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. I have only $500 to invest, am I limited to buying only penny stocks?

    No, you are not required to invest only in penny stocks - investors are generally not restricted to a certain kind of stock ... Read Answer >>
  2. Why should I invest?

    One of the most compelling reasons for you to invest is the prospect of not having to work your entire life! Bottom line, ... Read Answer >>
  3. Why would a person choose a mutual fund over an individual stock?

    There are a number of reasons why an individual may choose to buy mutual funds instead of individual stocks. The most common ... Read Answer >>
  4. How can you lose more money than you invest shorting a stock? If you have no money ...

    The simple answer to this question is that there is no limit to the amount of money you can lose in a short sale. This means ... Read Answer >>
  5. Why do mutual funds require minimum investments?

    Learn how funds usually set minimum investments to keep away small, short-term traders from impacting the cash flow and the ... Read Answer >>
  6. Are mutual funds considered equity securities?

    Find out why mutual funds, like stocks, are equity securities, including the similarities and differences between investing ... Read Answer >>
Related Articles
  1. Investing Basics

    Start Investing With Only $1,000

    Find out what fees and restrictions need to be considered before investing $1,000.
  2. Mutual Funds & ETFs

    The Advantages Of Mutual Funds

    Learn how to get diversification, liquidity and professional management at an affordable price.
  3. Investing Basics

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  4. Fundamental Analysis

    Hot or Not: Single Stocks in Your Portfolio

    It can be rewarding to invest in well-performing companies, but single stocks can present some downside for your portfolio, too. Here's why.
  5. Investing Basics

    Getting Started In Stocks

    We'll provide a step-by-step introduction on how to invest - and succeed - in this market.
  6. Mutual Funds & ETFs

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
  7. Mutual Funds & ETFs

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
  8. Investing

    Ten Worst Mistakes Beginner Investors Make

    Here are the ten worst mistakes beginning investors make.
  9. Options & Futures

    Retirement Planning: Asset Allocation And Diversification

    Asset AllocationSo far, we've gone through how to determine what you'll need for retirement, where you can get your retirement savings from, what types of investment accounts you can put your ...
  10. Retirement

    Is Investing $25 A Month Worth It?

    Find out how small investments can add up over time and how to avoid the fees that can eat tiny returns.
RELATED TERMS
  1. Cumulative Discount Privilege

    A way that an investor in a mutual fund can qualify for lowered ...
  2. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  3. No Transaction Fee Mutual Fund

    A mutual fund that is offered to investors by a brokerage firm ...
  4. Investing

    The act of committing money or capital to an endeavor with the ...
  5. Common Stock Fund

    A mutual fund that invests in the common stock of numerous publicly ...
  6. Mutual Fund Liquidity Ratio

    A ratio published monthly by the Investment Company Institute ...

You May Also Like

Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center