Trading techniques have evolved over the years. Traders can start their journey in the financial markets with much lower capital than was required even a decade ago. Now, all you need is a computer, good internet connectivity and a regulated broker to start trading.
With this in mind, here’s a look at how to build your portfolio on a budget.
How much money do you need to start day trading?
Trading with a small amount of money requires preparation. It’s important to consider the following questions:
- Do you have the time to hone your trading skills?
- Do you have market knowledge and understanding of how things work?
The amount of money required to start day trading depends on the choice of securities. Stocks are usually traded in round lots or for minimum orders of 100 shares. So, to buy stock worth $50 per share, you will need at least $5,000 in your account. In some countries, stock trading entails minimum trading account capital requirements, as stipulated by the financial regulatory body.
There are no such legal minimum requirements in the forex market. Many brokers will allow you to start trading currencies with $100 in your account. The same is true for cryptocurrencies, which are typically traded through CFD accounts. Most CFD providers will require a minimum deposit of $1,000. If you have a leverage of 1:50, your available capital goes up to $50,000. However, always remember that while leverage allows you to open larger positions than you could with your own capital alone, this increases both the profit and loss potential.
Trading on Leverage
Both the concept of leverage and margin trading need to be understood as they are vital tools that could allow you to gain high exposure to the market, even with a low-budget account. Leverage shouldn’t only be taken to increase the trade size, but rather to reduce the margin requirements. It is also important not to trade highly leveraged instruments simultaneously. If you do trade on leverage, make sure you choose a regulated broker, who will follow stringent regulatory guidelines.
One-Percent Risk Rule
This is an effective risk management tool for traders. Day traders usually do not risk more than 1% of their trading account on a single position. By following this rule, an unexpected market turn won’t significantly deplete your account.
How to open a trading account with a low budget
Opening a trading account with a broker offering CFDs is usually straight-forward. You register online, provide identification documents, deposit into your trading account, download their online platform and start trading.
Most brokers also offer to trade on a demo account. This is a great way to try out the platform, practice trading and develop trading strategies too.
Perhaps your most crucial decision is choosing which broker to open your trading account with. It’s always smart to choose a regulated broker since you will be entrusting your hard-earned money with the firm. For example, a broker operating on Australian shores should be licensed by the Australian Securities and Investments Commission (ASIC). Other notable regulatory bodies include the Financial Conduct Authority (FCA) in the UK and the European Securities and Markets Authority (ESMA) in the EU.
Regulated brokers offer benefits for smaller account sizes, such as:
- Protection of client funds
- Segregation of client accounts
- Negative balance protection
- Robust trade terminals for fast trade execution
- Multiple assets to trade
- Financial reporting and audited statements
- Multi-lingual support team
- Educational resources to strengthen trading knowledge
- Tighter spreads and transparent commission system
- No manipulation of trades
The last point, in particular, deserves special mention. It is vital that you understand the profit-making model of your broker. A market-maker differs from an ECN broker. The latter offers you direct access to the best market prices, while the former could trade against you. When the broker’s interests take priority over your own, you know you are at a disadvantage.
CFDs Vs Exchanges
Trading cryptocurrencies or even company stocks on exchanges are common. But if you’re on a tight budget, Contracts for Difference of CFDs could be a preferred option. These are derivatives that allow you to speculate on price movements of an asset without needing to actually own the underlying asset. This means that you can enter into positions with much less capital than would be required to buy units of the asset – a clear advantage for those with little starting money.
Another clear benefit of CFDs over exchanges is that you don’t have to have a wallet to hold your cryptos. This means there’s no risk of being hacked. Also, you can trade in both rising and falling markets. With CFDs, you agree to exchange the difference in the value of the underlying asset, between the beginning of the contract and its end. You cannot lose more than the trading balance. CFDs are often considered as a better option for day trading cryptocurrencies because the spreads are usually lower.
CFDs also offer considerable flexibility. You can choose to trade forex, equities, commodities, and cryptocurrencies via CFDs. One of the major advantages clearly lies in access to global markets from a single platform, which is cost-effective. CFD brokers offer the same order types as traditional instruments, including risk management tools, such as stop-loss and limit orders.
One thing to be aware of, however, is leverage. Almost also CFDs involve leverage compared to crypto exchanges which often do not support leverage trading. Leverage provides more market opportunities but also hikes risk levels.
Trading with a small account is indeed possible, by choosing the right broker and financial instruments. However, it is always smart to put adequate risk management measures in place.
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