Trading Account: How much money do you need?
Is the need for capital stopping you from chasing your trading dreams? Do you believe that you need tens of thousands or hundreds of thousands to trade in the stock market?
If you said yes to either of these questions, I’ve got some great news for you! Neither of these are applicable.
You don’t need an outrageous amount of money to get in the markets, and TRADEPRO will lay out some options that require as little as $2000 to start with.
The key to being able to trade big with a small account is the right broker, and of course margin and or leverage.
Trading Account: The minimum
Margin accounts allow traders to trade large size with only a certain portion of minimal money. Something like a trading mortgage.
We have an excellent video on trading on margin. Click here.
Essential if your broker provides you with a margin account, you have access to a lot more buying power, no matter the asset type.
Trading Account: Asset classes
The main three asset classes we are going to discuss are Futures, Options and Forex. They’ve all got one thing in common, a mix of margin and leverage allows traders to reap bountiful rewards trading these assets.
Trading derivatives often involve exponential leverage and margin, futures is no different. Depending on your broker you could have access to 1 equity E-mini contract for just a few hundred dollars. Take AMP Futures (broker) for example. You could trade the S&P 500 E-mini contract with a $400 account. This is not advised but it is possible.
While the S&P 500 is roughly 2700 points, you will have access to this large market for just $400. Just to put that in perspective, 1 point moves on the ES E-mini contract is equal to $50 up or down.
Assuming you buy a contract and the S&P 500 futures move from 2700 to 2715, you have just made $750 on 1 contract with $400 down. That is nearly a 200% return. Alternatively the position can go against you and that is why TRADEPRO preaches risk management.
For more information on trading futures on margin click here.
For more information on AMP futures click here.
Options trading is the epitome of leverage and margin trading. Options are derived from stocks and other underlying financial instruments. If the stock you want to trade has options, you can trade it for a fraction of the price. An options contract will expose you to more potential returns without having to actually own the stock.
For example if you want to get a piece of a current stocks rally, Oracle from example which is trading at $51.00. To get a substantial profit from a move in the stock you have two options.
Option 1: buying call options on Oracle, an ITM call is around $4.00 which gives you access too 100 shares of the underlying. In which you have the option to buy if exercised. This will cost you $4.00*100=$400 to get access to 100 shares of Oracle. If you bought 400 shares flat out you would have paid $5,100.
Now lets look at the possible gain for a $5.00 move in both scenarios before we move onto options 2.
If you bought the shares for $51.00/share and they are now worth $56.00/share. You’ve realized a $500 profit.
Assuming you used options and your delta is 0.75. This means for every $1.00 move in the underlying your options goes up $0.75. A $5.00 move would mean a $3.75 move in the options contract. The option position is now with $7.75 or $775. A realized gain of $375.
Now wait, isn’t $500 more than $375? YES! However a $500 gain on $5,100 is 9.8%. While a $375 gain on $400 is 93.75%. That’s the power of margin and leverage.
Option 2: buy Oracle shares with a margin account, depending on the margin account to buy 100 shares you could have to put down as little as $1,000 to gain access to those shares.
To learn more about options check out our Swing Trader Package.
Currency trading is notorious for leverage, some brokers use to offer over 100:1 leverage. Most now offer anywhere between 5:1 and 30:1.
Forex trading gives traders access to thousands of units of a currency with just a few hundred dollars in their account. Take the example below, provided by XM.com.
Assuming conservative leverage for margin of 15:1, and you decide to trade EUR/USD with 1 standard lot, giving you access to 100 000 units of the currency. You would need a $7,520 account in which 1 pip of movement would equal $10. Of course if your broker provides better leverage, you would need a smaller account.
For example, 25:1 leverage would require your account to have $4,500 in it. For more information on Forex and access to our Forex Newsletter where the TRADEPRO’s share Forex trade ideas check out our Swing Trading Courses.
Margin and leverage can be a double edged sword. As it does present traders with a lot of opportunity for more gains, it can just as easily run away from you.
That is why the TRADEPRO family and community is a strong advocate for sound risk management, don’t over leverage in a trade, trade smart!
The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.