American Stock Market, US Stock Market, American Share Market

How much to invest in equity is depends on two criteria: the risk profile of investor and the liquidity requirements of the investors.

Risk Profile

Equity investments are not free from risk. Let us take 35 years old Nagesh; has a long bright career ahead of him. He can afford to take greater exposure and risk in equities. On the other hand, Nagesh’s father is retired and has no source of income other than his savings. So he will be able to afford very little risk; looking at evergreen stocks to choose his investments.

Liquidity requirements

Liquidity requirements signify the need of cash to meet one’s payment obligations. Nagesh has an idea of his monthly expenses so he has a better fix on his monthly cash requirements. He also needs to maintain a certain amount of cash in liquid savings to spend in medical expenses or any unplanned tour. Beyond these requirements, he can look at investing in equities. On the other hand, Nagesh’s father has to meet his entire expenses from his savings and would have large requirements for immediate cash. Hence, he can allocate a smaller portion of his savings to invest in equities.

Moral

From above two examples, we realized that Risk profiles and Liquidity requirements vary with age, current financial position and one’s own personality. These two criteria will be different for different people, but one should not lose sight of one’s risk profile and liquidity requirement while investing in equities.