A:

The short answer is "no" - you can buy a single share of any publicly traded company if you want to. Thus, if you have a small amount of money to invest, you can, in fact, buy a small number of shares of a public company. Most brokers will process a trade for a few shares of common stock, as they receive a commission for their services anyway.

However, just because you can invest your savings this way, does not mean that such an investment will be a good one. You have two major obstacles which must be mitigated before going ahead and buying a small number of common shares: diversification and transaction costs.

First, you need to strongly consider the costs of under-diversification if you are going to begin your investment portfolio with a single stock. If you have no other investments, investing in only one company exposes you to an excessive amount of company-specific risk (i.e. if your chosen company is the next Enron, you could lose virtually everything). Thus, if you have a small amount of money to invest, a much more efficient portfolio can be constructed by buying into a mutual fund. A mutual fund is essentially a large basket of investments bundled together, and will provide growth opportunities for a reasonably low amount of risk. (For further reading, see The Importance Of Diversification and Portfolio Protection In Diversification And Discipline.)

Second, even if you can stomach the risks of under-diversification, your next hurdle is a high one: transaction costs. Suppose your brokerage charges you $30 commissions for each trade. If you plan to buy and (hopefully) sell a stock for a profit, you will incur $60 of transaction costs. If you only had $200 to invest, your investment would need to gain 30% ($60/$200) simply to break even - an extremely inefficient investment. Conversely, if you invested the same $200 in an open-ended mutual fund, you would likely only be charged a small management fee of, for example, 3%. This would leave you with 27% of the 30% you would have had to spend on a single stock purchase. (To learn more, see Don't Let Brokerage Fees Undermine Your Returns.)

When combined, transaction costs and the risk of under-diversification usually prove to be too costly for those who only have a small amount of money to invest. Therefore, rather than purchasing a few shares of a public company, buying mutual funds is often a much better option.

To learn more, read Mutual Fund Basics Tutorial and The Advantages Of Mutual Funds.

RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. Do mutual funds require a demat account?

    A dematerialized account enables electronic transfer of funds. The account is used so an investor does not need to hold the ... Read Full Answer >>
  5. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  6. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Top 3 Lazard Funds for Retirement Diversification in 2016

    Learn about Lazard Asset Management, its long history of strong performance and the top three Lazard funds to consider for retirement diversification.
  2. Investing Basics

    How liquid are Fidelity mutual funds?

    Review the liquidity features of mutual fund shares and an overview of Fidelity mutual funds. Most investors look for convenient access to their investments.
  3. Mutual Funds & ETFs

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  4. Mutual Funds & ETFs

    Top 5 Wellington Funds for Retirement Diversification in 2016

    Discover the top five Wellington Management funds for retirement diversification in 2016, with a summary and performance details of each fund.
  5. Mutual Funds & ETFs

    3 Morgan Stanley Funds Rated 5 Stars by Morningstar

    Discover the three best mutual funds administered and managed by Morgan Stanley that received five-star overall ratings from Morningstar.
  6. Mutual Funds & ETFs

    Top 3 Voya Funds for Retirement Diversification in 2016

    Learn about Voya Investment Management's mutual fund offerings and the three Voya funds to consider for retirement diversification in 2016.
  7. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  8. Mutual Funds & ETFs

    3 AllianceBernstein Funds that Are Rated 5 Stars by Morningstar

    Discover the top three mutual funds administered and managed by AllianceBernstein that have received five-star overall ratings from Morningstar.
  9. Mutual Funds & ETFs

    Top 4 Davis Funds for Retirement Diversification in 2016

    Discover the four best mutual funds managed by Davis Advisors that pursue different investment strategies that can help diversify retirement portfolios.
  10. Mutual Funds & ETFs

    Is Morningstar’s Star System An Effective Ranking Tool? (MORN)

    Learn why Morningstar's star rating system is not always a great predictor of future performance, and why investors should not pick funds on star ratings alone.
RELATED TERMS
  1. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
  2. Warrant

    A derivative that confers the right, but not the obligation, ...
  3. Bull Call Spread

    An options strategy that involves purchasing call options at ...
  4. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  5. Consumer Staples

    Essential products such as food, beverages, tobacco and household ...
  6. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center