Trading Basics: Evolution of a Trader

TRADING: HOW MUCH MONEY, HONEY?

I began as a stock market investor with enough cash to buy 100 shares of a $20 stock (about $2,000).

If John wants to invest and not trade, he can cut the buy price to $5 and start with just $500 (or less if he wants to buy fewer than a round lot—100 shares). That is all it takes to become an investor. Save another $500, and search for a second stock to add to a growing list of companies in a portfolio.

Eventually, enough stocks will populate the portfolio that it will be time to sell one stock and use the proceeds to buy another. That is called turnover. I discovered that when I had 10 to 12 stocks in my portfolio, one would be ready to harvest for a profit and a new one would be waiting for planting.

What if you want to trade full time like John? A $500 investment will not pay the fuel bill for several hours of flying your Cessna Citation. You will need more money. Let us talk numbers.

What is your cost of living? Mine is about $1,000 a month, excluding taxes, because I live cheap. Adding taxes, home mortgage or rent, car payments, retirement plan funding, emergency cash, and your breakeven cost could skyrocket to $2,500 a month, or $30,000 a year. And that is just to break even.

How much trading capital would a monthly habit of $2,500 require from the pockets of Mr. (or Mrs.) Market? There are about 252 trading days each year, which translates into 21 days per month. That means each trading day you will need to pull $120 out of the market. Easy, ...