Why opening an account under $1,000 is dangerous

A few weeks ago I came across a new trader seeking advice. He opened a $500 account and asked what percentage he should be trading with.

This reminded me when I originally started trading with $500. I had no education and no ideas about position sizing. Months later, I realized there's little opportunity with a small account, and here are two reasons why you should save up and study backed with my personal experience.

 

Commissions

The first reason why trading with $500 is a challenge is easily explained from my first trade.

I made a staggering 20%, but earned only four dollars after $17.90 in fees. With a small account, trading comissions erase profits and turn breakeven trades into losing trades.

If you're all in with a $500 account, you'll make 30 dollars after commissions with a 10% trade. Under a $3,100 account, you can make 160 dollars if you make 10% with an $1,800 position.

You want commissions to take only a small percentage of your gains to grow your account easier.

 

Cash Account Disadvantages

In this email, I received a notice that my trading account was going to be restricted for 3 months. This was a result of trading without waiting for my cash to settle.

If you trade a $200 position in your cash account, than you have to wait 3 days until you can use that $200 again. The only way to avoid this is with a margin account, which has a $2,000 minimum requirement. Secondly, there is no ability to short stocks under a cash account. Shortly after this email, I gave a break from trading and decided to study and save up.

 

Conclusion

Trading is a rewarding experience when mastered, so build a strong foundation. Study DVD's and video lessons and you'll have valuable education behind every trade you make.

For example, PennyStocking Silver is a subscription by Timothy Sykes that gives you access to over 3,000 video lessons archived from 2010.

There's plenty of information available, so take it as you're saving up for a bigger trading account. This way you're better prepared and you'll avoid those limits that come with a small trading account.

Stock Market Mentors

Tim Sykes -  Pennystocking Silver

Paul Scolardi - SuperPro

Matthew Owens - Triforce Trader

 

DVD's

Tim Grittani- Trading Tickers

Timothy Sykes - PennyStocking Part Deux

Nathan Michaud - Textbook Trading