How Much Should You Invest In Stocks?
by Connor Lounsbury | July 30, 2021
A frequently asked question amongst new traders is "How much should I invest into the stock market?" My answer will always be as much as you are willing to lose. This article will discuss how much you should invest and how much you should put into each individual stock.
In the stock market, you should put in no less than 200 dollars. This will give you the opportunity to diversify your portfolio. Diversifying your portfolio is one of the best forms of risk management. Take this hypothetical instance: If you have 500 dollars and put it into four different stocks, what happens if all four stocks you picked go down in price and never recover? The answer is you lose a portion of your money. Now let's go with ten different stocks. If four of them are losers, but six of them are winners, then you will most likely come out profitable. There are other factors such as how much you lose in your losers and how much you profit on your winners. Using risk management, you should be able to keep your losers at a minimum loss while you maximize the gains of your winners.
If you are completely new to stocks, I recommend putting in no more than 1,000. This is to prevent major losses due to inexperience. You do learn a lot from simply trading on your own and recognizing your own mistakes, but to prevent losing actual money, you can paper trade to become more knowledgeable. As you become more experienced, you can scale more money into your portfolio.
Diversification is an important practice amongst many investors. Some may even take it as far as diversifying between different types of assets such as real estate, bonds, etc. In the stock market, you should have anywhere from 10-50 different stocks. Keep in mind, if you do go as far as 50 different stocks, then you must be able to keep track of each individual stock. This is difficult for newer investors to successfully pull off, so for the newbies, only have anywhere from 10-30 different stocks. Again, you must be able to manage these 10-30 different stocks, which does require some time. Diversifying your portfolio is an effective way to manage your risk and maximize your profits.
How much should you put into each stock you buy? I will begin by telling you what has worked with me. I put 5-10% of my portfolio into one long-term trade. Meaning if I have 1,000 dollars and wanted to buy one share of SNAP, I would only buy one share for about 78 dollars (approx. value). That would be about 8% of the total 1,000. I will only put in about 2-4% of my portfolio into a short-term trade. This is because trading short-term is more risky than trading long-term.
The goal in mind is to manage your risk while still making profitable trades. This is a lot easier said than done. If you have any questions, comment below and I will reply back to you.