How Much Money Do I Need To Trade Stocks?

Last Updated July 23rd 2021
17 Min Read

If you are thinking about trading stocks, there are a few things to consider.

Trading stocks for beginners isn't easy, and there's a high failure rate. Successful traders spend years developing their stock trading skills and also their mindset.

It's exciting to think it's possible to make a living from trading stocks.

Trading stocks can be frustrating, particularly when you don't know what you are doing, and you may need more money than you think to start trading stocks.

You may dream about giving up your full-time job to work from home, supporting yourself with your skills from trading stocks. But how realistic is it to make a living from trading stocks? How much money do you actually need for trading stocks, and can you do it on a shoestring budget?

The problem is that novice investors get a bit of success using a stock simulator and promptly jump into the stock market expecting the same results, and they try to do it with limited capital.

The sad truth is that most stock traders lose money over the long term.

Trading stocks is not just about finding a few good stocks, working with a proven trading strategy and banking the profits.

To become a successful stock trader takes hard work, mental discipline and ongoing trading education. All too often, the emphasis is on speed. You want results fast. You want to hand in your notice and live a glorious lifestyle from your stock trading profits.

In reality, it can take years of practice, and lots of mistakes, before you develop the skills, focus and discipline, required to trade stocks successfully. Many other trading education establishments may tell you how easy it is, and all you have to do is follow a process.

We believe it's more important to go into trading stocks with your eyes open and realistic expectations. When you know what you are truly up against, there'll be fewer disappointments, and you'll be more committed to your long-term goals for trading stocks.

We get many questions like, 'can you day trade stocks with $100?' and 'can you start day trading stocks with $500?' But these are the wrong questions for a positive trading approach. The answer to both questions is no because you'll lose that money pretty quickly.

We're not trying to shatter your dreams of making a living from trading stocks. It is possible to build a lifestyle from trading stocks, but you need to go into it with your eyes open and with realistic expectations.

In this article, you'll learn how much money you need for trading stocks. But you'll also find out the essential steps for how to make money trading stocks at home.

In conclusion, you will be fully prepared, knowing what you need to do to become a professional stock trader

Contents

What Is Stock Trading?

Typically, we think of the stock market as an arena for long-term investment in stocks and shares. A stock investor may hold onto stocks for five to ten years, allowing for the price of the assets to balance out and gain over that period.

Trading stocks is short-term. You buy and sell stocks frequently, intending to make a profit from price fluctuations. You may buy and sell for a higher price or sell a stock anticipating a price drop. Depending on your strategy, you may buy and sell frequently throughout a trading session in one day.

How Hard Is It to Make Money from Trading Stocks?

If it were easy to trade stocks, we'd all be swanning about in our Ferrari's.

Stock trading for beginners will push your buttons because trading stocks may be the hardest thing you ever do. Trading stocks with real money is risky, but there's no easy way around your trading education.

The preferred route for stock trading for beginners is to spend time working with a stock simulator. You get a chance to become familiar with the trading platform, experience real-time trading and find stocks and shares that you enjoy trading.

Commit to a long-term program of learning. The longer you take to practice trading stocks, the more chance you have to succeed when you start trading stocks live.

Check Out: 5 Common Active Trading Strategies

What Kind of Trader Are You?

There are three forms of stock trading, and they are all different. Make a decision based on your natural temperament because it's near impossible to trade stocks as a scalper, day trader or swing trader all at the same time.

Scalping

The trader who scalps the market aims to get in and out of a trade quickly. You may trade news events where the price momentum speeds up or just look for stock trading opportunities. Typically, you hold trades for short periods, like five minutes and up to thirty minutes.

You pay commissions on every trade and, with scalping, you are taking multiple trades each day. It can become costly, so each trade needs to be large enough to cover the commission fees. What this means is that you need sufficient capital to be able to take multiple trades throughout the day.

Scalping stocks is challenging and not for the faint-hearted. The mental demands can be exhausting.

Day Trading

Day traders aim to take a small handful of daily trades, sometimes only one or two a day. They may start trading with the stock market opening and then commit to closing trades before the end of the trading session.

In the United States, stock exchanges require day traders to deposit and maintain $25,000 in their trading account. If you dip below the $25k, the exchange demands that you top it up before allowing you to take more trades.

As a day trader, your stop loss may be wider than a scalping trader uses. That means you do need a financial cushion. To cover commission fees, it's unlikely you will trade less than one hundred stocks or shares at a time.

If you have time constraints, you can find out how to day trade stocks in two hours or less.

Swing Trading

Swing traders look for the bigger market moves. They know that no stock price moves in one direction without pullbacks, so they ride the waves of momentum.

A swing trader may hold a trade for days, weeks or sometimes months.

Because swing trading stocks requires a much wider stop loss, the swing trader needs sufficient capital to support the trades.

The swing trader may have several trades running at the same time.

Strangely, the $25k ruling for day trading doesn't apply to swing traders.

You can find out more about swing trading stocks in our recent article, How Much Money do I Need to Swing Trade Stocks?

A Risk Management Plan for Trading Stocks

How you manage your risk determines the long-term outcome of trading stocks.

Novice traders tend to focus on winnings and forget to assess the potential loss for a trade.

There are three factors to consider before taking a trade

  1. How much could you lose? – are you risking more than 1% of your account balance? Sticking with a 1% risk means that you would have to lose 100 times consecutively before wiping out your trading account
  2. What is your risk to reward ratio? – ideally, never take a trade with less than a 2:1 risk to reward ratio (RTR). If your RTR is 1:1 and you win 50% of your trades, you'll be at breakeven at best.
    With a 2:1 RTR, a 50% win rate gets you ahead of the game. Even better is a 3:1 or 4:1 ratio. Big wins and small losses are how professional stock traders make consistent profits
  3. Have you looked at both sides of the trade? – don't fall in love with your trade. If you have analysed your trade for a buy, switch it around and see how the charts stack up for a sell. If there's any doubt, leave the trade and look for another

How Much Money You Need to Become a Stock Trader

With financial markets like Forex (Foreign Exchange), it is possible to start trading with a few hundred dollars. But, if you're planning to trade stocks, a few hundred dollars won't cut it.

If you dream of quitting your job one day, how much money do you need to trade full time? And is it possible to make a living trading stocks? Well, it won't be easy, but many traders are making a living from trading stocks.

Hopefully, by now, you have decided whether you want to scalp, day trade or swing trade stocks.

The consensus amongst the stock trading industry is that a $10,000 start-up capital is sufficient to start trading stocks. As a bare minimum, you can just about get away with $5,000.

Read Also: How To Make Money Trading Stocks?

How Much Money Do You Need to Trade Stocks for a Living?

You may be surprised to learn how much money you need to trade stocks to make a living.

The amount of capital required depends on your standards of living and your financial needs. It also depends on your level of risk.

Let's take a look at a couple of examples.

Your current PAYE income is $50k a year

You average a 5% a month return on your stock trading

You need to generate $4,166 per month

To create $4,000 a month, you need $80,000 of capital (5% of $80k = $4,000)

By any standards, $80k is a lot of money

Perhaps you are very good at trading stocks, and you consistently generate 10% a month.

You still require $40k of capital.

You could halve these amounts with margin trading, but it's a significant risk.

Perhaps now you appreciate the reasons why it is almost impossible to create an income trading stocks with a few thousand dollars.

How do successful stock traders manage to make an income?

Professional stock traders don't take out profits until they have built their account to a level where they can withdraw a monthly percentage without denting their working capital.

It may take years to build up enough capital. But if you compound your account daily, it can grow surprisingly fast.

If you started with $10,000 and made 10% a month, you're now trading with 1% of $11,000, and that's monthly compounding.

Daily or weekly compounding will build your account faster, subject to consistent gains and allowing for losses and commissions.

The Problem of Not Having Enough Capital to Trade Stocks

If you don't have enough capital, it may limit your trading efforts when you want to buy or sell more stocks, but your 1% account risk determines how many trades you can take at a time.

How Do I Make Money Trading Stocks?

The secret to making money trading stocks is to have a set of rules that you stick to 100%.

Talk to any stock traders, and they will tell you they have rules for stock trading.

Without rules, your stock trading will be random and impulsive. The below list is not conclusive, but it's a great start for stock trading for beginners.

10 Golden Rules for Trading in the Stock Market

1. Be Disciplined

You can't take a course on how to be self-disciplined. It's hard work and takes daily self-reflection. Keep a trading journal and document every trade. Write about your emotional state when winning or losing and what went right or wrong with your trades.

2. Have a Trading Plan

Fail to plan and plan to fail.

Have a set of rules for entering and exiting a trade and a set factor for closing your trades down for the day. You may end the day after three consecutive losses or three wins. It's your decision. Stick to your plan as this teaches discipline and shapes your behaviour as a stock trader.

3. Don't  Follow the Crowd

It's tempting to follow the latest tips on social media or a nudge from your trading friends. But, the best way to learn is to make decisions without the influence of others. Great traders suggest always doing the opposite of the mass market.

4. Don't Cut Corners

Stock trading for beginners can be frustrating. You want fast results. You want to tell your friends what a great trader you are. But cutting corners shifts your discipline away from your trading plan. You'll end up impulsive trading and lose money.

5. Don't Break Your Rules

The only person you are hurting when you break your rules is you. Your trading rules are guidelines for your success.

6. Treat Trading Stocks like a Business

Do you imagine sitting in your pyjamas eating crisps and turning up to your trading station when you feel inclined? What a compelling picture. But, it's not how you become a successful stock trader.

Treating your stock trading as a business puts you in the right mindset for trading. You don't have to wear a suit. You can if you want to, but commit to a regular time for trading stocks and ask your family not to distract you when you are working.

7. Trust Your Intuition

Trading stocks uses both sides of the brain, your creative side and the logical side. One is not better than the other. Over time, and with experience, you will develop a sense of what the market might do. You can enhance this ability with meditation or any quiet practice before you start trading.

8. Keep it Simple

There's no need to over-complicate stock trading, but many traders do so. You don't need multiple tools on your charts. Nor do you need to research for days. Focus on price action. Become familiar with your favourite stocks and shares and trade what you see.

10. Don't Revenge Trade

You're going to experience losses, and even professional traders lose. Indeed, you may be surprised at the low winning percentage for top traders. But their stock trading ethos is to maximise wins and minimise losses.

Professional stock traders may use a high risk to reward ratio, such as 4:1, which means they can lose four trades and still break even. When they win, the gain is significant.

These rules are not exclusive. There are many more rules we could add. But, these are priority rules that will stand you in good stead for trading stocks as a beginner.

Recap of How Much Money do I Need for Trading Stocks

You need significant capital to trade stocks, and it may take time to develop the skills required for consistent monthly profits.

If you have less than $5,000 to $10,000 to start trading stocks, it may be challenging.

If you have less than $1000, it might be better to look at another form of trading, such as Forex, which is low entry trading. We have an extensive blueprint for trading Forex with $1000 or less.

Don't give up but be sensible in your approach to stock trading

Create a trading plan and stick to your rules. Start with the 10 golden rules for trading stocks and add your own rules as you experience trading the stock market.

Learn with a stock simulator and find stocks with volume and liquidity. Become familiar with a handful of stocks and trade these daily.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Trading or investing in stocks may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.

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Read More:

Blueprint for Day Trading Stocks with $1000

Forex Vs. Stocks: Top Differences And How To Trade Them

Best Swing Trade Stocks to Buy

How Beginners Can Buy Individuals Stocks

How to Set Up a Multi-Function Account and Trade Stocks On All Major Exchanges

Key Benefits of Investing In Stocks

FAQs

Is stock trading worth it?

It depends on your reasons for trading stocks. As we've discussed, it may take a long time to develop the skills and mental discipline needed to make a living from trading stocks.

What are realistic returns for trading stocks?

It's a tricky question to answer because there are so many anomalies.

Trading returns could be 100% a year, or you could end up with less than you started.

It also depends on how much capital you have for trading stocks and your ability to trade and profit consistently.

If you have sufficient capital and can find good stocks to trade, you could aim for, say, 5% a month. At this stage, though, it's guesswork because your stock trading abilities are as yet unknown.

How many stocks do you need for trading?

Stocks trade in round lots of at least 100 shares. If a share is $20, you require $2000. If you are margin trading, this reduces to $1000.

How do I find stocks to trade

You can use a stock screener and set your parameters.

Look for stocks with volume and liquidity. Whether you are scalping, day trading or swing trading, find stocks suitable for your preferred strategy. For instance, day traders search for stocks that have a minimum of 1 million shares traded daily.

Become familiar with a few stocks and trade these daily. The more you know about the stock behaviour, the more chance you have of trading successfully.

Can I swing trade with $1000?

You may struggle to swing trade stocks with $1000. You have to pay commissions on each trade, so the size of your trades needs to allow for commissions.

 It's easier to trade stocks if you have a minimum of $5000 - $10,000 capital.

 You can read our report on How Much Money do you Need to Swing Trade Stocks.

Can stock traders use margins?

With margin trading, you can buy more stock than you can with your own capital.

For this, you have to apply for a margin account, which your broker approves.

Margin trading is risky, especially for stock trading. For novice traders, it's challenging to say the least. Use margin sparingly or not at all.

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