2% Rule
 |
Definition of '2% Rule'A trading practice where an investor should concentrate no more than 2% of available capital on a single trade. To follow the 2% rule an investor first calculates 2% of the available trading capital, called the capital at risk. Brokerage fees for buying and selling shares are then factored into the capital at risk, and this figure is divided by the current share price. The resulting figure is the total amount of shares that can be purchased. If market conditions change and result in the trader losing the total value of that trade the downside exposure is only 2%, since the value of the original trade was limited to 2% of the total amount of trading capital available. |
 |
Investopedia explains '2% Rule'The 2% rule is a restriction created by investors in order to stay within the boundaries of a trading system. For example, an investor with $100,000 will purchase no more than $2,000 - or 2% of the value of the account - of a particular investment. By knowing the upper limit that can be risked, the investor can work backwards to determine the total number of shares that can be purchased. The investor can also use stop-loss orders to limit downside risk. |
Related Definitions
Articles Of Interest
-
Day Trading Strategies For Beginners
From picking the right type of stock to setting stop-losses, learn how to trade wisely. -
Trailing-Stop Techniques
The important decision to exit a position must be based on more than emotion if you want to be a disciplined trader. -
The Art Of Selling A Losing Position
Knowing whether to sell or to hold is tough. And no rule fits all. Find out what to consider. -
Having A Plan: The Basis Of Success
It ensures that you have a realistic outlook, and a solid strategy. We show you why and how. -
The Stop-Loss Order - Make Sure You Use It
It's a simple but powerful tool to help you implement your stock-investment strategy. Find out how. -
Taking The Sting Out Of Investment Loss
Get a hold of yourself! Take losses in stride and learn to invest dispassionately. -
Introduction To Treasury Inflation-Protected Securities (TIPS)
If you want to protect your portfolio from inflation, all you need are a few TIPS. -
6 Asset Allocation Strategies That Work
Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right. -
A Top-Down Approach To Investing
Use a global view to determine which stocks belong in your portfolio. -
How Risk Free Is The Risk-Free Rate Of Return?
This rate is rarely questioned - unless the economy falls into disarray.
Free Annual Reports