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How Small Traders Can Trade Effectively

May 5, 2015 •

Top individual investors seem to be in agreement that trading individual stocks is more productive than investing money in funds. Of course, funds have advantages since they reduce the amount of work that you need to do and instead pawn that off on others, but for the most part, the fees that funds take out cut into profits too much, and an educated market expert can usually outperform a fund manager.

Of all the arguments that can be made, there’s one that stands out above all the other ones. It has nothing to do with extra costs, or the fact that fund managers might not know what they are doing, or any of the other excuses that are out there. In fact, there are plenty of ways around almost every excuse that you can think of except one. By buying and selling individual stocks, you are giving yourself more complete control over your finances. For one, you can do your own research and decide if you like a stock or not before you do anything. Funds don’t let you do this. If you have ethical concerns about a company, or want to focus on a specific sector, you can do this, too. And, if some trends are being ignored that funds are ignoring, then you can hop on a trend before the big funds do and give yourself a boost.

But, one of the best parts about keeping control is that your money is more easily accessible. You don’t have to wait weeks for the fund to send you a check or transfer the cash. Also, you won’t have to wait until you are of retirement age to access your money, like with a 401(k) or IRA. Your money is yours and you can get it and alter it how you feel.

Buying and selling stocks is not free, though. Brokers charge commissions, and some fees are bigger than others. Some brokers will charge you as little as $5 to buy and another $5 to sell a stock, but these fees can add up very quickly, especially if you are not trading with large amounts of cash. Making ten transactions in a day will cost you at least $50, and unless you’re dealing with thousands of dollars, the cost will eventually eat up your profit rate. And even if you are profitable, you are minimizing the amount of money that you can make. It’s not the most helpful strategy for smaller traders.

Instead, smaller traders can give themselves an advantage here by focusing on binary options. Binaries are generally for smaller amounts per trade, with minimum trade numbers ranging from $10 to $25 depending upon what the specific broker says. And there are no upfront fees, but rather, a portion of earnings is withheld if your prediction is correct. If you are incorrect, you lose the amount you’ve risked, but if you are correct, then around 80 percent of what was risked is returned as a profit. The all or nothing nature of binaries makes it so that it can tough tough to be successful long term, but a good trader with only a couple thousand dollars to risk will find more immediate success with binaries than they will in the stock market because fees are much lower due to the fact that they are assessed only on the trades that are incorrect. If you’re wrong, you lose everything.

Beginning traders might struggle here, but this is normal for any type of financial activity. The best way to succeed is to study a bit before you begin. Take your time and learn what you are doing and read about the best ways to do it. Try and use a practice account or a demo account before you risk real money, too.

Categories: Starting Out
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