A:

Unlike mutual funds, which can be purchased in fractional units, shares of stock cannot be divided. So, the smallest number of shares an investor can buy is one share. There is a catch that could determine for investors just how many shares they will want to purchase - commission fees.

When people purchase stock, they must pay a commission fee to their stock broker who is transacting the security. Commission fees are usually charged on a per transaction basis up to a specified number of shares that are purchased/sold and are typically under $40 per trade. Most people prefer to reduce the average commission costs by spreading them over the purchase of many shares.

For instance, if a brokerage firm charges $20 per trade (i.e. for stocks under $20 and up to 100 shares) and an investor purchases one share (called an odd lot) of ABC for $10 per share, then the total cost would be $30 per share - the cost of the commission plus the cost of the one ABC share. If instead the investor decides to buy 100 ABC shares (a round lot) for the $10 share, then the average cost would be reduced to $10.20 [($1,000 + 20)/100]. Thus, by increasing the number of shares purchased, the average cost (including commission) per share would be reduced and the investor who purchased 100 shares would only have to wait until ABC stock price rose $0.20 to $10.20 to break even. As for the investor who purchased just one ABC share, he would have to wait until the stock price soared 200% to $30/share before breaking even.

Another catch with buying one share is selling it. If the investor who purchased one share of ABC wants to sell, he would pay $20 to sell the $10 share of stock. Thus, the total cost per share to buy and sell one share of ABC would be $40 ($20 + $20) - a 400% loss on a $10 stock. In addition, since one share is considered an odd lot, the stock would be less liquid since it would be difficult to sell just one stock to another investor. Generally, stock brokers prefer buying and selling shares in even lots. This problem usually won't arise if you are buying shares in companies that trade large volumes every day, but if you decide to purchase stock in a company with a low average trading volume, you may have a long wait until somebody is willing to buy the odd lot from you - or you will have to sell it for a lower price.

Bottom line: the smallest number of shares you can buy is one share. However, due to commission costs and liquidity issues, it is typically not feasible to do so.

For more information, check out our Stock Basics Tutorial.

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