December 1, 2011 | In: General
Minimum Amount to Trade Stocks
Many of those who wish to enter the sock market are reluctant to do so because they don’t know what the minimum amount to trade stocks is, and they think that the total amount of money that they have is less than the minimum allowable. Also, and for some reason, many of those think that the minimum amount for stock trading is $100,000 (yes, that’s a hundred thousand dollars).
Let me first start by saying that in general, there is no minimum amount imposed by the broker (your bank) to trade stocks. You can start trading with as little as a $100. But, the question is, can you really trade stocks with a $100? I don’t think so, and here’s why:
- Commissions will kill you: With this little amount, you will surely be charged the maximum commission fee per trade. So, let’s assume you want to buy some SIRI shares at the current price of $1.80. The amount of shares that you’ll be able to buy with your $100 is: ($100 – $29.99) / $1.80 = 70 / 1.80 = 38 shares (more or less). Now you might be wondering, where did the $29.99 come from? Well, believe it or not, that’s the commission fee per trade! Now, let’s say that SIRI jumped to $3 (which is a substantial jump and will never ever happen overnight), and now you think that you made money and you want to sell. Here’s how much money you will get: 38 x $3 – $29.99 = $84. So now you have less money that you initially had, even after the huge jump in SIRI.
Maintenance fees will make your balance in the negative: Most banks charge maintenance fees for stock trading accounts that are worth less than a certain amount (usually $5,000 or $10,000). The maintenance fee can be as high as $150/quarter. Imagine what will happen to your $100 when the bank hits you with this fee come the end of the 3rd month…
You will have to wait forever in order to just break even: As you can see from the above, even when the stock went up to $3, you still lost money. You probably had to wait for SIRI to reach $4. But when will that happen? In two years? In five years? You would be lucky if that ever happens…
Stock trading won’t be fun: The very long wait means that you’ll be able to only do one trade every few years, not fun!
You won’t be able to be become a frequent (or active) trader and take advantage of special pricing: Active traders enjoy lower flat fees. Most banks will lower the fees by 2/3 (67%) for active traders. For example, at the Bank of Montreal, active traders (traders who make 30 trades per quarter) enjoy a low flat commission rate of $9.95/trade (for equities).
You are stuck with only one stock. How many different stocks can you buy with just $100 if your commission rate is almost $30?
Now, let’s ask the question differently, what is the minimum amount that one needs in order to trade stocks?
In my opinion the absolute minimum amount that one needs to trade stocks and make money is $5,000. Here’s why:
- You will be able to afford your broker’s commissions: Imagine that you want to buy SIRI shares. You choose to buy 1,500 of these shares at the current price of $1.80. Your total cost would be: 1,500 x $1.80 + 29.99 = $2,739. Now if SIRI goes up just 10 cents (or just a bit over 5%) to $1.90 in 2 weeks (which is very possible), then your gross profit will be $150. Now if you sell the shares at this price, then you will get: 1500 x $1.90 – $29.99 = $2,820. Your initial investment in SIRI was $2,739. So your net profit will be $81. Not too bad for this small investment and for this timeframe.
You will be able to diversify your portfolio: After you buy SIRI, you still have $2,261 left that you can invest in another stock. This way you will diversify your portfolio, and if you’re losing (temporarily) money with SIRI, you will be most likely making money with your other stock. The rule is to have at least 2 different stocks that are in different industries, this way when one goes up you sell it and you make money on it and you purchase a different stock, and when one goes down, you wait until it goes up!
You will become an active trader: Since you’ll be able to buy and sell stocks more easily (because you’re making money on them), you’ll make more trades per quarter, and you may very well become an active trader, and trust me, there is nothing more joyful than becoming an active trader when you’re a small investor. You will be able to save at least $40 in each back and forth trade. So, if you were an active trader, you would have made a net profit of $121 on the SIRI trade above.
Stock trading will be fun: When you buy and sell frequently, and you see yourself waiting for a stock to go up to make money, or waiting for a stock to go down to buy it (and then sell it when it goes up again), then you will feel that you are really having fun!
Of course, if you have more money you can invest it all in the stock market, but it’s wiser, in my opinion, to invest just $5,000 when you first start trading. It’s safer, and you get to learn the game with no stress, and most importantly, you will have fun!
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