How to Start Trading in the Stock Market with $1,000 

Note: information from this post is only a guideline on how to trade with accounts that are funded with $1,000. All decisions regarding investments are to made by the investor and this blog post can not be regarded as investment advice in any way. 

Introduction 

New to investing in the stock market? Only have a limited amount of funds to invest with? No need to worry, there is still a way for you to enter the stock market and be able to make gains with only $1,000 in your account. However, be weary that it is difficult to gain substantial gains from a portfolio that has invested only $1,000. This is due to the following reasons: 

• It is difficult to diversify your portfolio (buy more than 1 type of stock) with little funds, because each stock trade has a commission fee and the trade must be large enough that you are able to at least break–even on commission. You may even be forced to put all of your funds in one stock to make a noticeable return. 

• Most stable stocks (listed in the S&P 500 or Dow Jones 30 for example) are expensive and it could take months or even years before you break–even or see a substantial return unless you buy more of that specific stock 

• While there are stocks that cost less than a dollar (penny stocks) and are easier to make profits from if you buy enough shares, they are riskier because most of these companies are speculative. This can result in losses.

Adding more funds to your account either one-time or on a monthly basis can help improve your odds on making a substantial return. 

Plan Your Moves/Goals 

When investing it is important to ask yourself questions on what your final goal is on the investment. The following questions should be considered: 

• How long am I planning to hold this investment? 

• How much am I willing to lose on this investment? 

• My investment is making a profit, when should I sell? 

• Did I do my research on this company? 

• How much of my money should I put into this investment? 

Having a backup plan in case the investment does not go in the direction you wanted can help you manage your portfolio more properly and may even prevent you from losing too much on a bad investment. 

Buy More of a Stock per Trade 

Reminder, every time you make a trade, you a pay a commission fee to your broker.  With this knowledge, you need to be aware of how much stock you are purchasing at a specific price because the stock must rise a certain amount to break–even on your investment. 

Take for example a stock that is worth $1 per share.  Let’s say you only buy 1 share. Why is this considered a bad investment? 

• The stock itself is worth only $1 and you paid commission to buy that stock, the commission itself takes up a large part of your investment. In other words, you paid commission for a stock that is only worth $1 

• You will have to pay commission to sell your stock.

• Taking this into consideration, your stock will have to rise considerably for your investment to break even on commission! 

• Because stocks that are worth $1 typically changes a few cents on a regular trading day, you may have to hold your investment for years to make a profit.

Now let’s say you buy the same $1 stock, only this time you buy 400 shares. Why is this a better investment than the previous one? 

• The entire investment is worth $400 + the commission fee. The commission itself only takes up a small part of the investment. In other words, you paid much less per share than for the one stock bought in the previous scenario 

• The stock will only have to rise a few cents for your investment to break even on commission and make a profit
  

• Again, since stocks that are worth $1 usually change a few cents per day, this investment makes more sense because not only will you be able to break even more easily on commission, you will also be able to make a profit. You also may not need to hold the investment as long to realize a profit 

As you can see, buying more stock is beneficial for the chance to earn returns while also breaking even on commission. 

Consider Trading Options

Opposed to stocks, options are an alternative way to make money on investments. Click here to learn more about options. Options can net larger returns compared to stocks but may also lead to losses if the investment goes poorly. Also, options have an expiration date that deem them worthless upon passing of that date. If you are willing to take the risk of making larger profits at the expense of potential making  losses, consider options as a means of investing. (Note: Options may not be available to purchases on your account depending on the circumstances) 

Preview Your Orders 

It is important to preview your orders to understand how much the trade is going to cost. You don’t want to find out after the fact that the trade you made is not up to your liking. Review the data such as the total cost, commissions, how much the stock needs to rise to break-even on the investment, or how much profit/losses you will make before confirming the trade. RWIBrokers.com profides the possibility to preview your trades before sending them to the markets.

OTC Penny Stock (Pink Sheet)

What are OTC Penny Stocks?

Over-the Counter (OTC) Penny Stocks are stocks that are currently unlisted from an official stock exchange (Example: NASDAQ, NYSE) that can be purchased usually for under $1.

These stocks belong to companies that are currently speculative and have yet to achieve major success. These companies also have low market capitalization compared to companies listed on official stock exchanges.

Examples of OTC Penny Stock

Puration Inc. (PURA) – Cannabis-infused beverage producer

Hypersolar Inc. (HYSR) – Hydrogen production company

Netlist (NTLST) – Computer memory/storage designer and manufacturer

Advantages:

• Prices are usually under $1, allowing investors, especially those who have limited funds in their account, to buy a large quantity of stock.

• Should the price increase slightly or should the company become successful, the investor may gain a large profit due to owning a large number of the stock.

Disadvantages:

• Because most penny stocks belong to relatively unknow companies, information on them (such as financial reports and company history) may be scarce.

• OTC Penny Stocks are not strictly monitored compared to listed stocks and are therefore more susceptible to criminal activity such as fraud and pump-and-dump schemes

• These stocks usually lack liquidity and therefore are more difficult to buy/sell

• Almost all penny stock companies lack the capacity to generate profit and usually run at losses, these stocks are more likely to hit the price of $0 and cause the investor to lose their entire investment.

• Because of the dangers of trading in OTC Penny Stock, trading accounts must be protected via security settings (2-factor authentication) in order to trade in these stocks

Contracts for Difference (CFDs)

What are CFDs?

Contracts for Difference (CFDs) is an arrangement made between the trader and the broker where the trader can hold more positions over a certain stock at a lower cost but does not actually own the stock. CFDs allows traders to make more risky bets on the price movement of a stock while only paying a fraction of the cost. This is especially beneficial for traders who simply do not have enough funds to take on positions where they must pay the full amount for all the shares they wish to hold.

Example of a CFD:

Suppose you wish to purchase 4 shares of a company for a current price of $180 USD each. Normally, you would pay $720 USD total to purchase these stocks. With CFDs, you only have to pay 25% or $180 USD while the brokerage pays the difference of $540. Therefore, you now have the CFD position of $720 while only paying the fraction of the cost (assuming commission fees are excluded).

Suppose the stock’s current price rises to $200 USD. Your gain in the CFDs is equal to the amount of stock multiplied by the change in price. Therefore your gain will be 4 shares * $20 = $80 total profit. Because you used the $180 for the CFDs instead of purchasing 1 share (1 share * $20 = $20 profit), you made 4 times the amount of profit you would have made if you had bought the share only.

However, supposed that the stock’s current price fell to $130 USD. Your loss in the CFDs position will be 4 shares * -$50 = -$200 total loss. This loss exceeds the amount that you invested and may be deducted from cash that you currently have uninvested in your account. If you had purchased 1 share for $180, your loss would have been only $50 total.

Advantages of CFDs

• Traders whose accounts have a net liquidation value under $25,000 are not subjected to the limitations of day trading rules (3 day trades only in 5 business days). Traders can buy/sell positions multiple times on the same day without being flagged as a pattern-day trader

• Unlike options, CFDs do not have expiration dates, therefore the positions can be held indefinitely

• Gains may be amplified since the users are trading on margin (borrowed funds)

Disadvantages of CFDs

• Although CFDs can amplify gains, it also may magnify losses

• Losses can exceed the amount of cash the trader has in their account and may subjected to a margin call (be asked to add more funds to their account). If the margin call is not completed, their position may be liquidated.

Passive Trading vs Active Trading

Most investors that are either beginners or experts identify themselves as two types of traders, each with their own benefits and disadvantages. The first type being the slow-and-steady passive trader who prefers to hold their investments over the long run. The second type being the fast-and-aggressive active trader who prefers to make multiple trades over shorter periods of time. But which type would you identify yourself as?

Active Trader

Active traders use the more aggressive buy and sell strategy, with the purpose of generating profits through correctly anticipating certain market/stock movements. These investors will trade daily/weekly in multiple investments

Advantages

• If done correctly active traders may earn much more profit than passive traders since they are always looking for the best point to sell

• Active traders have more flexibility when making trades, they can choose when to enter and leave the investment at any time

Disadvantages

• Active trading is often more expensive than passive trading as more commissions are paid out per trade

• Risk of losses can be higher as active traders need to correctly predict the direction of the stock in order to gain. One wrong prediction could result in a loss which could negate all gains earned previously

• Time and effort must be implemented to do research on the investment and to make the trades properly

Passive Trader

Passive traders often use the buy-and-hold strategy, they purchase one or multiple investments for the purpose of cashing out many months or even many years later. Most often, passive traders invest in index funds (funds that own fractions of multiple stocks in the market).

Advantages

• Passive traders pay less fees using the buy-and-hold strategy, especially commission fees as they do not trade very often

• Income is more guaranteed and losses are less prominent as studies have shown that over the long run, the stock market shows a general trend of increasing in value over long periods of time

• Investing in index funds such as the S&P 500 and Dow-Jones generally does not require much research, which save time and effort

   

   

   

  Disadvantages

  • Traders must consistently resist the urge to exit the market if the investment becomes unfavorable

  • Returns may not be as high compared to active traders as passive traders may not sell their investment at its best price

Cash vs Margin Account: What’s the Difference?

When you apply for a brokerage account you may notice that there are two types of accounts that you may obtain. These account types determine what you can and cannot do on your account. But what are these account types and what does that mean for you as a trader?

Cash Account

A cash account is available for anyone over the age of 18 years old. These accounts have the following features:

• Unlimited Day Trading (in and out of a position on the same day)

• May not own short positions or borrow funds for investing

• Funds for trading are limited to the amount of cash that was sent to the account

• Have limited features with regards to exchanges (Limited to trading stocks, bonds, and forex)

Margin Account:

A margin account is available to those who are over the age of 21. These accounts have the following features:

• Limited Day Trading (3 times every 5 business days). Violating this rule will flag your account as a potential pattern day trader and you will be unable to buy into positions for a number of days.

  • Number of days the account is unable to buy into positions is determined based on the number of times the rule was violated

• Unlimited Day-Trading for accounts with a Net Liquidation Value of over $25,000 USD or currency equivalent

• Accounts with over $2,000 USD or currency equivalent may short positions and trade with leverage

• May trade in exchanges such as Options and Futures

If you are a trader who prefers to trade passively with no risk of borrowing interest rates, a Cash Account may be more suitable for you. If you are a trader who is less risk adverse and has a preference for larger returns over a shorter period of time, a Margin Account may be more suitable for you.