Size Matters

We’ve already touched on the importance of your account size when I talked about money hungry service charges, but I’m about to beat a dead horse a little more here, and focus on account size alone.

Account size is a big issue when it comes to trading.  A larger account gives you more freedom as far as trade frequency. On the other hand, a large account can also just mean more money to lose over a longer period of time if your risks are too great.

So lets assume you have a system in place that can work. The size of the account will help determine how quickly this will begin to pay off.  A larger account amplifies the dollar size of both wins and losses, while minimizing the percentage taken by service charges.

I will once again use the example of an online brokerage that charges \$10 per trade. This means \$5 to make a purchase and another \$5 to sell.

If you’re trading a \$1000 account, each trade will cost you \$10, or 1% of your capital in service charges. Lets say you take a whopping \$100 from your account and purchase 10 \$10 stocks. The cost of the stocks will be \$100, and the service charge will be another \$10. This means that you start off at -\$10. Your stocks have to move up 10% for you to get the \$10 u used to buy them. So at \$110, you’re actually at 0, or the breakeven point.

Now you’ve saved more money and are now looking at trading with a \$10,000 account. You have the opportunity to execute a trade that is virtually the same. This time you take a whopping \$1000, and buy 100 of those \$10 stocks. The service charge is \$10, which means the whole purchase costs you \$1010. The service charge represents 0.001% of your account and 0.01% of the trade. Now if the stocks move up 10%, or \$1 each, you make a profit of  \$90 (\$100 profit – \$10 service charge). The exact same trade actually returns money when using a bigger account.

Large accounts are the reasons why you hear stories of millionaires living off of interest, or growing money without working etc. when it comes down to it, yes, paying a \$10 dollar service charge is still \$10, and still a \$10 loss. However, when you’re looking at it as a percentage, it looks a little different. In this game, you have to give a little to get something.

By: Tahric Finn

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