Most people want to be moving forward in life and know that their future is secure. This will often lead to investing in the stock market or other assets. But does the number of shares matter?
Yes, it can be worth buying 10 shares of stock. Managing a balanced portfolio is about having equal dollar exposure to several assets to help lower risk while keeping returns high. Therefore, it can make sense to buy 10 shares or even less depending on the share price. Also, buying fewer shares frequently can allow you to dollar cost average into your positions.
Does The Number Of Shares Matter?
While it can absolutely be worth buying 10 shares at a time it needs to fit within your investment plan for your portfolio. Focusing just on the number of shares you buy isn’t the best strategy for creating a balanced low-risk, high-return portfolio.
You can buy 10 shares at a time and slowly work your way into new or existing positions. Or, because of share price, you may only be able to purchase one or two shares at a time.
Buying 10 shares at a time (depending on price) and slowly building up your position is a good strategy called dollar-cost averaging. If you are deciding to invest $5,000 into a position and you do it over time you limit some of your downside risk (loss) by being able to average into your purchase price over time.
As a theoretical example if you buy 10 shares worth $1,000 of stock and it goes down 20% you would lose $200 of the value. If after a 20% dip you buy another 10 shares your average price will be lower than the original $100 per share you first bought at.
|# shares purchased (total shares)||Share Price||Share price change %||Portfolio Value||Total Cost||Total invested||Cost Per Share||% portfolio gain/loss|
As you kept buying 10 shares with the lower share price your total cost per share kept going down and your loss to your portfolio slowly balanced out. If you had bought 40 shares right away when the price was $100 you would have lost 20% and not been able to dollar cost average your way to lower losses.
This is even though the stock lost 20% of its value right away and then gained only 8.75% back later. ($87/$80) -1= 0.0875)
Now if the price of the shares keeps going up you start to dollar cost average up rather than down. This isn’t generally a big problem because it allows you to lower your potential risk over time for a slight loss in possible immediate returns.
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Why Buying 10 Shares Of Stock Doesn’t Matter
The real reason the number of shares you buy doesn’t matter is that you need to be mindful of the percentage value of the shares in your portfolio. Commonly called having a balanced portfolio, it is when each business in your portfolio holds an equal dollar value as the others (NOT number of shares).
For example, if you plan to purchase 10 stocks, each stock should have no more than 10% of your total portfolio value. Having even positions in all these areas is a balanced portfolio. If your portfolio was worth $50,000 you would only invest $5,000 into any given position.
|Stock Position||Stock portfolio Value ($50,000)||Percent Of Portfolio||Theoretical Share Price (rounded)||# Of Shares|
Because not all shares have the same risk profile or share price, making the decision to buy 10 shares rather than working on your portfolio balance can expose you to higher risks in the future. Having “too many eggs in one basket” can cause you to be overexposed in some areas.
This is more important when buying individual companies rather than an aggregate of businesses such as an ETF (Exchange Traded Fund) which can contain hundreds of businesses trying to track an index.
Imagine now if you kept the same theoretical share prices of our stocks but focused on the number of shares rather than the overall value. It would look something like this;
|Stock Position||Stock portfolio Value ($49,282.53)||Percent Of Portfolio (rounded)||Theoretical Share Price||# Of Shares|
As you can see your percent of portfolio for each stock is wildly out of proportion. Having 50.73% invested in Stock 6 will have a much larger impact on the potential loss of capital than Stock 2 with only 0.5% of your total value.
The Risks Associated With Shares VS Dollars
If Stock 6 lost 1% of its value you would have lost $250 but if stock 2 loses 1% you would lose $2.50.
If you have relatively the same risk of loss for each stock then having “more ducks in one basket” can open you to potentially higher losses.
With a balanced portfolio, you get to take advantage of gains in one stock helping to offset losses in another. Because of this, if stock 6 went down 1% (-$250) and stock 2 went up 5% ($12.50) the big gain the stock 2 still wouldn’t protect your portfolio.
Whereas, if you had a balanced value without worrying about the number of shares owned, then the loss of 1% would be offset completely by a gain of 5% in stock 2.
Is It Worth Investing In only One Or Two Shares as a beginner?
Paying attention to how many shares you purchase whether it’s one or two shares or 10 shares as a beginner can aid you in dollar-cost averaging into positions but can also give you some experience navigating the investment world. Investing can be a risky endeavor when not properly prepared or informed.
One problem with buying only a few shares, especially if they have a low share price is any transaction fees that might be associated with your investment platform. The reason this is more relevant with a lower share price is that you may need to have a bigger percentage gain in share price to offset the cost of purchasing the shares.
If it costs you $10 to make a trade and you only buy 1 share worth $20 you need to make a 50% gain just to break even on your purchase because of transaction fees. The total cost to buy the 1 share is $30, $10 fee + $20 stock price.
To break even you need to make up for the cost of the fees to trade, ($10) which means your stock has to increase by $10 or 50%.
While it might not be available to everyone, you can also take advantage of businesses such as wealthsimple or Robinhood which are great platforms that allow you to buy and sell shares for free!
Not having to pay fees can increase your returns by a huge amount especially when you are first getting started into investments.
While the number of shares you purchase doesn’t really matter, you still should take into consideration the effects it will have on your portfolio over the long run. If it means you only buy a few shares then don’t worry, your investment value is the important measure, not the number of shares
Get involved with platforms that allow you to trade for free, just don’t get carried away with buying and selling, you may end up losing more money by moving your money too often.
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