# Equal weighting

Equal weighting is a portfolio method that assigns the same target percentage of invested value to each holding, regardless of its market capitalization or share price.

## What it means

An equal-weighted stock basket starts with the same target dollar allocation for every stock. A basket of five stocks, for example, targets 20% in each. The number of shares usually differs because share prices differ.

Equal weighting describes **how money is allocated**, not whether the stocks are equally risky. It also differs from market-cap weighting, which gives larger companies larger weights. Equal weights are targets at a particular point in time; price movements can change the actual weights afterward.

## How it is calculated

For a fully invested basket with no cash allocation, the target weight for each stock is `w_i = 1 / N`, or `100% / N` when expressed as a percentage.

- `w_i` is stock `i`’s target fraction of the basket’s invested value; it has no units.
- `N` is the number of stocks, counted as holdings, not shares.

To translate that target into an order, use `target dollars_i = V / N`, where `V` is the basket’s target invested value in US$ and `target dollars_i` is the intended US$ allocation to stock `i`. Before trading costs, `target shares_i = target dollars_i / P_i`, where `P_i` is the assumed US$ price per share. This share result may need rounding if the broker does not support fractional shares.

To check actual weights after pricing or execution, use `actual weight_i = (shares_i × price_i) / total market value`. The prices used for this check should be measured at the same time and in the same currency.

## Worked example

Suppose a hypothetical investor plans a US$12,000 basket of three stocks. Their assumed prices are US$20, US$40 and US$80 per share, with no trading costs.

1. The target weight is `1 / 3`, or approximately 33.33%, per stock.
2. The target allocation is `US$12,000 / 3 = US$4,000` per stock.
3. At US$20 per share, Stock A needs `US$4,000 / US$20 = 200` shares.
4. At US$40 per share, Stock B needs 100 shares. At US$80 per share, Stock C needs 50 shares.
5. The allocations are each US$4,000 despite the different share counts.

Now suppose A’s value rises to US$5,000 while B and C remain at US$4,000 each. The basket is worth US$13,000, so A’s actual weight becomes `US$5,000 / US$13,000 ≈ 38.46%`. The basket is no longer equally weighted. Restoring equal targets would involve trades and potential costs; equal weighting does not require rebalancing at any particular frequency.

## Why it matters before you trade

Equal dollar allocations can make position sizes easy to understand, but they do not automatically diversify sector, country or currency exposure. Three equal-weighted stocks from one sector still leave the whole basket exposed to that sector. Likewise, an equal US$ allocation can represent very different fractions of each stock’s daily trading volume.

A pre-trade analysis can check the basket as a whole and each proposed line before any order is placed. Useful questions include whether share rounding changes the intended weights, whether the proposed order sizes are large relative to liquidity, and whether spread and market impact could make execution costly. Rebalancing to equal weights later can create additional turnover and transaction costs.

## How PreTrAIde uses it

PreTrAIde does not specify equal weighting as a required basket rule. Users build a stock basket with a side, quantity and execution conditions for each line. Its pre-trade analysis evaluates the basket and individual lines, including liquidity, execution and portfolio breakdowns by country, sector, region, currency and market capitalization. It also calculates a Herfindahl-Hirschman concentration index. Those checks can help a user assess an intended equal-weight basket without treating equal weights as a guarantee of diversification or low execution cost. PreTrAIde’s GO, NO-GO and MODIFY verdicts are decision support, not trade recommendations; users place any trades through their own broker.

## Common mistakes

- **Using equal share counts:** Equal weighting concerns position value, not the number of shares.
- **Assuming targets persist:** Returns change market values and therefore weights.
- **Equating equal weights with equal risk:** Volatility, liquidity and shared exposures may differ substantially.
- **Ignoring implementation:** Whole-share rounding, changing prices and trading costs can move actual weights away from targets.
- **Overlooking indirect concentration:** Equal stock weights do not imply equal exposure by sector, country or currency.

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Source: https://pretraide.com/glossary/equal-weight