I know, I know, we all want to have thousands and thousands of shares of a particular stock in our portfolio. It makes us feel big league, like we have a major stake invested in the company. If we have a lot of shares allocated to us on a trade, somehow we trick ourselves into thinking that we are going to make more money too.
Instead the exact opposite is true about the number of shares we buy
That’s right, if we are buying a stock in El Cheapo, Inc. because we can buy 100,000 shares at $0.01/share, we are truly fooling ourselves into thinking that somehow having more shares allocated to the portfolio at a cheap price will make us more prosperous as a trader. Instead we are almost guaranteeing that we’ll lose some or all of the money that we invested into El Cheapo.
Why does investing in cheap stocks for more shares result in more losses?
Simple, the companies are higher risk. Buy a stock with a share price under $10/share, you are most likely putting yourself into some higher risk assets, all for the sake of feeling good about owning more shares.
In the end it is about the percentage you make on your share.
If the market rallies 1%, and a stock like Amazon (AMZN), that trades over $800/share, will likely go up 1% at least too. It’ll make you around $8/share.
Shares bought in El Cheapo for $1.00 has a whole set of problems of its own, and if it rallies in line with the market returns, it will make you $0.01/share. But the problem with El Cheapo, is that it is more susceptible to ignoring the market’s overall action and even selling off while the rest of the market rallies. That’s always a great feeling when your own stocks can’t rally when everyone else’s is.
Just care about the percentage return when you buy shares
Traders get so caught up in how many shares they are able to purchase of a stock, as if it actually leads to making more money somehow.
But don’t buy into that myth. When you think that, you are making an emotional decision that strokes your ego into believing you are a big player on Wall Street, or when you go to the weekend cocktail party, you can say, “I have 10,000 shares on that stock”. It sounds nice, I won’t lie, much better than, hey, I was only able to buy 10 shares of Google (GOOGL).
Here’s the cold, hard truth about how many shares to buy
A 10% gain in a $1.00 stock is the same amount in profits as 10% in gains in a $225 stock. The number of shares you have does not matter and in more reputable companies, the undefined risk is far less.
By undefined risk, I mean the chances of a company declaring bankruptcy, the chances of a company having to issue more shares due to a lack of overal capital, or the chances of finding out that the CEO is a total fraud. The penny stock world and the stocks trading for next to nothing are filled with fraudsters and hucksters. Another solid reason to stay away from these clown stocks.
Stick with the companies that have a reputation to lose. Most of your penny stocks have already lost their reputation and will resort to anything to try and make a penny (pun definitely intended) – and do so at the expense of your investment.
If you have to trade or buy less shares because of a higher share price, there is a stronger likelihood that the stock that you are buying will result in success then if you would have traded with a small share price but received more shares in return.
So what are you into trading for? To stroke your ego, or to make some profits?
Traders are more caught up in number of shares they own than profits
I get emails from traders all the time, and often times they are critical of me for trading stocks that are often times over $50 or $100 because they think for some reason they can’t trade them. But let me be frank, stocks that trade at those levels tend to be better performing stocks, and more reliable from a technical analysis standpoint then stocks that trade under $10/share.
Those who buy shares in these low dollar stocks on a regular basis usually find themselves ending up as as long-term bag-holders, because the price movements catch them off guard far more often and as a result, they make excuses for the trade and decide to hold on for months on end holding out hope that the stock will go in their favor someday.
Final thoughts on the allotment of shares
I will also say that most traders who feel the need to only trade crap stocks with low floats, high spreads, and extreme volatility are those that are trying to take shortcuts in their trading education, believing that somehow, they can cut out a chunk of time in their development as a trader and that they will be better off for it. There will be times that you can be lucky as a trader and that is nice when it happens, but to base an entire trading strategy off of it, is horrible and one that will lead to certain destruction of your capital. Trading in sewers of penny stocks will do that to you.
So to sum it up… don’t be a tool and think that you somehow need to trade Wall Street’s trash simply because you can buy more shares of the stock. I used to think that way myself, a long…long….looong time ago, and it cost me a lot of capital in the process before I finally learned my lesson. So take it from me who has considered every conceivable way to profit in the stock market and believe when I say, that trading low dollar stocks, because you can buy more shares at the expense of ignoring higher share prices, better reliability and price action, will ruin your trading career.