There are a few factors to consider when deciding how many shares of a particular stock to buy. In addition to how much capital you have available, you should also consider diversification as well as whether you can buy fractional shares of stock.
With that in mind, here's a quick guide that can help you determine the ideal number of shares to buy.
How many shares can you buy based on price?
First, let's look at how many shares you can buy. Assuming your broker doesn't charge commissions for stock trades (most of the popular online brokers don't), calculating the number of shares you can buy with a certain amount of money is easy.
Here's the three-step process:
- Find the current share price of the stock you want. You can obtain a quote through your broker or through a financial website. Make sure you're looking at a real-time quote, not a delayed one.
- Divide the amount of money you have available to invest in the stock by its current share price.
- If your broker allows you to buy fractional shares, the result of step two is the number of shares you can buy. If you can buy only full shares (most common), round down to the nearest whole number.
As an example, let's say that I want to buy Apple (NASDAQ:AAPL) stock and I have $2,000 to invest. According to a real-time stock quote, Apple is trading for $325 per share as I'm writing this. Dividing those two numbers gives me about 6.15 shares. My broker currently does not support fractional shares, so this means that I can afford to buy six shares of Apple.
What about diversification?
Here's an important point, especially for newer investors. Just because you can buy a certain number of shares of a particular stock doesn't mean you should. For example, if you put $1,000 into a newly opened brokerage account, and a stock you want to own trades for $50, you have the ability to buy as many as 20 shares.
However, don't forget about diversification. Instead of a large position in one stock, maybe a better investment strategy would be spreading your initial brokerage deposit across a few different companies.
Most experts say that if you are going to invest in individual stocks, you should ultimately try to have at least 10 to 15 different stocks in your portfolio to properly diversify your holdings. And since most brokers no longer charge commissions for online stock trades, it is more practical than ever to spread a relatively small amount of capital across many different stock positions.
Can you buy one share of stock?
Absolutely. In fact, with the emergence of commission-free stock trading, it's more practical than ever to buy a single share. Several times in recent months I've bought a single share of stock to add to a position simply because I had a small amount of cash in my brokerage account.
If your broker is one of the few that still charges commissions, it might not be practical to make small investments. For example, if your broker charges $4.99 trading commissions, in order to buy one share of General Motors (NYSE:GM), a $29 stock as of this writing, you would have to pay a commission of more than 17% of the value of your investment. If you are still paying commissions, consider making the switch to a top-rated online broker that has joined the zero-commission revolution.
Is it possible to buy less than one share of stock?
Maybe. The concept of fractional shares has been around for years, mainly for the purposes of dividend reinvestment. For example, if a stock position you own pays you a total of $10 in quarterly dividends and the share price is $40, dividend reinvestment typically allows you to buy 0.25 additional shares. In recent years, however, brokers have started to embrace the idea of allowing investors to directly buy fractional shares.
There are two big benefits of fractional share investing. First, it gives newer investors access to stocks with a high share price. As one example, if Amazon.com (NASDAQ:AMZN) is trading for $2,500 per share, an investor with only $500 to invest could buy 0.2 shares of the stock.
Second, fractional share investing allows investors to put all of their money to work. Using our Amazon example, if you had $4,000 to invest and didn't have the ability to buy fractional shares, you would be able to purchase just one share and have $1,500 left over. With fractional shares, you could invest your entire $4,000 and purchase 1.6 shares of the e-commerce giant.
How many shares of stock should you buy?
The bottom line is that there is no universal answer to this question -- it depends on your personal situation. Just remember to consider these important factors:
- How much money you have to invest
- Whether you need to diversify your investment portfolio or want to put all your available capital into the stock
- Commissions or brokerage fees you have to pay (if any)