Okay, tip number four, quick and easy one. This is something, again, if you haven't guessed, these are all mistakes that I've made in the past, and I'm sharing these with you. So this is something I did over and over in the past. When I first started trading, I put like $500 in my trading account, and I was like "well I don't want to spend it all in one "place, so why don't I buy a couple of different stocks?" Diversification is not a bad idea, but when you invest so little, you have to overcome your commission before you can even make a profit, and in most cases, you're never going to, and let me explain to you why that is.
If you don't realize this, just because this is a beginner's video, I want to explain this. When you go on any website, Etrade, Scottrade, when you're going through an online stock broker or any stock broker, they're going to charge a commission for trading your stock. The prices vary based on websites or based on if you're using a live broker, whatever you're using, a human broker, but for me online, I trade with Scottrade, and it's like seven dollars a trade. Some of the sites are a little bit more, but Scottrade seems to be the best bang for your buck as far as what I've found, and just throwing this out there, I'm not paid by Scottrade, I wish I was, however I'm not, but I just like to tell people exactly how I do things because I like to be transparent.
Even if I'm not getting paid for it, I want to be honest with you. So when I was trading with Scottrade, I bought a number of stocks in companies, you know, or I bought a number of company stocks, spending about $100 on each trade, so here's the problem with that. Let's say you spend $100 in stock of the ABC Company, which, it doesn't exist, I just made that up, but you're gonna pay seven dollars on Scottrade to buy that stock, all right? Then you're gonna pay seven dollars to sell that stock, so yes, you pay commission every time you trade.
A round trip is opening and closing a position, so every round trip, you're gonna pay $14 in commission, so that means that 14% is how much your stock would need to increase just to offset your commission costs. Let me say that one more time. 14% before you even make a profit. Let's not talk about slippage, though, or no, let's talk about slippage because what is slippage? Slippage is the difference between the buy and the ask price for that stock. So just because the stock is trading at a certain value, doesn't mean that you're going to get that exact price for it.
Now when you trade a higher volume stock, there's less slippage because there's more trading going on, but you could possibly, if you're trading a lower volume stock, have a good amount of slippage, which means that maybe the stock is trading at $20.10 a share, but you only get $19.99 a share for it because that's what the current buy and ask prices are for the stock, so you won't necessarily get the quote of the stock at the time because of slippage. So your stock needs to increase 14% in value plus whatever slippage is involved before you even break even. So let's say you were trying to make $20 on this stock. You invested $100, you're hoping to get $120.
That means that the stock would have to increase 14% to 114 before you even made any money, and then account for your slippage. You're talking about having that stock raise 30 or 40%, somewhere around there, before you even make any money on that. You know, that's the point when you're making your $20, but even if the stock increased 15%, which, ask anyone, that's a great stock.