Stock market position sizing

Position sizing implies the exposure that you would like to take in the stock market. From an investor’ point of view, managing money is very important. It has quite some calculations which can help an investor consider how much money they are willing to invest in the equity market. Every investor always has a stop loss in mind, but that does not mean that they have taken sufficient care of position sizing. Stop loss only ensures that an investor is protected from depletion of capital due to fall in share prices below a certain level. But it has been found that investors lose most of their money owing mainly to stop losses. Position sizing helps a trader identify the units of a share (in numbers) that he can purchase. This goes a long way in ensuring that investors lose the least of their invested capital.

By placing a stop loss and the maximum loss they are willing to suffer on a script the investors can make use of these two figures for determining the number of shares they can buy. The calculation is pretty simple. Divide the maximum loss by the size of the stop loss, and the resultant figure would be the number of shares they can buy. The stop loss size is the difference between the buying price and the determined stop loss price of the trader. To cite an instance, if a trader had $10 to invest, and he placed $8 as the stop loss, then the stop loss size is $2. So if a trader uses this formula, he can take care of not overbuying shares, which can help him minimize his losses.

Let’ consider a real-life example. Suppose a trader enters the stock market with $1,000, with a risk bearing capacity of 5%, i.e., $50. So the maximum loss becomes $50 in this case. Suppose the price of a share is $5, and the trader exercises a stop loss of $4.50 in it, then using the formula, we can easily find out the number of shares he can buy without exceeding the maximum loss amount. So using the formula, we divide $50 by $0.50, so we get the result as 100. So the trader can buy 100 shares of the company without exceeding the maximum loss.

It is also possible to include brokerage in the maximum loss. In such a case, the brokerage needs to be deducted from the maximum loss. In the above example, suppose the brokerage was $10, then the number of shares according to the formula could be worked out as: ($50-$10)/$0.50 = 80 shares.
Restricting losses to the minimum is very important in trading, and position sizing helps you maintain your losses to a certain level. The article clearly lays down the benefits of position sizing, which should always be kept in kind by every trader and even the investors in the sock market.