How Much To Invest In Startup Stocks?

Investment in startups is treated as ‘high-risk, high-reward’, which is why you need to assess your risk tolerance and overall financial situation

Startups may appear promising, but there are risks involved. It is often a new business idea that may or may not work in the long run. Even after good market response in initial stages, things like lack of adequate profits or continuous losses could put a question mark on the company’s future.

As is evident, investing in startups can be quite risky. However, startups also have the potential to make you a millionaire. Let us take a look at how much you can safely invest in startup stocks.

Conservative estimate – If you have limited funds and prioritize stability, investment in startup stocks can comprise up to 5% of your portfolio. This will help you avoid any major volatility, which is often seen with startup stocks. Also, you will not have to face the situation where a significant part of your funds is locked-up due to a low share price over longer durations.

Moderate estimate – If you are looking at both growth potential and risk mitigation, investment in startup stocks at around 5% to 10% of your portfolio would be ideal.

Aggressive estimate – For maximizing profits, investment in startups stocks could be up to 20% of your portfolio. You can do this in various situations. For example, if you have funds that you can afford to lose. Or if you are confident that a specific startup stock will witness significant growth in the near future. While startup failure rate is high, the stocks may be highly valued in the initial stages. This is the best time to book your profits and exit. New startups are launched every year, so you can transfer the funds in these stocks.

Tips to succeed with startup stocks

Avoid long-term investment – Since failure rate of startups is quite high, it is generally not advisable to stay invested in the long term. If the market conditions are favorable, startup stocks may see a spike soon after their listing on the stock markets. This could be the right time to sell and book profits if you have got the shares via an IPO.

Do not gamble your savings – Some startup stocks may be marketed via influencers and other media channels. These may seed the idea in your mind that these stocks are expected to return major profits in the coming months. However, you should not blindly believe in such stories. It is important to do your own research before investing in startup stocks.

Diversification is the key – While investing in startup stocks, the age-old principle of portfolio diversification still holds true. So, make sure the majority of your portfolio still has traditional investments such as equity, mutual funds, ETFs, debt instruments, fixed deposits, gold, etc.

With the above tips, you can maximize your returns on investment in startup stocks. Make sure you study the business potential of the startup and leadership team before making any decision.