Being an active stock trader is difficult. Not only does it involve a lot of risk and a lot of capital, it involves a lot of technical knowledge. Stock traders need to have vast amounts of knowledge when it comes to analysis, both technical and fundamental in nature. Having great software is a must, and your broker should have a very easy to use platform, along with some tools that will help you to automate your trading, such as built in stop-loss points.
Trading stocks is different than trading in other markets. Your risk is never quite as much per trade as it is during a options trade, for example. If you buy $1,000 worth of Apple, you can sell your shares or set stop-loss points with your broker in order to protect yourself from losses so that too much isn’t lost all at once. If you buy 10 shares at $100, you can make sure that your shares are automatically sold off it drops to $99, for example, limiting your losses to 1 percent—minus fees. Average brokers charge anywhere from $5 to $50 per trade, so you need to pay attention to fees in order to limit needless losses. Experts call these hidden losses “slippage.”
Just like any other type of trading, slippage poses a huge risk. If you buy 10 shares of a stock at $100 and pay a $20 fee to do so, you’ve risked $1,020. Only $1,000 of that is working for you, though. So, let’s say that the price of the stock goes up 2 percent to $102. Your 10 shares are worth $1,020 now, so you’ve made up your costs, right? Nope. Now, to sell the shares, you spend another $20, and you’re standing at $1,000. With all that work—a 2 percent gain is pretty good for a stock traded over the short term—you’ve still lost money. You have become a victim of slippage.
A margin account is one of the greatest tools that a stock trader can have on their sides, and if you are going to begin actively trading stocks, you need to have one of these. Current legal requirements state that need to have a minimum of $25,000 in a margin account if you want to day trade. Furthermore, the SEC requires you that you be registered as a pattern day trader so that you can use your margin account for day trading purposes. That is a good minimum number, but ideally, to be a successful trader in the stock market you should have more cash on hand than this. A margin account will also allow you to sell stocks short, which is an essential part of your success if you are going to create profits in rough market times.
Larger accounts let you overcome slippage with more ease. If you have $10,000 in your account, $40 in fees ends up being quite a bit, especially if you are paying it a few times per week. If you have $100,000 in your account, your fees are much less comparatively. With other types of trading, fees are a percentage, so if you trade in small amounts, you aren’t hurt much. You can’t get away with this in the stock market. A margin account will allow you to comfortably take out the bigger positions that you need to if you are going to be successful trading, and it enables you to use all of the tools that you want.
Perhaps the biggest advantage of trading directly in the stock market is that you can buy companies that many people haven’t heard of. A options broker will only cover the biggest companies, but through a stock broker, you can buy companies that no one else has ever heard of, if you wish. It creates opportunities that other brokers do not provide.