Understand Your Start-up Costs And Be On Track To Make Millions

[David Jenyns]

Trading Preparation

Before you start trading, you will need to take into consideration a number of different things. Unfortunately, trading is more than simply the amount of money that... – there are a number of other costs (both monetary and non-monetary) that you will pay much like the costs of starting up a business.

The Cost Of Learning And The Trading Learning Curve

There is a long process of learning how to trade and learning about.... If you do not go through this process, the market will take the money from you anyway as punishing you through bad trading – in other words, you are going to lose the money either way, so why not invest it in learning how to trade properly so you can triple your trading profits!

In the first few years of learning how to trade & designing your own trading plan, you will have a very steep learning curve. The curve will eventually start to tail off as you learn more and finalise your trading plan and learn about the markets more. Additionally, as time goes by, these costs of trading will start to go down as you learn from your mistakes, start to succeed more and as your account increases in value.

The cost of learning can be three main forms:

• Monetary costs relating to material expenses of courses, books and information on learning how to trade
• Monetary costs relating to common trading mistakes in the early years (e.g. poor risk management, poor picking of stocks and poor discipline)
• Non-monetary costs of the time and effort needed to succeed as a great trader


The Account And Your Starting (Seed) Capital

You will need a seed of capital to invest when you start trading. It is difficult to state exactly how much money you will need to start but you will need to take into account issues such as commission charges, broker fees and appropriate taxes into plan.

For example, if your online broker charges $10 per trade and you want to invest $1000 in a particular trade, this will effectively mean that the stock will need to increase by 2% to breakeven (i.e. $10 to get into the trade + $10 to get out of the trade = $20 and this is the equivalent of 2% of $1,000).

If however, you decided to invest $10,000, the equivalent rise in the stock will need to be only 0.2% ($20 of $10,000 is the equivalent of 0.2%) and therefore there is more chance of you making more money as the stock only needs to go up by a smaller percentage to break even.

As can be seen, the more capital you have to start off with, there will be less proportion of your money going in fees and broker charges. The amount you invest still needs to be balanced by the increased risk you will be taking on by buying more stock.

Costs Of Data And Hardware

Online trading is becoming more common. You will need to take into account the costs of data feeds, software and other forms of computer hardware. A good and fast internet connection is essential and will also cost you more money.

Other Costs

There are many other hidden costs that a trader will face and you will need to account for before you trade. Some other examples include:

• Costs relating to the taxation of your winnings
• Costs of slippage (this is where in fast moving markets, you may not necessarily get the price of your stock that you wanted and may be quoted a slightly worse price as a result)
• The spread relating to your investments (this is the difference between the buy and the sell prices and varies between the markets that you trade)

A Reality Check

If you have an account of $10,000, is it realistic that you will be...? The chances are that you would be very lucky if this occurs. However many people start trading with these sorts of returns in mind. This does not mean that it is impossible but it does mean that it is highly unrealistic. Think of trading as a business. Most businesses will not expect such returns – and neither should your trading!

Using leveraged instruments such as options may increase the chances of your return but it does also mean that the chances of your losses will also be magnified. This is definitely not for beginners and will mean almost certain wipe out in the long run!

The Power Of Compounding

Additionally, thinking of trading in this way will mean that you are not drawing on your profits as a major part of your income. This means that your profits are free to be reinvested to make even more money. This is called “compounding” and the power of it can be shown below.

Example

Let us assume that you have $10,000 and that your trading system makes approximately 20% per year.

1. If we take all the profits we earn out of the account without reinvesting, we can assume that the annual return on a $10,000 account is approximately $2,000. In 10 years time, this will total approximately a $20,000 return on your account.

2. Now, let us take the example of compounding your winnings. In other words, you will not withdraw the 20% you earn every year but you will reinvest the money into your account and allow the money to accumulate. The example below shows how much more you can expect to make by using this method.


Year Total Account Value at 20% growth and compounding the winnings
0 10000
1 12000
2 14400
3 17280
4 20736
5 24883
6 29859
7 35831
8 42998
9 51597
10 61917

It can be seen from the table above that the initial seed trading capital has produced increased to $62,000 in 10 years and this has produced a return of $52,000! This is approximately two and a half times the amount you can expect from not compounding your winnings and with the same amount of money you started off with!

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