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In today’s episode, you’ll discover how much money you’ll need to start stock trading.
So tune in right now…
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Hey, hey, what’s up, my friend? In today’s episode, I want to talk about how much money you need to start stock trading.
I know some of you might be thinking, “That’s silly question Rayner, you can start with as little as $50 or even $100! Look at all those zero-commission brokerages out there these days!”
I get it, you can start with $50 or $100, it’s possible. But there are a few problems that you’ll face when you have such a small account for stock trading.
1. It’s near impossible to apply proper risk management
For example, let’s say you have a $100 trading account, and you want to risk 2% on each trade. This means that when you put on a trade, you cannot lose more than $2 per trade, which is near impossible. It’s very difficult to have your stop loss of only $2.
2. You’ll likely blow up your account
If you don’t have proper risk management, it’s a matter of time before you blow up that small trading account. If you think about this, if you blow up like 10, 20 small trading accounts, they end up being a huge amount of money, like $1,000 or $2,000.
3. You’ll have limited stocks to trade
You can probably only trade penny stocks if you’re not dealing with leverage or margin. Those are the kind of stocks that can accommodate your account size. But those types of stocks swing up and down wildly.
This is why I suggest not starting with a small $$100 or $200 stock trading account. Now you might be wondering, how much should you start with.
Start with at least $5,000 for stock trading
In my own opinion, I would say you should start with at least a $5,000 stock trading account. Some of you might not have that kind of money, but we’ll get to that later. There are a few reasons why I say start with $5,000.
Benefit #1. You can have proper risk management
With a $5,000 account and risking 2% on each trade, you can lose up to $100. With a $100 stop loss, you can do several things. You can buy a share that costs $100 and let it go to zero, that’s a $100 loss.
You can maybe trade two shares that are worth $50 each. If they go to zero, that’s a loss of $100 which is within the 2% risk management. And again, here we are just talking about the stock going to zero. (You won’t want to watch it go to zero.)
What I’m trying to bring across is that with a larger account size and a larger nominal stop loss value, you have more room to play with, more stocks to choose from and more options in general.
Benefit #2. You can avoid account blow up
Because now you have proper risk management in place. If you follow your risk management guidelines, it is unlikely that you will blow up an account.
And finally, the last benefit…
Benefit #3. You can trade more stocks out there
I wouldn’t say you’re able to trade all stocks, because some more volatile and higher-priced stocks like Tesla or Amazon, could easily swing up and down by more than $100. Those are stocks that you will probably avoid even with a $5,000 account.
But you can now trade other stocks which are priced at $40, $50 compared to having a small account of $100 or $200. That’s kind of like another advantage to having a decent size stock trading account.
At this point, some of you are thinking, “Rayner, I don’t have $5,000, what’s the solution?”
Two options for you. Number one, if let’s say you don’t have $5,000. Maybe you only have $500. My suggestion is to do paper-trading in the live markets. There’s no risk involved for you.
In the meantime, while you’re doing paper trading, you can get familiar with your trading strategies, see how they perform in the live markets, get comfortable with your platform. Then over time, save up the money from $500 to $5,000.
And hopefully, during paper trading, you gain the confidence in your trading strategy to be able to take it in the live markets with $5,000 and with using proper risk management.
There’s no point trading a sound trading strategy, but you only have to $200 in your account as you can’t apply proper risk management. Make sense? And if you don’t go down that route, then the other option that I have for you is to trade other markets, like forex.
Forex trading allows you to trade nano lots with a $500 account, where you can still apply proper risk management and that’s probably a topic for another day. That’s my other solution for you.
As a quick recap, let’s talk about what we’ve discussed.
- You can start stock trading with $100, $200 but you will likely blow up the account
- Start with at least $5,000 so you can trade most stocks out there, apply proper risk management & prevent blowing up your trading account
With that said, I wish you good luck and good trading. I will talk to you soon.