Professional investors follow strict rules preventing capital destruction. Limit single-stock exposure to 4-8% maximum per stock. Exceeding this threatens diversification entirely.
The 2% Risk Rule (Practical Application)
Trading account: ₹5,00,000
Risk per trade: 2% maximum = ₹10,000
Reliance share price: ₹2,300
Stop-loss: ₹2,250 (₹50 loss per share)
Position size: ₹10,000 ÷ ₹50 = 200 shares
Even if this trade fails, loss remains ₹10,000 only—preserving capital for other opportunities.
Why 8% Maximum Works
Holding 30-40% in single stock destroys diversification. One adverse event (accounting scandal, competitor threat) decimates the entire portfolio. 8% cap ensures any single holding collapse absorbs manageable damage.
Sector Concentration Risk
Never exceed 25% in a single sector. March 2020 hospitality crash destroyed portfolios overweighting travel/hotel stocks.
Optimal Portfolio Structure
- 15-20 total stocks across portfolio
- 4-8% per individual stock
- Maximum 25% per sector
- 60-70% broad index funds/ETFs
- 30-40% bonds, cash, defensive holdings
Real Example
₹10 lakh portfolio breakdown:
- ₹6 lakh: 8 stocks × ₹75,000 each (8% each)
- ₹2.5 lakh: Bonds/fixed deposits
- ₹1 lakh: Gold/international diversification
- ₹0.5 lakh: Emergency cash buffer
The Math That Survives Crashes
If single stock crashes 50%, 8% allocation loses only 4% portfolio value—manageable. Concentrated 30% holdings crashing 50% lose 15% entire portfolio.
Stock market courses in Delhi teach position sizing discipline preventing catastrophic losses.
