The step to becoming an active trader from a casual investor is a big one. Active trading is quite different from casual investing, and it is important to understand the implications of making the switch including increased commissions, which could wipe out your gains before you really begin.
Commissions are likely to be the greatest cost you will assume as an active trader. Other expenses, such as software, Internet, and training costs, could be high also, but they are dwarfed by the cost of commissions. A trader may make over 100 transactions per month, and the commissions will vary widely depending on the broker. Savvy investors shop around for the best software, execution speeds, and customer service, but also for favorable commission costs.
Different Trade, Different Costs
The amount of money you need to begin day trading depends on the type of securities you want to buy.
Stocks typically trade in round lots, or orders of at least 100 shares. To buy a stock priced at $60 per share, you will need $6,000 in your account. A broker may let you borrow half of that money, but you still need to come up with the other $3,000.
Options and futures trade by contract. A contract represents some unit of the underlying security. In the options market, one contract is good for 100 shares of the stock. These contracts also trade in round lots of 100 contracts per order.
You can buy less than the usual round lot for a security, but you will probably have to pay a high commission and receive poor execution of your order. Thus, the returns on each trade tend to be small, so make sure you have enough funds to trade your target asset optimally.
Bonds trade on a per bond basis, not in fractional amounts, and each bond has a face value of $1,000. Some trade for more or less than $1,000 depending on how the bond’s interest rate differs from the market rate. Many dealers have a minimum order of 10 bonds, so a minimum order would be $10,000.
Things to Look For
Although there is no hard and fast rule as to how much you need in your account to start trading, many brokerages will set the amount for you. For example, a brokerage may require a minimum of $3,000 to open a margin account, the type of account you need to make short sale trades or to purchase or sell options.
Research the account minimums at the brokerages that you find. This number is typically set for a reason. 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 are often designed to reduce the risk that you will burn through 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 to keep your current position open.