⚖️ Position sizing: how many shares to buy

🎯 In 30 seconds: Position sizing answers "how many shares?" The best-known method starts from how much you are willing to lose, not how much you want to make. Decide your rupee risk (say 1% of the account), take out an estimate for charges, decide where you will get out if wrong (the stop), and divide: shares = (account x risk% - charges) / (entry - stop). Everything else in this chapter, from R-multiples to F&O lot sizes to the Kelly criterion, builds on that one line.

The chai stall owner's question

Picture someone who runs a chai stall near a college. Every morning they decide how much milk to buy. Buy too little and they turn customers away. Buy too much and the extra spoils by evening. They do not decide by how good they feel about the day. They decide by what they can afford to throw away if the day goes badly.

Sizing a trade is the same decision. The question is not "how much do I want to make on this?" It is "how much am I willing to throw away if I am wrong, and how many shares does that allow?"

Three ways to size a trade

A position is the amount of one stock you hold. Position sizing is the rule you use to pick that amount. There are three common approaches.

1. Fixed rupee amount. You put the same amount, say ₹20,000, into every trade. It is simple. The problem is that the risk changes from trade to trade. If one trade has a stop 2% below entry and another has a stop 15% below, the second risks seven and a half times as much.

2. Percent of account. You put a fixed share of the account, say 10%, into each position. This grows and shrinks with your account, which is good. It still ignores where your stop is, so the risk per trade still varies.

3. Risk-based sizing. You fix the amount you are willing to lose on each trade, then let the distance to your stop decide the share count. It is widely taught because it makes every trade cost about the same when it fails.

The risk-based formula, Indian version

Here is the formula:

shares = (account x risk% - estimated charges) / (entry price - stop price)

• Account is the value of your trading account today, cash plus the current value of open positions.
• Risk% is the share of the account you accept losing if the stop is hit. 1% is a common starting point (see Risk comes first).
• Estimated charges are the brokerage, STT, exchange fee, SEBI fee, stamp duty, GST and DP charge on the whole round trip. On a delivery trade of ₹30,000 to ₹50,000 they come to roughly ₹150 to ₹180 with a ₹20-per-order broker, mostly because STT is 0.1% on both the buy and the sell. Your contract notes show your real figure. See What trading really costs.
• Entry minus stop is the loss per share if you are wrong. For an intraday short sale it is stop minus entry.

Always round the result down to a whole share. In the normal market on NSE, the market lot for shares held in demat form is one share, so there are no fractional shares.

Worked examples

All of these use hypothetical companies and prices, and a hypothetical broker that charges ₹20 per executed order and ₹20 DP charge on a sale.

Example 1: the basic case, Sharma Foods Ltd.

Example 2: a small account and a tight stop, Iyer Textiles Ltd.

Two things happened. A tight stop produced a huge position: 82% of the account in one stock, even though the planned loss is only 2%. And charges ate almost a fifth of the risk budget. On small accounts, fixed costs such as ₹20 brokerage and the DP charge weigh much more heavily.

Example 3: when the formula asks for more than you have. Account ₹2,00,000, risk 1%, entry ₹1,000, stop ₹995. The formula says (2,000 - 150) / 5 = 370 shares, a ₹3,70,000 position. You do not have that without borrowing, and a ₹5 stop on a ₹1,000 stock can be hit by ordinary noise.

This is why the formula needs a second rule: a maximum position size. A common choice is no single position above 20% to 25% of the account. With a 25% cap, Example 3 becomes 50 shares (₹50,000), and the real price risk is only 50 x ₹5 = ₹250. That is fine. The risk rule is a ceiling, not a target. The same cap would cut Example 2 to 62 shares (₹12,400).

Example 4: a high-priced share, Verma Engineering Ltd. Some Indian shares trade at ₹10,000 or more. Say entry is ₹12,400 and the stop is ₹11,900, so risk is ₹500 a share. With ₹1,850 of price risk you can buy 3 shares (₹37,200). One share more or less changes your risk by ₹500, a quarter of a percent of the account. For a ₹50,000 account at 1%, even one share risks the whole budget and is a quarter of the account. Sometimes the honest answer is that a stock is too coarse for your account size.

R-multiples: measuring trades in units of risk

R is the rupee amount you planned to risk on a trade. In Example 1, R is about ₹2,000. Every result can then be written as a multiple of R. Results below are after charges, rounded.

Why bother? Because R lets you compare trades of different sizes and different accounts. "+2R" means the same thing whether you trade ₹20,000 or ₹20 lakh. It also makes problems obvious. If your losses keep coming in at -1.5R or -2R, your stops are slipping or you are not honouring them.

Notice the second line. A "2R" target on the chart (₹48 above entry on ₹24 of risk) became about 1.8R in your account, because charges come out of the win too. Indian charges shrink every win and enlarge every loss a little.

The third line matters. A stop is a trigger, not a promised price. When a stock opens below your stop, the order fills near the opening price. Stop losses covers this in detail, including stocks frozen at their lower circuit.

R-multiples are also the language of expectancy, which tells you whether a set of trades makes money on average.

Sizing by volatility

Some stocks move ₹25 a day. Others move ₹8. If you use the same rupee stop on both, the quiet one rarely gets stopped out and the jumpy one gets stopped out by noise.

Average True Range (ATR) measures how much a stock typically moves per day, including gaps. It is explained in Volatility tools. A common approach is to set the stop a multiple of ATR away, often 1.5 to 3 times, and then size with the same formula.

Two hypothetical ₹600 stocks, ₹1,850 of price risk each after charges, stop at 2 x ATR, 25% position cap (₹50,000):

You own fewer shares of the jumpy stock and more of the calm one, and neither trade risks more than your budget. Volatility decides the share count, not your excitement.

F&O: when one lot is already too big

With shares you can buy 1, 37 or 77. Futures and options trade only in lots, a fixed number of units set by the exchange. That makes sizing coarse, often too coarse for a small account.

SEBI's rules require index derivative lot sizes to be set so that one contract is worth between ₹15 lakh and ₹20 lakh on the day the exchange reviews it, with reviews every six months. NSE set the Nifty 50 lot at 65 units from January 2026. Lot sizes change at each review, so always check NSE's current list.

Here is what that means, with a hypothetical Nifty level of 25,000 and a lot of 65:

The formula's answer is zero lots. A trader who takes one lot anyway is risking about 3.7% on a 100-point stop, and a 100-point move in the Nifty can happen in minutes. To trade one lot within a 1% rule with that stop, you would need an account of roughly ₹7.5 lakh.

Buying options feels cheaper, but the same coarseness applies. A hypothetical Nifty call at ₹120 premium costs 65 x ₹120 = ₹7,800 a lot. If you treat the whole premium as the risk, which is the honest default because options can go to zero by expiry, one lot is 3.9% of a ₹2 lakh account. You can set a stop on the premium, say at ₹90 (a ₹1,950 loss), but option prices jump around much more than share prices, so that stop is less reliable. Managing options risk covers this properly.

The Kelly criterion

In 1956 a Bell Labs scientist, John Kelly, published a formula for how much of your money to bet when you have an edge, to grow it as fast as possible over the long run. Traders adapted it. For a trade that wins a share W of the time, with an average win of b times the average loss:

Kelly fraction = W - (1 - W) / b

The result is the share of the account to risk (lose if wrong) per trade.

Those numbers are far above 1% to 2%. So why does almost nobody trade full Kelly?

Reason 1: the curve is lopsided. For the 55% method above, risking 10% grows the account about 0.50% per trade, compounded. Half Kelly (5%) grows it about 0.38% per trade, three quarters as much. Double Kelly (20%) grows it about zero, and 25% shrinks it. Betting too little costs you a little. Betting too much can cost you everything.

Reason 2: you do not know your real win rate. If you think you win 55% but the truth is 52%, the true Kelly fraction is 4%. Betting 10% then shrinks your account over time. Win rates measured over 30 or 50 trades are very uncertain, as Risk/reward and expectancy shows.

Reason 3: the ride is brutal. For the 55% method over 200 trades, our simulation (400,000 random sequences) of the chance of falling to half your starting money at some point:

Real trading is messier than the formula. Results are not neat wins and losses of fixed size, trades are not independent, gaps at 9:15 produce losses bigger than planned, and Indian charges come off every trade. So traders who use Kelly at all usually treat it as an upper limit and take a quarter or half of it, and many skip it and stick with a fixed 0.5% to 2%.

Putting it together

1. Pick your risk per trade (start at 0.5% to 1%).
2. Find the stop from the chart or from ATR, before thinking about size.
3. Subtract estimated charges from the rupee risk.
4. Compute shares = remaining risk / (entry - stop), rounded down.
5. Check the position against your maximum position size and cut it if needed.
6. For F&O, if the formula gives less than one lot, the answer is no trade.
7. Check total open risk across all positions, called portfolio heat. See Diversification and correlation.
8. Record R for the trade so you can measure the result in R later, in your trading journal.

Update the account value you use for sizing at a fixed time, such as every Monday before 9:15. Sizing off a stale, larger number after losses means you are risking more than you think.

Try it

Pick three stocks from the NSE website with different share prices: one under ₹300, one between ₹1,000 and ₹3,000, and one above ₹5,000. For each, choose a sensible stop below a recent low on the daily chart. Compute the share count for a ₹2,00,000 account at 1% risk, with ₹150 set aside for charges. Check whether any position would exceed 25% of the account, and cut it if so. Then pull up a contract note from your broker (or the sample in What trading really costs) and see how close ₹150 is to the real charges on a trade of that size.

Sources

• NSE: SEBI turnover fees, STT and other levies (updated April 2026)
• NSE circular (27 February 2026): Revision in transaction charges
• NSE circular (3 October 2025): Revision in market lot of derivative contracts on indices
• SEBI master circular for stock exchanges, chapter 5: exchange traded derivatives (contract size and lot size review)
• Union Budget 2026-27: Memorandum explaining the provisions in the Finance Bill (STT on futures and options)
• NSE: Trading system (market lot, order conditions)
• Kelly, Bell System Technical Journal (1956): A new interpretation of information rate