How Much Money Should You Trade?

There’s a big difference between putting all of your income into a low-risk savings account and waiting for it to grow over time and making a trading investment. One strategy is a passive option that’s unlikely to give you a lot of extra cash in the long term but may offer some peace of mind. The other solution asks you to take a more active risk with what you own.

When you first start looking at things like if you learn how to day trade or what penny stocks are, you’ll learn that there are many different ways to build your portfolio and make more money. Some are more hectic and riskier than others. The right strategy for you will depend heavily on a lot of different things, including your personal goals, your risk levels, and how much money you can afford to spend. So, if you do have cash to put into a trade or the stock market, how much should you use?

Only What You Can Afford

This might sound like a basic answer to a complicated question. However, the easiest way to decide how much money you should be putting into your account, is to find out how much you can afford to lose. In other words, if you have money in your savings that is going to help you pay off your mortgage or deal with your bills for the next month, then that shouldn’t go into your trading account. On the other hand, if you have some extra money outside of your emergency savings that’s just sitting around and losing value, then you might be on the right track to make a valuable investment.

Ultimately, you need to sit down and figure out how much you could afford to lose in your bank account if the worst should happen from your investment. Although, in an ideal world, you would win on the majority of your buying and selling risks, there’s never any guarantee in this world. In fact, it’s pretty likely that you’re going to lose something at some point. That’s why it’s so important not to put yourself in danger.

What If You Don’t Have Enough Cash?

If examining your current income reveals that you don’t have enough money to hit the right minimums with your broker or your preferred trading style, don’t panic. This is a good sign that it’s time for you to sit down and do some practice. Most brokerage companies will give you access to demo trading or paper accounts for free. These environments give you the freedom to experiment with your styles and strategies, so you know that your plan for making money is going to work.

Although you can’t make any cash initially from using a paper account, that doesn’t mean that this process isn’t worth your time. Just like any other skill, you’ll find that practice really does make perfect here. Sometimes, having a few extra months or even years to practice while you build some extra budget could be the best way to ensure that you lose less when you’re finally ready to put your money where your mouth is.