunity for gains.

Key Points

• The “power hour” refers to periods of high trading activity, volume, and volatility typically at the market’s open and close.

• While appealing to short-term traders, power hour trading carries more risk for longer-term investors.

• The first hour of trading is active due to reactions to overnight news, while the last hour sees increased activity as traders look to close positions or capitalize on heightened selling.

• Triggers for intense power hour trading include earnings reports, news about “daily gainers,” major economic news, and quarterly triple witching hour events.

• Due to increased volatility and risk, it is advisable for investors unfamiliar with choppy markets to avoid power hour trading.

What Is the Stock Market Power Hour?

During the trading day, the power hour is when traders have a concentrated time to leverage specific market opportunities. That goes for anyone trading common market securities like stocks, index funds, commodities, currencies, and derivatives, especially options trading and futures.

The power hour period typically occurs when the market opens at 9:30am ET and lasts until approximately 10:30am. Some traders identify a second power hour at the end of the day: roughly 3:30pm to 4:30pm, when the market closes.

The heightened activity during these periods comes from a confluence of factors.

• Traders digest recent news and upcoming events.

• They place new trades and look for opportunities.

• The combined activity can create short-term price volatility that some traders can take advantage of.

When Does Stock Power Hour Occur?

The term power hour is subjective, but most market observers land on two specific times in defining the term:

• The first trading hour of the market day. This is when news flows in overnight from across the world that can impact portfolio positions that investors may want to leverage, when investing online or using a brokerage.

• The last hour of the trading day. This is when sellers may be anxious to close a position for the day, and buyers trading stocks may be in a position to pounce and buy low when selling activity is high.

One commonality between the first hour of a stock market trading session and the last hour is that trading volatility tends to be higher than it is during the middle of a normal trading day. That’s primarily because traders are looking to buy or sell when demand for trading is robust, and that usually happens at or near the market opening or the market close.

Each power hour brings something different to the table, when it comes to potential investing opportunities.

Recommended: Stock Trading Basics

Power Hour Start of Day

The first hour of any trading session tends to be the most active, as traders react to overnight news and data numbers and stake out advantageous positions.

For example, an investor may have watched financial or business news the previous night, and is now reacting to a story, interview, or prediction.

Some traders refer to this scenario as “stupid money” trading, as conventional wisdom holds that one news event or headline shouldn’t sway an investor from a strategy-guided long-term investment position. The fact is, by the time the average investor reacts to overnight data, it’s likely the chance for profit is already gone.

Here’s why: Most professional day traders were likely already aware of the news, and have already priced that information into their portfolios. As the price goes up on a stock based on artificial demand, the professional traders typically step in and take the other side of the trade, knowing that in the long run, investing money will drift back to the original trade price for the stock and the professional investor will likely end up making money.

Power Hour End of Day

The last hour of the trading day may also come with high market volatility, which tends to generate more stock trading. Many professional traders tend to trade actively in the morning session and step back during mid-day trading, when volatility is lower and the market is quieter than in the first and last hours of the day.

Regular traders can perk up at the last hour of trading, where trading is typically more frequent and the size of trades generally climb as more buyers and sellers engage before the trading session closes out. Just as in the first hour of the trading day, amateur investors tend to wade into the markets, buying and selling on the day’s news.

That activity can attract bigger, more seasoned traders who may be looking to take advantage of ill-considered positions by average investors, which increases market trading toward the close.

Recommended: 7 Day Trading Strategies for Beginners

Red Flags and Triggers to Look for During Power Hour Trading

For any investor looking to gain an advantage during power hour trading, the idea is to look for specific market news that can spike market activity and heighten the chances of making a profit in the stock market.

These “triggers” may signal an imminent power hour market period, when trading can grow more volatile.

Any Earnings Report

Publicly-traded companies are obligated to release company earnings on a quarterly basis. When larger companies release earnings, the news has a tendency to move the financial markets. Depending on whether the earnings news comes in the morning or after hours, investors can typically expect higher trading to follow. That could lead to heavier power hour trading.

News on Big “Daily Gainers”

Stock market trading activity can grow more intense when specific economic or company news pushes a single large stock — or stock sector — into volatile trading territory.

For instance, if a technology company X announces a new product release, investors may want to pounce and buy that tech stock, hoping for a significant share price uptick. That can lead to higher volume trading stock X, making the company and the market more volatile (especially later in the day), thus ensuring an active power hour trading time.

Reserve/Economic News

Major economic news, like jobs reports, consumer sentiment, inflation rates, and gross domestic product (GDP) reports, are released in the morning. Big news from the Federal Reserve typically comes later in the day, after a key speech by a Fed officer or news of an interest rate move after a Fed Open Markets Committee meeting.

Make no mistake, news on both fronts can be big market movers, and can lead to even more powerful power hour trading sessions.

Anticipation of huge economic news, like a Federal Reserve interest rate hike or the release of the U.S. government’s monthly non-farm labor report, can move markets before the actual news is released, potentially fueling an even larger trading surge after the news is released, either at the open (for government economic news) or at the end of the trading day (for Federal Reserve news).

Triple Witching Hour Events

Quarterly triple witching hours — when stock options, futures and index contracts expire on four separate Fridays during the year — historically have had a substantial impact on market activity on those Friday afternoons, in advance of the contracts expiring at the days’ end.

When options contracts involving larger companies expire, market activity on a Friday afternoon prior to closing can be especially volatile. Thus, any late afternoon power hour on a triple-witching-hour Friday can be highly active, and may be one of the largest drivers of power hour trading during the year.

The Takeaway

The concept of a stock market “power hour” is based on the increased activity at certain times of day — typically the market’s open and close. While the power hour presents opportunities for some traders, others may find it risky.

Consequently, it’s a good idea to give power hours a wide berth if you’re not familiar with trading in choppy markets, where the risk of losing money is high when power trading activity is at its highest.

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

FAQ

Is the power hour a good time to trade?

For sophisticated short-term traders, trading power hour stocks can be advantageous. The heightened market activity often presents a number of opportunities. For those less skilled at maximizing these short windows of opportunity, power hour trading can be highly risky.

Is the power hour more volatile?

Yes, the hallmark of the power hour, whether at the market’s open or close, is its volatility. In short, the power hour is a high-risk time in the market for most ordinary investors.

Can you make money during the power hour?

It’s possible to make money during the power hour, assuming you have the skill and the strategies to seize the opportunities presented by short-term price movements.

Photo credit: iStock/Tatiana Sviridova

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

SOIN-Q325-089

Sep

2025

NBBO: What It Is and How It’s Calculated

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

Table of Contents

How Does “Bid vs Ask” Work in the Stock Market
What Is NBBO?
How NBBO and “Bid vs Ask” Prices Are Calculated
FAQ

NBBO — the National Best Bid and Offer — is a quote available marketwide that represents the tightest composite spread for a security, e.g., the highest bid price and the lowest ask price for that security trading on various exchanges.

The NBBO is a regulation put in place by the Securities and Exchange Commission (SEC) that requires brokers who are working on behalf of clients to execute a trade at the best available ask price, and the best available bid price.

Brokers must guarantee at least the NBBO to their clients at the time of a trade, per SEC rules.

Key Points

• The National Best Bid and Offer (NBBO) is a marketwide quote for the highest bid price and the lowest ask price for a security across exchanges.

• The SEC enacted the NBBO regulation to ensure brokers execute trades for clients at the best available bid and ask prices (the bid-ask spread).

• The bid-ask spread is the difference between the price an investor is willing to buy (bid) and the price a seller is willing to sell (ask).

• Securities Information Processors (SIPs) continuously process bid and ask prices to calculate and update the NBBO.

• There can be a slight lag in real-time data due to the high volume of transactions, which the SEC addresses with intermarket sweep orders (ISO).

How Does “Bid vs Ask” Work in the Stock Market

In order to understand NBBO, investors need to understand the bid-ask price of a security, such as a stock. This is also known as the spread (two of many terms investors and traders should know). If an investor is “bidding,” they’re looking to buy. If they’re “asking,” they’re looking to sell. It may be helpful to think of it in terms of an “asking price,” as seen in real estate.

The average investor or trader will typically see the bid or ask price when looking at prices for different securities. Most of the bid-ask action takes place behind the scenes, and it’s happening fast, landing on an average price. These are the prices represented by stock quotes.

That price is the value at which brokers or traders are required to guarantee to their customers when executing orders. NBBO requires brokers to act in the best interest of their clients.

What Is NBBO?

The National Best Bid and Offer (NBBO) is effectively a consolidated quote of the highest available bid and the lowest available ask price of a security across all exchanges. NBBO was created by the SEC to help ensure that brokers offer customers the best publicly available bid and ask prices when investors buy stocks online or through a traditional brokerage.

NBBO Example

Let’s run through a quick example of how the NBBO might work in the real world.

Let’s suppose that a broker has a few clients that want to buy stock:

• Buyer 1 puts in an order to the broker to buy shares of Company X at $10

• Buyer 2 puts in an order to the broker to buy shares of Company X at $10.50

• Buyer 3 puts in an order to the broker to buy shares of Company X at $11

Remember, these are “bids” — the price at which each client is willing to purchase a share of Company X.

On the other side of the equation, we have another broker with two clients that want to sell their shares of Company X, but only if the price reaches a certain level:

• Client 1 wants to sell their shares of Company X if the price hits $12

• Client 2 wants to sell their shares of Company X if the price hits $14

In this example, the NBBO for Company X is $11/$12. Why? Because these are the best bid vs. ask prices that were available to the brokers at the time. This is, on a very basic level, how calculating the NBBO for a given security might work.

Recommended: Stock Trading Basics

How NBBO and “Bid vs Ask” Prices Are Calculated

Because the NBBO is updated constantly through the day with offers for stocks from a number of exchanges and market players, things need to move fast.

Most of the heavy lifting in NBBO calculations is done by Securities Information Processors (SIPs). SIPs connect the markets, processing bid and ask prices and trades into a single data feed. They were created by the SEC as a part of the Regulation National Market System (NMS).

There are two SIPS in the U.S.: The Consolidated Tape Association (CTA) , which works with the New York Stock Exchange, and the Unlisted Trading Privileges (UTP) , which works with stocks listed on the Nasdaq exchange.

The SIPS crunch all of the numbers and data to keep prices (NBBO) updated throughout the day. They’re incredibly important for traders, investors, brokers, and anyone else working in or adjacent to the markets.

Is NBBO Pricing Up to Date?

The NBBO system may not reflect the most up-to-date pricing data. Bid, ask, and transaction data is changing every millisecond. For high-frequency traders that are making fast and furious moves on the market, these small price fluctuations can cost them.

To make up for this lag time, the SEC allows trading via intermarket sweep orders (ISO), letting an investor send orders to multiple exchanges in order to execute a trade, regardless of whether a price is the best nationwide.

The Takeaway

NBBO represents the crunching of the numbers between the bid-ask spread of a security, and it’s the price you’ll see listed on a financial news network or stock quote.

The NBBO adds some legal protection for investors, effectively forcing brokers to execute trades at the best possible price for their clients.

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

FAQ

What does NBBO mean in trading?

The National Best Bid and Offer (NBBO) is a marketwide quote for the highest bid price and the lowest ask price available for a security, across exchanges. That means it’s a composite or consolidated quote that ensures investors are getting the best available price for a security.

What is Level 2?

Level 2 is a subscription-based service offered by Nasdaq that gives traders access to live trading data from the exchange, including bid-ask spreads and order sizes from market makers. Level 2 offers more in-depth information about pricing than NBBO, which is part of a Level 1 trading screen.

What is the advantage of NBBO?

First and foremost, NBBO helps protect investors, by ensuring the tightest spreads for securities prices. As such, NBBO also promotes market transparency and competition.

Photo credit: iStock/g-stockstudio

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

SOIN-Q325-091

Sep

2025

A Walkthrough of What Leverage Trading Is

Understanding Leverage Trading

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Leverage Trading?
History of Leverage Trading
How Leverage Works in Trading
Example of Leverage Trading
Pros and Cons of Leveraged Trading
Types of Leverage Trading
Leverage Trading Terms to Know
Tips for Helping to Manage the Risks of Leveraged Trading
Decide Whether Leverage Trading Is Right for You
FAQ

Using leverage is a common trading strategy whereby qualified investors borrow cash to increase their trading power. Thus, investors can leverage a small amount of capital to get exposure to a much bigger position.

For example, a leverage ratio of 20:1 means a $1 investment can buy $20 worth of an asset.

To use leverage, qualified traders must open a margin account with a brokerage in order to place bigger bets, and potentially earn higher returns on their initial capital. (The terms leverage and margin are often used interchangeably.)

However, leveraged trading also significantly increases a trader’s risk of losses. If the asset moves in the wrong direction, the trader not only suffers a loss but must repay the amount borrowed, plus interest and fees.

This is one reason that only experienced investors qualify for margin accounts and leverage trading opportunities.

Key Points

• Leverage trading is a high-risk strategy that involves using borrowed funds to amplify buying power to seek potentially higher returns.

• To use leverage, traders must qualify to open a margin account. Leverage trading or trading on margin are often used interchangeably.

• By using a small amount of capital to place bigger bets, traders may see bigger returns. Risks include the potential to lose more than the initial investment.

• Not all securities are eligible for leverage; rules vary by broker and security type.

• Leverage is typically reserved for qualified investors, due to its high risk.

What Is Leverage Trading?

In both business and finance, the term leverage refers to the use of debt to power an expansion or purchase securities. With leverage trading, traders can use a margin account to borrow funds in order to take bigger positions with assets like stocks, derivatives, and foreign currencies (forex).

A margin account allows qualified traders to borrow from a brokerage to purchase securities that are worth more than the cash they have on hand. In this case, the cash or securities already in the trader’s account act as collateral.

What Is Margin, How Does It Work?

Leverage and margin are related but different concepts. For example, a trader can use margin to increase their leverage. Margin is the tool, and leverage is the force behind the tool, which can be used to potentially increase returns (or losses).

Not all investors can open a margin account, however, and different brokerages may have different margin requirements.
To start, an investor must complete a margin agreement with their brokerage, and remain compliant with a number of industry rules. For example, most margin accounts require a $2,000 minimum deposit (the minimum margin).

Once the margin feature is added to the investor’s account, that part of their account falls under the rules of FINRA, the Federal Reserve Board, the Securities and Exchange Commission (SEC), and exchanges such as the NYSE, as well as the policies of the brokerage itself.

Margin rules for equity trades, for example, require that the investor maintain 50% of the value of a trade in their margin account (per the Fed’s Regulation T) — a 2:1 ratio. The margin requirements for other securities, like forex and futures contracts, are much lower and allow for higher leverage (e.g., 3% to 15%).

Which Securities Are Eligible for Margin?

Not all securities can be bought using leverage, however. Industry rules dictate that equities known as penny stocks, as well as Initial Public Offering (IPO) stocks, and other volatile and illiquid securities, are not marginable.

Generally, stocks and exchange-traded funds (ETFs) that are worth more than $3 per share, as well as mutual funds and certain types of bonds, are eligible for leverage trades using margin. Check with your broker, as rules can vary by jurisdiction.

Margin can be used to trade many derivatives like options and futures, but this type of leverage trading can be risky.

Forex options trading, for example, allows traders to take a larger position using very small amounts of cash. While there is no standard amount of margin in the forex market, it is common for traders to post 1% margin, which allows them to trade $100,000 of notional currency for every $1,000 posted — a ratio of 100:1.

Leverage Risks and Rewards

Leverage trading can only be successful if the return on an investment is higher than the cost to borrow money, which you must repay with interest and fees.

Leverage trading can significantly increase potential earnings, but it is also very risky because you can lose more than the entire amount of your investment. For that reason leverage is usually only available to experienced traders.

What Is Pattern Day Trading?

Pattern day trading is a type of trading style that typically requires a much higher initial margin amount. Someone would be flagged as a pattern day trader if they make four or more day trades during a period of five business days — and if those trades amount to more than 6% of their overall trading activity.

Day trading refers to those who buy and sell a single security within one day. It’s a high-risk strategy that some traders employ to profit from very short-term price movements.

Once a trader is identified as a pattern day trader, per FINRA rules, they must keep a minimum of $25,000 in cash and/or equity in their margin account.

FINRA established the Pattern Day Trader Rule to limit risk-taking among day traders, by requiring firms to impose these restrictions.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

*For full margin details, see terms.

History of Leverage Trading

The use of leverage has a long history in the world of trading and finance.

Ancient Uses of Leverage

There is evidence that a form of leverage trading first emerged in ancient civilizations, often through the exchange of commodities. Traders could put down a small amount of money as a deposit on a share of a future crop or herd of cattle, for example.

Another more rudimentary form of leverage enabled merchants to raise money for an expedition from investors, who would invest smaller amounts with the hope of greater profits from the expedition, assuming the trip was successful.

Over the centuries, the use of leverage became more sophisticated, enabling the creation of various types of derivatives, including futures contracts.

Leverage in the 20th-Century

Over time leverage ratios became quite high, and they were not well regulated until the stock market crash of 1929. That event forced a reassessment of restrictions around the use of leverage.

For a period of time starting in the mid-20th century, leveraged buyouts became a popular business acquisition strategy. As it sounds, leveraged buyouts involve the use of borrowed capital to buy out an existing company, and then use different strategies to turn it around and make a profit.

Leveraged buyouts are still a common private equity strategy, but they can often fail.

Today, thanks to advances in technology and stronger regulations, allowable leverage ratios and rules governing margin accounts are subject to greater oversight.

How Leverage Works in Trading

Leverage trading consists of a trader borrowing money from a broker using margin, then using the borrowed funds along with their own money to enter into trades.

The key to understanding how using leverage can potentially help generate higher returns, but also greater losses, is that the margin funds are a fixed liability.

Suppose a trader starts with $50, and borrows $50 to buy $100 worth of stock. Whether the stock’s value goes up or down from there, the trader is on the hook to repay the $50, plus interest and any related fees, to the broker.

💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.

Example of Leverage Trading

Using the above example, suppose the stock appreciates by 10%, for a total of $110, and the trader closes out the position. They return the $50 they borrowed, and keep the remaining $60. That equates to a $10 gain on their $50 of capital, and a 20% return — double the return of the underlying stock, before fees and expenses.

Now, consider what happens if the stock declines in value by 10%. The trader closes out the position and receives $90, but has to give the broker back the $50 they borrowed, plus interest and fees. They are left with $40, a loss of $10, plus the margin expenses, which is a 20% loss or more.

Understanding Leverage Ratio

Leverage is often expressed as a ratio. For example, a leverage ratio of 2:1 is generally the rule for using margin for equity trades. If you have $50, you can buy $100 worth of stock.

In the case of other types of securities, the leverage ratio can be much higher. A leverage ratio of 20 means a $1,000 investment would allow you to open a trading position of $20,000; 50:1 would allow you to take a position of $50,000.

Maximum Leverage

Brokers have limits on how much they’ll lend traders based on the amount of funds the trader has in their account, their own regulations, and government regulations around leverage trading. If you’re considering using leverage, be sure to understand the rules.

• Stocks. Thanks to the Federal Reserve Board’s Regulation T, plus a FINRA rule governing margin trades in brokerage accounts, the maximum you can borrow is 50% for an equity trade.

• Forex. The foreign currency market tends to allow greater amounts of leverage. In some cases, as high as 100:1 in the U.S.

• Commodities. Commodities rules around maximum leverage and leverage ratios can fluctuate based on the underlying asset.

Pros and Cons of Leveraged Trading

On the surface, leverage may sound like a powerful tool for investors — which it can be. But leverage can be a double-edged sword: Leverage can add to buying power and potentially increase returns, but it can also magnify losses, and put an investor in the hole.

Pros

Using leverage can increase your trading power, sometimes to a large degree. It’s important to know the rules, as leverage ratios vary according to the securities you’re trading, the jurisdiction you’re in, and sometimes your broker’s discretion.

If you meet the criteria for using leverage or opening a margin account to trade, it’s relatively easy to access the funds and open bigger positions. Sometimes, placing that bigger bet can pay off with a much higher return than you would have gotten if you invested just the capital you had on hand.

Cons

Just as using leverage can amplify gains, it can amplify losses — in some cases to the point where you lose your initial investment, you must repay the money you borrowed, and you may owe fees and interest on top of that.

For that reason, many brokers require investors to meet certain criteria before they can open a margin account and place leveraged trades.

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Pros of Leverage:

• Increases buying power

• Potential to earn higher returns

• Relatively easy to use, if you qualify

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Cons of Leverage:

• Leverage funds must be repaid, with interest

• Potential to lose more than your initial investment

• Investors must meet specific criteria in order to use leverage or open a margin account

Types of Leverage Trading

There are a few different types of leverage trading, each with similarities and differences.

Trading on Margin

As noted, margin is money that a trader borrows from their broker to purchase securities. They use the other securities in their account as collateral for the loan.

If a leveraged trade goes down in value, a trader may be subject to a margin call. This means they will need to sell other securities to cover the loss, or deposit enough funds to meet the margin minimum. Failing that, a brokerage could sell other securities from the investor’s account.

Many brokers charge interest on margin loans. So in order for a trader to earn a profit, the security has to increase in value enough to cover the interest.

Leveraged ETFs

Some ETFs use leverage to try and increase potential gains based on the index they track. For example, there is an ETF that specifically aims to return 3x the returns that the regular S&P 500 index would get.

It’s important to note that most funds reset on a daily basis. The leveraged ETF aims to match the single day performance of the underlying index. So over the long term even if an index increases in value, a leveraged ETF might decrease in value.

Derivatives

Traders can also use leverage trading with derivatives and options contracts, although leverage in these cases looks quite different.

For example, using leverage with futures contracts is not considered a loan, exactly; it’s called a performance bond. The investor puts down a good faith deposit (the initial margin) in order to control a desired position. Once the position is open, the required or maintenance margin must be met. The terms of that contract are determined by the exchange.

Buying a single option contract lets a trader control many shares of the underlying security — generally 100 shares — for far less than the value of those 100 shares. As the underlying security increases or decreases in value, the value of the options contract changes.

Options trading is highly risky and generally recommended only for experienced traders.

Forex Leverage

Forex trading allows even more leverage than futures contracts. That said, leverage ratios vary by the type of currency pairs being traded. In addition, a broker may have different margin requirements depending on the size of the trade overall, as well as the potential volatility of the currencies involved in the trade.

Recommended: Options Trading 101

Leverage Trading Terms to Know

There are several key terms to know in order to fully understand leverage trading.

Account balance: The total amount of funds in a trader’s account that are not currently in trades.

Buying power: This is the total amount a trader has available to enter into leverage trades, including both their own capital and the amount they can borrow.

Coverage: The ratio of the amount of funds currently in leveraged trades in one’s account to the net balance in their account.

Margin Requirement: This is the amount of funds a brokerage requires a trader to have in their margin account when entering into leverage trades. If a trader incurs losses, those funds will be used to cover them. Traders can also use securities they hold in their account to cover losses.

Margin call: If a trader’s account balance falls below the margin requirement, the broker will issue a margin call. This is a warning telling the trader they have to either add more funds to their account or close out some of their positions to meet the minimum margin requirement. The broker does this to make sure the trader has sufficient funds in their account to cover potential losses.

Used margin: When an investor enters into trades, some of their account balance is held by the broker as collateral in case it needs to be used to cover losses. That amount will only be available for the trader to use after they close out some of their positions.

Usable margin: This is the money in one’s account that is currently available to put into new trades.

Open position: When a trader is currently holding an asset they are in an open position. For instance, if a trader owns 100 shares of XYZ stock, they have an open position on the stock until they sell it.

Close position: The total value of an investment at the time the trader closes it out.

Stop-loss: Traders can set a price at which their asset will automatically be sold in order to prevent further losses if its value is decreasing. This is very useful if a trader wants to hold positions overnight or if a stock is very volatile.

Tips for Helping to Manage the Risks of Leveraged Trading

Experience and skill can help you manage the risk factors inherent in leveraged trades, and a couple of basic protective strategies may help.

Hedge Your Bets

It might be possible to hedge against potential losses by taking an offsetting position to the leverage trade.

Limit Potential Loss of Capital

One rule of thumb suggests that traders limit their loss of capital to no more than 3% of the actual cash portion of the trade. While it’s difficult to know the exact risk level involved in a particular trade, it’s wise to observe certain limits to protect from loss.

Decide Whether Leverage Trading Is Right for You

Although there is potential for significant earnings using leverage trading, there is no guarantee of any earnings, and there is also potential for significant loss. For this reason leverage trading is often said to be best left to experienced traders.

If an investor wants to try leverage trading it’s important for them to assess their financial situation, figure out how much they’re willing to risk, and conduct detailed analysis of the securities they are looking to trade.

Setting up a stop-loss order may help decrease the risk of losses, and traders can also set up a take-profit order to automatically take profits on a position when it reaches a certain amount.

The Takeaway

Leveraged trading is a popular strategy for investors looking to increase their potential profits. By using borrowed funds it’s possible to take much bigger positions, and possibly see bigger wins. But using leverage, or trading on margin, is very risky because you can lose more than you have (the money you borrow has to be repaid in full, plus interest).

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, from 4.75% to 9.50%*

FAQ

How much leverage is too high?

Knowing how much you can afford to lose is an important calculation when making leveraged trades. In addition, the amount of leverage available to you will also be restricted by existing regulations or brokerage rules. And remember, if a trade goes south, your broker can liquidate existing assets to cover your losses and any margin.

What is the safest way to use leverage in trading?

Investing always involves risk, and the use of leverage is a high-risk endeavor. When using leverage it’s wise to know your limits, both financially and in terms of your skill as an investor. It’s also important to maintain a clear understanding of the regulations around the use of margin.

Can you lose more than you invest with leverage?

Yes. The biggest risk with using leverage is that you can lose more than the total amount of your initial investment.

Why is leverage not recommended for beginners?

All forms of leverage are complex and highly regulated, and demand a certain level of sophistication. For the most part, only experienced investors should use leverage.

Photo credit: iStock/ljubaphoto

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

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

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SOIN-Q325-055