One very typical investment strategy is to purchase stocks directly. While I don’t personally own any stocks at this time, and as I’ve discussed before, I recommend purchasing cash-flowing assets; it’s undoubtedly a pervasive investment strategy, especially for beginning investors.
Once you’ve decided to do that, this begs the question of needing more confidence in how many you should purchase.
One of the most common challenges investors face is deciding how to invest. Allocation is a challenging 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 do not want to invest all their money in one area. People might 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.
I recommend having a diverse portfolio by owning 20 to 30 stocks. You can manage your investments by monitoring your portfolio regularly. While managing a smaller number of stocks is more manageable, owning more can help diversify and protect your portfolio from risk.
It is crucial to have a diverse portfolio to protect against losses. Put, 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 other industries, etc.) within a portfolio of stocks or bonds.
Key Takeaways:
- Directly purchasing stocks is a common investment strategy, but diversification is vital to protect against losses.
- A diversified portfolio should include a variety of investments across different assets and within asset classes.
- A general guideline for owning stocks is 20-30, but no set rule exists.
- Investors should consider their risk tolerance and aim for long-term gains.
- Passive investing in index funds is a good starting point before adding individual stocks to a portfolio.
- Research is essential before investing in individual stocks, and it’s advisable to have at least ten stocks in a portfolio and not invest more than 10% in a single company.
- Diversification is critical to spreading risk across different investments and achieving steady growth over time.
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 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 various companies and assets lowers the chance 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 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 constitute a significant cost, like manufacturing, may increase.
Different types of investments, such as stocks and bonds, sometimes move in different directions.
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 other 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 consider 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 the following:
- 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 many shares.
You can buy as many or fractional shares as your budget allows with those rules in mind. Remember that there might be charges for buying stocks.
How Many Shares Are in a Company?
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 equals the number of shares multiplied by the stock price.
Company A is trading at around $250 a share. Company B is trading at $125 per share, which is more than double that of Company A.
Rules for Day Traders:
Another consideration around how many stocks you can buy is the 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 must have at least $25,000 in their accounts. You must be a labeled day trader to buy and sell, or sell and buy, the same stock four or more times in five days.
To learn more about the rules surrounding day trading and the maximum amount allowed, contact 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 adhere to the rule that the risk isn’t necessarily in the investment but in the investor.
With that in mind, let’s get into some tips for the average investor.
Stock Buying Tips For The Average Investor
- Think Long Term
Some investors only care about short-term gains and treat the stock market like a casino, which can lead to less successful outcomes. New investors often get excited about the “hot ticker” 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 will likely 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.
- Look to Reduce Risk
All investors are exposed to systematic risk (volatility) when buying stocks. Any 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.
When making decisions, investors need to be aware of the unsystematic risk, which is unique to specific companies or industries. In other words, diversification lowers your risk by investing in various 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 unlikely that all your investments will fail – as long as they are not all in the same industry.
- Start with the Passive Approach
Investors face many choices when entering the stock market, making it difficult to diversify their portfolios appropriately. You might love Amazon, for example, but with shares trading at more than $3,000, you could drop all your investment money into a single stock if you 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 and many other companies. You could benefit from that company’s performance by investing in a fund that provides for several different companies.
Most index funds are passively managed. This means these investment funds need 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.”
- 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 daunting when considering the many companies you must research. To simplify the investment process, start investing in companies with a long history of success. When you invest in a company, you will become part of that company. Researching and investing in companies you believe will be successful in the future is vital.
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 ten 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.
- 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, add mutual funds to your portfolio. Mutual funds are actively managed baskets of securities that attempt to beat the stock market. You should invest in real estate investment trusts (REITs), bonds, or cryptocurrency.
Building a diverse portfolio by investing in various asset types can reduce risk and allow you to achieve steady growth over time.
Final Takeaway
This is a call to action to start investing if you still need to start. The longer you wait to invest, the more money you miss out on making. This is time you will never get back. And in the stock market, time means everything.
Before investing, research the market and where you should put your money. Spreading your money is essential 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 ten companies.
It may be more helpful for investors to consider diversifying their portfolio holdings instead of focusing on how many stocks they should or shouldn’t own. Diversification is essential when investing because it allows you to spread risk across different investments. This way, if one investment does poorly, you have a better chance of making up for it with another asset. 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, we recommend approaching investing from the perspective of working to achieve financial freedom, where the cash flow from your investments exceeds your monthly expenses.
Frequently Asked Questions (FAQs):
Q: How many different stocks should you own in a diversified portfolio?
A: A general guideline is to own 20-30 stocks in a diversified portfolio, but there is no set rule. Diversifying your investments across different assets and considering your risk tolerance is essential.
Q: How many stocks can you buy?
A: The number of stocks you can buy depends on trading rules set by the company, your budget, and the time you have to manage your investments. An investor is not limited to a certain number of stocks they can purchase. Still, companies may have rules that prevent traders from buying many shares.
Q: What are some tips for the average investor when buying stocks?
A: Investors should think long-term, reduce risk by diversifying their portfolio, start with a passive approach by investing in index funds, add individual stocks to their portfolio after building a foundation with index funds, and continue diversifying their portfolio by adding other types of investments. It is important to research companies before investing and to avoid investing more than 10% of your portfolio in a single company.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.
