Very few people start out investing when they are rich and have a lot of money. Most people are hoping they can grow what little they have.
Just because you don’t have a lot of money doesn’t mean you should be deterred from getting started in trading, but if you have $1,000 lying around — or can save that much to get started with — here are some factors to consider to get the most from trading your small account.
How to Start Investing
- Know your brokerage firm’s account minimum deposit requirements
- Know the per trade commission costs and remember it’s charged for buying and selling, so break-even stocks can quickly drain your account
- Diversify your portfolio
Don’t think every brokerage firm will be anxious to take your $1,000 account. All financial institutions, including brokerage firms, have minimum-deposit requirements.
That means you would need to deposit a certain amount of money until your account is approved. A long-term buyer of mutual funds can often beat back account minimums by agreeing to have a certain amount — often as little as $25 per month — regularly and automatically deposited into an account, but when you are looking to trade stocks, you will want to find a reputable brokerage firm that has been reviewed by experienced traders that would accept a $1,000 deposit.
Don’t just look at the minimum; find out if the firm charges any fees if your balance falls below the minimum level; if it does, you could be facing an extra cost in your trading.
Know Your Costs
Speaking of costs, trading and investing can be expensive, eating into your trading capital if you’re not wise about your costs. Trading bonds brings the most expensive trading fees.
Generally speaking, you will pay commissions or trading fees when buying and selling stocks and ETFs. With a $1,000 account, minimizing trades — and therefore your costs — is important. For example, if your commission fees are $5 per trade, you would be paying $10 per round trip (when you buy and sell the stock). That means that 100 break-even trades would wipe out your account; you need to do more than break-even to cover your costs.
We all learned as kids the inherent danger of putting all of our eggs in one basket. In investing, diversification is spreading your investment capital across multiple securities.
When you’re first starting out, however, you might only be able to hold one or two securities with just $1,000. If and when you build your account and become consistently profitable, you will want to protect your money by diversifying your portfolio; in the beginning, however, you may have to accept non-diversification risk and build your account one trade and one security at a time.
A lot of investors start small, but it’s where you finish that counts. To finish big, you will have to watch your costs and your trading execution, look at account fee structures, and treat every dollar like it’s precious. Those practices will help you for the rest of your investing/trading career.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks. He’s taught over 10,000 traders and for a limited time.