A:

The step towards becoming an active trader is a big one, because the world of active trading is quite different from that of casual investing. It is important to understand the implications of making the switch, including increased commissions, which could be wipe out your gains before you really begin.

Commissions

Commissions most likely are the largest cost you will take on as an active trader. Other expenses, such as software, Internet, and training costs, could be high, too, but often they are dwarfed by the cost of commissions. A trader sometimes will make over 100 transactions per month and commissions can vary widely depending on the broker you are working with. It is important not only to shop around for the best software, execution speeds, and customer service, but also to look around for commission costs that are most favorable to you.

Things to Look For

Although there is no hard and fast rule for how much you should have in your account to start trading, many brokerages will set this amount for you. For example, a brokerage may say that you need a minimum of $3,000 to open a margin account, the type of account you would need to make short sale trades or to purchase or sell options.

For a good start, be sure to look out for account minimums at the brokerages you investigate. This number usually is set for a reason because it is in the brokerage's best interest to keep you trading for as long as possible to ensure that they continue to collect commissions. These minimums often are put into place to reduce the risk of you burning up your entire account in just a few trades, or even worse, getting a margin call. In the case of the latter, you would have to deposit more funds into your account in order to keep your current position open.

To learn more about commissions, be sure to read Defining Active Trading and Evaluating Your Broker.

This question was answered by Ayton MacEachern

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