What Is a Good Amount of Money to Invest in Stocks?
Before choosing to buy any particular stock, investors should first decide how much of their liquidity, or available cash, should generally be allocated to investments and how much should be invested in any particular stock. Good stocks are a function of investor preferences. These preferences include the need for dividends, capital gains, safety of principal and liquidity. The answer to these larger issues determine investment success much more than the choice of any particular stock.
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A Balanced Portfolio
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Stock investors need to understand that investing in stocks, bonds, commodities and real estate with assets proportioned among each asset class greatly reduces the overall risk of a portfolio. This is called a diversified portfolio. Within the portion of assets allocated to stock, investors must first decide what outcome, or return, they expect from the portfolio and what losses they will accept. They need to decide whether the return should be in the form of dividends or capital gains. Investors should examine historical returns of the stock market as well as the returns of major mutual funds to understand if their goals are reasonable and achievable.
Diversified Stock Risk
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Investors seeking to minimize risk with small amounts of money should consider exchange traded funds (ETFs) or mutual funds. Under professional management, these funds provide investors with a diversified stock portfolio. Diversification allows no one stock to greatly affect the overall performance of the portfolio. Diversified funds generally are designed to perform as well as the average return of the broad stock market. Individuals building their own portfolio should consider the advantage of creating a portfolio based upon many stocks from many industries both large and small, domestic and international.
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Risk Per Trade
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Professional investors usually buy stocks with strict limits on losses. A good amount to invest begins with a decision of how much per investment you are willing to lose. A portfolio loss of 20 percent takes only 4 trades if the trader's loss limit is 5 percent per trade. Four consecutive losses is a common occurrence in investing. The same loss takes 20 trades when a 1 percent loss limit is used. Individual traders should convert the amount of risk they are willing to take and view it as a percentage of the total number of dollars invested. Adjust to moderate the effect of a single loss on the portfolio at large.
Investor Satisfaction
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Investor satisfaction reflects whether a good mix of stocks provides a balance of current income through dividends or long term appreciation. The proper balance of stocks to buy will be affected by income tax considerations, future expenses, and the ability to absorb extended downturns in the market during times of economic stress. A good amount of stock to own will differ with each individual need. Good stocks have good balance sheets and excellent growth prospects. Buying and holding good stocks is not easy. No stock trend is without substantial pullbacks during recessions or growing competition. No one stock is good indefinitely. However, portfolio balance is the only long-term path for economic success over long periods of economic uncertainty.
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