$1000 to start…Not so FAST
I wanted to discuss with you how trading with only $1000 for a new trader in a small account can cause more harm than good. You see more and more of this on Social media, where someone turned $500/$1000 into 50k or more. It’s the new way to sell chat rooms and services.
Now what the folks that open these small accounts don’t tell you, is for one thing they have been trading for a while. They’re not Newbie traders. Secondly, they have money in the bank so that if the account goes bust, they can cover all losses. They show you the accounts that win but not the ones that they blew up prior to hitting that large gain. When you watch their videos they always hit that one trade that they went all in on and get a huge gain. So, you try to emulate that and you get wiped out.
I have been trading (Swing trading, Day trading, Long term trading) for over 15yrs and I doubt I could turn 1$k into large sums of money on my first try.
With swing-trading, you have a better chance with a small account. Sometimes it is not even about the $1000 but the feeling you get when it is all gone. You say to yourself, ‘why wasn’t I able to do it?’ ‘What is wrong with me?’ The mental pain and anguish you go through and the resulting turn-off to trading and investing stops you in your tracks. And you say, if only I did it the right way…
Yes, it is exciting that you are about to open an account with a Broker and begin trading. You have been studying stocks and charts watching videos of big traders turning $500 into $50k $75k and more. You say ‘hey I’m doing this like those guys that make the videos saying they turned $500 into $10 k or more.’ Yes it is possible, anything is possible. But that isn’t what happens to most people.
This is what usually happens. You open an account, get margin but you end up paying high commissions and platform fees. Being on margin is great – all this buying power that you know might allow you to double your money. You may do great on your first few day-trades to make $50 then $100 may be even $200.
But as you do better, you take a larger position size because you’re gaining confidence. When you play too small you can’t make money because the commissions eat at your gains. So you play larger and higher margin and now if you lose too big on a trade and blow out your account, not only did you lose the original money but you’ll owe on that buying power that allowed you to play a larger size. So, if you started with $1000 and lose that and the trade went against you $600.00, you’ll owe the broker $600.00 plus interest. The other gotcha is that you have to pay the platform fees so you have to step it up since the fees are due soon or you may have paid them up front. You get caught in a hole that is hard to dig your way out of.
This is the financial loss. However, the real loss is the mental anguish from that feeling of failure. The enormous pressure that was on you to turn this $1k into thousands. Not to mention that it taught you to trade the wrong way. Trying to do lotto type trades is not going to lead to long-term success. It will just ruin you as a future trader and any chance of success you may have had. If you want to tell me you’re doing it for practice with $1000, then do it in a cash account through a broker with no margin and follow the PDT rule. Since it is for practice, you don’t need to practice every day and study in-between.
So what should you do if you have $1k and you want to get into the stock market? First off, don’t quit your job and say you’ll become a day-trader – not going to happen. You’ll never make it. Obviously you want to keep your job but studying and learning can continue. That costs you nothing.
So how much should you have before you start trading and what type of trader should you be? In my opinion you should wait until you have $5k and should become a long term investor. Don’t invest all of the $5000, keep some in the bank for emergencies. You could buy SPY or QQQ or the DIA ETFs and gradually buying these in increments each month or every 3 months. You can find brokers that do not charge commissions; these can be a great starting point but always do more research for yourself before selecting a broker. As you invest and get older and have more income and savings, you will gain confidence in yourself and feel more secure. During this time, you will have learned more about the markets and how they work.
Take personal responsibility for your finances and investments. Become educated and informed – know what you are doing.
The other thing you should do, if you are working, is check if your employer has a plan to invest in, such as an IRA or RRSP (Canada) and add to that each week or month. This is a very good way to start investing.
I know many want the dream of being a day-trader but that can be something for you later, in the future. But if you’re young, work and invest for the long term. Even work 2 jobs if you can in order to allow yourself to save faster. So that when you have over $25k, you can think about becoming a day-trader and being your own boss. By then, you will also have studied and readied yourself to become a good trader by building up knowledge with the Funds that you have already begun to invest in as well as gaining experience in the Markets. This prepares you for the next part of your journey as a Swing-trader and then possibly adding Day-trading into the mix.
It is a journey to become an investor of different levels – don’t be in such a rush to get there and be financially ready for it. The amount of money that you have determines the type of trading strategy you should use. The less capital you have to invest, the longer the trading outlook you should have. Swing trading is a better option for smaller accounts than day-trading. The objective is to build and grow your account in order to give yourself more options. That’s why I don’t just focus on day-trading, I also I have an eye to the short-term swings and long-term trades.
The Market will always be there when you’re ready. Your challenge is to make yourself ready.