Position sizing: how many shares is the right number?
A simple method for turning an account size, a risk limit and a stop price into a share count, with a worked example.
Most beginners decide how much to buy by looking at the price. A more useful starting point is how much you are willing to lose if you are wrong. Position sizing works backward from that number.
The formula
Position size equals the dollar amount you are willing to risk, divided by the risk per share.
- Dollar risk is your account size multiplied by the percentage you choose to risk on one trade.
- Risk per share is the distance between your entry price and your stop price.
A worked example
Say you have a $25,000 account and decide to risk 1% on a trade. That is $250. You plan to buy at $50 and exit if the price falls to $47.50, so the risk per share is $2.50.
$250 divided by $2.50 is 100 shares. The position costs $5,000, or 20% of the account, yet the planned loss is only 1%.
Change the stop to $45 and the risk per share doubles to $5, so the same $250 risk buys only 50 shares. The wider the stop, the smaller the position.
Why it matters
Sizing by risk keeps one bad trade from doing outsized damage. It also makes trades comparable: a volatile stock and a calm one can carry the same dollar risk even though the share counts differ.
What it does not do
- A stop order does not guarantee your exit price. If a stock gaps down overnight, your loss can be bigger than planned.
- The method says nothing about whether the trade is a good idea.
- Costs such as commissions and spreads are not in the simple formula.
- The percentage you risk is a personal choice. There is no number that is right for everyone.
Try it
Use the position size calculator to test your own numbers, and the risk/reward calculator to see what win rate a trade needs to pay off.