Managing Your Capital Base in the Financial Markets

Whenever you invest or trade in the financial markets, you take on a certain level of risk. While it is impossible to get around that risk, it is possible to manage your risk by educating yourself before you start investing or trading.

Capital Base and Trading Fees

Before you start trading or investing, you must make sure that you have planned ahead and set aside the capital you will need to invest. This will eliminate the unnecessary need to borrow money for your investments or trades, and ensure that all of your profits will go in your pocket, and not into someone else’s. Keep in mind though, that the capital you set aside should also include the most expensive part of trading and investing: brokerage fees.

While each broker will have different rates, most charge a flat fee per trade. These flat fees make it much easier to see a return on your investment, much sooner than you would with a variable rate. This also means that if you are starting with a fairly large investment of say $10,000, and the brokers trading fee was a $100 flat rate per trade, you would only need to generate a return of 1% to break even. The reverse is also true, in that if you are starting with a smaller investment of only $1000 or so, you would have to see at least a 10% return to do the same.

Your rate of return will also depend on whether you are investing or trading using a short-term or long-term system. In a short-term system, which is geared more so towards trading, you will incur more brokerage fees, as the frequency of your trading will lead to additional trading commissions. However, with a long-term system, which is more so geared towards investing, you will incur far fewer brokerage fees. This is due to the fact that with a longer term investment, you are investing in the future viability of a company or asset class, rather than trading immediate price action.

Trading on Someone Else’s Dime? — Proceed With Caution

One of the most important things to remember about any trade or investment, is that if your entire capital base is borrowed on margin, you take on an even greater risk than the actual trade or investment itself. It is never a good idea to borrow money, whether it be from a lending institution, your broker, or from your credit cards, to come up with the cash you need for any specific investment, especially if it may be difficult for you to manage. The problem is that by borrowing more money than you need for an investment, your level off risk increases. If the investment or trade moves against you, you will still have to repay the money that you borrowed, and may even have to pay additional penalties depending on your (current) financial position, and ability to repay the loan.

One Last Thing: Be Mindful Of Market Risk

Managing your capital wisely will help to manage your investment or trading risk. But it is important to remember that even when your monetary risk has been considered, there is always the market risk to be mindful of. That is to say that there is always the chance that when you invest in the financial markets today, there is no guarantee that the markets will be around tomorrow. There are no guarantees in investing and trading, and there is certainly no way to eliminate your risks entirely.

But with good financial planning, and a little common sense, investment and trading can be a fantastic and prudent way to build wealth for your future.

© 2020 Economics Global Inc.

Content Disclaimer

Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This article does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

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