Are there a minimum number of shares I must buy if I want to invest in equity?

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Are there a minimum number of shares I must buy if I want to invest in equity?

The simple answer is “no”—you may purchase a single share of any publicly listed corporation. As a result, if you only have a modest amount of money to invest, you may acquire a limited number of shares in a public firm. Many brokers would conduct a deal for a few shares of common stock since they are compensated for their services.

However, just because you may invest your funds in this manner does not imply that you should. Before purchasing a limited number of common shares, you must overcome two key obstacles: diversification and transaction expenses.

First, if you are going to start your investing portfolio with a single company, you must seriously examine the expenses of under-diversification. Investing in just one firm exposes you to an excessive degree of company-specific risk if you have no other assets (i.e. if your chosen company is the next Enron, you could lose virtually everything).Thus, if you just have a modest quantity of money to invest, a mutual fund may be used to build a far more efficient portfolio. A mutual fund is simply a broad basket of assets that have been pooled together to create growth prospects with a low level of risk.

Second, even if you can bear the dangers of under-diversification, the next barrier to overcome is significant: transaction expenses. Assume your brokerage costs you $30 for each transaction. If you want to acquire and (hopefully) sell a stock with a profit, your transaction expenses will be $60. If you just had $200 to invest, you’d need to earn 30% ($60/$200) just to break even—an exceedingly inefficient investment. If you placed the same $200 in an open-ended mutual fund, you would most likely just be paid a minimal management fee, such as 3%. This would leave you with 27% of the 30% required for a single stock buy.

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When combined, transaction costs and the risk of under-diversification are typically too expensive for people with a limited quantity of money to invest. Buying mutual funds, rather just a few shares of a public corporation, is frequently a far better idea.

Advisor Insight

Dan Stewart, CFA®Revere Asset Management, Dallas, TX

Buying as little as one share is more realistic in today’s world of internet bargain brokerage companies, although the transaction would still cost roughly $8 in fees. If you choose this route, stay with the greatest and most powerful corporations in the world. You may start with a few of shares of a high-tech firm, for example, and then switch to an industrial or consumer stock the following time to avoid becoming too focused in one industry. Your portfolio will be more volatile, but you will almost certainly earn more money over time.

Alternatively, you might buy an ETF or a traditional mutual fund and obtain rapid diversification with just one transaction. Mutual funds normally have starting minimums of $500 to $3,000, but you may contribute in $500 increments after that. The minimums for an IRA are frequently lower.

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