How to earn money when market crashes – How much cash to maintain in brokerage account?

An article by Punit    No Comments

Thats an important question to ask yourself no matter if you are seasoned or a beginner in investment. Day traders already have kind of mastered this area because they trade on momentum. When the tide is high and market is in bull mode, day traders will buy. As soon as market tops (according to calculations), day traders will sell. In fact they might do it several times during the day with lot of volatile stocks. It can extremely lucrative however there is risk associated too. Lot of these day traders do not even care about company’s financials, all they care about is company’s daily spread! If the spread is large, they got room to trade. Such trading requires vast amount of cash.

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Now lets look at short-term traders and long term traders.

Cash requirement for short term traders

Short term traders are people who buy and hold the stocks for few months at max. Few months is good timeframe if you wanted to capitalize on positive or negative (short and cover) news. Stock market has tendency to swing on news and its day traders who have a big hand in making it happen. If you shorted BP a month ago on the news about oil spill, you would have been able to cover it in 30% less already and that story is probably going to continue from here. So if you want to take that advantage, you need to have cash in the account at any moment to be able to load up the boat when the news hits.

Cash requirement for long term traders

Long term traders usually hold the stock for 6 months to few years. These people invest in promising companies and hence are not necessarily glued to their PC all day long. Typical investments examples for these people would be AAPL, C, S etc. As a long term investor, you want opportunities where news have hit the market and its affecting one of your favorite stocks. You are expected AAPL to hit 800 by 2010 end, and suddenly there is a lawsuit by a firm, and their shares drop 10%, you buy! For that to happen, you need cash.

I personally usually maintain close to 20% cash in my account at any given time and it has come handy in recent few weeks! Good luck to all traders! Enjoy a day with all greens in your portfolio (time to short?)

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