A frequently asked question from people who are considering learning to trade with us is “how much money do I need to trade?” I usually answer that unless you are planning to day trade, you need a lot less startup money than you might think.
IF YOU ARE STARTING WITH A SMALL BANKROLL YOU WILL NEED TO STICK WITH LOW PRICED SMALL-CAP, LOW-END MID-CAP AND GROWTH STOCKS. TRY TO FIND STOCKS WITH DECENT FINANCIALS IN THE $5 TO $15 TRADING RANGE. SWING TRADING THESE TYPES OF STOCKS IS THE NAME OF THE GAME WHEN YOU HAVE LIMITED CAPITAL.
The financial community has made it a lot easier for small investors to get involved in the market. In this article we will examine the things they have done that has made it imperative that everyone should start immediately to get involved at whatever level you can. Even if that means trading using a trading simulator until you build up enough capital and experience to get in the market. We like to use Tradingview.com for our simulation trading. We recommend all new students to paper trade with Tradingview.com until they become proficient at trading.
Table of Contents
- Recent industry changes make It easier for small investors
- Focus on one stock at a time
- What’s the best trading style for a small bankroll? (building positions)
- Plan to continually add more to your bankroll
- Conclusion
Recent Changes make it easier for small investors
There has been a quiet revolution going on in the investment community. No longer are brokerage firms focusing solely on big ticket clients. Brokerage firms finally woke up and recognized the huge amount of money small investors can bring into the stock market. They have made a concerted effort to lower the barriers to entry so that these smaller investors will get into the game. They have done this with two relatively recent changes have made it easier to start investing and trading stocks. These two are:
- Little to no account minimum balances
There are many online brokers where you can establish a trading account with as little as a few hundred dollars. There are even some that you don’t have to deposit any money to open an account. If you want to trade, and you have a little money you can still most likely find a brokerage to accommodate you.
Do you due diligence and at first you should try not to be picky. As your trading pot grows, you can then consider some of the bigger names in the industry like TD Ameritrade. They also have very low minimums so don’t assume you can’t use them, check out their web site and see if you can get an account set up if you really want to.
The fact that you can start a trading account with such small amount of money is the key that allows new traders and people with only small amount of money the opportunity to get started in the stock market. - Zero Commission Trading
The next change made by the brokerage community is that most of the top shops have gone to a zero-commission going model. This is a game changer for small traders. While the old fee structure was pretty reasonable, if you were a small trader the percentages were still very high, and it made it almost impossible to make money.
With commissions eliminated, you can slowly build a position in a stock and not drown in fees. The commission charges you would have paid in the past, are now literally yours to keep. It is a lot easier to become a successful trader without these costs weighing on you and your trading.
Focus on one stock at a time
Many financial professionals advise you to diversify to stay safe when you buy stocks. With a small bankroll you need to do the opposite. You need to focus your buying power into one stock at a time. You must stick with that stock until you make that make it a successful trade. Stay small, add to your position strategically and make defense your best offense.
If you spread yourself too thin with a limited bankroll you are asking for trouble. I believe you will end up with a bunch of underperforming positions rather than one winning position.
What is the best way to trade for a small bankroll?
The best way to trade for those people with a small bankroll is to “build positions” in companies. This involves buying small amounts of the stock over time and averaging your position as the stock’s price comes down. If you focus on building positions at continuously lower average price you will eventually have a winning position.
Building positions is the way professional traders trade. Fund managers don’t plunk down their entire allotment of dollars at a single price point to enter a position in a stock. This would artificially drive up the price they have to pay to complete their purchase. This would make it much more difficult to have a successful trade. Instead they gently work the market and buy the stock in reasonable amounts and wait for the stock to come into them rather than chasing the market with a big order.
This is really the best way to trade and the way most professionals make money. It is the best way to trade with a small bankroll and over the long term will make you a better trader.
Plan to continually add more to your bankroll
When new students ask me about how much money they need, usually say something like “I have $250 to invest, is that enough?”. I ask them, “are you going to have any more money next month? It doesn’t have to be a lot; can you put together another $50? How about the month after that?
The secret to success in the market is get in a habit of continually adding money to your account. Continually adding money is crucial to your success. If you are averaging yourself into a position and you run out of money, add more as soon as you have some available.
If you make this a habit and continually add more money while building positions in stocks, in a short time your account is going to look very different that it did when you started.
Key Points to Remember
- Low account minimums and zero commission trading has made it extremely attractive for small investors to get into the market.
- With a small bankroll you must focus on a single position at a time
- Building small positions at a lower and lower cost basis is the key to working with a small bankroll
- Plan to continually add to your bankroll with the intent of compounding your gains over time
Conclusion
We have answered the question: How much money do you need to start trading stocks. We reviewed the key changes to the industry that have allowed the small investor to get into the market. We discussed why you need to buy one position at a time and focus your buying power. We discussed they type of style you should trade with. Finally, we discussed how you must consistently add more money to your account and build you investment dollars as time progresses.