How much should I invest in Stocks ?



Image by Nattanan Kanchanaprat from Pixabay 
The first question that comes to mind, when we enter stock market is, “How much should I invest in stocks?”. People should answer this question before they take any position in the market. “How much?”, it all depends on individual’s risk appetite. As we explained in earlier blog (click here) , investors are unaware about risk involved in stock market and this becomes an important parameter before you make any investment in stock market.


“When you take risks, you learn that there will be times when you succeed and there will be times when you fail, and both are equally important.” – Ellen DeGeneres

 To explain this in simple way, let us look at the below point in a detailed manner.

  •  Assess your risk appetite: - Risk is involved in everything we do and if you do not do anything, then it’s a biggest risk that you are taking. But this does not mean, you take undefined or unlimited risk.

Let us see this with example; Arun and Vijay are friends; both have recently joined a good company, and both earn good salary of 50,000 Rs. Arun is single child and his parents are working, whereas Vijay is an elder son and his parents are dependent. Arun enjoy spending money in restaurants and at pubs, whereas Vijay is sincere child and he knows his responsibilities towards old age parents. His mom is always sick and often need doctor’s attention. Vijay’s siblings are not working, they are still studying. Hence, Vijay is aware about his expenses, after meeting all his expenses, he can barely save 5,000 money, where as Arun does not have any responsibilities and even after spending a lot money , he can save 20,000 Rs as he has no obligation towards his family.

So now looking at both friends, who do you think, can take more risk with his money. Yes, you are right.  Arun can take more risk with his money compared to Vijay. Hence, Vijay’s risk appetite is less than Arun.

Before we do any investment, we should always check our mandatory monthly obligations. Stock market is uncertain and if you need money in emergency, you will have to sell the shares if they are in loss. Hence, Arun can directly take more exposure in stock market and Vijay can buy mutual fund or stocks amounting to 20% of his savings i.e. 1000 Rs, he can invest in stock market by buying shares of good company worth 1000 Rs every month.

Before we make any investment in stock market, we should make sure that out basic needs or requirements have been addressed. Event in life are uncertain just like stock market.

And in today’s time, we can see how Covid-19 has affected world. Markets are down and people fear losing their money. In this uncertain time, where job and business stability are affected. We should first check, if we have sufficient emergency corpus with us, to take care of our family’s responsibility and Health expenses are going to rise. Hospital bills will be heavy; therefore, we should always see these factors and current situation and act wisely.

Does not matter, how good is the opportunity in stock market but we should assess our risk appetite and responsibilities first. Only if we are certain and sure that we have sufficient corpus to take care of our family, only then we can invest in stocks to take some advantage.

Yesterday, one of my friend shared a news that 35 year old software engineer  from Noida, who allegedly run into huge losses because of uncertain stock market  during lock down  and had significant debts to repay, was found hanging from a ceiling fan in his fifth floor flat at housing society. The major mistake that he did, was he took a loan and put that money in stock market. He had 50 lakh investment and incurred a huge loss. This does not mean Stock market is bad, this clearly mean, he overlooked his risk appetite and greed took over the logic.

Therefore, always check your own risk, do your analysis on your own. Even a financial planner will fail to understand your risk if you do not share correct information.
Hope, this piece of information is helpful in such time. Please share this with your friends and families. Also comment, which topics you would like to read in coming time.

Next topic will be "stock vs mutual fund, what is better option."




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