What Is Considered a Concentrated Stock Position?

A concentrated stock position is when a large portion of an individual’s investment portfolio is held in a single company’s stock. This situation can introduce significant risk, as the investor’s financial well-being becomes heavily tied to the performance of that one company. Understanding whether you have a concentrated position is the first step toward managing this potential vulnerability.

Defining a Concentrated Stock Position

While there is no single, legally mandated definition, financial professionals rely on accepted guidelines. A position is often considered concentrated if a single stock accounts for 10% to 20% of an investor’s portfolio. Some advisors suggest a more conservative threshold of 5% to 7%. These percentages mark the point where a downturn in one stock could disproportionately harm the portfolio’s value.

Concentration can be measured against either “investable assets” or “total net worth.” Investable assets include liquid holdings like stocks, bonds, and retirement accounts. Total net worth is a broader measure that incorporates less liquid assets like real estate. Using investable assets as the base results in a higher concentration percentage and is a common metric for assessing investment risk.

An individual’s personal financial situation also helps define an acceptable concentration level. Factors like age, proximity to retirement, and overall risk tolerance are important considerations. A younger investor might be more comfortable with a higher concentration, while someone nearing retirement may find that same exposure an unacceptable risk.

Common Ways Concentrated Positions Are Created

Concentrated stock positions often accumulate passively rather than through a deliberate investment strategy. Common sources include:

• Employee compensation: Companies use equity, such as stock options, Restricted Stock Units (RSUs), or Employee Stock Purchase Plans (ESPPs), as part of benefits packages. As an employee vests these awards or purchases shares, their holding in the company’s stock can grow substantially.
• Inheritance or gifts: Receiving a large block of stock can create an instant concentration issue. This often occurs when heirs inherit highly appreciated stock, as the cost basis is “stepped up” to the market value at the time of death, reducing the immediate tax liability.
• Exceptional investment performance: An investor might purchase shares in a company that experiences tremendous growth, causing that one holding to dominate the portfolio’s value. The emotional attachment to a winning stock can make it difficult to trim the position.
• Business ownership: Founders and early employees of a company often hold a significant stake in their enterprise. A concentrated position can also be created if a private business is acquired and the owner receives a large amount of the acquiring company’s stock as payment.

How to Calculate Your Stock Concentration

Determining your stock concentration is a straightforward calculation. The process involves valuing the single stock, valuing your total portfolio, and then finding the ratio between the two.

The first step is to find the current market value of your holding in the single stock. This is calculated by multiplying the number of shares you own by the stock’s current market price, which can be found on financial news websites or your brokerage platform.

Next, calculate the total value of all your investable assets. This figure should include all financial accounts, such as brokerage accounts, 401(k)s, and Individual Retirement Accounts (IRAs). This calculation should exclude personal assets like your primary residence or vehicles.

With both values determined, apply the formula: (Total Value of the Single Stock ÷ Total Value of Your Investment Portfolio) x 100. For example, if you own $150,000 worth of a single company’s stock and your total investment portfolio is valued at $750,000, your concentration would be 20%.

Financial Implications of a Concentrated Position

A concentrated stock position exposes an investor to a high degree of unsystematic, or company-specific, risk. This risk stems from factors unique to a company or its industry, such as poor earnings reports, management changes, or regulatory issues. A negative event impacting that single company can cause a severe loss in the investor’s portfolio, a risk that could have been mitigated through diversification.

This is different from systematic risk, which is inherent to the entire market and driven by broad factors like interest rates and economic recessions. Systematic risk cannot be eliminated through diversification. An investor with a concentrated position is exposed to both the unavoidable systematic risk of the market and the avoidable unsystematic risk of a single company.

The primary method for managing investment risk is diversification, which involves spreading investments across various assets and sectors. This strategy reduces the impact of poor performance from any single investment. A concentrated portfolio is the opposite of this principle, making it highly vulnerable to events affecting that one company.

This heightened risk also comes with the potential for outsized returns. A single, successful stock can generate wealth far beyond what a diversified portfolio might achieve. However, this potential for high reward is directly linked to the potential for significant loss, requiring careful management and a clear understanding of one’s risk tolerance.