With billions of dollars exchanging hands every day on Wall Street, trading stocks certainly can seem like an opportunity that’s too good to pass up. But, when it comes to the stock market, the old adage “it takes money to make money” rings very true. In order to sell a stock for a profit, you need capital to buy it in the first place.
A Penny For Your Thoughts
Just how much capital is required to begin trading stocks?
If the goal is simply to buy and hold stocks for long-term gains, very little capital is required to start trading. Most online trading platform have minimum deposits ranging from $0 to several thousand dollars. If you find the right broker, you can start buying stocks with $500.
However, with only $500 in a trading account, there are a few issues to consider. First, the stock market averages long-term annual gains of around 7 percent. With $500 fully-invested in a broad U.S. equities ETF such as the SPDR S&P 500 ETF Trust SPY 0.15%, a 7 percent return means only $35 of profit per year, minus commission.
Nickels And Dimes
Commission is another issue. Commission fees range from $3–15 per trade for most online trading accounts. Even if you only make five trades per month, a $10 commission means $600 in annual trading fees. Making too many trades without enough capital is the quickest way to lose money trading stocks.
If you plan on making more than four U.S. stock trades per week, the Financial Industry Regulatory Authority (FINRA) requires a balance of at least $25,000 in your account. According to trader Cory Mitchell, that means traders should start with no less than $30,000. But even at $30,000, the math shows the disadvantages traders have.
Mitchell recommends traders risk no more than 1 percent of their total capital on any single trade. That means no more than $300 per trade for a trader with $30,000 in capital. Even a 10 percent gain on a $300 trade would only be $30. Once taxes and commissions are subtracted, that may only leave $7 or less in profits. And of course, any day trader will tell you that 10-percent day trading gains are few and far between.
One trader on Quora pointed out that it would be difficult for even the best day traders to earn $1,000 per day trading with $1 million in capital. “If you want instant gratification, get a pet,” he added.
Dollars And Sense
Here are some sobering statistics on day trader performance. A 2004 study from the University of California – Davis found that over five years, more than 80 percent of day traders in the Taiwan Stock Exchange lost money during a typical six-month stretch. The same study found that only 1 percent of day traders were consistently profitable.
According to tradingsim.com, the prospects aren’t good for day traders starting with less than $50,000.
“If you are attempting to day trade with less than 50k dollars and you have any monthly expenses, you will be out of money within 6–24 months,” the author explained.
The author suggests that even $250,000 isn’t enough to day trade for a living if you also have bills to pay.
If you are considering day trading, the first step in the process is to assess your situation and set realistic expectations. Day trading is a skill that few traders can master, and even the ones that do take years to become consistently profitable. The less capital you start with, the less likely you are…
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