How Many Shares Should a Beginner Buy in Stocks?
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Each investor is unique, so there is no single answer as to how many shares of stock a beginner should buy. The amount of money you have to invest, the commissions youll have to pay, the share price of the stock you want and your tolerance for risk are just a few things youll need to consider when determining how much stock to buy. While there is no absolute number of shares a beginner should buy, you can determine whats best for you by understanding some basics about stock market investing.
If youre a beginning investor, cost plays an important role in knowing how many shares to buy. The commission you pay for a stock, particularly at an online or discount broker, is typically fixed. As a result, the more shares you buy, the smaller your commission will be as a percentage of your investment. For example, if you have $500 to invest in stocks and your broker charges $20 per trade, your commission is 4 percent. However, if you can invest $5,000, that $20 commission now represents just 0.4 percent. Four percent represents a significant cost, whereas 0.4 percent is negligible. The less you pay in commission, they more shares of stock you can buy.
The number of shares you should buy depends in part on the price of the stock you want to own. For example, if you have $2,000 to invest in stock, you could only buy 10 shares of a $200 stock. If you want to own a $10 stock, you could buy 200 shares. Since the price of every stock is different, its a more sensible investing strategy to determine the amount of money you want to invest rather than buying a strict number of shares.
Putting all of your money into a single stock is a risky strategy, even for professional investors. Stocks can fluctuate wildly in value and even become worthless, so youre putting your money at risk if you only buy one stock. At the same time, youll have to balance the need for diversification with the costs involved in buying additional stocks. If you can keep your costs down, some experts recommend buying a portfolio of 12 to 18 stocks to properly diversify out the risk of owning individual stocks. Your diversification should be based on total share value, not share count. For example, with $12,000 to invest, an equally diversified portfolio of 12 stocks would have $1,000 in each stock, rather than 100 shares of each stock. The number of shares you should buy is based on an equal-value allocation.
From a risk-reward perspective, the more money you have in savings, the more you can afford to buy additional shares of stock. With more money in reserve, youre exposed to less risk when you buy more shares of stock. For example, if you have $10,000 and use it all to buy 1,000 shares of a $10 stock, your entire investment portfolio is at the mercy of that one stock. If the stock goes to zero, you lose everything. If instead you only buy 100 shares of that $10 stock, even in the worst-case scenario youd only lose $1,000 of your $10,000, or 10 percent. Having more money in savings minimizes your risk and allows you to buy more shares of stock.