How much is too much or too little to invest in a single stock is one of the most common questions asked by a first-time investor. Every financial expert and investment advisor might differ on their views and opinions. But in this context, the right question should be not how much but what proportion of their investment should an investor invest in a single stock.
In the words of Warren Buffet, “do not put all your eggs in a single basket”. This is one of the essential rules while investing in stocks. Every investor should follow some basic rules in investing in the stock market. These include diversification of investment, rebalancing investment portfolio, keeping the cost of investing minimal and research before investing.
Portfolio Diversification
Diversification of investment portfolio implies investing in stocks of different companies and within different industries, different form of securities and financial instruments instead of a single stock. The golden rule of investment states that never invest all your money in a single stock. Portfolio diversification aids investors in minimizing their risk and exposure. Financial markets can be very uncertain, and a simple piece of news or information can alter investor sentiments in a manner which can lead to prices of stock to either skyrocket or nosedive. Portfolio diversification can safeguard the investor from such uncertainties as their losses from one stock and be covered by the profits earned by other stocks and instruments within their portfolio.
Imagine a scenario wherein an investor has invested all his investment within stocks of Company A. Company A was performing well on the stock market, but the news of a financial fraud within the company tanked the prices of the shares. This will result in the investor facing massive losses. If the investor only invested a small percentage of their investment in Company A and invested in a wide array of stocks, financial instruments, the accumulated profit earned by the investor’s other stocks and investment can exceed the losses incurred investing in Company A, and hereby this strategy safeguards their entire investment portfolio.
Portfolio Rebalancing
Rebalancing of portfolio implies reviewing your investment portfolio on a regular basis, off-loading under-performing stocks and financial instruments, and reinvesting in stocks which have future growth potential.
Stock prices can be highly volatile with stock prices rising and falling on a daily basis. This implies that the value of an investor’s portfolio will change on a regular basis. Not all investment decisions made turn out to be wise ones, but it is even more unwise not to rectify a bad investment. Hence it is vital for an investor to regularly track the performance of all the stocks within their portfolio, identify and off-load non-performing stocks and invest in stocks with growth potential.
Minimize Cost
Investing in the stock market and financial instruments involve costs. These costs include brokerage and commissions, cost involved in maintaining and operating a Demat account. While it is not entirely in the investor’s hand to control the performance of their investments, investors can control and reduce their costs involved in making their investments by opting for online discount brokers, negotiating Demat account charges with their banks, etc.
Conduct Your Research Before Making an Investment Decision
One of the most important principles of investing in the stock market is to research before making an investment decision. Investors often make their investments based on market rumors, advice and tips from brokers, financial advisors, friends and family, and some merely follow the bandwagon and invest in a stock which is going hot and everyone is investing. It is vital for an investor to conduct their research regarding the financial performance of the company, read pertaining material about the latest developments of the company and evaluate the future potential of the company in whose stock the investor wishes to invest.
Maintain Your Course
Investing in the Stock market can be a roller coaster ride with prices of stocks rising and falling almost every day. Investors should not panic in an event wherein the price of their investments fall and resort to selling their investments due to fear of further losses. An investor should understand the end goal of their investment is to create wealth, and hence they need to keep their emotions in check and maintain their course. Investors should seek to adopt a strategy of buying and holding stocks for a long-term period. This allows the investment to ride out the ups and downs of the stock market and make substantial gains over a period of time.
Alter your Investment Strategy as per your Needs
Life is never constant and undergoes a process of continuous change. Life changes bring in a change in goals, responsibilities, changes in financial situations etc. A person when young can have a higher risk taking appetite and invest in stocks with high risk-high returns. But when a person gets married, buys a house, starts a family, their life goals and responsibilities change, and so should their investment strategies.
Investors should evaluate their life situation and assess their financial goals and risk taking appetite and accordingly alter their investment strategy from time to time. It is wiser to invest in less risky investments and increase the proportion of debt instruments as an investor goes through these changes within their lives.
Start Small
First-time investors need to start small, i.e., invest only a certain proportion of savings in stocks and financial instruments
Investors need to ask the right question, i.e., what percentage of their investment allocation they should invest in one stock rather than how much to invest in one stock. Investors can earn handsome returns investing in the stock and financial markets by simply following some basic investing rules such as diversification of investment, rebalancing investment portfolio, keeping the cost of investing minimal and research before investing.