Why You Should Avoid Trades of Less than $2,000 When Investing in Stocks

When buying shares, small trades for hundreds of dollars, and even $1,000, just aren’t worth the risk. Consider that with most financial institutions you get charged a commission of about $10 when buying shares, and another $10 to sell them later.

If you are investing $1,000 that means you will need to achieve returns greater than 2% in order to turn a profit and cover your commission costs. If you’re only investing $500, you now need returns of 4% in order to breakeven. It’s for that reason I normally avoid trading less than even $2,000, when my breakeven point is only 1%. The larger the trade, the easier it will be to make a profit. The old adage of needing money to make money still rings true.

However, it’s not just commissions that you should consider; overall returns are even more important. People may claim they use a discount brokerage and so commission costs are minimal. However, if you’re investing $500, then even if your investment has a great return of 10% you’ve only made $50. Odds are you’ll often see returns of less than 10% and could even incur losses along the way, which makes it even more important to make sure that you make the most of your good investments.

If the problem is a lack of funds, then rather than investing you might be better off building your savings first and fine tuning your strategy with practice investment accounts. You shouldn’t rush to investing, and there are times when it might even make sense to sit on the sidelines and wait for a good opportunity if none are available.

Related Stories