October 7, 2014

Question on investment amount

Question: What to earn by investing 10k in stock ??..its foolishness or waste of time and money. I think either we have to invest more or better to do fixed deposits. How can we do wealth creation in small piece of money??  asked by bears and bulls

Answer: it all boils down to risk management which is the most neglected part of any trading plan.

I approach risk management in two ways:
- limit investment to 5% of your trading capital in any stock (10K if your capital is 2L) or
- limit risk per trade to 1% of your trading capital (average loss 1K per trade if your capital is 1L).

Any of the above will guarantee that your losses will be small and that a series of wrong trades (10-20) will not mess up your account and you will still be left with enough capital to recover losses.

Regarding "wealth creation", the vast majority of traders end up destroying their wealth simply because they cannot understand/ manage risk and they would have been better off investing in FDs.

How can we do wealth creation in small piece of money? 

By following risk management rules, you are only limiting the maximum investment in a stock. So if your capital is 2L, you will invest 10K per stock. It is obvious that you can invest in 10-15 stocks or more depending on your capital.

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