How Much Money do I need to Start Trading?
This stock trading question about how much money is needed to start trading comes from Mike C. whose #1 challenge is…
“What is a good size account to start with?”
In other words, how much money do I need to start trading?
It’s a common and important question. Too often new traders overlook the impact of various forces on their trading capital. I like to work backward:
- How many trades a year will the strategy generate?
- What commission does your broker charge?
The total commission drag of your account, commission rate x trades per year, should not exceed 5% of your capital, indeed the lower that amount is, the better off you’ll be.
Let’s say you are trading a strategy that is shorter term in nature. If your strategy makes 50 buy and 50 sells per year (100 trades) and the broker charges you $29.95 per trade, you’re up for $2,995. This would mean that the minimum starting capital should be $59,900 and that your need to return 5% to breakeven.
Consider however if your broker charged $6. Your commission cost drops to just $600 meaning you could theoretically start with a $12,000 account. That said, we highly recommend some buffer.
Both these inputs, the strategy chosen and the broker used, are within your control (Remember: Event + Response = Outcome). If you seriously want to stay with a specific strategy yet the commission drag is high, then you should either change brokers or save extra funds until that drag puts you in a much stronger position to be successful.