As a rather low-income earner who doesn’t have much disposable income, my budget for investing tends to restrict me from going out and buying 5 or 10 shares of any stock at a time. This is why I love dollar-cost averaging so much; it’s also the reason why most of you know me as Public’s unofficial DCA guy.
What you probably don’t know is that I don’t just buy partial shares. My real goal is to acquire 5 to 10 shares of each of my long-term holdings.
So why 5 to 10 shares?
The big banks and most large investors buy their stocks in 100 share blocks and the beauty of that strategy is the multiplication of returns. In simple math, if you own 100 shares of stock and that stock gains $1, you would automatically gain a $1 profit multiplied by 100 shares, and therefore be sitting on a $100 unrealized gain.
Using the same 100 share example, if your stock went up to $10, which isn’t unheard of, you could easily make $1,000 on a $10 increase in the stock price. If that sounds like easy money, just remember it’s just as easy to lose $100 or $1,000 if things go in the opposite direction, but we all know big risks generally pay big rewards.
Realistically speaking, I don’t expect any small investors to buy a 100 share block of any stock, it’s just not a good strategy regardless of if you purchased 100 shares of a decent blue-chip stock or if you purchased 100 shares of a penny stock.
Don’t put all your eggs in one basket.
Before you buy 100 shares of anything, as a small investor it’s probably best to take that money and split it between several ETFs or stocks so that all of your eggs are not in one basket. As a small investor, I believe that buying 5 to 10 shares of any stock, so long as the stock price is under $100 a share, would be a decent block of shares for a small investor.
Even if you don’t have a lot of money, it’s not difficult to work towards gathering 5 to 10 shares of a stock that you believe in, especially if the small investor plans to hold the stock on a long-term basis.
I don’t necessarily suggest doing this for short-term holdings if you have a small investment budget, but for long-term holdings, this strategy allows you enough time to build a multiple share position in the stock and the flexibility to sell a few shares if you need to.
How it works:
Let’s say you love the company that you are investing in and want to hold forever. If you buy one share and make a huge gain, you can only sell it once and you missed the chance to multiply your gains.
If you have 5 shares and things go good or horribly wrong, you can sell 4 shares and keep the 5th. The remaining share allows you to stay in the stock because we said we’d hold forever, but the money from the 4 sold shares can be invested elsewhere or held until it’s time to buy the stock back at a cheaper price.
If things are going well with the stock and you have 5 shares, you can always sell one or two shares to lock in your profits and either invest your gains elsewhere or buy the stock back during the next dip. It’s like having your cake and eating it too! Regardless of what happens, you multiply your gains and you create more buying/selling opportunities.
What happens if you lose money?
Sometimes I like to keep one share of a stock that I lost money on so I can use it as a “high watermark”. That one share will tell me how far the stock has fallen, and also serve as a reminder to buy back in if or when the stock starts to recover.
That is a risky strategy and should only be done if you like the stock and don’t mind risking that one share. If you do this, you naturally end up averaging down on your share price and recoup losses as you invest into the rising tide. Averaging down is a great strategy but it is a risky strategy that often backfires so if you attempt to average up or down, please use common sense and discretion because in the stock market there is no guarantee that any stock will recoup those previous losses or revisit previous highs.
⚠️This is not investing advice this is my own opinion.