So, you've done some research and have decided on a stock you want to own, but don't know how many shares you should buy in your brokerage account.
There are several factors that you should consider when trying to determine position size, which is the number of shares you'll buy. One obvious factor is how much money you have to invest, but there are some others you should keep in mind as well. Here's a quick rundown that can help you find the ideal number of shares you should buy using your desired investment amount, as well as a few other considerations that might apply to you.
How to determine how many shares you can buy
If you already have a dollar amount in mind that you want to invest in a stock, determining how many shares you should buy is rather easy. Here's the procedure:
- Look up the current price of one share by viewing a stock quote.
- Divide the dollar amount you wish to invest by the current share price.
- If your broker allows you to buy fractional shares (only a few do) this is how many shares you can 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 that I want to invest in Walmart (NYSE: WMT) and that I have $1,000 in cash in my brokerage account. We'll assume that I cannot buy fractional shares.
A quick glance at a quote shows me that Walmart is trading for just under $120 per share. Dividing $1,000 by $120 gives a result of 8.33. Rounding down tells me that I can buy eight shares of the stock.
Can you buy one share of stock?
Absolutely you can invest in just one share of a stock -- and 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 is feasible for you to start investing with very little money.
If you use one of the few brokers that still charge 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 that you want to invest in General Electric (NYSE: GE) stock, which trades for approximately $11 as of November 2019. If your broker charges a $6.99 trading commission and you buy 10 shares, you're paying roughly 11% of the transaction cost in the form of commission. If you buy 100 shares, this drops to just over 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 a stock as you want. And if your broker does charge commissions, you may want to consider switching to a stock broker that doesn't charge per transaction.
Is it possible to buy less than one share of a stock?
Some brokers have started to allow customers to buy fractional shares of stock.
This isn't exactly a new concept. By enrolling stocks in dividend reinvestment, most major brokers have allowed customers to add fractional shares to their investments for some time. However, buying fractional shares as a stand-alone transaction is a relatively new concept.
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 also allow this.
This is beneficial in two main ways.
- First, investors who don't have enough money to buy a full share of a 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 stock (about $1,750 per share), you're out of luck unless your broker allows fractional shares. If you can buy fractional shares, you can use your $500 to buy about 0.29 shares of Amazon stock right away.
- Second, investors who buy more than one share can put all of 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 fractional share investing.
Two other considerations when determining the number of shares you should buy are diversification and the significance of 100-share lots.
- Diversification -- Just because you can afford a certain number of shares doesn't mean that you should put all of your money in a single stock. As I mentioned, the absence of trading commissions makes it much more convenient to buy smaller positions, so keep this in mind when deciding if you'd be better off with a larger position in one stock or smaller positions in several.
- 100-share lots -- In stock trading, 100 shares is known as a "round lot." Institutional traders tend to buy and sell in multiples of 100 and options are typically priced based on 100 shares per contract. If you have no idea what options trading is, you can safely ignore this section, but if you plan on using covered calls to generate income, you may want to buy in multiples of 100.
How many shares of stock should you buy?
There's no one-size-fits-all answer to this question, but hopefully this has shed some light on the ideal number of shares to buy for you. To sum it up, investors should consider:
- How much money you have available to invest
- Commissions you'll have to pay (if any)
- The diversification of your portfolio
In the vast majority of situations, these three factors can help you answer the question of how many shares of a particular stock you should buy.