Zeag’s Portal

This post might seem like a big jump from my last post. However, I think now is a good time to talk about money management in investing in the stock market. The reason would be linked to the post I made about the undergraduate that lost 700k.

The point of money management is about the reduction of risk. In trading of the stock market, one should never put 100% of his capital into just 1 of the investment. Reason is this. Your analysis can be wrong. It will be wrong. There is no 100% correct analysis in the world. Even Warren Buffet loses money in some of his investments.

The key in growing your money is in making more money in your winning trade and losing less money on your losing trade. Sounds simple? I think so too. But not everyone can do it.

Generally speaking, one should not have more than 20% of their capital on any single stock. This is already a very aggressive form of investment. The reason is that you can lose 3 of your trades with proper cut loss of 15% and still make back the money with 20% gain in 2 of your remaining trades.

2 out of 5 is not a bad odd. Some investors will go for even up to 10% for each trade. For my options trading, every trade is just 5% of my capital. This is how we reduce risk.

1 of the most important rule in investing is capital preservation. When your funds dries up, then its game over.