Stock brokerage firms typically charge the same commission regardless of how many shares of a stock you buy or sell in one transaction. That means for smaller transactions, those fees represent a higher percentage of what you're paying for the stock itself. Buying under 100 shares can still be worthwhile, especially with today's low fees, if you think you're going to make enough money on the investment to cover the fees at buy-and-sell time.
Historically, stockbrokers charged fairly hefty commissions on stock trades, which meant that buying and selling small amounts of stock often wasn't worth it because the commissions would swallow a large part of your proceeds. Serious investors were said to purchase stock only in round lots – that is, buy their shares in round numbers divisible by 100 – and odd-lot investors buying in smaller quantities were taken less seriously.
Today, many investors trade with online discount brokerages, and brokerage fees seemingly continue to decline. Major brokerages such as Charles Schwab and Fidelity offer trades with commissions under $5, and some others even offer free trades in certain circumstances. That changes the equation as to when it can be worth it to buy an odd lot of stock, though if you're paying anything more than $0 for your trades, you'll always save on fees by combining multiple transactions into one.
To determine for yourself if a small trade is worth it, you'll want to look at your brokerage's commission and the actual stock price. Buying 50 shares of Berkshire Hathaway, the company helmed by Warren Buffett, could at times cost you upward of $15 million since one class of stock in the company has traded above $300,000 a share. Other companies' stock trades for as little as a penny, so buying 50 shares would only cost you 50 cents. A commission of $5 dollars on a 50-cent purchase has a much different effect on the total cost than a $5 commission on a $15 million purchase.
You'll generally want to look at the current share price, estimate the price at which you would sell the stock and calculate the difference. Then, multiply that price by the number of shares you intend to trade to see how much your profit would be, before commissions. Then, subtract the commissions you'd pay to both buy and sell the stock, and determine if the transactions seem worth it. Of course, as with any investment decision, you'll also want to consider the risk involved since the stock might not perform as well as you anticipate, as well as the return you could get from other types of investments.
If you have a small amount of money to invest, you have alternatives beyond investing it in a particular stock or simply keeping it in your savings account.
You can purchase exchange-traded funds, which are investment funds that are bought and sold similar to stock. Many of them invest in the stocks in particular stock indexes, such as the S&P 500 or the NASDAQ, meaning they can be cheaper and give even better returns than traditional mutual funds, where stocks are picked by highly paid experts.
You often can buy and sell shares in these funds for free, which can make them a good way to make small investments.
- Financial Dictionary: Round Lot
- McClellan Financial Publication: The Disappearing Volume
- Yahoo! Finance: BRK-A Basic Chart 5 Years
- Investopedia: How Much More Will It Cost Me to Buy an Odd Lot of Shares?
- Investopedia: Odd Lot Theory
- CNBC: The Race to Zero in Endless Online Brokerage-Fee War Already Has Been Won
- Firstrade: Fee-Free ETFs
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