Investing in stocks is about more than just picking the right companies. It’s also about managing risk and allocating your capital wisely. One of the most common questions new investors ask is: “How many shares should I buy?”. While it might seem like a simple math problem, determining the optimal number of shares to purchase involves a combination of risk tolerance, portfolio strategy, stock market outlook, and capital availability.
In this guide, we’ll break down everything you need to know about position sizing, including formulas, strategies, and best practices tailored for long-term financial success.
Step 1: Define Your Investment Goals
Before diving into numbers, take a moment to define why you’re investing. Your specific goals will shape the amount of risk you’re comfortable taking, how long you plan to hold an individual stock, and what type of companies you might invest in.
Here are a few common investment goals:
- Long-term growth for long-term investors: Are you looking to build long-term wealth over time through capital appreciation? This strategy often focuses on quality companies with strong fundamentals and growth potential. Investors with this goal may be more willing to ride out short-term volatility or in other words have a longer investing time horizon.
- Dividend income: Are you seeking to generate passive income through dividend payments? In this case, you might prioritize companies with a consistent dividend history and allocate based on yield and stability rather than aggressive growth.
- Short-term speculation or day trading: Are you aiming to profit from short-term price movements? Traders often use technical analysis and are more sensitive to timing, liquidity, and price volatility. Risk management becomes especially critical here.
Each of these goals will influence how much capital you’re willing to commit to a position, what kinds of companies you select, and your approach to risk. Being honest about your investment objectives & financial goals can prevent emotional decisions and lead to a more disciplined strategy.
Step 2: Assess Your Available Capital
Once your goals are clear, the next step is to figure out how much money you’re comfortable investing in a single stock. This is a critical part of risk management because overcommitting to one position can be dangerous, especially if the stock experiences a downturn.
Start by looking at your total investable portfolio. This is the amount of money you’ve set aside for investing in the stock market, excluding emergency funds, short-term savings, or other financial commitments. From there, determine what percentage of that portfolio you’re willing to allocate to one stock.
A Common Guideline
Most financial advisors recommend that no more than 5% to 10% of your total portfolio should be invested in any single company or exchange-traded fund (this common guideline could also apply to other asset classes). This helps you stay diversified and reduces the impact of one bad investment.
Example:
Let’s say your total investment portfolio is worth $50,000. If you follow the 5% rule, you should invest no more than $2,500 in any one stock. This way a diversified portfolio could be achieved.
Even if you’re very confident in the company, it’s usually best to stay disciplined with your allocation. If you’re early in your investing journey, you may want to stay on the conservative side – around 2% to 3% per stock.
By thinking carefully about your available capital, you’re setting the foundation for smarter, more calculated investing.
Step 3: Use Position Sizing Formulas
With your capital and goals established, the next step is to determine how many shares to buy using a position sizing formula. One simple and effective way for new investors is to divide the dollar amount you’re willing to invest by the current share price.
Basic Formula
Example:
- Amount to Invest: $2,000
- Stock Price: $40
Number of Shares of Stock = $2,000 / $40 = 50 shares
This straightforward method ensures you stay within your capital limits while taking a position that aligns with your risk tolerance and goals.
While more advanced individual investors may incorporate stop-losses and risk percentages, these are not necessary at the beginning. However, you should remain aware of how much you could lose and monitor your stock holdings regularly.
If you’re curious or ready to explore more advanced risk-management tools later, you can consider adding stop-loss planning to your sizing strategy.
Things to Keep in Mind:
- Account for trading costs or taxes: Don’t ignore brokerage fees, taxes, and bid-ask spreads. These can eat into profits, especially if you’re buying low-priced stocks or trading frequently.
- Round numbers aren’t mandatory (fractional shares is an option): Round numbers aren’t mandatory: You don’t need to buy in traditional ’round lots’ of 100 shares. Thanks to modern brokerage platforms (such as Charles Schwab, Robinhood and others), investors can now purchase fractional shares, allowing you to invest precise dollar amounts regardless of the individual stock price. This means that even high-priced stocks like Amazon or Tesla are accessible to everyday investors through fractional share investing. Whether you’re starting with $10 or $1,000, fractional shares make it easier to diversify your portfolio without waiting to accumulate larger sums.
- Cash reserves matter: Don’t invest everything at once. Keeping some cash on the sidelines gives you flexibility to take advantage of future opportunities.
- Understand stock splits and price history: Stock splits can make a stock seem more affordable, but they don’t change the fundamental value of your holdings. For example, Broadcom (AVGO) announced a 10-for-1 stock split effective in July 2024. If the share price was $1,200 before the split, it would adjust to $120 after, and your share count would increase tenfold.
Other Key Considerations
Even after determining how many shares to buy, a few important factors can fine-tune your decision-making:
A. Understand the Stock’s Volatility and its Unsystematic Risk
Some stocks naturally fluctuate more than others. Metrics like beta, Average True Range (ATR), or standard deviation can help you assess how volatile an individual stock tends to be. If an individual stock has a history of large price swings, consider reducing your position size to better manage the level of risk and avoid emotional decision-making.
B. Consider Dollar-Cost Averaging (DCA)
If you’re unsure about entering the stock market all at once, DCA is a proven strategy. Instead of buying your entire position in one go, you invest smaller amounts over a period of time—weekly or monthly, for example. This smooths out the impact of market volatility and helps you avoid the pressure of trying to “time the bottom.”
C. Behavioral Discipline and Diversification
Successful investing isn’t just about numbers. It’s also about mindset. Resist the urge to chase trending stocks based on hype (FOMO). Instead, stay focused on your strategy and maintain diversification to protect against major losses. Regularly review and rebalance your portfolio as your goals or market conditions change.
D. Track your portfolio like a pro:
Investing doesn’t stop once you hit the “buy” button. Use portfolio tracking tools like Gainify, Yahoo Finance, or your brokerage’s dashboard to monitor your positions, watch key metrics like P/E, dividend yield, or volatility, and stay on top of news that could affect your investments. Regular portfolio reviews help ensure your allocations stay in line with your goals, especially as prices and company fundamentals change over time.
Final Thoughts
The question “How many shares should I buy?” goes far beyond simple math. It ties directly to your overall investment strategy, personal risk tolerance, and long-term financial goals & objectives. Thoughtful position sizing helps manage risk, enhances portfolio discipline, and increases your chances of achieving consistent returns, especially during volatile market conditions.
By defining your investment goals, assessing your available capital, and applying a structured approach to buying shares, you move from emotional decisions to strategic actions and achieve a diversified portfolio. While it’s easy to get caught up in market hype or fear, using a clear framework keeps you focused on what matters most: building wealth sustainably.
Whether you’re just starting out or refining your investing process, mastering position sizing is a foundational step toward becoming a confident and well-informed investor.
