Motley Fool co-founder David Gardner calls it, “one of new investors’ first default psychological errors.”
It’s the all too common focus on the price per share and number of shares you own, when an investor should be focused on dollars allocated to a stock.
Every day on our discussion boards, we see a variation of the question:
Is it better to buy more shares of a less expensive stock instead of just a couple shares of a stock with a high share price?
Lower share price doesn’t necessarily mean less expensive
As David answered a recent version of that question, “Respectfully, I think your question is the wrong question. I totally understand why you’d ask it; that’s where most people start,” he wrote. “But the price per share of any company you want to buy should be, for all intents and purposes, nearly irrelevant to you. Think in terms of your overall dollars invested, and that’s how you allocate. Do not even think in terms of what a stock’s price is, or how many shares you get.
“It’s all about making sure you buy quality companies that you feel supportive of — as I wrote in Stock Advisor two years ago, ‘Make your portfolio reflect your best vision for our future.’ I try to find excellence, buy excellence, and add to excellence over time. I sell mediocrity. I would recommend you do the same.”
The math behind the shares
As Motley Fool member David Deitch (CMF_Fuskie) summed it up, “Whether you own 10 shares at $100 or 100 shares at $10, you still own $1,000 of a company. If that company’s market value grows by 10%, you earn $100 regardless.”
Today, many online discount brokers allow you to buy fractions of shares of higher-priced stocks, so not having enough to buy a full share shouldn’t hold you back. Or, if it’s a company you want to own and you don’t have enough saved to buy a share, keep saving.
Looking at the potential long-term gains, it probably won’t matter if you buy now or a month from now.
“Invest in the company, not the stock symbol,” Fuskie concluded, adding he’d “rather own one share of a really good company like Apple or Netflix or Under Armour than dozens of shares of a mediocre company.”
Next up, how many stocks should you own?
And if you’re interested in finding some of those great companies to buy, we’ve set up an opportunity for you to take a free 7-day trial to Stock Advisor today.