How Many Stocks Should I Buy

You are at a point in your life where you earned enough money to invest for long-term growth or short-term trading strategy. But how many stocks should I buy to ensure excellent performance with low risk attached?

Diversification

Your inner voice will already tell you that you need to invest money in more than one company’s shares. The reason for it is simple. Putting all your money in one investment, means that your overall performance 100% relies on the one companies performance.

Strange things can happen overnight, and one single earnings announcement or EPS update can make a massive difference to a companies stock price. Sure, if you would have invested in Facebook, Apple, Amazon, Netflix, or Google stocks right from the beginning, well, this would have been an excellent decision.

Even if you had bought one of those stocks in March 2020, your performance on one of those stocks could have been >100% in just six months. But the point is, investing your money into the basket of all FAANG stocks by buying an equal amount of $ for each company would have reduced overall risk.

Imagine that one of those companies would have run into financial problems with short-term liquidity issues or something similar? How would you feel if the other four FAANG stocks would have doubled their stock price in 6 months, but the one you have chosen just went sideways, or even to the downside?

Market Risk vs. Company Risk

Investing in just one companies stock is neither an exceptionally good nor bad idea, as long as you are aware of the risk. A diversified portfolio mix always reduces risk but also limits potential gains. This may sound strange, but the best way to explain is by looking at one specific index like the NASDAQ 100.

If your guts had told you to buy the best performing stock every year, your portfolio would have outperformed the NASDAQ 100 significantly. But if your decision would have been wrong, well, then the risk you have taken would have led to significant losses.

Company Risk

Investing in one specific company makes your investment 100% relying on the performance of the companies shares. This can be huge leverage to the upside, but also the downside.

Market Risk

Markets go up and down, and singe stocks in a market go up and down as well. A broad index can rise +1% even when 90% if the index-included stocks fall simultaneously. That’s because different companies in an index have an unequal weight. Vise versa, an index like the NASDAQ 100 can fall, even if 90% of the NASDAQ 100 stocks rise.

How Many Stocks Should I Buy?

It is important to understand that too few investments in diversified stocks increase the company risk, while too many investments reduce the outperforming potential.

The answer to the question of how many stocks should I buy mainly relies on your defined profit goal for your investment. All major stock indices grew over the past decades making new all-time-highs every now and then. But we have seen companies filing for bankruptcy, while others grew by +1,000% and more.

  1. If your goal is to reduce risk and if you are fine with market average performances of about +8% per year, then the index-portfolio is the right choice. Instead of buying shares of every company in the NASDAQ 100, you better go with an exchange-traded fund with low fees.
  2. Do you think you can beat the market by creating a custom portfolio? Then investing in well-chosen stocks is an excellent way to invest in the long-term. You can decide based on the financial data of those companies or based on technical analysis. One important thing to consider is keeping costs low by using a commission-free brokerage account.
  3. You prefer investing in one specific company, but you want to avoid overnight risk? Day trading might be a good way for you to make money by trading one specific stock each trading day.

Day Trading vs. Investing

Investing in specific stocks involves one substantial risk; the overnight risk. Let’s say you along in a pharma stock, and you hope to approve their new drug. But strange things happen all the time, and the FDA rejects the request at night after the market close. As an investor, you will probably face a huge down gap on the next market open with a huge loss on your position.

As a day trader, you do not hold a position overnight, and you can start trading the stock on the day after the FDA decision. Those volatile moves open the potential to make money in the short term. Day traders close their position before the market close to being 100% in cash overnight.

Invest Like the Pro’s

Investing in an ETF is simple. You start, and you add more over time. In the long-run, you make money if the overall market performs well. Your focus is to keep the management costs low, but not much more than that. If you decide to invest in specific stocks, you need to invest meaningful time in analysis and the due diligence processes.

There is a way to combine the power of stock selection with minimal time for analysis. Let a team of finance professionals do the work for you. They analyze hundreds of companies and choose the best ones based on their research. In exchange for their work, you pay a little annual fee. This way, you can create a custom portfolio with 0 commissions and low administration fees.

Stock Advisor

The brothers Tom and David Gardner have two newsletters called Motley Fool Stock Advisor and Motley Fool Rule Breakers. Stock Advisor mainly invests in companies with already positive earnings per share and an already unfolded growth story. At the same time, Rule Breakers is more about finding the hidden gems in the world of stocks to find the next Amazon or Netflix.

Both newsletters have an active promotion for $99 per year with a new stock pick every two weeks. The fantastic thing about Motley Fool is that their stock picks clearly outperformed the S&P 500 in the past years, and their team of experienced analysts has proven that they are right most of the time.

Subscribers get notified during a day if a new stock get’s added to the portfolio. Therefore, there is enough time to open a position before the market close. Motley Fool is transparent about its stock-picking history and allows new subscribers to access the whole archive with all stock picks. Their services Stock Advisor and Rule Breakers provide an insight into all things subscribers can see in the member dashboard. I talk about their recent stock picks and performance.

Conclusion

Buying individual stocks opens the potential for above-average performance. There is no explicit value for the specific number of stocks and buying into shares for different stocks. But more than one stock always reduces the portfolio volatility in all market conditions. Investors who focus on long-term portfolio growth consider buying an index fund instead of a single stock.

The number of stocks in a portfolio should be manageable by investors, and too many stocks can make it complicated to track each company’s financial key aspects. Using a stock advisor reduces the time needed for research, but costs a little extra per year. It is crucial to reduce costs if you plan to buy into shares of a company by using a commission-free broker.

You may also wonder how many shares of stock should I buy? A good way is by balancing your portfolio to an equal investment amount per company. If you have a $5,000 portfolio and you want to hold 10 diversified stocks in your portfolio, then your calculation is $5,000 / 10 = $500 in the first step, and then $500 divided by the price per share for each stock gives you the number of shares per stock for the portfolio.

About the author: Alexander is the founder of daytradingz.com and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.