I am going to answer a question that many readers have been asking me recently.
This question is certainly not a new one, and is likely to always be asked in the foreseeable future. Why is this? It’s because the question relates to pretty much everyone.
Every new investor or trader begins with a different account balance. Some brokers demand a minimum amount to even open a brokerage account.
Some years into my career, I had begun with different account balance levels as I tried out different systems I would create.
Let me begin by stating that this will be dependent on two major factors:
- Are you planning to invest long-term, or does active trading better suit your personality?
- What amount of money does your broker charge on a per order basis? The lower the amount the better.
When making long-term investments, a much smaller account size is not a problem. I only started with about $1,000 when I first began my full time career. I saw it and treated it like a sort of savings plan, and just made automatic diversions of money to purchase a specific stock or ETF (Exchange Traded Fund) each payday, and gradually built up my trading stake in this manner.
Indeed, by doing this, I created the disciplined habit of saving consistently and lowering my ability to just spend my pay by going out, purchasing things I didn’t need just to impress others, and so on. As my full time job’s pay increased, I continued to boost that initial amount.
As a consequence, for investment, you can start with literally $1,000 and begin saving.
With regard to trading, I will be blunt. The more money you start with, the better off you will be. This fact will upset some people, professionals and amateurs alike. Why is this? It’s because everyone has his or her own view, but I will provide mine on the basis of my experience of two decades length.
Many stock courses, and particularly forex courses, will say that even a $5,000 account will be enough as you can borrow the rest from your broker on margin.
I disagree with this.
Firstly, an amateur trader who does not have any market experience except for a little knowledge they just gained at a weekend course should not even consider trading with leverage.
The majority of courses teach people to just see the possible positive consequences, and not the very real risks. Leverage can easily be seen as a double-edged sword. It can make you, but it can also break you because people do not have enough practical market experience to be able to see the things that can really go wrong with regard to a trade, especially in trading with leverage.
Learning to trade is an endeavour that takes time, and the risk is only heightened by risk. When you trade without leverage, you are basically flying an airplane high in the sky, but when leverage is involved with a low balance account, your plane is now flying merely above a tree line with no room to maneuver if a disaster occurs.
During my beginning years, I experienced the negative effects of leverage, and found that even with only a marginal amount of leverage the results can be devastating. It decimated my first trading account in 90 days. The second time around I had to start from scratch.
Therefore, until you are able to trade profitability without leverage, your best decision is not to even think about leverage unless you have a strange desire to decimate your account within months or even weeks.
Others will say:
If I begin with a larger account, I might lose all the money as I am inexperienced. Therefore, with a smaller account, I can afford to lose the money and it will have no effect.
I disagree. The question I would pose to you is:
Are you seeking to learn to trade, or to gamble?
Any money, no matter how tiny the amount, is precious capital you cannot afford to simply “play” with and lose without gaining any sort of lesson from your losses.
There can be two consequences to losing your account.
One possibility is that you could keep on thinking that the market is like a gamble, and another is that you will now think that the market is too dangerous and completely quit. I think that the second consequence is extremely common, and it is a shame because you won’t have given yourself the chance to learn to trade in the right way.
Allow me to state that trading is not gambling despite what you probably hear from many amateurs, as well as those who have never really done any trading in the past. Trading should never be seen as a hobby. It is a business. The stock you hold is like any stock you find on supermarket shelves. It is purchased and sold, and this is hopefully at a profit margin. However, even in supermarkets, sometimes discounts are necessary to move stock, and the stock is then sold at a small loss to make way for new merchandise.
Trading has exactly the same.
In trading, I would never encourage any person to carry out trading with less than $25,000. You would benefit more by investing slowly through saving consistently until you reach this account size.
The greater amount of funds you possess, the more “flying” room you allow yourself on your new venture in trading, and the lower the risk you can take by way of diversification.
Here is a practical example that should explain this more clearly:
Picture an account size of $5,000.
You place two trades at $2,500 each, thus totalling $5,000.
One of the trades goes terribly wrong, and falls 30% overnight (this is common with regard to over-valued stocks).
At this point, on paper you have lost $750 (-30% of $2500).
The second trade has a bit better performance, and gains 5% or $125.
Net, you have fallen by $625 ($750 less $125) or -12.5% of your account.
Now imagine that you trade using a larger account of $25,000, and place the exact same two trades.
Being down the same amount of $625 is only 2.5% ($625 of $25,000) of your total account size instead of to 12.5% ($625 of $5000), a minor obstacle that needs to be overcome and can easily be dealt with by only a couple of better future trades.
Now imagine an account sized of $100,000. That same $625 loss is only .0625% of the entire portfolio, an amount that is easily offset by one strong trade or investment.
I am hopeful that these real life examples clearly demonstrate how the size of your account really does matter in trading.
I know how difficult it can be to save up a practical $25,000 account. I have been there, so I understand. But I don’t wish to give the newbie hopes that are actually false about trading. If I did so, it would be nothing more than a sales pitch, and it is not my intention to do that.
I want to provide a sense of reality to every newcomer, and if that means putting off someone’s hope of immediately trading, so be it. I would rather this happen than see someone’s money go down the drain.
Remember that sometimes, the tortoise wins the race…
