What is Position Sizing?
Deciding how much capital to allocate to a single trade or holding.
Formal Definition
Position sizing determines the dollar or percentage weight of each holding based on conviction, volatility, and risk limits. Methods range from equal weighting to volatility-scaled sizing and the Kelly criterion. Proper sizing ensures that any single loss stays within tolerance and is a cornerstone of disciplined risk management.
In Simple Terms
It is deciding how big a bet to place on each stock. Even a great idea can hurt you if you put too much into it, so sizing keeps any one position from doing serious damage.
Example
With a 2% risk rule and a stop 10% below entry, an investor sizes each position at about 20% of capital so the worst-case loss is roughly 2% of the portfolio.