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Is Trading For You?

A lot of companies encourage people to trade. Some companies attempt to “teach” people how to trade and be successful in the market through short-term trades. Online brokerages offer discounts and “special tools” to frequent traders.

To anyone with half a brain, it should be obvious why these groups encourage people to trade. Those “teaching companies” are trying to sell a product, which is “investor education.” How good or bad (most likely bad) their advice is is not the subject of this article. As for the brokers, more trades means more commissions, so it’s obvious why they encourage trading too.

Some people are successful at frequent trading, but most are not. So is trading for you? Each person’s situation is different of course. But there is one simple method of giving you a clue if you should even consider frequent trading.

In short, stock trading is a rich man’s game. Trading frequently means racking up commissions, and for trading to be profitable, these commissions need to be small relative to your asset base. Let’s consider someone with a $20,000 portfolio. Even if they are paying just $10 a trade, if they make 10 trades a week (2 a day), this results in about $5000 in fees over the course of the year. That’s 25% of their portfolio! To be profitable against the market, you would need to beat the market by 25% a year, so on average make about 35% a year (since the market makes about 10%). Anyone who can make 35% on average would soon be one of the largest hedge fund portfolio managers on earth.

However, instead of a $20,000 portfolio, let’s say you had a $2 million portfolio. All of the sudden, these fees are now just .25% of your asset base, which is quite manageable. What turned into an insurmountable obstacle is now not a big deal.

Brokers don’t give discounts to people with smaller asset bases so that trading is more reasonable for them. In fact, if anything, they charge people with large asset bases less per trade. This compounds the issue, making it clear that unless you have a lot of money to throw around, trading just isn’t for you.

So if you are considering trading, first consider your asset base. Frankly, if you have less than $500k in the market, most likely trading is not for you. The fees themselves will make it an unprofitable venture.

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