If you are thinking about getting started in the world of day trading, you may be wondering how much money you need. Day trading can be a great way to supplement your income without spending a significant amount of your time. You might get so good at day-trading stocks that you may be able to quit your day job down the road!
At the same time, everybody starts from somewhere. How much money do you need to get started? There are a few important points to keep in mind.
You Can Get Started with a Few Hundred Dollars
If you want to get started day trading stocks, you may not need any more than a few hundred dollars. The share price of companies can vary widely from less than $1 to several thousand dollars. If you have a few hundred dollars, you may be able to buy a small slice of some of your most popular companies.
In addition, depending on the brokerage firm you use, you may be able to buy fractional shares. This may allow you to get started with an even smaller amount of money. A good starting point for a small account is between $500 and $2,500. With a bit of practice, you may be able to grow your account quickly.
You Need Enough Cash To Cover Your Trades
In general, you will not be able to execute a trade unless you have enough cash in your account to cover the cost of the trade. If you begin the process of transferring money from your bank account into your brokerage account, you may be able to start trading stocks using that money before it has settled.
This is referred to as a cash settlement. After sending a request to your bank to send money to your brokerage account, it may take a few business days for the cash to arrive in full. You may be able to execute a trade before this transfer has completed. Once the transfer has completed, this is termed “settling.”
If you execute a trade and your cash does not settle appropriately, your brokerage firm may automatically sell whatever you have recently purchased to cover the cost of that trade. Therefore, you need to make sure you have enough cash transferring from your bank account to your brokerage account to cover the cost of any trade you execute.
What Happens When Your Account Starts To Grow?
When you get started, your day trading account may have as little as $1,000 in it. After you have been dating for a while, your account may grow to between $10,000 and $25,000. At this point, you are probably buying and selling trades and greater amounts. Depending on the setup of your brokerage account, you may have to pay income or capital gains taxes whenever you sell something and make a profit. You may be able to offset this profit by taking losses elsewhere; however, you do need to make sure that you pull out enough money to cover the cost of your taxes.
If your account grows to $25,000, you may want to think about putting some money away for the future. You want to make sure you are not playing with all of this money, as a volatile stock market could lead to significant losses. That is why you need to learn about the PDT Rule.
What is the PDT Rule?
The PDT Rule is an acronym for the Pattern Day Trade rule. It was created by the Financial Industry Regulatory Authority (FINRA) in 2001. This applies to all stock traders in the United States. The goal of this rule is to minimize the risk associated with the stock market that can be volatile from time to time.
In addition, your account is classified as a margin account if you are borrowing money from your brokerage firm in order to increase leverage. Even though this could increase the profits you make, it can also significantly magnify your losses, placing yourself and the brokerage firm at risk.
If you have a margin account that executes four or more day trades within five business days, you are flagged as a pattern day trader. If your account is flagged, your potential earnings will be limited because you may be prohibited from executing certain trades.
Day Trade Wisely
Even though you have the potential to make a significant amount of money day trading, you want to limit your risk. That is why it is important for you to learn everything you can about day trading before you get started.