What the calculator measures
Portfolio concentration is about how your money is distributed, not just how many stocks you own. Ten equal-sized positions give each stock a 10% weight; ten positions with one holding at 70% tell a different story.
Enter each position’s current market value and sector. The calculator uses those values to show:
- Position weights: each position’s share of the total entered value.
- Portfolio HHI: a measure that gives greater weight to large positions.
- Effective number of stocks: how many equally weighted positions would produce the same HHI.
- Largest position and largest sector weight: two straightforward ways to spot where value is clustered.
- Concentration reading: diversified, moderately concentrated, or highly concentrated, based on the stock-level HHI thresholds below.
The result describes the positions you enter. It is not a measure of expected return or a recommendation to change your holdings.
How are portfolio weights and HHI calculated?
First, add the entered position values to get the total portfolio value. Divide each position value by that total to get its weight:
Position weight = position value ÷ total entered portfolio value
For example, a hypothetical US$20,000 position in a US$100,000 portfolio has a weight of 0.20, or 20%.
The Herfindahl-Hirschman Index (HHI) squares every position weight and adds the results. On the calculator’s 0–10,000 scale:
HHI = 10,000 × Σ(position weight²)
Here, Σ means “add across all positions,” and weights are decimals: use 0.20 for 20%. Equivalently, if weights are expressed as percentages, square each percentage and add the squares. In a fully invested portfolio of positive-value positions, HHI is above 0 and no higher than 10,000. A single position produces 10,000; equal-sized positions produce 10,000 ÷ number of positions.
Squaring makes large holdings matter disproportionately. A 40% position contributes 1,600 HHI points (40²), while a 10% position contributes 100 points (10²). Four 10% positions therefore contribute only a quarter as much to HHI as one 40% position.
What does the HHI reading mean?
The calculator applies these descriptive bands to the stock-level HHI:
| HHI | Reading | What it indicates |
|---|---|---|
| Below 1,500 | Diversified | Value is less concentrated in individual positions by this measure. |
| 1,500 to below 2,500 | Moderately concentrated | Individual positions have a more noticeable influence. |
| 2,500 or above | Highly concentrated | A relatively small number of positions can dominate the result. |
These are classification thresholds, not safety limits. A “diversified” reading does not mean the portfolio is low-risk, and a “highly concentrated” reading does not establish that a holding is unsuitable. The labels address position sizes only; they do not assess the companies, their prices, or how their returns might move together.
A worked example
Suppose a hypothetical US$100,000 portfolio contains five stocks:
| Stock | Value | Sector | Weight | HHI contribution |
|---|---|---|---|---|
| A | US$40,000 | Technology | 40% | 1,600 |
| B | US$25,000 | Technology | 25% | 625 |
| C | US$15,000 | Health care | 15% | 225 |
| D | US$10,000 | Financials | 10% | 100 |
| E | US$10,000 | Consumer staples | 10% | 100 |
| Total | US$100,000 | 100% | 2,650 |
The HHI is 2,650, so the reading is highly concentrated under the stated thresholds. Stock A is the largest position at 40%. Technology is the largest sector: stocks A and B together account for 65% of the entered value.
For comparison, five equally weighted stocks would each represent 20%, giving an HHI of 5 × 20² = 2,000. Both portfolios contain five stocks, but the unequal weights produce greater stock-level concentration.
What is the effective number of stocks?
The effective number translates HHI back into an intuitive count:
Effective number of stocks = 1 ÷ Σ(position weight²) = 10,000 ÷ HHI
In the worked example, 10,000 ÷ 2,650 ≈ 3.77. Although the portfolio contains five stocks, its position-weight concentration is equivalent, by HHI, to about 3.77 equally weighted stocks. This does not mean it literally holds 3.77 stocks, nor does it predict its volatility.
An equally weighted five-stock portfolio has an effective number of exactly five. Unequal weights lower the effective number because larger positions contribute more heavily to the sum of squared weights.
Why check the largest sector as well?
Stock-level HHI can miss a simple form of clustering: several individually modest positions may all belong to the same sector. Adding the weights of positions assigned to each sector reveals the largest sector weight. In the example, no technology stock exceeds 40%, but technology as a whole represents 65%.
Sector weight matters because businesses in the same sector may share exposure to industry conditions. It is a useful second view, not a substitute for examining individual companies. Sector assignments are broad categories: two businesses in the same sector can differ substantially, while businesses in different sectors can still respond to the same economic forces. Use consistent sector labels when entering positions; otherwise, the calculator may split what you consider one sector into separate groups.
What this calculator does not capture
HHI measures weights, not correlations. It cannot tell whether two holdings tend to rise and fall together. A portfolio with a low HHI could still have substantial shared exposure across its holdings.
The calculation also depends on what you enter. If you leave out positions or other assets, the weights and HHI describe only the entered positions. Because weights use current values, they can change as market values change, even without a trade. Sector results depend on the sector labels you provide.
Use the outputs as a snapshot of position and sector concentration, alongside other measures of portfolio risk. PreTrAIde also offers a free, no-sign-up portfolio concentration checker; its broader pre-trade analysis evaluates a proposed stock basket before the user places any order with their own broker. Neither the calculator nor a pre-trade verdict is investment advice.