DON’T ALWAYS BUY THE SAME NUMBER OF STOCK SHARES
One of the things you always hear about is the importance of diversifying. Don’t have too much of your money in any one stock and actually, don’t have all your money in stocks either unless you are very young. Diversifying properly is important to protect yourself from losing too much in any one investment type.
One of the mistakes beginners can make while buying stocks is to always buy the same number of shares. It is easy to get into this pattern, especially when you are just starting out and you are NOT diversifying properly when you do this.
As an example, lets say our beginner starts by funding their online broker account with $20,000. Their next step is to pick some stocks so that they have a little of this and a little of that. With five different stocks (or more) they can own something in retail, technology, banking, oil, and whatever else they want. In other words, they can diversify.
Our beginner then picks their first stock and decides to buy 400 shares of Kinross Gold (KGC) which is is selling for just under $17 a share right now. They then decide they’d like to buy some Citigroup (C) because although it has had some really tough times, they’ve heard that it might perform better from here out. So for Citigroup they also buy 400 shares which costs just under $5 a share. After that they decide to buy a technology company and settle on 400 shares of Nokia (NOK) at just under $11 a share.
Lets stop here. So far our beginner will have bought three different companies in totally different industries and might think that they are properly diversifying. But are they?
While they ARE buying stocks of companies in totally different disciplines and diversifying in that manner, they are NOT buying the correct amount of shares to get the job done. You see with this example, they will own:
$6,800 of KGC
$2,000 of Citigroup
$4,400 of Nokia
They have more invested in KGC than the other two stocks COMBINED and that is not how to diversify! With a starting amount of $20,000 they need to figure out approximately how diversified they want to be and that will determine how many different companies to buy stock in. They might decide to buy 5 different stocks and then they should buy the number of shares of each company to equal about $4,000 apiece. $4,000 X 5 stocks = $20,000. In that scenario they are fully diversified with the same amount of money in EACH INDUSTRY.
When first starting out, it is easy to get into the habit of buying 100 shares, 200 shares, or some other number of shares for every stock you buy. This isn’t the right thing to do under any circumstance and you need to start buying the same total DOLLAR amount of each stock to be diversified correctly.
Of course there will be times when you want to buy more of a stock because you particularly like the company or a bit less because you are a little less sure how strong a choice they are. It is fine to adjust the dollar amount of the stocks you buy based on your perceived strength of the companies but you shouldn’t get stuck in a pattern of always buying the same number of stocks.
