How Much Initial Capital Do You Really Need?
Today, I’m going to talk numbers, so bear with me …
Knowing the ideal initial investment you need as a beginner trader is fundamental if you want to start your adventures in the stock market off on the right foot.
But don’t panic. You don’t need to have a degree in math to understand the basics of your initial investment. In fact, it might be easier than you think to decide how much money you need to deposit in your brokerage account.
If you’re familiar with my work, you know that I started trading with just over $12,000. That’s not a magic number — it’s just what I had.
Some people make an initial investment in the six figures, while others start with several hundred. What I want to share with you today are the considerations you need to take into account before you make that initial investment.
What Is an Initial Investment?
Your initial investment is the amount of money you deposit in your brokerage account to begin trading. You can’t trade stock without money, so you need cash in your account to buy and short stocks.
Don’t put every penny you have to your name in your brokerage account. That’s a recipe for disaster. You only want to trade with money you’re prepared to lose. According to Medium, about 90 percent of traders lose money in the stock market. It doesn’t mean that you’ll lose, but you have to accept the risk.
With that in mind, have a conversation with yourself. Be honest. How much money are you willing to risk on day trading, intraday trading, or other investments? If you share your finances with someone else, such as a spouse, make sure you clear your decision with him or her.
To give you a starting point, finance experts recommend keeping at least six months of living expenses in savings. That way, if you lose your job or incur an unexpected expense, you don’t have to scramble to come up with the cash.
Make sure you know how much you earn every month and how much your household spends. Taking the time to crunch those numbers will protect you from making too big of an initial investment in the stock market.
Factors That Affect the Initial Investment That a Trader Requires
As I mentioned before, there’s no magic number when it comes to an initial investment. You have to consider several factors, and not all factors will apply to your situation.
Let’s be clear: I’m not going to tell you what initial investment to make. Instead, I want to help you decide that for yourself. I’m not a financial advisor. I’m a teacher. If you can make these decisions on your own, you’ll be a better — and more conservative — trader.
To trade in the stock market, you need a brokerage account. Your broker allows you to trade stocks through your account based on how much money you have and any rules that apply, which I’ll cover in a minute.
Every brokerage firm decides whether it wants to set a minimum initial investment. Among those that have a minimum, you’re probably looking at a few hundred dollars since you’re a retail investor. However, the bigger investment firms can have minimums of $1 million or more.
Don’t worry. If you’re a beginner stock trader, you don’t need to worry about playing in those leagues. There are plenty of retail cash brokerage accounts that don’t have any minimums at all. You can open your account at your leisure, then deposit money when you’re ready to execute trades.
Costs and Fees
Brokerage firms don’t allow you to trade for free. The only exception is when you make a certain minimum investment that qualifies you for no commissions for a specific period of time.
This type of promotion is common among retail brokerage firms because it helps bring in more traders with larger initial investments.
Even in those cases, you’ll eventually have to pay.
A commission is a set amount of money that the brokerage firm charges per trade. Some firms charge by the share, but most charge by the trade. In other words, if the commission is $4.95, you’ll pay $4.95 whether you’re trading five shares or 5,000.
Some firms also charge account maintenance fees. They’re similar to annual fees on credit cards. Other fees you might expect to pay include low-balance fees, transfer fees, and bank wire fees.
Do your research to find a brokerage firm that allows you to trade at the lowest possible cost.
Tomorrow I’ll talk about the different types of trading accounts available to you.
You can open lots of different types of trading accounts, each of which might require a different initial investment.
I’ll get into all the details in tomorrow’s issue.
Editor, Penny Stock Millionaires