How many stocks should a beginner buy?

How many stocks should a beginner buy?

A new investor should buy a minimum of 10 to 15 different stocks for diversification. Choose the number of stocks depending on your risk tolerance. The less stocks you buy, the more influence a single stock has over your entire portfolio.

Imagine, hand-picking a few select stocks with amazing growth potential. Knowing how to pick the right stocks can lead you to outperforming the market.

You could even find stocks which increase your portfolio by 40%. The S&P 500 only returns around 10% annually. 

What a difference! 

Luckily for you, I’m going to show you how many stocks a new investor should buy. You want to find stocks that will continue to grow in value, but also be prepared for poor performance. Diversification is key for protecting your Investments.

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How many stocks should a beginner buy?

New investors should seek to buy a minimum of 10 to 15 different stocks. The less diversification you have in your portfolio the more influence a single stock has. Too many stocks and you may find yourself struggling to monitor performance.

Diversification is key when it comes to investing. The goal is to purchase quality stocks which you believe will increase in value over time. However, not every company will perform and most will have bad years.

10 to 15 different stocks provides a minimum level of diversification. Assuming you’ve done your research, you have picked 10 to 15 stocks which should increase in value over time.

Now let’s assume you’ve purchased 10 stocks at $100 each. Each stock holds an equal weight in your portfolio. 

Two of the stocks take a 50% hit due to market conditions or missed earnings. The remainder of the stocks increase in value for an average of 20%. You have lost $100 on two stocks, but gained $160 on the other eight.

Your portfolio was diversified, so you came out ahead. Most beginners mistakenly choose two or three stocks. Poor performance in any one of the stocks could cause negative returns.

Purchasing too many stocks can be difficult for you to manage. You’d have to be keeping up with each company’s ongoings, which can be difficult with many stocks. One company may be going bankrupt, but you didn’t know because there’s too many to manage.

If you want to purchase many stocks, consider exchange traded funds or ETFs. ETFs are a collection of stocks offered for a low price.

What are the best stocks to buy for beginners?

Beginners should look for stocks with earnings per share growth and a history of share price increases. Ideally, new investors should be familiar with the company and its operations. Avoid purchasing shares based on price, but rather, invest in quality companies.

Earnings growth is one of the most important factors for growth. Look for companies with positive earnings and forecasted increase in earnings per share. Generally, if the earnings per share is growing then so will share price.

You should also look at a company’s share price history. Ideally, the share price has been increasing over the last 10 years. However, past performance is not a guarantee of future success.

New investors should be familiar with the company they’re purchasing. I know Walmart and would most likely hear news which impacts Walmart’s business. I’m not up to date on the ongoings of pharmaceutical companies and probably shouldn’t invest.

Most new investors want to buy stocks based on price. They want to purchase as many shares as possible, but cheap stocks are cheap for a reason. Higher quality stocks tend to be more expensive.

Assuming you have $100, you could buy 20 shares of a $5 stock or 1 share of a $100 stock. 20% growth on either is still a gain of $20. Don’t focus on share price, but rather, percentage gain.

Remember, at the end of the day, you are purchasing a stake in a company. You want to purchase companies who are winning.

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How many shares should I start with?

New investors should focus on diversifying their portfolio over a certain number of shares. Buy different stocks to diversify your portfolio and then add more shares. Remember, it is more important to buy one share of a quality company than many shares of a poor performer.

Start with diversifying your portfolio. When you’re just starting out you’ll most likely not have a lot of cash to invest. Therefore, find the companies you want to invest in and try to buy at least one share each.

As you get more money, try to keep your portfolio diversified. You don’t want one company to have too much weight in your portfolio. For example, some people try to limit their top holding to 5-10% of their portfolio.

As you gain experience, you can add more companies to your portfolio. If you’re happy with the level of diversification, keep adding shares.

Can I buy less than one share of a stock?

Some brokerages will allow you to purchase fractional shares. A fractional share allows you to own a portion of one share. Therefore, you don’t need to purchase the entire share. Purchasing fractional shares allows you to diversify and purchase expensive stocks more easily.

Robinhood is one brokerage which allows you to buy fractional shares.

For example, Amazon’s share price is $3,400. Most individual investors don’t have enough money to purchase a single share. Purchasing one share might mean your portfolio lacks diversification, because your money is in one share.

Maybe, I want to own a share of Amazon, but only have $100 to spare. I can purchase 3% of one share [3% = ($100/$3,400)*100]. Now, I have exposure to Amazon in my portfolio even if I didn’t have enough money.

If I only had $1,000 to invest, my fractional share of $100 now makes up 10% of my portfolio. I can now purchase 9 other shares of $100 or less or more fractional shares.

Can trading make you rich?

Some traders have made a lot of money by actively trading stocks. However, the majority of traders lose money and should invest by “buying and holding” for the long term. Therefore, you should focus your efforts in growing your income and investing more.

I can understand the appeal to being an active trader. Typically, there is a large learning curve before someone makes money as a trader. Therefore, start small and learn the ropes before investing large amounts of money.

Learning to trade stocks with $100 isn’t nearly as risky as using a large sum. Should you feel more comfortable, you can add more money later. I guarantee, 99% of new traders are going to lose money before they learn to make money trading stocks.

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Summary: How many stocks should a beginner buy?

As you can see, building a diverse portfolio can start with 10-15 stocks. Beginners should focus on finding quality stocks and keeping their portfolio diverse. 

Too few stocks can give one stock more influence over your portfolio’s performance. Too many stocks can be hard for a new investor to manage.

Beginners should look for stocks with a history of price and earnings growth. Ideally, you know the companies you’re investing in and avoid buying based on stock price. Quality stocks are often higher priced stocks, while cheap is cheap for a reason.

Don’t worry about the number of shares you purchase. Instead, focus on maintaining a diverse portfolio. Start by getting a share of your initial 10-15 stocks. Add more stocks or shares as time goes on while keeping your portfolio diverse.

Some brokerages will allow you to buy fractional shares. A fractional share lets you buy a portion of one share. You can then buy more expensive stocks at a fraction of the price. Fractional shares can help you maintain a diverse portfolio when you’re just starting.

Generally, trading should be avoided. Buying and holding for the long term is a better strategy. However, you can start trading if you want, but start with a small amount. You can always add more money later when you figure it out.