How To Start Trading With $500
The other day I received a question on one of my videos:
This is a GREAT question, and I promised that I would answer it in an article.
So here we go 🙂
How to Start Trading Stocks With $500
Before I answer the question, let’s do some simple math:
When I use PowerX Optimizer, I am looking for stocks that had at least 60% return on investment over the past year.
Making 60% in the stock market consistently is a great accomplishment!
Yes, of course, every now and then you will have a trade that doubles, triples and maybe even quadruples your money.
But you will also have some losing trades. 60% per year is an excellent result if you can make it consistently.
For this article, I want to be even more optimistic.
Let’s say you can DOUBLE that, and you can achieve 120% per year.
Based on a $500 account, you would make $600. You would grow your account from $500 to $1,100.
Or, if we look at it in a different way, you would make $50 per month = $600 per year / 12 months.
I don’t know about you, but $50 per month doesn’t sound very exciting.
You would make more money when you drive 1 day per month for Uber!
But let’s dive a little bit deeper:
What Can I Invest In With $500?
Most brokers will allow you to open an account with $500 to trade stocks and options.
Oh yeah, you also can trade Forex, but when trading Forex you’re trading against the house, so you’re almost guaranteed to lose money.
I’ll do another video on that topic.
So let’s take a look at stocks first:
The so-called “blue chips” are the 30 stocks in the Dow Jones, and right now, a stock in the Dow costs you between $35 for Pfizer (PFE) and $320 for Apple (AAPL).
You should never put all your eggs in one basket. I recommend that you diversify and have at least 5 different positions in your account.
This means that you divide your $500 into 5 equal parts, i.e. you can allocate $100 per stock.
Only 10 of the 30 stocks in the Dow are trading below $100, so you could only trade these stocks.
Of course, you can look at the Nasdaq or the S&P500 for additional stocks.
My point is: You’re restricting the stocks that you can invest in, simply because you don’t have enough capital.
And for me, that’s a significant handicap.
It’s like going to the grocery store and trying to buy food for a week for $20. Yes, it’s possible, but not easy. Same here when you’re trading stocks.
Ok, so if trading stocks with $500 is not possible, or very difficult, what about options?
Learn to trade stocks & options in 15 minutes a day
Can You Start Trading Options With $500?
Options sound like a great alternative for people with smaller accounts.
After all, most options are priced between $1 and $2! The problem: options come in 100 packs, so if an option costs $1, you actually have to bring $100 to the table.
So you’re running into the same problem as with stocks: In order to diversify your $500 into multiple positions, you need to trade options that cost less than $1.
Here’s the problem: When an option costs less than $1, it’s usually “out of the money”. This means that the probability of making money with this option is rather small.
Here’s an example:
Let’s say you want to trade an option on Disney (DIS). Right now, DIS is trading at $135, and you expect it to go up to $150.
You could buy the 130 Call Option, and this trade would have a 42% chance of success.
The problem: The price of the option is between $8.95 and $9.10, and since they come in 100 packs, you would have to invest $895 – $910.
But you only have $500, so this option doesn’t work.
Most people then look for a cheaper option, would look at the 155 Call option.
It only costs between $0.65 – $0.70, so you need only $60 – $70 to buy this option. With a $500 account, that’s possible.
But take a look at the “Profit Probability:”
It went down from 42% to only 7.7%.
YES: The option is cheaper and more affordable, but the chances of making money with the option are slim to none.
So what’s the solution?
How To Start Trading With $500?
As you can see, even though technically you can open an account with $500, the odds of making money with such a small amount are stacked against you:
- You would only make $50 per month, which doesn’t make sense.
- You can only trade very few stocks since you need to buy cheap stocks. So your trade selection becomes extremely difficult.
- You can only trade cheap options, and there’s a reason why they are “cheap:” The probability of making money with cheap options is slim to none.
For these reasons, most people who start with $500, will lose it all within a few weeks or a few months.
I know that THIS is now what you want to hear, but try to save up some more money before you start trading.
Think about it as starting a business:
Yes, you might be able to start a business with $500, but the chances of making any money with the business are small.
The good news:
You can still learn how to trade and practice on a simulator until you have more money available for trading.
So take your time to master trading on a practice account until you have enough money to start starting – and your chances of making it as a trader will be much, much higher.
By the way:
I made a video “How much money do you need to start trading.”
Take a look, I’m sure you’re going to love it. Talk soon.
Learn to trade stocks & options
in 15 minutes a day