Allocating capital is rarely a binary decision.
It is not uncommon to have positions that are highly correlated to one another and move in the same direction along with the market.
Investors should aim to diversify across sectors in order to minimize company and industry specific risk, and generate excess returns over the benchmark.
Key Factors When Deciding How Many Shares to Buy
1. Investing Strategy
An investor’s long-term goals and objectives can help ascertain the amount of risk that can be taken and inform the investing horizon.
As a result, investors seeking long-term compounding and steady appreciation of their capital will strongly benefit from allocating capital periodically to stay invested in the market rather than trying to squeeze out extra returns by actively churning over their capital.
This means they will set aside a fixed amount each investing period and will spread it across their portfolio in a predetermined manner, thereby dictating the size of each investment and the shares to be bought.
2. Stock Price and Sizing
Any investment that exceeds 15-20% of a portfolio will have an impact on risk metrics as any gains will disproportionately increase returns and vice versa.
In order to mitigate such errors, investors should adopt a rules-based framework where each position doesn’t exceed a certain threshold for the portfolio or the individual security.
Such rules will prevent getting stuck in illiquid names and stay out of harm’s way by not letting anyone trade drawdown the entire account.
3. Top-Down Analysis
Investing in stocks can also be viewed as obtaining fractional ownership of publicly listed enterprises.
It is essential to analyse the global macroeconomic landscape and the key drivers of economic growth in order to appreciate the environment in which these companies operate in.
For example, in periods of high growth and low inflation, technology fares well.
However, when growth remains steady or flat and inflation picks up, then commodities and real estate perform well.
By reading market movements accurately, investors can aim to own more of a particular sector which is in play and underweight other “cold” sectors of the benchmark.
4. Concentration and Illiquidity Risk
Investors can find opportunities in all types of companies, irrespective of their market cap.
However, if appropriate position sizing isn’t given thought, then it may lead to acquiring a larger position than warranted in the case of micro-cap/small-cap names.
Large money managers can easily become 10-20% of the daily volume and may find it hard to source liquidity on their way out without meaningfully moving prices.
Did You Know?
Brian Hunter of Amaranth had a spread position on winter natural gas futures in 2006/07 which was too large for the market and ultimately caused the fund to implode, costing $6.6 billion. This instance highlights the extent of concentration risk in an illiquid contract.
5. Activism and Voting Rights
Most retail investors do not have the resources to lead an activist campaign but can piggyback on the coattails of activists such as Carl Icahn and Bill Ackman to participate in influencing management to unlock shareholder value through specific actions that increase the share price.
Such campaigns usually involve a well-thought out and articulated business strategy where the incumbents may be voted off entirely and a new management team is instituted by the Board to make radical shifts that turnaround the company.
Depending on the prospects of success, investors can start accumulating shares slowly to be able to vote in favour of the activist and drive change in the management of the company.
Is Buying One Share of Stock Worth It?
Investing in a company involves significant amounts of due diligence to understand the business’s fundamentals, growth prospects and to determine its fair value.
Investors that conduct such a thorough analysis will seek to own more than one share to justify the time and resources invested in the security selection process.
However, it can be useful for new investors starting out to acquire one share each in a range of companies and sectors that interest them to keep track of those names, get access to the company’s investor materials and to get a feel for investing.
At the same time, certain companies like Berkshire Hathaway have a share price in the few hundreds of thousands of dollars wherein owning one share might be worthwhile.
Can I Buy Less Than One Share of a Stock?
Absolutely! With the advent of fractional ownership, investors can acquire less than one share, purchasing by dollar amount instead of number of shares.
Those who are starting out and have limited access to capital will be able to invest alongside larger investors in similar names.
This approach is extremely helpful to get sector-specific exposure for a certain amount for a given portfolio as well as for diversification and re-balancing purposes.
Frequently Asked Questions
- Is owning 100 shares worth it?
It is often recommended to acquire shares in 100 unit blocks as this helps to create option writing strategies to acquire more shares by selling puts or writing covered calls to generate additional income. If an investor engages in options trading to augment their return, but has inadequate underlying holdings, they open themselves to naked exposure and losses can exceed the initial investments if things go awry.
- How many shares should a beginner buy?
Any investment in a company should not be made in isolation. Instead, it should be in conjunction with each piece of the portfolio to understand its overall and net impact on various correlations and performance ratios. Further, it is important to avoid excessive concentration in any single position, sector or company and restrict any investment to 5-10% of the portfolio value to de-risk any substantial impacts on the rest of the holdings. Based on these factors, investors can hone in on an appropriate dollar amount and work backwards from there to acquire the requisite number of shares.