Ask Colin

Because you limit your position size to 6% of your equity does that mean you are prevented from buying high priced stocks like the banks or CSL or Cochlear. If you did buy a high priced stock the lack of leverage would take away from the attractiveness of the deal if you were to limit it to 6% of your equity.

My method does not mean I cannot buy a stock because of its share price. Its share price is quite irrelevant in the sense that I am investing an amount of money. So, for a high priced stock, I simply buy fewer shares. However, the same amount will be at risk.

What might stop me buying a share is how big the risk to the stop-loss is, not the price of the share. If the risk is too large, I may be only able to buy a very small position, which breaks my other rule of not risking less than 2% of capital.

The leverage you refer to is that with low priced stocks, you can buy lots of shares. So, a small price movement gives you a big return. However, remember that this is a two edged sword - on the downside you will lose a lot from a small reverse.

While it is true that large stocks tend to be less volatile than small stocks, this is not always so. Consider the percentage gain on Cochlear or CSL over the 1990s and it compares rather well with the percentage gain on smaller, lower priced stocks. It is percentage gain that is the important thing.

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