How much money do I need to start trading?
In this article we look at how much money is needed to get started in trading as well as trade full time or semi-professionally
What's on this page?
How much money is needed to start trading in South Africa?
The money needed in your trading account would need to cover the trading costs (finance, spread and or commission), margin (deposit) requirements as well as any losses that may be incurred.
Different trading instruments carry different costs and margin / deposit requirements. For example, trading Johannesburg Stock Exchange (JSE) listed shares would usually incur a commission charge, while trading a forex pair would incur a spread charge. Positions held overnight can incur finance charges as well for traders.
Shares generally require a larger deposit (margin) relative to the value of the market position (nominal value), than currency pairs would, therefore necessitating more funds in the account.
The smaller deposit required relative to trade size in currency trading is due to the fact that these products generally carry higher degrees of leverage. Leverage pertains to the amount a traders profit, or loss is magnified in the market place.
A trader should consider the financial markets they are looking at, the costs and margins associated thereto, and how this might affect returns and the money needed in their account.
What is margin trading?
Margin refers to the deposit required to place a trade and is usually a percentage value of the full position size.
For example, a trader might want to buy R100 000 worth of a JSE listed company as CFDs. To place this trade, he would not need to outlay the full R100 000, but instead a deposit or margin of 20%. So, to generate profit or loss from R100,000 of shares he would require a margin / deposit of R20,000 i.e., 20% of R100,000.
The margin requirement will however vary depending on the stock, currency pair, commodity, index, or whichever asset class the person is trading.
What is leverage or gearing in trading?
Leverage or gearing in trading refers to how much a position’s profit or loss in the market is magnified relative to the margin deposit.
For example, if a trader bought R100,000 worth of JSE listed shares, and the value of this position increased to R120 000, the trader would have made R20,000 or a 20% return.
If the trader was only required to have used a 20% margin deposit for this trade i.e., R20,000, the trader would have still generated R20,000 return, although this return is 100% of the capital outlaid.
The profit in this example was magnified 5 times relative to the capital outlaid, meaning that the trade was geared or leveraged 5 times.
The other side to this is that if the position moved unfavourably against the trader the losses would also be magnified by the same proportion.
For example, if a trader bought R100,000 worth of JSE listed shares, and the value of this position decreased to R80 000, the trader would have lost R20,000 or 20% of their capital.
If the trader was only required to have used a 20% margin deposit for this trade i.e., R20,000, the trader would have still generated a R20,000 loss, although this loss is 100% of the capital outlaid.
An easy way to remember how much a trader’s profit or loss is geared or leveraged in the market is to divide 100% by the margin percentage required.
If a trading position requires a 20% margin deposit, 100/20 = 5. This trade is geared 5 times.
If a trading position requires a 25% margin deposit, 100/25 = 4. This trade is geared 4 times.
How much money is needed to start trading full time in South Africa?
The amount of funds required to trade full time is dependent on the individual, their skill level and how much money they need to earn to maintain their living expenses and lifestyle. These factors remain the same whether trading in South Africa or abroad.
To determine the funds needed to trade for a living, a person might consider what is a feasible expectation of annualised returns on a percentage basis. A trader who can achieve a 50% return per annum on R 1 000 000 in capital would be generating R500 000 per year. A person looking to earn more on a full-time basis would then either need to generate a higher percentage return, or the same percentage return on a larger sum of capital.
It should be noted that a 50% return would be a very high return on an annualised basis, and most are not able to achieve this on a consistent basis. If we look at IG’s South Africa 40 Cash Index as a benchmark for returns on a rolling 12-month basis (as of the 5th October 2022), the index shows a median return of around 14% since 2005.
How much money is needed to start trading semi-professionally?
To supplement an income through trading or trade semi-professionally, a person will need to allocate risk capital to markets in proportion to how much of a profit (in percentage terms) they are able to generate on a consistent basis.
There are no guarantees in the trading environment in terms of anticipated returns, and therefore no firm answers to the question of what a suitable amount of funds required to trade either professionally or semi-professionally is.
The money allocated to a short-term trading account is widely recommended to be a smaller proportion (10% to 25%) of a total investment portfolio. This is due to the fact that leverage trading carries an increased level of risk relative to the increased size of potential reward.
Can I start trading with R100?
While a trader can deposit as little as R100 into their account, it is unlikely to be enough to start trading effectively or efficiently. Traders need to ensure that the costs of placing and maintaining a trade does not inhibit the opportunity of trying to make a profit in markets.
How much do traders make per month?
The amount of money a trader can make per month is a function of the capital allocated to trading and the skill level of the trader. An unskilled trader might not be able to generate a profit at all, while a trader who can generate a compound rate of return of 6% every month will be able to double their starting capital in a year.
It should be noted that market conditions are ever-changing and some months are obviously more difficult than other months. Traders will need to develop strong risk management skills to protect their portfolios in the months that are more challenging whilst being able to capitalise on the months where there is more profit opportunity. Market conditions whereby volatility is elevated often provides more opportunity to make money in financial markets although at an elevated degree of risk i.e., higher risk and higher reward opportunity.
What are the pros and cons of trading?
The following lists outline some of the pros and cons of trading
A successful trader is able to supplement his or her income
Trading products such as CFDs (Contracts for Difference) provide the opportunity to generate a profit in a rising or falling market
Trading can be used to protect or hedge an underlying investment portfolio
Leveraged trading (i.e., CFDs) will often have lower transactional costs
Leveraged trading allows a person to only outlay a small percentage deposit of the full transactional size, freeing up capital
Becoming a consistently profitable trader can take time
A high percentage of retail traders are loss making
Trading assumes a higher risk than investing due to leverage
While transactional costs are lower than in investing, the higher frequency of trading can see total costs accumulating
What trading is best for beginners?
Those starting out in trading might consider using a demo account at first. Brokers such as IG, offer new traders a demo account facility. This allows those who are new to financial markets the opportunity to test out and develop their skills in a risk-free environment. A demo account would reflect forex, commodities, shares, and cryptocurrency markets (to name a few), allowing users to trade with fictional funds.
Traders who find that they can generate consistent ‘profits’ in a demo trading environment, whilst also understanding how these different markets operate (in terms of costs, leverage etc.) might then decide to progress to a live account. Moving to a live trading environment is likely to add a new dimension to trading in terms of emotion and discipline. When trading with real money, a trader might consider starting off with small positions, understanding how they react to and make decisions in this environment.
Open up a demo account and access a broad range of financial markets / asset classes.
The money needed in your trading account would need to cover the trading costs (finance, spread and or commission), margin (deposit) requirements as well as any losses that may be incurred
The amount of funds required to trade full time is dependent on the individual, their skill level and how much money they need to earn to maintain their living expenses and lifestyle
There are no guarantees in the trading environment in terms of anticipated returns, and therefore no firm answers to the question of what a suitable amount of funds required to trade either professionally or semi-professionally is
Those starting out in trading might consider using a demo account at first
Trading assumes a higher risk than investing due to leverage
Trading can be used to speculate on financial markets as well as protect or hedge an underlying portfolio
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.