What’s the legal minimum capital to start trading?

Day trading 101

What is the legal minimum capital investment to start day trading?

A commonly asked question is the required amount of capital that should be invested, before starting trading. Each market has its own regulations, laws, and ideal amounts. It is important to understand all of them before delving into putting your hard-earned money and valuable time. The four main markets are:

  1. Stocks (equity) 
  2. Forex 
  3. Futures
  4. Options

We will explore the legally required or obligatory resources needed to start trading in the major markets. However, each effective trader will have their own methods and strategies that work for them, meaning there is no one ‘ideal investment’ to achieve substantial earnings.

Stock Market:

The base for day-trading stocks in the United States, called a reserve balance, is $25,000. This is the minimum equity balance that is required by the Securities Exchange Commission (SEC) which must be maintained at all times by a trader. If not, the customer will not be permitted to trade, until sufficient cash or securities are deposited into their account to meet the reserve balance.

Although this is the minimum amount of money that must be maintained within an account, it is advisable to deposit more. This will cover you if you face any type of loss or a suspension hold on your account. A generally accepted minimum for those intending to trade is $30,000.

Other countries may have more relaxed policies than the United States. It is still ideal to put at least $10,000 into a trading account, or fees and commissions, which are the largest cost for traders, will take a significant portion of any potential profits. The stock market provides ample ability to take risks or trade conservatively. However, it is essential to always be conscious of the costs associated with any trade. Casual traders can find brokers who have lower minimums and/or allow them to borrow a portion of the amount.

Forex:

The forex (short for foreign exchange) market is a global, decentralized, financial medium for currency trading. It involves a currency pair with an exchange rate which fluctuates continually. Unlike stocks or other markets that trade on an exchange like NASDAQ, Forex trades are conducted via the trading rooms of big banks.

Generally, Forex trading does not require large amounts of money in a traders account, at least relative to trading stocks. This is because of the more relaxed regulations, including greater allowable leverage. For example, a trade of $5,000 of your money, with leverage of 1:100, means you can purchase $500,000 worth of currency. The additional $495,000 is borrowed from the broker. The losses and returns resulting from high leverage tend to be higher, due to generally increased risks and rewards. 

Out of all the major markets, the currency market is the largest, with over 5 trillion dollars in  daily trading volume. This results in high ease of trading due to the plethora of buyers and sellers. 

The legal minimum amount in the United States needed to open a Forex account is $100, but it is recommended to start with $500 at the very least. With below $500, utilizing proper stop loss levels will be difficult. In order to begin one’s path to day-trading as a profession, it is best to start with at least $1,000, but preferably over $3,000-$10,000. It is definitely possible to be successful with small amounts of money, however, if a trader’s starting amount is too small and they experience consecutive losing trades, they may feel urgently pressured to change their strategy, even if it is effective. 

Futures:

Futures trade by contract, meaning that they represent some unit of a security. Recently, futures, a derivative of an underlying asset, have grown significantly in popularity. Not needing to maintain the $25,000 reserve balance that stocks require and the opportunities that greater leverage provides have fueled this growth. Examples of products that are traded in the futures market include oil, stock indexes, and natural gas, among others. 

In the futures market, brokers require their clients to maintain a strict minimum balance of $1,000, and a first deposit of at least $5,000. However, most brokers require a minimum of $5,000-10,000 to reach the margins to borrow. Thus, even though there is no legal minimum balance, you should research specific brokers  in order to best understand the amount of money that is required.

Options:

Like futures, options are considered to be a derivative of another underlying asset like a stock. When you buy an option, you get the right to buy a stock at a later date at a price, which is specified now. The volume in which you wish to trade options will have an impact on the minimum and optimal amounts of money to put in.

Those who execute 4 or more trades per day are considered to be pattern day traders, and need a minimum of $25,000 in their account. In options trading, only using small amounts of money can be a hindrance as many brokers may restrict what you can do. It is highly advisable that at a minimum, one should be putting in $5,000-10,000 for starting options trading in order to make any profits. One can use conservative strategies to ensure that they at least make back their initial investment. Options trading is considered to be all about customization. It is usually considered to be one of the lower risk opportunities among the major markets, but like all other investments, you should be cautious of the decisions you make.

Conclusion:

Among the 4 major markets, the minimum legally required capital, from least to most is:

  1. Forex
  2. Futures
  3. Options
  4. Stocks

Most suggest the “1% Risk Rule,” meaning that new traders should not risk more than 1% of their total capital on any given trade. This mitigates any losing purchases that might occur. Often, even experienced traders will avoid risking above 2-3% of their total capital.

Each market has its benefits and obstacles. Prospective traders should evaluate their strengths and shortcomings to determine which market(s) is/are best for themselves. 

For those looking to trade for a living, it is essential to put aside an emergency fund. If you have consecutive losses, it will act as a safety net that you can live off of. Whether you are in trading as a professional, as a hobby, or as a beginner, anyone can experience losses, so it’s important to be prepared.

 

A bit about BetterTrader, regarding the markets in this article:

Better Trader provides the best analysis that interprets economic event releases and market movements into actionable insights in real-time. The company was created by traders with real experience on the world’s biggest exchanges. BetterTrader will help you achieve your trading goals at all levels and in all markets, with the company specialization being the Forex and Futures markets.