How to Distribute the Amount Wisely in Stocks to make Profits?

How to Distribute the Amount Wisely in Stocks to make Profits?

I am always posed with a situation where I have to distribute the Investing Amount in the Selected Shares/Stocks.

Just to give an example:

Lets say If I have $ 10000 and I have selected three Stocks to be bought with this amount..

STOCK-NAME--PRICE------PROFIT
Stock I---------$ 32--------$ 37
Stock II--------$ 55--------$ 62
Stock III-------$ 77--------$ 81

I want to get a Logic ,which gives me the Best Quantity of Stocks for each Stock in the given Investing amount and which yields the maximum Profit...

Though my main goal is to make profits but it is also to buy all the three stocks maybe not in the same quantity..

Lets Say If I buy Stock I - 100 nos then I would have spend $ 3200 and Then I would remain with $ 6800 for the other two , then lets say If I buy 70 of Stock II then I would have used $ 3850 and then with the remaining amount i.e. $ 10000 -($ 3200 + $ 3850 ) = $ 2950.

With $ 2950 remaining I would be able to buy $ 2950 / 77 = 38 Stocks of Stock III.

Now I want some helping hand to understand why I have to buy a particular Stock more than the other...

I am also looking for any logic which can be expandable if more no of Stocks are included as well as one more criterion of Risk is Induced alongwith the prices as follows.

STOCK-NAME--PRICE------PROFIT---RISK
Stock I---------$ 32--------$ 37-----HIGH
Stock II--------$ 55--------$ 62-----MEDIUM
Stock III-------$ 77--------$ 81-----LOW

I thinks this question also involves some mathematical acumen....

Warm Regards

This is one of the most fundamental question when it comes to applying Position Sizing or Money Management in practice.

This is how I will go about it..
- first define my rule of how much of my capital can be trusted with 1 stock.
It sets a limit (say A for me). For simplicity lets say I decide $2500 as limit for each stock.
- For this limit of A, calculate how many stocks I can buy at current mkt price. Lets call it UNITS-A.

- second, forget the profit target, but find out where is the stoploss the stock i.e. how much I can loose. Trading is about risk management, and if that is done smartly, profit will take care of themselve.
- Decide on how much of loss I can afford on each stock. Thumb rule is not more then 1 % i.e. for 10k acct, it is $100, but u can use different number as well. For illustration - lets us $200 as max loss per position that we can take.
- For this Max loss limit, calculate how many stocks you can buy based on the risk of each trade i.e. current price - stoploss price. (Say UNITS-B)
- Actual number of stocks that u shd buy is the minimum of UNITS-A and UNITS-B.

Lets put the result in extended table as below
This ensures that
- you take calculated risk and even if one company dooms tomorrow, you will not loose your acct..
- It also ensures that if mkt turns down and takes all stocks down with it, ur maximum loss will still be $600 and your account remains intact. This 6% loss on 10k account is still recoverable in next 1 months time.

There are many other position sizing methods available with their own advantages and complexity. But this is one of the most simplest and takes care of prudent risk mgmt aspect of investing.

Hope this helps.
Happy Trading.

Can u plz request Traderji/Moderator to move this thread to "Risk and Money Mgmt" section (thur PM or Report button). This question is lot more serious then General chitchat and will help many people..

Thanks lot AW1o.. I knew that I could count on you for the response..

ANd also for showing the pro-activeness of informing me in the other thread to check it here as I was totally unaware of your reply..

I am trying to absorb all the matter which you have mentioned and shall cum back after that's done..

I had made two threads accidentaly and had informed one of the Moderators to delete this thread and keep the other one as that something more mentioned but anyways..

Sorry for the trouble..but have requested the other thread to be deleted now...

That's good to know that its called Position Sizing..

I believe $ 2500 is a ficititious amount which happens to be 25% of the Total say "X"
Now just had a Question why 25% and why not 33.33% which is Dividing the Complete amount by the no of Stocks..
i.e. 100/3 = 33.33%

What do you mean by Position out here?
Each Stock Is it individual Share or Stock I?

Didn't quite get this portion..marked in red above..

Lets put the result in extended table as below
I did not understand how you got the figures of 78 and 100 Units-A Units-B

This ensures that
- you take calculated risk and even if one company dooms tomorrow, you will not loose your acct..
- It also ensures that if mkt turns down and takes all stocks down with it, ur maximum loss will still be $600 and your account remains intact. This 6% loss on 10k account is still recoverable in next 1 months time.

There are many other position sizing methods available with their own advantages and complexity. But this is one of the most simplest and takes care of prudent risk mgmt aspect of investing.

[/QUOTE]

yes 25% was an example assuming I am planning to have 4 stocks in my portfolio. U can very well change this size to any other number but the approach remains the same.

Each position means each trade. Same as each company/stock.

I tried my best to put Units-A / Units-B in my explanation. Maybe it was not good enough. Let me try it with example here..

-- Units-A = number of units that u can buy with $ amount that u have planned. So for stock I @32, u can buy 2500/32 = 78 qty.
-- Units-B = number of units that is allowed as per your risk limits. Yr risk limit is $ 200 i.e. 2% of your 10k acct. The risk for stock I is $2 which is the diff of buy price 32 and stoploss price of 30 i.e. 32-30 = 2 is your risk on this trade.
So $200 of risk allows you to buy 200/2 = 100 qty.

So your final qty shd be minimum of 78 or 100.. i.e. 78. This way your risk will be 78*2 = 156$ which is within yr limit of $200.
If you go ahead and buy 100 qty, then u need 3200 for this..and that goes beond yr 25% limit planned for each stock/position. By doing this, u will be taking extra exposure to fate of 1 single company. Tomorrow if any negative development comes from this company and stock tanks by 20%, then it will hit hard on your portfolio. Or if this company goes out of business then as proud owner of this company, your investment also goes in the drain with it.

In the table, I have used this approach to calcuate Unit-A and Unit-B for each row.

Hope it is clear now. Please google and read more on money management/ position sizing to get better idea about this topic.

Happy Trading

Understood how I get 78, however did not get why we are taking 2% risk on 10K ( Is it a thumb Rule? )

???? How did we get $ 2?

Did not understand Why are we dividing the $ 200/2 ?
$200 is the Max Risk on the Total Portfolio..

DId you mean that the Final Quantity shud be btwn 78 and 100? I did not understand why we are multiplying 78 *2 = $ 156 ...No of Stocks is 78 and Risk =2..rite!

Sorry to bother you but there are some loose end-points..
needed to understand to compute it in Excel..

My main aim is to have a Application wherin I put an Investing Amount "X" and the no of Stocks and the Stock Prices and their Risk values as per your explantion and replicate thsi logic across..


Ofcourse with your valuable inputs I know what to research now..:clap:

Do u understand
- What is the meaning of Stoploss?
- how do you define the Risk on a trade ?

In absence of that, understanding Unit-B calculation might seem difficult.

Plz read about these terms on Investopedia dot com site first. Read on position mgmt/money mgmt as well. Then comeback to my 3 posts and see if your questions are still unanswered.

Post your findings then and I will reply to them.

I could have given straight answer but prefer to show u give u pointers to read more. I am believer of "Teach a man to fish..." rather then "feed a man.."

Hope you see my point here..and take it in positive way..

Happy Learning/Trading.

Happy New Year AW10

And I Shalth DOeth the Needful at the Earliest..

Thanks for the help..

deleted.....

hi,
For this topic, the answer already i have prepared excel sheet, see the below link :

http://www.traderji.com/risk-money-management/38563-porfolio-management-v-1-1-a.html