How Many Shares Do You Buy?
When you are investing in individual stocks, how many shares do you typically buy? My decision in this area is typically based on the price of the stock. Generally if a stock is over $25, I will open my position with 30 shares and build up to 70 or 80 shares. If a stock is under $25, I will open a position with 50 shares and build up to somewhere between 100 and 200 shares. Please remember How I Invest with Jim Cramer and read the example of how I use his service.
The reason I am writing this post and asking this question is due to the recent performance of my friend's stocks. He shall remain nameless. (He reads this blog, and he knows who he is). I got him to open an account with TD Ameritrade awhile back where he essentialy had free trades for 45 days. He used these trades to open very small positions in different companies. Here is an example:
He purchased 10 shares of Intrawest Corp. - IDR - This company subsequently got bought out by a private equity firm. The 10 shares he bought for under $28 a share were all of a sudden worth almost $35 a share. He made almost $7.50 a share. $7.50 a share times 10 shares equals a gain of $75. This is a huge amount based on his original investment of $275. His $75 gain will turn into a $65 gain when he sells the shares and pays a $10 commission.
So, I'm happy for him, but also wished he would have been in for 50 shares or 100 shares. I think at some point you have to realize the impact trading commissions will have on your purchases. Granted, his purchase transactions were commission free due to his TD Ameritrade sign up bonus but he still has to pay a $10 commission to sell his shares.
So, if you buy 10 shares of a stock and pay $20 commission ($10 to buy, and $10 to sell), your stock has to increase by $2 a share to make more than your commissions. This is not a big deal if the stock costs $80 a share, but if the stock is $15 a share, a $2 increase can be a lot to ask.
Anyone want to share the number of shares they are buying?
posted by Please Read @ 10:41 PM
6 comments
6 Comments:
I think the biggest thing to remember is that some people either can't or don't think they can afford to open a position on a $25 share for 80 shares or even 50 shares. For some, that's a lot of money to throw around.
Personally, I am more like your friend. I tend to open up positions in a variety of companies. I also tend to use companies like buyandhold.com and sharebuilder.com instead of the big houses as the commissions tend to be a bit lesser if your just in it for a hold pattern and not active trading.
The "friend" here: The intial thinking in purchasing the small amounts was to get my feet wet, which was very easy with free trades for the first 60-days. Unfortunately, I waited for half of that period with no purchases. Then before I knew it, my free trade period expired (I really did not know that it had expired until it was too late- read the fine print!) My intention was to purchase and sell within the 60-days just to try out the AMTD thing. No fees at all. Now, of course if I had sold IDR during that period, I would have lost 10% instead of making 10%. In hind sight, I wish I had put more in IDR for obivous reasons. Now that I have defneded myself...
I agree with you. I am now trying to purchase around $1200 per position. This means that my transaction costs ($20 on the buy-sell) will eat up 1.6% of my basis, so my first 1.6% is not really a gain for me, just recovery of costs. If I fund AMTD with more money, then I can increase the position AND give myself room to cut in half my positions to take some money off the board. I did this in AMTD stock and XMSR- hopefully it works in the long.
It is just "monopoly money" anyways isn't it??? By the way, how do you build a house or a hotel on Boardwalk with my Ameritrade account?
It is generally recommended (and I follow this) by websites such as Motley Fool and others that your trading costs should be less than 2% of the overall transaction. I generally follow this rule and even try to make trading close to 1% if I can.
Thatedeguy - I agree with you, if you are going for a buy and hold pattern, the number of shares you buy doesn't matter as much.
T65 - I wish it was monopoly money. If it was, I'd take a lot more risk.
Mr P. - That seems like a good rule of thumb - I had never heard of that - But I like it.
mr p, that is a good general rule to follow by. I usually look at my investments in terms of percentage rather than dollars, to keep things in perspective.
I've seen people use the free trades for the sake of the "free" part. It's good if you just want to do it as a learning tool, but don't be rushed to buy a stock just for the sake of it.
I use both Ameritrade and Fidelity. I use Ameritrade for mostly my active trades and Fidelity for its "Full View" (great for easy calc of your net worth).
Personally, I try to invest $1000 or more in a stock so that the commission fees (currently $7 to buy and $7 to sell) won't be too significant if the stock just sits there and doesn't do anything. Or if I get nervous and want to dump it I won't have taken a bath, at least not on commissions. I also like to buy in multiples of 25-shares if buying less than 100 shares, or multiples of 50 or 100 if buying more than 100 shares. I have this idea that the round numbers move through the system more easily. :-) I don't know where I come up with these ideas, but I think there was a basis for it at one time. I make limit (as opposed to market) trades almost exclusively.
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