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Learning Department
January 1999

Learning Dept. was created as an educational tool to help traders and investors, especially those just starting out, to get up-to-speed, to understand more about markets and investing. It's used to discuss new investment products, as they become available.

"HOW do I get organized (for serious investing)" is a frequently asked question from new subscribers. Our recently revised Introduction to HSL Market Sections answers many aspects of that question, explaining various HSL market sections, types of market orders (eg, stoploss), etc. But a big question it doesn't answer is how much of each individual stock or investment should you buy or sell short?

A favoured approach is to take total account equity, eg, $500,000 & divide it into 10 or more equal-sized "units." If using 10 units, each purchase would be $500,000 (with 50% margin: $100,000). Advantage of this approach is simplicity.

But 1000 shares of a $50 utility stock is not the same as 1000 shares of a $50 internet stock, now is it? The latter is very likely to be far more volatile & risky. A more volatile stock usually requires a larger stop-loss to account for the greater daily price movement. If you use an "average" stop-loss, it would too often be hit during normal price fluctuations. A larger stop-loss means more risk unless you factor in the larger stop-loss when initially making the investment.

How do you do that? One method is by picking a percentage of your account you're willing to risk on each investment 1% is conservative, while 3% is aggressive. Again using our hypothetical $500,000 account, that means risking $5,000 (1%) to $15,000 (3%) per investment.

Let's use an example from the last HSL. We recommended buying Amgen (AMGN) at 80-sco (stop-close-only). On December 7, AMGN closed at 80.31, triggering our buy signal. Recommended stop-loss was 74. The $-risk was $6.31/share ($80.31 minus $74). A 1% risk of $5000,000 is $5,000. To limit risk to 1% you'd buy 792 shares ($5,000 divided by the amount of risk per share: $6.31). To keep it in round lots, you'd buy 800 shares.

Since this approach is more time-consuming, you may want to use it for selected investments you believe will be more volatile. It works very well for highly speculative investments. Using this technique makes it impossible to buy too much of one investment. Which, should it not work out, would take too big a bite out of your account. It also forces you to decide upon a "give-up" price, ie, stop-loss (included with HSL portfolio recommendations), ahead of time, when the decision is far less emotional, rather than after a price move against you. (This is #20 in "Learning" series; US $25 for the set).

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