One very typical investment strategy is to directly purchase stocks. While I don’t personally own any stocks at this time, and as I’ve talked about before that I recommend purchasing cash-flowing assets, it’s certainly a very common investment strategy, especially for beginning investors.
Once you’ve decided on to do that, this begs the questions of not being confident in how many you should purchase.
One of the most common challenges investors face is figuring out how to invest. Allocation is not an easy task.
Some investors become overly aggressive and start buying up every stock they can afford, including stocks from companies such as Apple, Microsoft, Amazon, Berkshire Hathaway, and others.
Some people avoid stocks because they are afraid or because they do not want to invest all of their money in one area. People might choose to buy exchange-traded funds (ETFs) and mutual funds instead of investing all their money in one place. This would allow them to reduce risk and diversify their investments.
My own recommendation is to be sure to have a diverse portfolio by owning 20 to 30 stocks. You can manage your investments by monitoring your portfolio regularly. While it may be easier to manage a smaller number of stocks, owning more stocks can help to diversify and potentially protect your portfolio from risk.
It is important to have a diverse portfolio in order to protect against losses. Put simply, diversification means having a variety of investments within a portfolio or between portfolios.
Portfolio diversification can come in two forms:
- Basic or asset class diversification, i.e. investing in a diverse array of asset classes (stocks, bonds, real estate, etc), also known as asset allocation.
- Diversification within asset classes: e.g. owning, for example, shares of various companies and different types of companies (large, medium, and small companies, international and domestic, shares of companies in different industries, etc.) within a portfolio of stocks or bonds.
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How Many Different Stocks Should You Own?
Diversification is known as the “only free lunch” in finance because it is a way to reduce risk by spreading out portfolio holdings across different assets or different types of a single asset. Lowering your risk exposure can potentially increase returns.
While asset allocation and diversification are related, asset allocation is generally thought of in terms of the broader asset classes (stocks, bonds, cash), and how the proportion of each might impact your exposure to risk/reward over time. Your asset allocation should generally become more conservative as you age. This means shifting your focus from stocks to more fixed-income investments.
Diversifying your investment portfolio across multiple asset classes is a more sophisticated way to manage risk and reward. By diversifying within asset classes as well, you can further mitigate potential risks while still being able to participate in potentially high rewards. Investing in a variety of companies and assets lowers the risk that your entire portfolio will be impacted negatively if one holding underperforms.
Diversification also reduces the overall risk of an investment portfolio by hedging against potential losses in any one particular investment. If you own stocks for companies in different industries, you may see some sectors go up while others go down. For example, if commodity prices crash in mining, stocks in a different sector where commodities are a major cost, like manufacturing, may go up.
Different types of investments, such as stocks and bonds, don’t always move in the same direction.
The beneficial aspect of owning an array of stocks in different sectors is the logic behind it. This leads to the question of how many different stocks one should own.
How Many Stocks Should You Have in a Diversified Portfolio?
A general guideline is to have 20-30 stocks in your portfolio for diversification, but there is no set rule.
Mutual funds, ETFs, and target date funds are all examples of stock funds. The average number of stocks in a stock fund can range from a few dozen to a few thousand.
It is a good idea to diversify your investments across different assets, and to think about how much risk you are comfortable with. The portfolio might have more stocks when the individual is younger so the investments have time to grow. As an individual gets closer to retirement, the portfolio transitions to have more fixed-income instruments because the individual’s risk tolerance goes down.
How Many Stocks Can You Buy?
The number of stocks you can buy will depend mainly on:
- Trading rules set by the company.
- Your budget.
- The amount of time you have to manage your investments.
An investor is not limited to a certain number of stocks they can purchase. Companies may have rules that prevent traders from buying a large number of shares.
You can buy as many shares or fractional shares that your budget allows for, with those rules in mind. Remember that there might be charges for buying stocks.
It varies. The number of shares a company has outstanding can vary greatly, regardless of the size or revenue of the company. Some companies have billions of shares, while others have far fewer.
In general, stocks of companies with fewer shares tend to be more expensive. This is because the market capitalization is equal to the number of shares multiplied by the stock price.
Company A is trading at around $250 a share. Company B could be trading at $125 per share, which is a little more than double what Company A is trading at.
Rules for Day Traders:
Another consideration around how many stocks you can buy are day trading rules.
According to FINRA rules, a pattern day trader is: If a customer makes more than four day trades within five business days, and those day trades make up more than six percent of their total trades during that period.
A day trade is when you buy and sell the same stock within one day.
Only pattern day traders can trade in margin accounts and they must have at least $25,000 in their accounts. If you are not a labeled day trader, you cannot buy and sell, or sell and buy, the same stock four or more times in a five day period.
To find out more about the rules surrounding day trading and the maximum amount allowed, reach out to your brokerage firm directly.
Generally speaking, I do not recommend being an active or day trader for the novice or even intermediate investor. However, I do adhere to the rule that the risk isn’t necessarily in the investment, but rather in the investor themselves.
With that in mind, lets get into some tips for the average investor.
Stock Buying Tips For The Average Investor
1. Think Long Term
Some investors only care about short-term gains and treating the stock market like a casino, which can lead to less successful outcomes. New investors often get excited about the “hot ticker” that everyone is talking about and invest in the company without knowing what it does. Not surprisingly, that usually doesn’t turn out very well.
Anyone looking to make quick and easy money in the stock market is likely to be disappointed. Making significant gains in the market takes years, even decades. Commit to companies for the long term. The way you view the companies you invest in will be altered by this information, which is some of the best financial counsel you’ll come across.
2. Look to Reduce Risk
All investors are exposed to a level of systematic risk (volatility) when buying stocks. Any type of risk that affects the entire market is called systematic risk. Even the best stocks are subject to this type of risk. There is no way to predict or avoid it.
Investors need to be aware of unsystematic risk, which is unique to specific companies or industries, when making decisions. In other words, diversification lowers your risk by investing in a variety of companies and industries.
Investing your money in eight companies is less risky than investing all of your money in one or two companies. In this scenario, it is relatively unlikely that all your investments will fail – as long as they are not all in the same industry.
3. Start with the Passive Approach
Investors face many choices when entering the stock market, which can make it difficult to properly diversify their portfolios. You might love Amazon, for example, but with shares trading at more than $3,000, you could drop all of your investing money into a single stock if you were to buy even a fraction of a share.
Instead of investing all your money in one company, you could invest in an affordable index fund that includes the company you’re interested in, along with a number of other companies. You could potentially benefit from that company’s performance by investing in a fund that includes several other companies.
Most index funds are passively managed. This means that these types of investment funds do not have a dedicated portfolio manager and are designed to track the overall market instead of trying to beat it. “Index funds often outperform managed funds because the fees associated with a managed fund outweigh any gains that a hands-on approach might add to the returns.”
4. Add Individual Stocks
The next step in investing is to add individual stocks to your portfolio after you have built a foundation with index funds.
This task can be quite daunting when considering the high number of companies you have to research. To make the investment process easier, start by investing in companies that have a long history of success. When you invest in a company, you will become part of that company. It is important to research and invest in companies that you believe will be successful in the future.
To find good stocks to invest in, look for companies that are doing well and have a strong brand. You can research stocks by looking up information in your brokerage account.
Acquiring the skills to read stock charts and understand business and investing metrics is advisable. It is more effective to evaluate a company using measures such as its price-to-earnings ratio, price-to-book ratio, or dividend yield, rather than rely on someone’s recommendation without investigating the company first. That’s an easy way to get manipulated.
In terms of volume, it is advisable to have at least 10 stocks in your portfolio, and to avoid investing more than 10% of your portfolio in a single company. As you continue investing, you can add to your existing stocks or buy new ones with additional funds.
5. Diversify Your Portfolio
After you have assembled a basic investment portfolio of index funds and stocks, you can focus on expanding the diversity of your assets and adding other types of investments.
For example, you may want to add mutual funds to your portfolio. Mutual funds are actively managed baskets of securities that attempt to beat the stock market. You might want to invest in real estate investment trusts (REITs), bonds, or cryptocurrency.
Building a diverse portfolio by investing in a variety of asset types can help reduce risk and allow you to achieve steady growth over time.
Final Takeaway
This is a call to action to start investing, if you have not already started. The longer you wait to invest, the more money you’re missing out on making. This is time you will never get back. And in the stock market, time means everything.
Before you start investing, do your research on the market and where you should put your money. It’s important to spread your money around so you’re not putting all your eggs in one basket. To passively invest, purchase index funds and then invest in stocks from at least 10 different companies.
It may be more helpful for investors to think about diversifying their portfolio holdings instead of focusing on how many stocks they should or shouldn’t own. Diversification is important when investing because it allows you to spread your risk across different investments. This way, if one investment does poorly, you have a better chance of making up for it with another investment. There are many ways to build a diverse stock portfolio, whether you let your interests in a particular industry or company guide you, or you are attracted to the simplicity and low barrier to entry of an ETF. The main thing is to figure out which method works best for you.
After researching and deciding on an appropriate level of diversification, the next step for an investor is to open a trading account and begin buying stocks.
While stocks are a fantastic way to start investing, personally we recommend approaching investing from the perspective of working to achieve financial freedom, where the cashflow from your investments exceeds your monthly expenses.
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