Often you’ll hear how you have to start investing and there is no better day to invest than today.  I tend to think that’s a pretty broad statement and I can’t possibly know every one’s situation.  Today I want to talk about just how much money is required so trading commissions and spreads don’t eat up your hard earned dollars.

Money for Stock Market – If you’re long term buy and holding than I recommend you put into your IRA or 401K first.  If you’re using you’re 401k don’t worry about the minimum amount because you’re usually paying on the percent of assets you have invested.  If you’re investing in your own account or an IRA than I primarily would watch out for commissions.  I don’t like to pay more than 1% on my investments in buying trade commissions. 

% of investments = commission / total purchase price * 100

I pay $7 per trade so in my example 1 = $7 / total purchase price * 100

or (remember your algebra?) total purchase price = $7 * 100 / 1 = $700

Therefore, unless I have $700 I’ll wait to invest because I don’t want to give too much away to the brokerage.

Money Stock Trading- If you are actively trading your account you have to also watch for the draw down on your accounts.  The only way to know this is to test, test, test.  Say, your trading strategy wins 50% of the time.  This is not that unusual, many trade systems have lower win percentages than this.  With a 50% win-loss ratio you can expect one string in every 1000 trades to be 10 losses in a row.  Can your portfolio handle 10 losses in a row?  If on average you lose 10% on a trade and you’re leverage 2:1 you’ve lost 20% on the trade.  If you trade 30% of your account on every trade then you’ve lost 6% of your account on the trade.  Do this 10 times in a row and your down 46% from your high.  Can your system handle this every trade?  Can your emotions?  We didn’t even factor in commission costs yet. 

You can tweak for your own system, but a good general rule of thumb is not to lose more than 2% of your account on any trade plus you still don’t want to burn more than 1- 2% of your trade on commissions. 

So if you have $10,000 dollars and your max loss is 5% per trade and you leverage 2:1 You can trade about 17% of your portfolio per trade ($1700) where the commission will eat 0.8% (assuming $14 round trip commission). 

Whoa, I know lots of thinking, but if you want to venture into trading if you have to get a handle on your money management before you can make money stock market trading.

%RELATEDPOSTS%

Related posts:

  1. Trading Money Management
  2. Make Millions in the Penny Stock Market
  3. Knowing the Tricks of the Trade through Stock Trading Education
  4. How to Invest in the Stock Market: Make the Best Moves
  5. Making Money Trading Forex

« »