How Big of a Position Should You Have?

Keeping a 1 percent threshold for your trades is vital, but you should look at how many shares you will buy at a time. You can use this brief equation to get an idea of how big your position needs to be:

1. Take the total amount of money that you are going to place at risk.
2. Divide the position by the cents per risk. (This will be in decimal terms; 50 would be listed at 0.5.)
3. You should determine the total number of shares that you will trade.

Let’s say you were going to invest $250 in a stock while having a stop order at 50 cents. You would divide $250 by 0.5, which equals 500. That is, you should buy up to 500 shares at a time. Be aware of added commission charges associated with your stock plans. These might not cost as much as the entire investment itself, but it still helps to at least consider the charges when planning your trading strategy.

On a related note, there might be times when you have to round your stock order up. You might not be allowed to trade 250 or 270 shares. Instead, a broker might ask you to trade 200 or 300 shares. You would have to round that number up or down because the broker will have an easier time executing your trade with an even number. You have the choice, but it is best to choose the lower number if possible. For this example, use the 200 share option. This is clearly going to be less than 1 percent of your portfolio total, but that is fine at this juncture. You just need to invest in the stock with care so you can eventually move forward to increase your position later. The smaller order will be less of a risk, but that is another topic.