“How much money do I need to get started to trade or invest?”
This question is not new and will always be asked over time. Why? Because it relates to practically everyone.
Myth: You Need a LOT of Capital
A lot of people think that you need to have a massive amount of capital and because of that, they end up trying to save that amount of capital first before they begin their investing and trading journey.
And the truth is you actually only need as little as $100 to $200 dollars per month, as long as you find a very cheap broker and just begin investing (not trading) that way — I’ll explain in more detail below.
So there’s no need to actually have a massive amount of capital.
It’s just more of the importance of beginning right away and letting compounding do its job.
Every new trader or investor starts with a different account balance. Some brokers require a minimum to even open a brokerage account.
Over the years, I had started with different account balance sizes as I experimented with new different systems I would create. Let me start with saying that this will depend on two main factors before we even get into anything else.
Are you investing long term or does your personality prefer active trading?
How much does your broker charge per order? The lower the better.
How Much Money You Need to Start Investing for the Long-Term
When investing for the long term, a much smaller account size is not an issue.
I myself, started with $1000 when I first began to work full time.
I treated it like a savings plan, and just automatically diverted the amount to buy either a particular stock or ETF (Exchange Traded Fund) every payday and slowly built up my trading stake that way.
In fact, by doing that, it also helped me create a disciplined habit to save consistently and reduced my ability to just spend all my pay on going out, buying things I didn’t need to impress people I didn’t care about etc.
As my pay from my full-time job went up, I kept on increasing that initial amount also. Therefore, for investing, you can literally start with $100-$1000 and begin saving.
How Much Money You Need to Start Trading in the Short-Term (and Why You Should Avoid Leverage)
For trading, I will be blunt. The more you have, the better you will be. This will ruffle a few feathers I am sure, amongst amateurs or professionals alike.
Why? Because everyone has his or her own opinion but I will be giving mine based on my two decades of experience.
Many stock and in particular forex courses will advise that even a $5000 account will do because you can borrow the rest from your broker on margin.
I beg to differ.
Firstly, an amateur trader without any market experience besides a bit of knowledge they just learned from a weekend course should not even think about trading with leverage. Most courses teach people to just look at the upside, not the downside.
Leverage is a double-edged sword. It can make you or break you and from my experience, seeing so many traders over the years, it usually breaks them simply because they have not had enough practical market experience to know what can really go wrong with a trade, especially trading with leverage.
Learning to trade takes time and leverage only heightens the risk.
A metaphor I like to use is that you fly an airplane high in the sky when you trade without leverage, but once leverage is taken on-board with a low balance account, your plane is now flying just above the tree line without much room to maneuver if something does go wrong.
I have experienced the traumatic effects of leverage over my beginner years, and that is even with a small amount of leverage so I know how devastating leverage can be. It wiped out my first trading account within 90 days. I had to start from scratch the second time around.
So until you are certain you can trade profitably without leverage, it is best to not even think about leverage unless you want to blow up your account within months or weeks.
Are You Here to Trade or are You Here to Gamble?
Others will say; “If I start off with a larger account, then I might lose all the money because I am inexperienced and thus with a smaller account, I can afford to lose this money and it will not affect me.“
The question I would then ask you is; “Are you here to learn how to trade or are you here to gamble?” Any money, no matter how small, is precious capital you cannot afford to just ‘play‘ around with and lose without learning anything from losses no matter how small.
The (Unspoken) Consequences Of Losing Your Entire Account
Losing your entire account can have two consequences — either you continue thinking like the market is a gamble or you now believe the market is too hard and you quit, never coming back because you blew up your account.
I think the second is very common and a shame, especially if you really want to learn how to trade the right way.
Let me say that trading is not gambling despite what many amateurs and those who have never really traded before say (this of course depends if you are thinking long term or short term) and should never be treated like a hobby. It is a business like everything else.
Your stock of companies you hold is just like any stock you see on supermarket shelves. It is bought and it is sold, hopefully at a profit margin but at times, even stock that does not sell off the shelves of supermarkets are discounted and sold at a small loss to make way for new stock.
Trading is exactly the same. Therefore, for trading, I would never encourage anyone to trade with less than $10,000 (that’s trading without leverage).
Invest Before You Trade
You are better off investing slowly through consistent saving until you get to this account size.
The more funds you have, the more ‘flying’ room you give yourself on your new trading business venture and the less risk you can take through diversification.
Let me give you a practical example which should explain it better…
Imagine an account size of $5000. You place 2 trades at $2500 each, totaling $5000.
One trade goes drastically wrong and drops 30% overnight (by the way this is also common on overvalued stocks). Now you have lost on paper $750 (-30% of $2500).
The second trade does a little better, and it gains 5% or $125.00. Net you are down $625 ($750 less $125) or -12.5% of your account.
Now imagine you trade with a larger account of $25,000 and place the same 2 trades.
Being down the same $625 is just 2.5% ($625 of $25,000) of your total account size as opposed to 12.5% ($625 of $5000), a much lower obstacle to now overcome which can easily be made up by just a couple of better trades in the future.
Now further imagine an account size of $100,000.
That same $625 loss is a mere 0.625% of the whole portfolio, an amount easily made up by a single good trade or investment.
I hope the real-life examples clearly show how account size does matter when you trade.
I understand how hard it can be to save up a practical $25,000 account — I’ve been there so I know. But I also don’t want to give the newbie false hopes about trading easily and profitably with small accounts.
If I did, it would be nothing but sales and that is not my intention. I want to give every newcomer a sense of reality and if it means delaying someone’s hope of trading immediately, so be it. I would rather this than seeing good hard-earned income thrown down the drain simply because they were incorrectly sold into a false dream.
Sometimes, the tortoise does win the race…
Keep in mind these points the next time you think about how much money you need to get started in investing and trading.
Effective Trading Solutions Pty Ltd t/as theFreedomTrader.com is a Corporate Authorised Representative (CAR No. 1267698) and Terry Tran is an Authorised Representative (AR No. 1267697) of Australian Financial Advisory Group Pty Ltd (AFSL No. 475300).
Any information or advice contained on or disseminated through this website is general only in nature and does not constitute personal or investment advice.
You should seek independent financial advice prior to acquiring or disposing of any financial product. All securities, financial products or instruments carry risks. Past performance is not indicative of future results.