Dylan Lewis: So, you've done your research and you have a stock that you want to buy,
but now you don't know how many shares of that stock you should buy. I'm Dylan Lewis
from The Motley Fool. In this FAQ, we're going to break down how to decide the right number
of shares to buy. There are a couple of factors to consider
when trying to determine position size, or the number of shares of stock that you'll buy.
One of the best places to start is figuring out how many shares you can buy, meaning how
many shares you can actually afford. If you already have a dollar amount in mind that
you want to put towards a stock, determining how many shares you can buy is pretty simple.
Look up the current price of one share using the stock's ticker, divide the dollar amount
you wish to invest by the current share price, and if your broker allows you to buy fractional
shares -- only a few do -- this is how many shares you can actually afford. If you can't
buy fractional shares, round the result of the calculation down to the nearest whole number.
For example, let's say I want to invest in Walmart and I have $1,000 in cash in my brokerage account.
We'll assume that I cannot buy fractional shares.
A quick Google search shows me that as of taping, Walmart is trading for just
under $120 per share. Dividing 1,000 by 120 gives me a result of 8.33. Rounding that down
tells me that I can buy eight shares of the stock.
Now, for some nuance, say you don't have a lot of money on hand. Can you buy just one
share of a stock? Absolutely. And actually, it has become far more practical to do so
than it used to be. Now that most major brokers have done away with trading commissions,
it's feasible for you to start investing with very little money -- $50, even $100. If you use
one of the few brokers that are still charging commissions, the cost of trading should be
taken into consideration when deciding if it's practical to buy a certain number of shares.
For example, let's say you want to invest
in General Electric's stock, which currently trades for around $11 as of November 2019.
If your broker charges a $7 trading commission and you buy 10 shares, with buying and later
selling, you're probably paying about 11% in transaction costs in the form of commissions.
Now, if you buy 100 shares, this drops to 1%. In other words, the more shares you buy,
the less of an impact commissions will have. On the other hand, if your broker doesn't
charge commissions, go ahead and buy as few or as many shares of stock as you want. If
your broker does charge commissions, you may want to consider switching to a broker that
does not charge for transactions. Astute viewers may have thought about the
remainder from our Walmart example and thought, "Can I buy a fraction of a share?" Some brokers
have started to allow customers to buy fractional shares of a stock. Schwab is one example of
a major broker that allows investors to buy stocks on a fractional basis, and there are
several newer brokers that are also allowing for this. It may seem silly to buy a quarter
of a stock, but it's a huge benefit for investors for a few reasons. First, investors who don't
have enough money to buy a full share of stock can still invest if they can buy just a fraction
of a share. For example, if you only have $500 to invest and want to buy Amazon's stock,
which as of taping is about $1,700, you're out of luck unless your broker allows for
fractional shares. If you can buy fractional shares, you can use your $500 to buy about
0.29 shares of Amazon stock right away instead of having to save up for the full $1,700.
Second, investors who buy more than one share can put all their money to work. In our Walmart example,
I would be able to buy 8.33 shares with my $1,000 if my broker allowed for fractional share investing.
There are a couple other considerations to
keep in mind when you're deciding how many shares of stock to buy -- namely, diversification.
Diversification is probably one of the most talked about entry-level investing topics,
and that's because it's incredibly important and can save newbies from catastrophe. We
generally advise folks to work to a portfolio with at least 10 to 15 stocks in it. The reason
for that is, you don't want to have your success decided by one or two companies. If you own
two stocks in equal amounts and one of them goes down by 50%, your whole portfolio will
go down by 25%. But, if you own 10 stocks in equal amounts and one of them gets cut
in half, your portfolio will only drop 5%. Diversification is particularly important
for new investors because, just like being new to anything, as an investing rookie, you're
going to make mistakes, and it's helpful to have some guardrails in place to keep those
mistakes small. Now, how does that play into deciding how
many shares to buy? Well, say you have $1,000 to invest. It's often better to buy several
stocks in small amounts upfront -- say, $250 worth of four different companies -- and then
buy more of each over time, rather than simply buying $1,000 of one stock right away.
Doing things that way will give you some diversification in terms of what you own, and it'll set you
up to diversify within each stock over time. There's a concept in investing called cost
basis, and if the average cost you paid for the thing that you own. Buying the same stock
in several spaced out purchases allows you to avoid having your costs tied to one moment in time.
You might be thinking, "Yeah, sure,
but my stock is going to go up in the future. Why would I want to buy more later when it will
be more expensive?" Well, let's look at a stock that is currently near all-time highs
-- Apple. Now, if you bought your shares in late September of 2018, you'd be sitting on
about 17% gains. Not bad. If you bought shares in January of 2019, you'd be up over 75%.
So you know I'm not just cherry-picking one data point, buying Apple in early May of 2019
would have you up about 25%; but if you bought the stock later in the same month, you'd be
up 50% now. The point is that even wildly successful businesses experience setbacks
along the way. As an investor, it's nice to be able to view those as chances to buy more
rather than scary events that crush your portfolio. Buying in small chunks over time allows you
to do just that, and with commissions going away, it's never been easier or cheaper to do it.
I personally do this with every stock I buy, knowing that if I continue to think
that it's a good company, I'll likely buy it again three or four more times in the future.
There's no-one-size-fits-all answer to this question, but to sum it up, investors should
consider how much money you have available to invest, commissions you'll have to pay,
if any, and the diversification of your portfolio, both in what you own and when you buy it.
If you keep those things in mind, you'll be doing just fine.
Thanks for watching this video! Viewers, we want to know what stocks you're interested in.
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