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Generally, the number of stocks you own is determined based on your account size, type of trader you are, risk tolerance and the time you have to manage your portfolio.
Trading in too many stocks becomes difficult to manage from a time perspective. If you have a lot of time to spend watching your stocks and keeping track of them then you can likely manage more.
One common problem is forgetting you even own a particular stock.
According to William J. O'Neil's "How to Make Money in Stocks" in an account containing between $20,000 to $100,000 you should have between 4 to 5 stocks. For those with accounts between 5,000 to $20,000 you should be limit yourself to 3 to 4 stocks.
Let us look at two traders. Both have $10,000 accounts and are looking at buying five different stocks. For this example, all of the stocks cost $10 and our traders want to spend $5,000.
Trader A pays $29 per transaction or $58 to get in and out of a stock. Therefore, if the trader buys 100 shares of each stock they will have paid $290 in commission or 2.9% in trading fees versus only 0.58% had they just bought 500 shares of one company.
The advantage of buying five companies is you will likely sell the worst ones quite quickly and hold on to the winners. Provided the winners go up more than $290 plus the losses incurred from the losing trades, the overall trade will be a winner.
Trader B pays $1 per 100 shares or $2 to get in and out of a 100 shares of stock. Therefore, if the trader buys 100 shares of each stock they will have paid $10 in commission or 0.1% in trading fees whether they buy 500 shares or 100 shares of five different stocks. Making a profit in this scenario is much easier than in the above scenario.
The difference between the two traders is that Trader A is disadvantaged by buying different stocks while Trader B is not.
While it takes more time to manage, many traders feel safer by owning a large number of stocks. Identifying how you operate and your comfort zone will play a role in determining the number of stocks you should be trading.
Your account size will also determine the number of stocks you should own.
Monte Carlo Simulator
for Traders Having troubles sticking with your trading system?
Do you move from system to system looking for the one system that will bring you riches?
Perhaps you already have it and tossed it aside when it went into a down period.
Using this Excel based program will show you what you can expect out of your trading system once you know the % wins and profit factor.
Stop wasting your time searching for the perfect system (which does not exist) and start trading.