How Much Stock Should You Buy?

Ok, so you have done your homework and found a great stock that you believe will head up.  It is following all of your rules.  Now you have to decide, how much of it do you want to buy.

Obviously you don’t want to put your entire account in 1 stock because nothing is a for sure thing.  You can still lose money even if everything appears to be good.   If it goes sour you don’t want it to take your whole account down with it.

So you have to determine how much you are willing to buy based off of your account and how much you are willing to risk.

There are 2 different ways you can do about doing this.                   

1.       You can divide your account up equally among all your trades.

 In this case you just divide your portfolio by the maximum amount of open positions you are going to have at 1 time.  So if you have a $100,000 account and want to have a maximum of 10 trades open at any time then you want to buy $10,000 worth of stock for each trade.

So, that is an easy way to determine how much to buy.  If you are putting $10,000 to every trade and the stock is trading at $50 you can buy 200 shares. 

If you do use this it is important to remember, you want to still use other methods such as stop loss orders.  This way you are still controlling the risk.

2.       The other way is to determine the risk.

If you are willing to risk 2% of your account on any 1 trade, well then the difference between what you bought the stock for and your stop should never exceed 2% of your whole account.

So say your account is $100,000 and you only want to risk $2,000 per trade.  You found a stock that looks like a good buy.  You plan on getting into it and set a stop 10% below the current price.  Here we could buy $20,000 worth of stock because 10% of $20,000 is $2,000 which is 2% of our total account.

Determining how much stock you should buy is an important question that needs to be answered before each trade.