How much money do I need to start trading?

By Ayton MacEachern AAA
A:

The step toward 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 be 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

RELATED FAQS

  1. What techniques are most useful for hedging exposure to the banking sector?

    Learn how investors hedge exposure to the banking sector by investing in more aggressive sectors and also by investing in ...
  2. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    Learn about the value at risk and how to calculate the value at risk of an investment portfolio using the variance-covariance, ...
  3. During what stage of the economic cycle should I invest in the drugs sector?

    Learn why the expansionary stage of the economic cycle represents the best time to invest in the pharmaceuticals and biotechnology ...
  4. What is backtesting in Value at Risk (VaR)?

    Learn about the value at risk of a portfolio and how backtesting is used to measure the accuracy of value at risk calculations.
RELATED TERMS
  1. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
  2. Open Trade Equity (OTE)

    Open trade equity (OTE) is the equity in an open futures contract.
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  5. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  6. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...

You May Also Like

Related Articles
  1. Trading Strategies

    High-Frequency Trading Regulations

  2. Mutual Funds & ETFs

    Is Amazon a Prime Pick for Your Portfolio?

  3. Mutual Funds & ETFs

    Should You 'Like' Facebook in Your Portfolio?

  4. Mutual Funds & ETFs

    Google: Should It Be Part of Your Portfolio?

  5. Options & Futures

    Why Is Best Buy Stock So Volatile?

Trading Center