by Jeff Reeves | October 15, 2013 2:35 pm
If you’re a young investors learning how to invest money — or more specifically, learning how to invest in stocks — chances are you’re full of questions.
Besides the far-from-simple task of picking the right companies, plenty of other decisions pop up in trying to understand how to invest in stocks. A few examples: finding the proper entry price, the proper diversification, the proper number of shares and so on.
When it comes to how much stock you should buy, though, it’s 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.
To better understand how to invest in stocks and how many shares you should buy, 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 S&P 500 ETF (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?
how to invest in stocksFor 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 when deciding how to invest in stocks.
And while we’re at it, you shouldn’t care how expensive the shares of stock you’re buying are.
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 when it comes to how to invest in stock. You 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 personal .
There’s not single blog post or online article that can give you a magic bullet for that.
Jeff Reeves is the editor of InvestorPlace.com and author of “The Frugal Investor’s Guide to Finding Great Stocks.” 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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