by Jeff Reeves | October 25, 2012 1:31 pm
“If an individual was thinking about purchasing a stock, how much is normally purchased?”
I get a wide variety of questions as the editor of InvestorPlace.com, but this is one of the most basic.
It is deceptively simple, but is really more of a question about the kind of investor you are and the kind of portfolio you are trying to build.
See, money is the same regardless of shares purchased or individual stock prices. Instead, it’s all about the percentages gained and lost — and how you’re allocating your money.
Let’s take a look at two different scenarios.
In the first, a man has $9,000. He wants to invest in Company ABC, but he doesn’t want to get too aggressive with his money. So he puts $3,000 in ABC, $3,000 in a diversified index fund like the SPDR S&P 500 ETF (NYSE:SPY) and keeps $3,000 in a low-yield but low-risk CD.
In the second, a woman has $9,000 but wants to invest in Company XYZ. She also doesn’t want to get too aggressive and allocates $3,000 for XYZ, $3,000 for an index fund and $3,000 for a CD.
Let’s say Company ABC is worth $3 a share and Company XYZ was worth $300 a share. Does this change the previous statements about portfolio allocations?
Whether the man buys 1,000 shares of ABC at $3 or the woman buys just 10 shares of XYZ at $300, their portfolio allocations are the same — barring the differences in those individual stocks, of course. The bottom line is a targeted $3,000 investment (a third of their portfolio) in an individual equity these investors believe in.
What’s more, if the stocks go up or down in tandem on a percentage basis, the gains are identical.
For instance, if ABC is a $3 stock and goes up 10%, it is now $3.30. But if XYZ is $300 a share and goes up 10%, it is now $330. The man who bought 1,000 shares of ABC gets 30 cents profit per share for $300 total. The woman who bought 10 shares of XYZ gets $30 profit per share for the same $300 gain.
So you shouldn’t care about the number of shares you’re buying.
And while we’re at it, you shouldn’t care how expensive the shares of stock you’re buying are.
Think of it this way: If the man bought 10,000 shares of a 30-cent stock and the woman bought 1 share of a $3,000-stock … what would the difference be if both companies gained 10% in their stock price?
You got it — nothing. There would be absolutely no difference.
In short, the share price and the quantity of shares purchased should never be a driving factor in your investment decisions.
Rather, you should focus on creating reasonable goals and reasonable allocations for the slices in your portfolio. Nobody should ever be 100% invested in a single stock, and nobody should ever hold 50 or 60 different positions.
But there’s a heck of a lot of gray area in between those extremes, and your investment decisions depend on the kind of risk you want to take, how much money you have to invest and how much time you have left before retirement.
And there’s not single blog post or online article that can give you a magic bullet for that.
If you need more help getting started in investing or if you have a question on a specific stock you’d like me to take a look at, email me at email@example.com.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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