5-24-2023: The Cost of A Trade

The Cost of A Trade

A lot of people are under the impression that it can cost a lot of money to place a trade, and they’re right it can. 

However, a lot of people are also mislead into thinking that the cost of a trade is the amount that’s mentioned and the moment they place that trade the money will be TAKEN OUT of their account. This isn’t exactly easy to explain, I personally think that the video above explains it better, but to take an attempt to explain it…. 

I’m basically saying that the cost of a trade might be around $500. If the trade costs $500 to place, that doesn’t mean $500 is taken out of your account and that’s how much you have to pay to enter into a trade. In fact, if you get into that trade and lose $5, then you will ONLY lose $5. The cost of the trade is basically referring to the BUYING POWER you have to ENTER into a trade. 

A lot of traders are mislead when they see that number. If a beginner trade is about to trade and notices that it costs hundreds of dollars to get into it, they might back off because they might think that that money is GONE when they enter into a trade… in fact it’s not!

So, here’s another example. Let’s say you have $25,000 in your margin day trading account. You purchase ONE TESLA CALL for $500 and you make $200. Your account balance will now be $25,200. The $500 cost is just the amount you have to have in your account to trade. 

Keep in mind that if you want to DAY TRADE and place more than 3 trades a day, you’ll have to have a MARGIN account with over $25,000 in it. If you have less than $25,000 in your account, you can day trade, however your trades won’t settle instantly – but that’ll be saved for another blog post. 

So… back to the original topic. When you’re about to place a trade, DO NOT OVERTHINK when you realize that the cost of getting into a trade will cost hundreds if not thousands. That doesn’t mean you’re going to lose it. You can get into a trade that costs $1000, lose $5… and your account balance will be $5 (not $1000) less than your account balance before the trade. 

Watch the video above for more clarity!