Position sizing decides how much capital a trade or investment exposes. For a trading plan, one method divides an intended loss budget by the distance between entry and a planned stop. That produces a scenario, not a guaranteed maximum loss.
Work an example
A $20,000 account with a 1% planned risk budget allows $200 of scenario loss. An entry at $50 and planned stop at $48 imply $2 per share, suggesting 100 shares before fees and slippage. The position consumes $5,000 of capital.
Stress the assumption
If a gap produces a $43 exit, the same position loses $700 before costs. A stop order does not ensure the assumed execution. Illiquidity, leverage, and correlated positions can make the account's actual risk much larger.
Apply a second constraint
Limit capital concentration as well as scenario loss. Several trades that each risk 1% by a stop-distance calculation may all respond to the same market shock. Include existing positions when judging total exposure.
Long-term investors can instead size positions from allocation targets and loss tolerance. The appropriate framework depends on the strategy, but neither framework makes the business or market predictable.
Sources & further reading
Check the linked source for current rules and disclosures. Numerical examples on Stockbok are hypothetical unless explicitly attributed.
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General financial education, not personalized investment or tax advice. Investing involves risk, including loss of principal.