Starting small

It is hard to start investing and trading when you have a small account and only a few dollars in your account. Unfortunately, a small investor is doomed to take a larger risk than if you have thousands of dollars at your disposal.

Taking a $500 risk on one trade feels different in a $1,000 dollar account than in a $1,000,000 account.

And, you will need double or triple of patience than a large investor. I have seen many small investors, myself included, blowing up their accounts because of being impatient. They wanted to grow their accounts fast, took too much risk, doubled up on trades, and blew it all.

But it can be done.

I personally started trading by buying cheaper stocks. It is appealing to want to trade AAPL but if you do not possess at least $20,000 cash in your account, you can forget it.

I was always into dividend stocks. My philosophy always was that if I would be owning a stock I want to be paid holding it. If you own a good company that pays you a dividend, you get paid in good times as well as in bad times. If the market crashes and all your stocks go south, you still want to receive a check in your mail (well, virtual mail). With growth stock, you do not get this benefit. The growth stock is down and all you can do is to wait empty-handed for it to recover.

But which company is so good that it will pay you even when the markets crash? Not guaranteed, but dividend aristocrats are good candidates to start with.

I went to the dividend aristocrats list and picked People’s United Financial, Inc. (PBCT). It is a dividend aristocrat that has paid and increased dividends continuously for 28 years and it was priced between $10 and $13 a share. The stock is optionable although not as great as more expensive stocks.

First, I started accumulating shares of this stock to gain confidence. Once I accumulated 100 shares, I started selling 50 DTE – 60 DTE covered calls. This takes a lot of patience because you have to wait 50 to 60 days to repeat the process. Many novice investors are not willing to do it. They engage in risky trades for which they do not have enough capital to handle the trade if it turns against them.

You take a credit you have received and buy 1 or 2 shares of another stock. I used PPL. Brokers made it easy today when you pay no commission to buy a single share of any stock. It was not possible just two years ago. When adding more cash into my account, collecting dividends and premiums, I soon could add put options towards my PBCT trades. At first, I went partially naked (I only had 50% saved to cover the put side) but I was selling a partially covered strangle now.

Soon I accumulated enough shares in PPL to repeat the process and started selling covered calls and naked to partially covered puts. I kept saving cash buying an ICSH fund that pays dividends and holds value in volatile times. If I get assigned to any of the stock I just sell the required portion of my ICSH holding to release enough buying power to cover the assignment. But with a single put or call, I do not have to do it. I roll the options. Rolling the single options, unlike spreads, is easy. Many times in 2020 my holdings were on a roller coaster yet I could lower or raise my strangle as needed to avoid assignment.

And cash kept rolling into my account. At first slowly, but soon faster and faster. You need to give your trades and stocks time to grow. Nothing will ever happen overnight. There is no quick rich strategy, no fast profits. Fast profits will come once you accumulate a large enough portfolio so you can afford to take riskier trades.

Don’t rush it. Rushing it will lose you money. If you give it time, you will be surprised how quickly it all turns around and how fast your portfolio will go up despite the initial turtle moves.

Cash flow

4 responses to “Starting small”

  1. John Bos says:

    This is sound advice. I would only add looking at a drip fund tied to your bank account so that small amounts (what ever that means to you) are deposited each month with their dividends and it really does not take that long before the amount grows and all in all without significant risk.

    • Martin says:

      I think having automatic deposits to your account would work once you accumulate large enough capital so you start withdrawing cash. Before that, I reinvest everything back to grow the account.

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