How To Start Trading Stocks With A Small Starter Account

March 5th, 2010 | Filed under: Trader Lessons

Stock trading is quickly becoming the option of choice when it comes to growing your money. Whether you do it directly or indirectly through various sources, almost anybody with money has some exposure to the market in one form or another.

A question I get asked all the time is:

How can I successfully trade stocks with little money to start?

Translation: how do I make a lot of money without risking much. It’s the obvious the expectation. We would all like to make the most amount money while using the least of our own.

I always like to recommend new traders to start out with $1,000 even if you have to wait a little bit longer to save up. It allows you to hold firm positions in multiple stocks at once, while also allowing room for some losses.

So can it be done? Can you make a reasonable return using just a little money? Well I originally did it, my friends have done it, and many of the people I have taught have done it, so I’ve come up with a few rules and guidelines that helped me do it.

1. Temper Expectations

Understand the return you are looking for in relation to your starting capital. For example, if you want to reach $10,000 in the next 2 years and you are starting with $1,000. That comes out to a 450% EACH over the next two year. Sure it can be done, but the odds are not exactly in your favor.

By tempering expectations it allows you to control your emotions. You’ll feel comfortable taking that $30 profit instead of waiting for it to become a $100. While it might seem small, these little gains add  up.

2. Find A Cheap Brokerage

Consider using a cheap stock brokerage like TradeKing or Zecco. As salesman as it might sound, finding a cheap brokerage can go a long way in avoiding incurred expenses. While these brokerages might not have the best services, today’s Internet allows us to get quality free research material elsewhere. All you want are the cheap stock trades.

Compare a brokerage like TD Ameritrade with TradeKing. TD has $9.99 commission per trade and TradeKing as $4.95 commission per trade. So on a complete buy and sell transaction, you are already saving $10 in incurred expenses. Extrapolate that over 10 trades and you saved $100.

In other words, using the expensive brokerage would have cost you 10% of our total starter account.

3. Go All In

The prudent trader will diversify. They will make sure their portfolio consists of holdings with exposure to different sectors. While there is nothing wrong with this method, with your starter account, it’s just not financially possible.

Find 1-2 stocks to trade at one time and go all in. Don’t necessarily worry about if you are diversified or not. Don’t try to buy a couple shares of 5 stocks. Grab a good chuck of shares (75-200) and go all in.

4. Take Profit When You Can

Sounds like the obvious bullet, but can often be mismanaged. Because you are dealing with such a small account you don’t have any extra capital at your disposal. So if a better opportunity comes around you have no money to use. Typically when you sell, you must also wait a couple days for that money to be usable again. So you can’t quickly sell and then by into your next stock.

By taking profit when we can, it keeps us efficient. When the momentum of a stock seems done, we can move on to the next one. Our capital is tight, so we need to free it up for the next great trade to come around.

5. Don’t Hold On To Losers… Too Long

Ultimately if you had a little more money, you could afford to hang on to losers a little bit longer; however, this becomes a real risk when dealing with such small capital. As you are just starting out with the minimum $1,000, any money you lose instantly diminishes your buying power, and the longer you wait it out; the longer it takes to make money.

If you tried to wait out a stock but ended up losing $100, now your account is down to $900 and the options have become that much more limited. Even if you decided to wait longer, it just makes it that much more longer that your capital will be tied up in a loser. Moreover, it may prevent you from being able to take strong positions in two stocks.

6. Trade Companies You Know

Depending on your background you may be more equipped to research and seek out new stocks, but for most of us, we will know pretty much nothing when starting out. Start researching and buying companies you already know.

For example, my first couple of stock trades included: Starbucks, Microsoft, and AT&T. While they may have not big the huge money makes, I was already familiar with what they did, so researching it was a little bit more easier and the profits came easier.

7. Stay Within Your Price Bracket

Always think “how many shares can I buy” when looking at a stock. While it might be cool to buy Apple, at nearly $200 a share, it is almost worthless for the amount of shares you could buy. You want to stay some where between $4 – $30 a share.

As a a new trader is can be hard to decipher between a good and junk stock under $4.

8. Don’t Get Too Fancy

I’m sure you’ve heard the phrase, “ignorance is bliss”. Stock trading is compiled of a bunch of traders using a million of different strategies. Some strategies mesh well together, while others offer contradicting view points.

With a little account, you are essentially dealing with a small margin of error. This can cause you to put more pressure on making sure if the trade is a good one or not. If you dig hard enough and use as many strategies as you know, any stock can be made to look good.

Even in my personal trading, my worst performance has been when I’ve used an array of sophisticated indicators. So I decided to get rid of the clutter and simplify my process. My trading instantly improved. Keep it simple and trust your instinct.

9. Don’t Get Cocky

You’ve followed the first 8 rules and turned your starter account into a nice juicy trading account. While there will be some changes like holding more stock positions at once, continue to stay true to what got your there. You don’t need to instantly change your share position from 100 to 500 a holding, and you don’t need to venture off into some new type of stocks.

Just as easily as you earned that money, you can lose more that much easier. It happens all the time. A stock trader makes a bunch of money and then suddenly loses it all. It’s not that their strategy suddenly stopped working. Greed took over and they risked more on lower-quality opportunities.

Conclusion

Thanks to cheap commissions and freely available resources stock trading has become more accessible to the average person. You don’t need some savvy education and, more importantly, you don’t need a huge bank account. All you need is determination, dedication, confidence… and The Wild Investor.

Question – What’s some advice you have for traders with a small starter account.