With the recent surge toward home-based businesses and sole proprietorships, many people who enjoy buying and selling stocks for their own account wonder about making it a full-time business. While it’s true that millions of people have gone this route, it’s not without its own pitfalls. If you have been thinking about becoming a one-person trading business, you probably already know the ins and outs of purchasing and selling securities. What you likely don’t know are the four areas where new entrepreneurs have the most difficulty. Here’s a short summary of what you need to watch out for if you decide to earn a living in the online securities business.
Avoid Mistakes: Use a Simulator for a Few Weeks
Before putting your hard-earned, real money on the line, use your platform’s simulator to spend fictitious dollars, and lose or earn fake money, for several weeks. This is a crucial phase of learning that will show you how to place exact orders, get out of bad deals in a hurry, and become accustomed to all the platform’s peculiarities.
Avoid Going Broke: Know the 2 Percent Rule
If you don’t want to blow out your financial reserves, i.e., go broke within a month, abide by one of the oldest stock market guidelines in existence, the two percent rule. In short, never make a buy that costs you more than two percent of your entire brokerage account. For example, if you have $15,000 of money at your disposal, don’t ever initiate a transaction for more than two percent of that amount, or $300. Obviously, you’ll be making lots of small buys during your early days of being a professional, and the rule can seem very limiting. On the bright side, you’ll be able to preserve the majority of your capital even if you make several unwise deals in a row.
Avoid Trading Restrictions: Know the Pattern Day Trader Rules
Unless you’re okay with keeping a minimum of $25,000 in your brokerage account at all times, you must learn and live by these important rules. There are several of them, but the only one to memorize is the first, namely, “If you engage in more than four round-trip trades in a five-day period, you will automatically be classified as a day trader.” If you get hit with the classification but don’t have the necessary funds in your account, the brokerage will close you down and restrict your activity. However, if your activity that falls into the definition accounts for less than six percent of all your activity, you won’t be in danger of getting slapped with a ban. In essence, that means you can get away with a few violations as long as the deals are tiny enough to not exceed six percent of the dollar value of your activity during the five-day period in question.
Avoid Frustration: Begin Slowly
This is not the kind of business that you want to jump into full force. Keep your regular job, as people often advise, and ease into your new enterprise slowly. Consider spending just a couple hours per day in front of the screen, and then slowly ramping up from there.