How Many Shares Should a Beginner Buy?


Ocean

Don’t think of stock investing as something that only the wealthy should do.  When you buy shares in a company, it’s like you’re starting a business without going through all of the trouble of starting a business.  Better than that, you get to look at established businesses and decide which ones you want to be a part of.  You can see which companies have a business model that is working, rather than trying to open up a business and hope that people will come.  You get to hire a professional management team with all of the ivy league credentials.  Who wouldn’t want to do that?

(Note, this site contains affiliate links.  As an Amazon Associate I earn from qualifying purchases. When you click on an affiliate link and buy something, The Small Investor will get a small commission for the referral.  You are charged nothing extra for the purchase.  This helps keep The Small Investor going and free.  I don’t recommend any products I do not fully support.  If you would like to help but don’t see anything you need, feel free to visit Amazon through this link and buy whatever you wish.  The Small Investor will get a small commission when you do, again at no cost to you.)

One of the first things people who get interested in stock investing want to figure out is how many shares of stock they should buy.  Can I just buy one share?  Should I buy ten, or 100, or 1000?  Is there a minimum that I need to buy, or can I just buy however many shares I can afford at the time?  Today we’ll go into that topic.

Are you really ready to invest?

Before you buy your first share of stock, you should make sure you’re in the financial condition where you will be able to invest successfully.  It costs money to buy and sell shares, plus the price you’ll be able to get for your shares will vary from day-to-day.  You want to be able to make a long-term commitment to a company if you want to do well, so you don’t want to need to sell out a few months after you buy in because you need the money you’ve invested for something else.  Worse than that, you don’t want to lose half of the money you really need for something because you invested it and the market takes a nose-dive right before the expense comes due.  Money used for investing must be money you won’t need for many years.  To be ready to invest in individual stocks you should:

  1.  Have your credit cards all paid off.  There is no reason to be investing while you’re paying credit cards 12% interest or more.  Pay off you high interest debts, then think about investing.
  2. Have an emergency fund of at least $9,000.  If you don’t have a good emergency fund, you’ll have just bought your first shares, then need to sell them to pay for something that breaks.  Or worse, you’ll pull out the credit card to pay the bill, starting you into debt.  Note this does not apply if you’re under 18 since you have your parents to pay the bills – and this is a great time to first start investing.
  3. Be putting at least 10% of your pay into a retirement fund,  This could be a 401k, 403B, or even an IRA.  This money should be invested almost exclusively in a diversified set of low-cost mutual funds.  You still want to be able to retire even if you’re a bad stock picker.
  4. Be ready to leave your money alone for at least 5-10 years.  Stock investing, particularly individual stock investing, is a long-term game.  Investing for anything less than five years is just gambling.
  5. Have money you can afford to lose.  Individual company stocks can and do go bankrupt.  You should allow the possibility of losing ever dime you invest.

This isn’t to say that you can’t buy a few shares, say 1 to 10, just for fun even if you don’t have $9,000 in the bank, but you aren’t ready to seriously get into investing.  If you are not in this kind of financial position, the issue may be that you need to advance in your career before you’re ready to invest.  If you’ve been working for a while, the issue may be how you handle your cash flow.  To learn how to be better at cash flow management and grow your wealth from your paycheck, check out FIREd by Fifty.  It gives step-by-step guidance on how to figure out where you are financially and then how to reach financial independence.  You can get the e-book edition for less than $5, so why wouldn’t you?

Round lots and odd lots

In the past, brokerage firms charged less if you bought in increments of 100 shares, called “round lots.”  This meant that if you were buying shares of XYZ corporation, which was trading at $20 per share, you would want to buy 100, 200, 300, and so on shares at a time.  You would therefore need to have at least $2000 to buy 100 shares.

You could buy fewer shares, say 30 shares, but your broker would charge you more for what is known as an “odd lot.”  The reason is that it cost more was that in order to sell you 30 shares, the brokerage firm would need to acquire 100 shares, sell you 30, and then find someone else to take the extra 70 shares.  You would get charged extra for this extra trouble.

The use of computers to match buyers and sellers, along with many brokerage firms being what is called “market makers,” where they simply take the other side of a trade, has made this less costly for the brokerage firms, so many simply charge a fixed fee regardless of how many shares you buy, so it is not always necessary to buy in round lots anymore.  You might pay $25 per trade whether you buy 10 shares or 100 shares.

                     

Reducing your cost per share

With fixed fees, it still can make sense to buy more shares at a time to reduce your overall cost.  If your broker charges you $25 per trade whether you buy 1 share or 100, you’ll be paying $25 per share if you buy a single share, or $2.50 per share if you buy 100.  This means that if you buy a stock at $30 per share, it would need to go up to $55 per share for you to make money if you’re buying one share at a time, but only to $22.50 for you to make money if you’re buying 100 shares at a time.  You’ll need to pay a commission when you sell shares as well, so the stock might need to go to $80 per share for you to make money with a single share if you’re paying a $25 commission.  It would only need to go to $25 per share to make money if you were buying in 100 share increments.

If you’re using a broker that doesn’t charge a commission as some are now doing, this is no longer a concern and you can buy stock in whatever increments you wish.  Find out from your firm what you pay for commissions and use this information when deciding whether you should build up a large amount of cash and buy a lot of shares at one time or if you can buy a few shares at a time and not end up paying a lot in  commissions.  You should be able to find this information right on you broker’s  website.

How much do you need to buy to really make money?

If you’re not really investing to make money, but instead just want the fun of holding a few shares, you can buy around 10 shares.  We bought 10 shares of Home Depot for $300 for my son when he was born, and now (15 years later), his holdings are worth about $1200.  Even better , he gets a dividend every three months which has been steadily increasing.

Finally, if you really are serious about single stock investing, and you can afford to take the loss if something goes wrong, you should try to buy in increments of 500-1000 shares.  At this level you will really profit if you are right and the company does well.  If you hold 100 shares of company XYZ and they go from $20 to $60, you’ve only made $4,000.  This is nice, but really not that substantial in your life.  If you have 1000 shares, you’ll have made $40,000.  That’s enough for a year in college, a good down-payment on a house, or a couple of high quality, late model used cars.

Getting to 1000 shares may take a while and require some build-up.  In fact, it is probably better to buy in increments of 200-300 shares a few times rather than buying 1000 shares all at once since then you can pick up more shares on dips and get a better price.  In fact, to reduce your risk, you should probably pick up 200-300 shares of stock A, then 200-300 shares of stock B, then 200-300 shares of stock C.  Then, buy more of whichever company’s shares are the best bargain when you’re ready to buy more.  Of course, sometimes a stock will take right off after your first purchase and never look back, so you never know.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

6 comments

  1. I’m still working on steps 1 & 2, but these are essential. Your comment on my last net worth post got me thinking about how easy credit card debt builds up once you have a little going…and how to better address that in my own life. Shares I really want to start purchasing, but not until the foundations are in place.

    • Sounds like a great plan. Credit card debt is definitely dangerous due to the interest rates and the fact that most people raise their spending to the point where there is nothing extra left at the end of the month. Add a little extra from a credit card interest payment, and it is tough to knock things back down.

  2. These tips are invaluable. I’ll admit I was excited to jump into investing, then an audiobook I was listening to also suggested paying off my debt first. Of course! Makes perfect sense. I hadn’t given it much thought at first, but it definitely makes sense.

  3. My first foray into investing (outside of my 401k) was small quantities of individual stocks. Man I wish I had this advice then! I picked terrible penny stocks, non- dividend producing stocks, and bought 1 share of Microsoft (because that’s all I could afford). In hindsight I should’ve waited and bought more higher quality stocks. When it comes to investing in individual stocks, it takes money to make money is super true.

    • Thank you so much! This is just the kind of comment I love to get. I go into this strategy in detail in my first book, The SmallIvy Book of Investing. I call it “serious investing” because it is what you do when you really want to make money, as opposed to just get entertainment.

Comments appreciated! What are your thoughts? Questions?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.