A trading account is essential for transacting in secondary markets. In case, there is any issue or confusing in opening a trading account, one can always visit the websites of a brokerage firm or Depository Participant (DP) to know more about the process. Once you are clear with the nitty-gritty of how to open a trading account, you can select a broker as per your investment style to open demat and trading accounts.
There are many stockbrokers who provide you free trading account as per their packages offered to you. Discounted brokerage reduces your transaction cost while trading.
As a novice, you may have a small balance to trade with. As you gain expertise, your bank balance keeps building and eventually you can trade larger accounts.
However, trading with smaller accounts is tougher than trading with larger accounts. Most of the small accounts just cover the requisite margin. In this read, you will know more about the challenges of trading with a smaller account.
Challenges of trading with a smaller account:
1. High level of risk
Small balances allow you to hold only a few positions. Many times, investors try to deal with this challenge by acting impulsively and trading aggressively. Consequently, overtrading leads to higher losses. Long losing streaks, which are a part and parcel of intraday trades, deplete the capital faster when you have a smaller account. Exercising discipline and caution will enable account balances to grow. You can also periodically review your risk tolerance levels and profit targets to prevent total capital wipe-out. Trading with a stop loss limit ensures capital protection.
2. Trading with smaller accounts tests your patience
With smaller balances, your trades don’t move fast. Consequently, making high profits in a short span of time becomes difficult. This may become disheartening or discourage you with the process. Hence, you may start swing trading to recoup small losses or frequently dump one position for another for quick gains. But, with either of the strategies, small account holders are likely to suffer higher losses.
Thus, being patient till your trading balance becomes bigger will do wonders in the long run. Taking small positions in good stocks and holding on to them for some time increases the profit potential of smaller accounts.
3. Reduced Trading Flexibility
With smaller accounts, you cannot trade in any available market. You can only trade in markets with low margins or small tick values. You cannot engage in trades involving multiple contracts too. Besides, incremental buying or selling is not easy with low trading balances.
4. Compelled to Trade Conservatively
With a low trading balance, you can trade only in conservative stocks. High-risk trades cannot be executed due to low stop-loss limits. As there is no buffer money or room for error, picking up low risk stocks is at the core of small account trading. Moreover, you cannot hold more than 4-5 stocks at a time.
Blue-chip stocks are better as they carry relatively lower risks and decent returns. ‘Trading around the core’ strategy is ideal for small account holders to achieve time-frame diversification of stocks. This strategy reduces risks and increases returns. The ‘one percent risk’ rule is good for investors with smaller accounts.
The above-described points are the main challenges associated with trading a smaller account. However, this does not mean that small trading accounts are not viable.
Margin requirements can be reduced by trading the underlying stock in derivatives markets. Executing dummy trades on trade simulators will help you test your trading strategies before your stake real money. Trade simulators are ideal for practicing intraday trading.
Handling pressure and optimizing risks will help you make profits from trading smaller accounts. Your account balance will gradually grow and help you trade larger accounts in the long run.