Monday, November 7, 2011

How to Start Trading Stocks with Little Money

A few people have asked me how to start trading stocks with little money. I suppose the easiest answer would be to tell them small capital investing is best done in venues other than the stock market. We'll take a few moments to explore how you can make money investing with little money to start and why the stock market probably isn't your best overall option.


Why the Stock Market Isn't the Place to Begin as an Investor

Everyone will tell you that investing in the stock market is risky, but that is not the reason the trader / investor just starting out shouldn't start here. All investments carry some for of risk, and in general the rewards earned from an investment should be proportional to the risk taken on. The reason why a person with a small amount of capital shouldn't start out trading stocks is the basic mechanics of the market. Trading stocks has specific costs which immediately eat into profits. As a result, the cost/profitability hurdles (in percentage terms) are much higher for a person with $1000 to invest than the person with $1000000. Typical daily returns on stocks are less than 1% per day, yet transaction costs on a $1000 investment typically would be at least 5% (getting into and then out of the stock). A day trader with just $1000 capital is likely to lose their entire stake over time just to transaction costs... and that doesn't even bring the cost of the bid/ask spread into the discussion. People wanting to know how to invest in the stock market as beginners really need to think about simplifying their investment choices. Making money trading stocks is more complicated than the new investor can be expected to handle in today's fast-paced market.

How Much Money Does It Take to Make Money in the Stock Market

I don't think there is an easy answer to this one, but as best I can tell based on today's yields I think it's safe to say a half a million dollars would be a minimum starting point to make decent money in the stock market. I tend to focus on how much money would a trader have to have ready to commit at prevailing top yields (for moderate risk) in order to make a median wage. A person with enough time to research could probably find a few investments earning 6-7% yield which (on a half million dollar investment) would earn income of $30-35K annually. That's a far cry from the median wage of upwards of $45K, but you could at least pay a modest size mortgage with that level of earnings.

How to Start Trading Stocks with Little Money

I imagine most people reading this column won't have close to the half-million dollar figure but still have a passion to make money investing in the stock market. So where does one go to learn how to start trading stocks with little money? I think the answer to that question lies with what investments are out there that pay high yields but have low transaction costs and can be made in small increments? The answer to how to start trading stocks with little money involves finding a way to invest small capital amounts in a way that offers a high enough yield to actually be worth the time and risk involved. It is for this reason when people demand, "Teach me to trade," I point them to a binary options trading system. It has all the elements needed for a beginner day trader: the contracts are simple, are traded in tiny dollar increments, and transaction costs are not a factor.

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