A:

The answer to this question is not as straightforward as it seems. Many people would say that the smallest number of shares that an investor can purchase is one, which is true if you are buying from your broker or on an exchange. But unless you're buying Warren Buffett's Berkshire Hathaway - which was trading at around $109,100 in February 2007 - buying one share at a time isn't the most effective way to buy stocks. This is because the commission on the trade does not depend only on the amount of shares you are buying or selling. You are charged the full commission regardless of whether you buy one share or a whole board lot.

However, the answer to this question is complicated by something called a dividend reinvestment plan (DRIP). A DRIP is a plan in which a dividend-offering corporation or brokerage firm allows investors to use dividend payouts to purchase more of the same shares. As this amount "drips" back into the purchase of more shares, it is not limited to whole shares. Thus, you are not restricted to buying a minimum of one share, and the corporation or brokerage keeps accurate records of ownership percentages. For example, if you were enrolled into the DRIP of Cory's Tequila Corporation (CTC) and you owned one share of CTC - which pays a dividend of $2 per share and is trading at $40 - the $2 dividend would be automatically used to purchase 0.05 ($2/$40) shares of CTC. The reason DRIPs are so popular is that most of them don't have commission or brokerage fees, so it is cheaper for investors to increase their holdings and use their dividend payouts without having to pay extra fees.

For related reading on this topic, check out The Perks Of Dividend Reinvestment Plans.

RELATED FAQS
  1. What effect does a company's dividend reinvestment plan have on its stock price? ...

    When a dividend is received, an investor has two options: to keep the proceeds in a bank account or reinvest them. For the ... Read Answer >>
  2. What's the smallest number of shares I can buy?

    Unlike mutual funds, which can be purchased in fractional units, shares of stock cannot be divided. So, the smallest number ... Read Answer >>
  3. How can I purchase stocks directly from a company?

    There are a few circumstances in which a person can buy stock directly from a company. The following is meant to cover some ... Read Answer >>
  4. What is a DRIP?

    The word "DRIP" is an acronym for "dividend reinvestment plan", but "DRIP" also happens to describe the way the plan works. ... Read Answer >>
  5. Do I receive the posted dividend yield every quarter?

    First things first: a company with common stock that pays a dividend will typically distribute the dividend every quarter. ... Read Answer >>
Related Articles
  1. Investing

    The Perks Of Dividend Reinvestment Plans

    These plans offer shareholders a way to directly invest in some of the top companies without the commissions.
  2. Investing

    6 Reasons Why Dividends Should Be Reinvested

    Learn about the advantages of dividend reinvestment programs and how they may benefit longer-term investors who want to build a position in a company.
  3. Investing

    How Does a Dividend Reinvestment Plan Work?

    A dividend reinvestment plan allows investors to use their dividends to purchase more shares of the corporation’s stock, rather than receiving payment.
  4. Investing

    5 Ways to Lose Money With a Dividend Reinvestment Plan

    Enrolling in a dividend reinvestment plan can backfire if you're not using it wisely, costing you money in the process.
  5. Investing

    Got Dividends? Here's How to Reinvest Them

    Reinvesting dividends is almost always a good idea if you intend to hold your shares for the long term, and there are several ways to do it.
  6. Retirement

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
  7. Retirement

    Should Retirees Reinvest Their Dividends?

    Find out why dividend reinvestment may or may not be the right choice for retirees, depending on their financial needs and investment goals.
  8. Investing

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Managing Wealth

    Are You Too Young To Care About Dividends?

    Find out why it's never too early to begin thinking about dividends and how dividend-bearing stocks and funds can grow your investment account effortlessly.
  10. Insights

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
RELATED TERMS
  1. Dividend Reinvestment Plan - DRIP

    A plan offered by a corporation that allows investors to reinvest ...
  2. Treasury DRIP

    A dividend reinvestment plan that uses dividends to purchase ...
  3. Dividend

    A distribution of a portion of a company's earnings, decided ...
  4. Stock Dividend

    A dividend payment made in the form of additional shares, rather ...
  5. Average Up

    The process of buying additional shares at higher prices. This ...
  6. Buy To Cover

    A buy order made on a stock or other listed security that closes ...
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center