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. How much will it cost me to become a casual investor on my own?

    Understanding the costs associated with becoming a casual investor is important if you want to be successful. It is important ... Read Answer >>
  2. How can I prevent commissions and fees from eating up my trading profits?

    First off, understand that there is no universal system regarding trading commissions charged by brokerage firms. Some charge ... Read Answer >>
  3. What happens if I cannot pay a margin call?

    Minimum margin is the amount of funds that must be deposited with a broker by a margin account customer. With a margin account, ... Read Answer >>
  4. I have only $500 to invest, am I limited to buying only penny stocks?

    No, you are not required to invest only in penny stocks - investors are generally not restricted to a certain kind of stock ... Read Answer >>
  5. How are the interest charges calculated on my margin account?

    One way that investors borrow funds from brokerages is through margin accounts; it is these interest charges that allow them ... Read Answer >>
  6. Why won't my broker allow me to sell one stock and buy another on the same day?

    There are two likely reasons why a customer would be unable to buy and sell a stock in the same trading day. For simplicity's ... Read Answer >>
Related Articles
  1. Investing Basics

    Start Investing With Only $1,000

    Find out what fees and restrictions need to be considered before investing $1,000.
  2. Options & Futures

    10 Tips For Choosing An Online Broker

    This important investment decision happens before you pick your first stock. Find out how to get it right.
  3. Investing Basics

    Opening Your First Brokerage Account

    Learn what steps you should take before you open your first brokerage account.
  4. Trading Systems & Software

    Top 10 Brokerage Firms For Day Trading

    Day traders have different needs from long-term investors. Investopedia rates the top 10 brokerage firms for day traders.
  5. Brokers

    Evaluating Your Stock Broker

    Make sure you're getting the best service by staying informed and involved.
  6. Options & Futures

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  7. Options & Futures

    Margin Trading: What Is Buying On Margin?

    The Basics Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able ...
  8. Forex Education

    9 Tricks Of The Successful Forex Trader

    These steps will make you a more disciplined, smarter and, ultimately, wealthier trader.
  9. Options & Futures

    Brokers and Online Trading: The Costs

    Opening an Account Every brokerage has different terms and conditions for opening an account. There is a wide range of minimum deposits, varying anywhere from $500 to $2,500. Make sure you read ...
  10. Active Trading Fundamentals

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
RELATED TERMS
  1. Commission

    A service charge assessed by a broker or investment advisor in ...
  2. Double Dipping

    For brokerage firms, when a broker puts commissioned products ...
  3. May Day

    Refers to May 1, 1975, when brokerages changed from a fixed commission ...
  4. Commission Broker

    Someone who gets paid by the brokerage company for which he works ...
  5. Soft Commissions

    Any type of commission that is not paid in actual dollars. Soft ...
  6. Commission House

    A brokerage or merchant firm which buys and sells futures contracts ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center