Position Sizing Guide: How Much to Invest in Each Stock

You have ₹10 lakh to invest. How much goes into each stock? Position sizing is the most underrated skill in investing—it determines whether you survive crashes or get wiped out.

What Is Position Sizing?

Position sizing is the mathematical part of trading that determines how much capital you allocate to a specific trade or investment. It is the single most important factor in determining whether you will survive a string of losses or blow up your account.

Most beginners focus 90% of their energy on "Entry Signals" (what to buy) and "Exit Signals" (when to sell). They spend almost zero time on "Sizing" (how much to buy).

The Golden Rule: You can have a trading system with a 99% win rate, but if you bet 100% of your account on every trade, that one 1% loss will bankrupt you. Conversely, you can have a system with a 40% win rate and become a millionaire if your position sizing is perfect.

The Mathematical Reality: The Risk of Ruin

The "Risk of Ruin" is the statistical probability that you will lose so much money that you can no longer continue trading (usually defined as a 50-100% drawdown).
If you risk too much per trade, your Risk of Ruin approaches 100%, regardless of how good your strategy is.

The 50% Drop (math is cruel)

If you lose 10%, you need an 11% gain to recover.

If you lose 20%, you need a 25% gain to recover.

If you lose 50%, you need a 100% gain to recover.

If you lose 90%, you need a 900% gain to recover.

Conclusion: Preventing large drawdowns via small position sizing is the only way to win long-term.

The Psychology of Oversizing

Why do investors bet 20%, 30%, or 50% of their net worth on a single stock? Two reasons: Greed and Overconfidence.

1. Greed: "If I put ₹10,000 and it doubles, I make ₹10,000. That won't change my life. But if I put ₹10,00,000 and it doubles..." This thinking ignores the downside.

2. Overconfidence: "I've done the research. This company cannot fail." History is littered with "can't fail" companies (Enron, Lehman Brothers, Yes Bank, DHFL) that went to zero.

The Solution: Assume every trade can be a loser. Size it such that even if it goes to zero, you can sleep at night.

Position Sizing Example

Portfolio: ₹10,00,000

Target: 10 positions

Position size: ₹1,00,000 each (10% per position)

If one stock drops 50%: Portfolio loss = 5% (₹50,000)

If you had put 50% in that stock: Portfolio loss = 25% (₹2,50,000)

Position Sizing Methods

1. Equal Weighting (Beginner)

Divide portfolio equally across all positions

Example: ₹10 lakh ÷ 10 stocks = ₹1 lakh per stock

Pros: Simple, automatic diversification

Cons: Treats all stocks equally (no conviction weighting)

2. Conviction Weighting (Intermediate)

Allocate more to high-conviction picks, less to speculative ones

Example: High conviction = 10-15%, Medium = 5-8%, Low = 3-5%

Pros: Maximizes returns from best ideas

Cons: Requires skill to assess conviction accurately

3. Risk-Based Sizing (Advanced)

Size positions based on volatility and risk. This is what unmatched professional traders use.

Formula: Position Size = (Account Value × % Risk per Trade) ÷ (Entry Price - Stop Loss Price)

Example:

Account: ₹10,00,000

Risk per trade: 1% (₹10,000)

Stock Price: ₹100

Stop Loss: ₹90 (Risk per share = ₹10)

Shares to Buy = ₹10,000 / ₹10 = 1,000 shares

Total Capital Deployed = 1,000 × ₹100 = ₹1,00,000 (10% position size)

Pros: You risk the exact same amount of money (₹10,000) on every trade, whether the stock is volatile or stable.

Cons: Requires strict adherence to stop losses.

4. The Kelly Criterion (Expert)

A mathematical formula used by professional gamblers and quants to maximize compound growth.

Formula: K% = W - [(1 - W) / R]

Where W = Win Rate (e.g., 0.60), R = Risk/Reward Ratio (e.g., 2:1).

Warning: Full Kelly is extremely volatile (can suggest betting 20-30%). Most traders use "Half Kelly" strictly to avoid drawdown pain.

Position Size by Portfolio Size

Portfolio Size	Number of Positions	Position Size	Max Per Stock
₹1-5 lakh	3-5 stocks	₹20,000-₹1,00,000	20-33%
₹5-20 lakh	5-10 stocks	₹50,000-₹2,00,000	10-20%
₹20-50 lakh	10-15 stocks	₹1,50,000-₹5,00,000	7-10%
₹50 lakh+	15-20 stocks	₹2,50,000-₹5,00,000	5-7%

The Hidden Killer: Correlation

You might think you are diversified because you have 10 positions of 10% each. But if all 10 stocks are Tech Stocks (e.g., TCS, Infosys, HCL, Tech Mahindra...), you effectively have one giant 100% position in the IT Sector.

In a market crash, correlations go to 1.

During the 2020 Covid crash, almost everything fell together. Gold and Treasury Bonds were some of the few assets that held value. True position sizing must account for sector correlation.

Sizing by Asset Class

Not all 10% positions are created equal. Putting 10% in a Government Bond is safe. Putting 10% in a Crypto Altcoin is madness. You should scale your maximum position size based on the volatility of the asset class.

Conservative Assets (High Size)

Index Funds (Nifty 50): Up to 30-40%
Sovereign Gold Bonds: Up to 10-15%
Corporate Bonds: Up to 20%
Blue Chip Stocks (Reliance, HDFC): Up to 8-10%

Speculative Assets (Low Size)

Small Cap Stocks: Max 2-3%
Crypto/Bitcoin: Max 1-2%
Options Trading: Max 1-2% of total capital
Turnaround Plays: Max 1%

Common Position Sizing Mistakes

Mistake 1: Too Concentrated

Putting 50%+ in one stock. One bad pick wipes out half your portfolio. Never exceed 15% in a single position.

Mistake 2: Too Diversified

Owning 50+ stocks with 1-2% each. You can't track them all, and returns get diluted. Stick to 10-20 positions.

Mistake 3: Equal Size for Unequal Conviction

Putting same amount in your best idea and a speculative bet. Weight your high-conviction picks more (10-15% vs 3-5%).

Mistake 4: Never Rebalancing

One stock grows to 40% of portfolio. Now you're over-concentrated. Rebalance annually to maintain target allocation.

Advanced Strategy: Pyramiding vs. Martingale

When you are in a trade, do you add more money? If so, when? This is where sizing gets dynamic.

Pyramiding (Adding to Winners)

This is what trend followers do. You start with a small "Pilot Position" (e.g., 2%). If the stock goes UP and proves you right, you add another 2%. You repeat this until you reach your max size.

✅ Upside: You have your biggest position size on your best performing stock.
✅ Downside: Your average cost goes up. If it reverses sharply, you lose profit fast.
💡 Verdict: Highly recommended for growth investing.

Martingale (Averaging Down)

This is what gamblers do. You buy. It drops. You buy more to lower your average price. It drops again. You buy DOUBLE to get it back.

❌ Upside: If it bounces, you breakeven faster.
❌ Downside: If the stock goes to zero (Yes Bank), you lose EVERYTHING because your position size became massive on the way down.
💡 Verdict: Dangerous. Only acceptable for broad Index Funds, never for individual stocks.

Case Study: The Turtle Traders

In the 1980s, legendary traders Richard Dennis and William Eckhardt conducted an experiment to prove that trading could be taught. They hired a group of novices (the "Turtles") and gave them a strict set of rules. The most important rule? Position Sizing.

The "N" Factor (Volatility Sizing)

Example: If Gold is very volatile today (N is high), they bought FEWER contracts. If Corn is quiet (N is low), they bought MORE contracts.
The Lesson: They equalized dollar risk. A 20% move in Corn had the same P&L impact as a 2% move in Gold. This allowed them to trade wildly different markets with consistent risk.

Result: The Turtles made over $175 million in 5 years.

Standard Sizing vs. Fixed Ratio Sizing

As your account grows, how do you size up?

1. Fixed Fractional (The Standard)

"I will risk 2% of my account on every trade."

Account = ₹1,00,000 → Risk = ₹2,000

Account grows to ₹2,00,000 → Risk = ₹4,000

Verdict: Safe, compounds fast, but can be volatile at large numbers.

2. Fixed Ratio (The Ryan Jones Method)

"I will increase my size only after making a specific amount of profit (Delta)."

You trade 1 lot. You decide you need to make ₹50,000 profit before trading 2 lots.

It prevents you from sizing up too fast early in a lucky winning streak.

Verdict: Conservative, smoother equity curve, best for options/futures.

FAQ

How many stocks should I own?

10-20 stocks is optimal for most investors. Less than 10 = too concentrated (single-stock risk). More than 30 = too diluted (hard to manage, diminishing returns). Sweet spot: 15 positions.

What's the maximum I should put in one stock?

Never exceed 15% in a single stock, even your highest conviction pick. If it drops 50%, you lose 7.5% of portfolio (manageable). At 50% allocation, you'd lose 25% (devastating).

Should I use equal weighting or conviction weighting?

Beginners: Equal weighting (simpler, less room for error). Experienced: Conviction weighting (10-15% for high conviction, 3-5% for speculative). Never go below 3% or above 15%.

How often should I rebalance?

Once a year is sufficient. Rebalance when a position drifts 5%+ from target (e.g., 10% target becomes 15% or 5%). This locks in gains from winners and buys more of losers.

What if I have a small portfolio (₹1-2 lakh)?

Start with 3-5 stocks (₹20,000-₹40,000 each) or just buy index funds. With small portfolios, brokerage fees eat into returns. Consider index funds until you reach ₹5 lakh.

Master Position Sizing

Position sizing is more important than stock picking. Get this right and you'll survive any market.

Rule 1

10-20 total positions

Rule 2

Max 15% per stock

Rule 3

Rebalance annually

Read the Full Risk Management Guide →

Position Sizing: How Much to Invest in Each Stock

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