How many shares should i buy

Investors diversify their capital into many different investment vehicles for the primary reason of minimizing their risk exposure. Specifically, diversification allows investors to reduce their exposure to what is referred to as unsystematic risk , which can be defined as the risk associated with a particular company or industry.

Investors are unable to diversify away systematic risk, such as the risk of an economic recession dragging down the entire stock market , but academic research in the area of modern portfolio theory has shown that a well-diversified equity portfolio can effectively reduce unsystematic risk to near-zero levels, while still maintaining the same expected return level a portfolio with excess risk would have. In other words, while investors must accept greater systematic risk for potentially higher returns known as the risk-return tradeoff , they generally do not enjoy increased return potential for bearing unsystematic risk.

The more equities you hold in your portfolio, the lower your unsystematic risk exposure. A portfolio of 10 stocks, particularly those across various sectors or industries , is much less risky than a portfolio of only two stocks. Of course, the transaction costs of holding more stocks can add up, so it is generally optimal to hold the minimum number of stocks necessary to effectively remove their unsystematic risk exposure.

What is this number? There is no consensus answer, but there is a reasonable range. For investors in the United States, where stocks move around on their own are less correlated to the overall market more than they do elsewhere, the number is about 20 to 30 stocks. Predominant research in the area was conducted prior to the revolution of online investing when commissions and transaction costs were much higher , and most research papers put the number in the 20 to 30 range.

A well-diversified equity portfolio can effectively reduce unsystematic risk to near-zero levels, while still maintaining the same expected return level a portfolio with excess risk would have. More recent research suggests that investors taking advantage of the low transaction costs afforded by online brokers can best optimize their portfolios by holding closer to 50 stocks, but again there is no consensus.

Keep in mind that these assertions are based on past, historical data of the overall stock market, and therefore does not guarantee that the market will exhibit the exact same characteristics during the next 20 years as it did in the past As a general rule , however, most investors retail and professional hold 15 to 20 stocks at the very least in their portfolios.

If you are intimidated by the idea of having to research, select and maintain awareness of about 20 or more stocks, you may wish to consider using index funds or ETFs to provide quick and easy diversification across different sectors and market cap groups, as these investment vehicles effectively let you purchase a basket of stocks with one transaction.

The number of stocks in a portfolio is in itself unimportant. That's because a portfolio could be concentrated in a few industries rather than spread across a full spectrum of sectors. In such a case, you could hold dozens of stocks and still not be diversified. If, on the other hand, the stock holdings were diversified over a wide variety of industries, two or three dozen should be sufficient. Here, too, proper stock selection will make a big difference. It usually helps to focus on the stronger players in each industry in order to take advantage of the potential that each industry provides.

Mutual Funds. Compare options among the best brokers for stock trading. A good place to start is by researching companies you already know from your experiences as a consumer. Most online brokers also provide tutorials on how to use their tools and even basic seminars on how to pick stocks. Limited time offer. Terms apply. You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio with a stock all at once.

You can add to your position over time as you master the shareholder swagger. New stock investors might also want to consider fractional shares, a relatively new offering from online brokers that allows you to buy a portion of a stock rather than the full share. What that means is you can get into pricey stocks — companies like Google and Amazon that are known for their four-figure share prices — with a much smaller investment.

Many brokerages offer a tool that converts dollar amounts to shares, too. Refer to this cheat sheet of basic stock-trading terms:. For buyers: The price that sellers are willing to accept for the stock.

For sellers: The price that buyers are willing to pay for the stock. The difference between the highest bid price and the lowest ask price. A request to buy or sell a stock ASAP at the best available price. A request to buy or sell a stock only at a specific price or better. When the stop price is reached, the trade turns into a limit order and is filled up to the point where specified price limits can be met.

There are a lot more fancy trading moves and complex order types. Investors have built successful careers buying stocks solely with two order types: market orders and limit orders. Bid and ask prices fluctuate constantly throughout the day. Good to know:. A market order is best for buy-and-hold investors, for whom small differences in price are less important than ensuring that the trade is fully executed.

Some low-cost brokers bundle all customer trade requests to execute all at once at the prevailing price, either at the end of the trading day or a specific time or day of the week. A limit order gives you more control over the price at which your trade is executed.

On the selling side, a limit order tells your broker to part with the shares once the bid rises to the level you set. Limit orders are a good tool for investors buying and selling smaller company stocks, which tend to experience wider spreads, depending on investor activity.

They're also good for investing during periods of short-term stock market volatility or when stock price is more important than order fulfillment. There are additional conditions you can place on a limit order to control how long the order will remain open. Limit orders are placed on a first-come, first-served basis, and only after market orders are filled, and only if the stock stays within your set parameters long enough for the broker to execute the trade. Limit orders can cost investors more in commissions than market orders.

A limit order that can't be executed in full at one time or during a single trading day may continue to be filled over subsequent days, with transaction costs charged each day a trade is made. If the stock never reaches the level of your limit order by the time it expires, the trade will not be executed.

The concept of fractional shares has been around for years, mainly for the purposes of dividend reinvestment. In recent years, however, brokers have started to embrace the idea of allowing investors to directly buy fractional shares.

There are two big benefits of fractional share investing. First, it gives newer investors access to stocks with a high share price. As one example, if Amazon. Second, fractional share investing allows investors to put all of their money to work. The bottom line is that there is no universal answer to this question — it depends on your personal situation. Just remember to consider these important factors:.

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