"How much capital do I need to start day trading stocks?" is one of the mostly frequently asked questions I receive from people who want to start day trading. The following article looks at this common question.
Day Trading Requirements in US and Abroad for Stock Traders
To day trade stocks in the US you will need to maintain an account balance of $25, 000. You should start with at least $30,000 (but likely more) if you plan to make more than that 4 day trades per trading week (more than 4 day trades per week will give you day trader status and you will be subject to the $25,000 minimum account balance). If you're account drops below $25,000 you won't be able to continue day trading until you replenish your account to more than $25,000.
You can day trade other global markets without this account minimum. You should open a typical account with at least $10,000 if you are short-term trading outside the US (each exchange may have different requirements). With smaller accounts than this, fees can become a very large obstacle to overcome.
Also, stocks are traded in 100 share lots, therefore, a small amount of capital limits the stocks which can be traded--for instance with a $10,000 account stocks over $100 will not be tradable, unless you're using leverage since you can't even purchase 100 shares. That said, if trader sticks to low priced stocks, this is not an issue.
While these minimums are in place to enter the market (regulation in US, guidelines in most other markets), it is important to remember that one of the common errors traders make before even starting to trade is being under capitalized. Keep in mind that losses do occur, so you need to account for this fact. After taking losses you still need to have enough money to keep trading.
The above information applies to personal accounts. For other options, such as trading for a firm, see: How to Become a Day Trader.
I recommend only ever risking--at most--1% of your capital on a trade. Your risk is defined as the difference in price between your entry price and and your stop level, multiplied by the number of shares of have. For example, you enter at a stock at $10, place a stop-loss at $9.75 and take 500 shares. Your risk is $0.25x500=$125. To make trades like this you need $12,500, as $125 is 1% of the account. In the US you need $25,000 but in other markets you may be able to get away with less, as the example above shows.
For more on stock trading requirements in the US you can read this little pamphlet from the SEC: http://www.sec.gov/investor/alerts/daytrading.pdf, but here are the main points:
Minimum Equity Requirement: The minimum equity requirement for a customer who is a pattern day trader is $25,000 [four day trades per week]. This $25,000 requirement must be deposited into the customer’s account prior to any day trading activities and must be maintained at all times. A customer cannot fulfill this $25,000 requirement by cross-guaranteeing separate accounts. Each day trading account is required to meet the $25,000 requirement independently, using only the financial resources available in that account.
If a customer’s account falls below the $25,000 requirement, the customer will not be permitted to day trade until the customer deposits cash or securities into the account to restore the account to the $25,000 minimum equity level.
Day Trading Buying Power: A customer who is designated as a pattern day trader may trade up to four times the customer’s maintenance margin excess as of the close of business of the previous day for equity securities. If a customer exceeds this day trading buying power limitation, the customer’s broker-dealer will issue a day trading margin call. The customer has five business days to meet his or her margin call, during which the customer’s day trading buying power is restricted to two times the customer’s maintenance margin excess based on the customer’s daily total trading commitment for equity securities. If the customer does not meet the margin call by the fifth business day, the day trading account will be restricted to trading only on a cash available basis for 90 days or until the call is met.
Day Trading Alternatives - Forex Trading
Other products and markets are available to the smaller trader that allow accounts to be opened for smaller amounts of money. One such market is the FOREX, or foreign exchange market. Forex provides leverage up to 50:1 (higher in some countries). While this is an advantage to the smaller trader (because only a small amount of capital is needed), it is also a useful tool for seasoned traders who want to magnify their gains through the use of leverage not available in most markets. Remember, increased leverage means increased risk. Discipline is always paramount in trading. To determine how much leverage you need, see: How Much Forex Leverage
The Foreign Exchange market is based on the simultaneous buying of one currency and the selling of another. Currencies are available for trade 24 hours a day, 5 days a week. Being that the currency market is the largest market in world, with daily volume of over $1.4 trillion being bought and sold, the liquidity and market hours makes it one of the most potentially lucrative markets available to anyone.
Accounts can be opened for as little as $100 to $500. With this amount of money you aren't going to be making a living from the markets. You may make a few dollars or so a day, which will grow your account, but likely you'll want to build your account to about $10,000 before you'll see some cash flow worth withdrawing each month...assuming you have a good forex trading system and strategy. There is a lot of opportunity in forex, but if you go in under capitalized you likely won't make it.
Since traders can use leverage up to 50:1 (this can be up to 500:1 outside the US) safe guards are normally in place so you cannot lose more than your original account deposit with many brokers, but this will depend on the broker. Proper risk management must always be used to preserve capital.
My forex eBook provides all the info and strategies you need to get started day trading or swing trading forex: Forex Trading Strategies Guide for Day and Swing Traders
Day trading stocks can be capital intensive, but traders should make sure they have enough capital before commencing day trading. Being under-capitalized is a big mistake as a few losing trades can cripple a trader making it hard to make the capital back and thus creating a downward spiral. Forex provides a less capital intensive way to trade than typical stock day trading requirements.
Work out a strategy and make sure you can handle a string of losses. Only when enough capital is available to sustain a long string of losses and a strategy is outlined (in detail) should a real money account be opened (see: My Favorite Forex Broker and Why).
Also trading takes time to learn. If you are going to day trade trade full-time (no other source of income) you should budget for at least 6 months to a year to learn how to trade consistently. This is an additional cost to funding your account. Therefore, you will need more money than just what you put in your account. Don't expect your day trading to start paying off immediately or consistently. Money and consistency take time, so have at least 9-12 months or more of savings to pay your bills (if you have no other source of income).
The nice thing about forex is that it can be traded at different times of day, making it much easier for people to hold another job or continue having another stream of income, AND day trade forex.