The Formula for Finding Your Sweet Spot
The initial investment formula you use depends entirely on your goals and trading style. As a beginner, though, remember to consider the amount of money you’re willing to risk.
You can calculate your initial investment using an initial investment formula, but if the result is more money than you’re comfortable with investing, it’s moot.
I’m a big proponent of crawling before you walk. In other words, don’t blow a ton of cash on the stock market before you know what you’re doing. I see a lot of amateurs crash and burn because they didn’t take the time to understand the stock market first.
A common initial investment formula looks like this:
Initial Investment = [Number of Trades x ((Lot Size x Lot Volume)/ Leverage)]
That assumes you’re using leverage, which isn’t a great idea. You might get that advice from your broker, but you have to remember that brokers are in this game to make money. When you trade lots of stock, they take home cash.
Don’t listen to your broker if a recommendation makes you uncomfortable. Listen to your gut and trade conservatively. It’s a great way to help maximize gains and mitigate losses.
Ideal Initial Investment Indicated for Beginners
Honestly, there’s no perfect number for an initial investment, but keep it manageable.
When you have a huge trading account, you’ll feel tempted to trade huge positions. That’s great when you have lots of experience, but it can prove dangerous if you’re new.
Five hundred dollars can be a good place to start. It’s a common initial investment minimum, and can help you get your feet wet without tempting you into bigger plays.
However, it depends on your net worth, too. If you have a net worth of $1 million, there’s no reason to limit your initial investment to $500. Instead, you want your money to work harder for you, so learn faster.
Minimum Capital Requirement to Day Trade
You might have heard of the pattern day trader rule. It’s a requirement set forth by FINRA for day traders who use margin accounts. If you make four or more day trades in a given week, you must have $25,000 minimum in your trading account.
This won’t apply to most of you. If you have a cash account, for instance, you’re not bound by the pattern day trader rule. Similarly, if you only day trade one or two times per week, you don’t have to follow the FINRA guidelines.
Look, I know you’re excited to start trading, but when you trade too often, you get cocky. You also lose money. I sometimes go days without trading at all because I don’t see any good plays. The same goes for other traders I know.
If you’re trading penny stocks, you don’t have to worry about many SEC regulations in terms of how the companies operate or your initial investment. It’s important to educate yourself about the securities industry and your responsibilities, but penny stocks aren’t subject to SEC filing rules.
Additionally, as long as you’re trading infrequently or holding plays overnight, day trading rules don’t apply. Learn the rules and know when you don’t have to follow them.
How Traders Can Optimize their Initial Investments
Education is your most powerful resource. That’s why I don’t tell people what plays to pick. I show them how I trade so they can repeat my successes and avoid my failures. That’s it.
When I got started in the stock market more than two decades ago, I didn’t have anyone to teach me. I learned by myself, reading everything I could get my hands on so I’d profit from the stock market. And it worked.
I’m living proof that knowledge is power. If you’re not willing to learn, you might as well do something else with your money.
To help optimize your initial investment, do your research first. Learn about chart patterns, fundamentals, and other intricacies of the securities industry.
The Bottom Line
Your initial investment turns you into a trader the moment you make your first play. It’s an exhilarating experience, but you don’t want emotion to take over.
Learn what chart patterns mean. Research companies that interest you. Set up Google Alerts so you learn about breaking news and catalysts before other traders.
Memorize stock market terms and learn how they apply to your trading strategy.
— Tim Sykes
Editor, Penny Stock Millionaires