Investing in stocks can be a great way to grow your wealth over the long term. However, it is also important to know how much money one can invest in stocks each month. Stocks are both risky and rewarding, hence they must be handled with a careful hand.
Investing in stocks is a long-term strategy. The stock market can be volatile in the short term, but over the long term, it has historically trended upwards. This means that if you invest in stocks and hold them for a long period of time, you are likely to see your money grow.
However, it is important to know how much money you can afford to invest each month. If you invest too much money, you could put yourself at financial and psychological risk. If the stock market takes a downturn, you could lose money. Hence, a retail investor should invest only a portion of his excess cash in stocks. There is also a psychological risk when the market falls. If excess money is parked in stocks, even small-small corrections can trigger anxiety. Hence, one must invest in stocks as per their risk profile.
A good rule of thumb is to invest no more than 30% of your disposable income. This means the money that you have left over after you have paid for your living expenses and other financial obligations. If you can afford to invest more, that is great. But it is important to start with a small amount and gradually increase your investment amount over time.
Let’s try to answer the question of how much money one can invest in stocks in more detail.
How Much To Invest in Stocks [Online Calculator]
Use this calculator to estimate how much of your net savings you can invest in stocks. The calculator will estimate your stock investing capacity based on your investment horizon, risk profile, age, and net savings capacity.
Factors To Be Considered To Know How Much To Invest in Stocks
By investing in stocks and knowing how much money you can afford to invest each month, you can grow your wealth over the long term and reach your financial goals. There are a few factors you should consider when determining how much to invest in stocks.
#1. Income and expenses:
How much money do you have coming in each month? What are your total expenses (just include everything here)? Subtract expenses from your income to know your disposable income. Now, start to think about how much of that you can afford to invest. You can get a clue from your age.
As a rule of thumb, if your age is 35, you can invest about 65% (100 minus age) of your savings in stocks.
It means that a younger person can invest a higher portion of his savings in stocks as compared to an older person. For example, a person who is 70 years of age can invest about 30% of his net savings in stocks.
But age is not the only factor that determines how much money one can invest in stocks. Let’s see factor number two.
#2. Risk tolerance
The risk tolerance of a person is a product of one’s experience and his/her psychological set-up. Suppose you are an experienced investor who sailed through the market falls of 2008 and 2020. It means your risk tolerance is high. Some people are also naturally psychologically strong to bear the impacts of a market crash, corrections, etc.
So considering one’s stock investing experience and psychological setup, all investors can be broadly categorized into four types:
- Defensive: People falling under this category should not invest more than 25% of their net savings in stocks.
- Moderately Defensive: People falling under this category should not invest more than 50% of their net savings in stocks.
- Moderately Aggressive: People falling under this category can invest up to 75% of their net savings in stocks.
- Aggressive: People falling under this category can invest up to 100% of their net savings in stocks.
Please note that the age factor shall not be ignored in deciding how much money one can invest in stocks. A combination of the age factor and one’s risk tolerance will give a more apt answer.
#3. Investment Time Horizon
Stock investing is essentially a long-term game. People who can invest their money only for a smaller time horizon should avoid stocks. Similarly, people who have a very long time horizon available for investing can pick stocks as a priority.
Time horizon can play a very essential role in stock investing. The longer one can stay invested in stocks, the lower will be the risk of loss and the higher will be the chances of fast compounding.
Stock Investing Basics
One can use the above online calculator to decide how much money one can invest in stocks. But stock investing is not only about putting money to work. Knowing how much to invest is just a starting point. One must also learn other important basics of stock investing:
Here are some tips one can utilize to start investing in stocks wisely:
Tip #1. Start small:
When you are first starting out investing in stocks, it is important to start small. This will allow you to learn the ropes and get a feel for how the market works without risking too much money.
There are a few reasons why it is important to start small.
- First, the stock market can be volatile, and there is always the risk of losing money. If you start with a small amount, you will minimize your losses if the market takes a downturn.
- Second, when you are first starting out, you may not have a lot of money to invest. Starting small will allow you to invest what you can afford. One can gradually increase the investment amount over time.
- Third, starting small will give you time to learn to analyze different types of stocks. Picking the right ones that suit one’s investment goal is the key.
There are a few ways to start small when investing in stocks. One way is to invest in stocks through exchange-traded funds (ETFs). ETFs can be bought and sold just like stocks from the stock market. But ETF is a collection of companies grouped into one security which is called ETF. Beginners can trade in Index ETFs to get a feel of stock investing. As Index ETFs represent a basket of quality companies, the risk of loss is greatly minimized.
Another way to start small is to invest only 50% of your calculated value (as per the calculator), in direct stocks. The balance shall be invested in Index ETFs. While investing in direct stocks, make sure to buy stocks of only blue chip companies.
Tip #2. Diversify your portfolio
Diversification is one of the most important principles of investing. It means spreading your money across different assets, such as stocks, gold, debt, cash, and REITs. This helps to reduce your risk because if one asset class performs poorly, your other assets may help to offset the losses.
There are a few reasons why diversification is important:
- First, it helps to reduce your risk. If you put all of your money in one stock, and that stock goes down, you could lose a lot of money. However, if you spread your money across different stocks, you are less likely to lose as much money if one stock goes down.
- Second, diversification may also help you to improve your returns. For example, if one invests only in blue chip stocks, the long-term returns are stable but not as high. If one diversifies one’s stock portfolio between blue chips and quality low-cap stocks, the long-term return potential can greatly improve.
There are a few different ways to diversify your portfolio. One way is to invest in different stocks. Another way to diversify your portfolio is to invest in different asset classes. For example, you could invest in stocks, REITs, Gold ETFs, physical gold, real estate properties, debt funds, bank deposits, etc.
Tip #3. Do your research
Doing your research is one of the most important things you can do before investing in any stock. This means understanding the company’s business model, its financials, and its competitive landscape. You should also be aware of the risks associated with investing in the company.
There are a few different ways to do your research. The most reliable method is to do a thorough fundamental analysis of the company. Once you have done your research, you should have a good understanding of the company and its prospects. This will help you make an informed decision about whether or not to invest in the company.
Beginners may not find it easy to do a complete fundamental analysis. In such a case they may use our Stock Engine to get the analysis done upon click of a button. Alternatively, they can also follow a relative price valuation method to get the analysis done.
Tip #4. Be patient
The stock market is volatile, and there will be times when the market takes a downturn. This is normal, and it is important to remember that the market has historically trended upward over the long term.
If you panic and sell your stocks when the market takes a downturn, you are likely to sell at a loss. However, if you stay patient and hold your stocks, you are more likely to see your money grow in the long run.
There are a few reasons why it is important to be patient when investing in stocks.
- First, the stock market is cyclical. This means that there will be periods of growth and periods of decline. If you sell your stocks when the market takes a downturn, you will miss out on the potential for growth in the future.
- Second, the stock market is a long-term game. This means that you should not expect to get rich quickly by investing in stocks. You should invest with the goal of growing your wealth over the long term.
- Third, the stock market is unpredictable. This means that you cannot predict when the market will take a downturn. If you try to time the market, you are likely to make mistakes.
By being patient, you can avoid selling your stocks at a loss and give your money time to grow. This is an important part of investing in stocks for the long term. A lot of money can be made out of quality stocks just by staying invested in them for a very long term (like 7-10 years).
There is no one-size-fits-all answer to the question of how much money one can invest in stocks each month. The amount you can invest will depend on your individual circumstances. However, by considering the factors listed in this article, you can get a better idea of how much you can afford to invest.
Investing in stocks can be a great way to grow your wealth over the long term. However, it is important to know how much money you should invest each month. Hence, I have also provided an online calculator that people can use to help determine how much money can be invested in stocks The calculators typically take into account the net saving potential, age, and risk profile of the investor.
Once you know how much you can afford to invest, you can start to think about how to invest your money.
To start investing in stocks, you will need a savings account. I’m assuming that you already have one. Then you will need two things, an online trading account, and a Demat account. Generally, online trading accounts are opened for free. To open a Demat account there are charges (approximately Rs.300). Henceforth, a recurring expense of about Rs.200 will be charged for Demat maintenance charges. Use this online calculator to know how much you can afford to invest in stocks.
There is no minimum investment amount for buying individual stocks. But one can buy a minimum of one stock of a company. You can’t buy in a fraction. This is But the price of each stock can vary between companies. For example, one stock of MRF, as of today, is priced at Rs.1,07,000. Similarly, the price of a few penny stocks can be below Rs.10 for each share. Buy buying one stock of say Rs.10 may not be economical. Because there are some fixed and variable charges applicable to all transactions. I generally, try to invest more than Rs.3500 for each transaction to keep it economical.
One should invest a fraction of one’s net savings in stocks. Read this piece to understand what factors you should consider while evaluating how much to invest in stocks. Alternatively, you can use this online calculator to get a quick answer.
Have a happy investing.