How Much Money Do You Need to Trade?
The question of how much money one should have before trading stocks has very few definitive answers. To get started trading in the stock market, a trader can turn a few thousand dollars in to a modest side income if they are patient and commit to learning as much about stock trading as they can. In order to determine how much money to save or set aside for a brokerage account, a number of factors should be considered.
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Fees
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The new investor must take in to account broker fees before trading stocks. While a new investor could buy only a few shares of stock if they have a limited amount of money, broker fees will range from $5 to $50 to buy and the same amount to sell. Broker fees and commissions can quickly erode any profits made if the initial amount of invested money isn't high enough.
Jim Cramer
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In his book Real Money, former hedge fund manager and trader Jim Cramer suggests beginning with no less than $5,000, but he says $10,000 is preferable. When investing, diversification is essential. By investing in more than one type of stock, the trader gains more protection from the potential losses. To diversify, Cramer suggests starting with five stocks and planning on one hour of research per stock each week.
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The SEC
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If the goal is to be a day trader, or one who buys and sells stocks on the same day, the Securities and Exchange Commission has rules in place to govern that style of trading. In order to be a day trader, the investor must have a margin account with their broker and have no less than $25,000 in their account at all times. The SEC doesn't recommend that a part-time trader perform day trades.
Percentages
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While making $50 on a stock might be exciting, the investor should look at the percentage of gain instead of the dollar amount. Making $50 on a $500 investment is an impressive 10 percent gain, but $50 on a $5,000 investment is a less than exciting 1 percent gain. Using this idea, a 5 percent gain on a short-term stock trade would be considered a great gain, but if only $500 is invested, that impressive 5 percent is only $25. And that may not cover a broker's commission.
Conclusion
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The most important thing to take in to account is the risk/reward factor. Is the risk of possibly losing money worth the small gains that would come with not investing a larger amount? Second, does the amount of time it will take to make good stock picks justify that amount of potential gain? While getting involved in the stock market and learning how to invest has no minimum, in order to make a significant amount of money, an investor should plan on having at least $5,000 if significant short-term gains are desired.
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