What is Max Loss Per Share and Why Should You Care?
Max loss per share is the difference between your purchase price and the current market price of a stock. For investors holding long positions, understanding your maximum potential loss is crucial for risk management and portfolio planning.
Why should you care? Knowing your potential loss per share helps you make informed decisions about position sizing, stop-loss orders, and overall portfolio risk. It's an essential metric for any investor who wants to manage their downside exposure effectively.
How to Calculate Max Loss Per Share
The calculation is simple:
[\text{Loss Per Share} = \text{Purchase Price} - \text{Current Price}]
Where:
- Purchase Price is the price per share you paid when buying the stock
- Current Price is the current market price per share
A positive result indicates a loss, while a negative result means you have an unrealized gain.
Calculation Example
Let's say you bought shares at $50 each and the current price is $35.
[\text{Loss Per Share} = 50 - 35 = 15]
You have an unrealized loss of $15 per share.
Understanding Maximum Loss
For a long stock position, the theoretical maximum loss is your entire purchase price (if the stock goes to zero). For example:
| Purchase Price | Current Price | Loss Per Share | Max Possible Loss |
|---|---|---|---|
| $50 | $35 | $15 | $50 (if price = $0) |
| $100 | $80 | $20 | $100 (if price = $0) |
| $25 | $30 | -$5 (gain) | $25 (if price = $0) |
Risk Management Tips
- Set stop-loss orders to limit your downside
- Never risk more than you can afford to lose
- Consider position sizing based on your maximum acceptable loss
- Diversify to reduce the impact of any single stock's decline