# Position sizing

Position sizing is the process of deciding how many shares to hold or trade based on available capital, intended portfolio weight and the amount of risk an investor is prepared to take.

## What it means

Position sizing turns a proposed stock trade into a specific number of shares. That number determines both the capital committed and how much a price move affects the portfolio. A position can be measured in shares, US$ market value or percentage of portfolio value.

There is no single sizing rule. An investor might set a maximum portfolio weight, limit the cash used, or set a risk budget tied to a planned exit price. Those approaches answer different questions: *How much capital goes into this stock?* and *How much could be lost if the planned exit is reached?*

## How it is calculated

For a purchase sized by a planned risk budget:

`Shares = floor(Risk budget / (Entry price − Planned exit price))`

- **Shares** is the whole-share quantity, rounded down so the calculated loss at the planned exit does not exceed the budget.
- **Risk budget** is the maximum planned loss for this trade, in US$.
- **Entry price** is the assumed purchase price per share, in US$.
- **Planned exit price** is a lower reference price per share, in US$. The difference is the planned loss per share; it must be positive for this formula.

A separate capital check is `Position value = Shares × Entry price`. If the resulting value exceeds available cash or a portfolio-weight limit, the share count must be reduced to meet that constraint. For a short sale, the price direction and exposure considerations differ; the purchase formula above does not apply unchanged.

This calculation describes a *planned* loss, not a guaranteed maximum. A gap, partial fill or trading halt can prevent an exit at the reference price. Fees, spread and market impact can also make the realized loss larger.

## Worked example

The following numbers are hypothetical. Suppose a portfolio is worth US$20,000, the risk budget for one proposed purchase is US$200, and the assumed entry and planned exit prices are US$50 and US$45 per share.

1. Planned loss per share: US$50 − US$45 = US$5.
2. Risk-based quantity: US$200 ÷ US$5 = 40 shares.
3. Position value: 40 × US$50 = US$2,000, or 10% of the US$20,000 portfolio.
4. At the planned exit price, the price-only loss would be 40 × US$5 = US$200, excluding trading costs.

If this hypothetical investor had instead set a 5% portfolio-weight ceiling, that ceiling would allow US$1,000 of stock at US$50 per share, or 20 whole shares. The smaller limit would govern the final quantity. Neither calculation establishes what price an actual order will fill at.

## Why it matters before you trade

Position size connects a stock-level idea to portfolio-level exposure. Doubling the share count doubles the position's dollar change for a given per-share price move, before costs. A position that fits a risk budget may still create excessive concentration in one stock, sector or country.

Order size also matters for execution. A larger order relative to a stock's daily trading volume may be harder to fill under the desired conditions and can have a greater estimated market impact. Checking size before placing an order helps distinguish the intended exposure from the quantity the market may accommodate at acceptable cost. These checks are decision inputs, not assurances about outcomes.

## How PreTrAIde uses it

PreTrAIde's pre-trade analysis starts with a user-built basket containing a side, quantity and execution conditions for each stock. Its quantitative layer evaluates participation in daily volume, estimated spread and market impact, and portfolio concentration, among other measures. It returns basket-level and line-level GO, NO-GO or MODIFY verdicts with risk assessments and reasoning; these are decision support, not recommendations.

PreTrAIde also offers a free position size calculator without sign-up. Its product facts do not specify that PreTrAIde automatically chooses a risk-budget-based share count for the user. Users place any trades themselves through their own broker.

## Common mistakes

- **Confusing capital committed with risk:** A US$2,000 position is not necessarily a US$2,000 planned loss; the loss calculation depends on the assumed price move.
- **Treating a planned exit as a guaranteed fill:** Gaps, limited liquidity and trading halts can change the realized result.
- **Ignoring combined exposure:** Individually small positions can add up to a concentrated basket.
- **Overlooking trading costs:** Spread, market impact and fees affect the cash needed and the outcome.

---
Source: https://pretraide.com/glossary/position-sizing