Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not quite as straightforward.
While there is no minimum order limit on the purchase of a publicly traded company's stock, it's advisable to buy blocks of stock with a minimum value of $500 to $1,000. This is because no matter what online or offline service an investor uses to purchase stock, there are brokerage fees and commissions on the trade.
Buying on the Open Market
When purchasing stock on the open market, an investor should open a trading or brokerage account with a financial institution, such as E*TRADE, Charles Schwab, or TD Ameritrade. Once the trading account is opened, it's up to the investor how many stocks he/she wants to purchase at any one time. Before making any purchase decisions, an investor should do ample research on the various types of equity securities that are offered.
Although there may not be minimum limits on equity orders, brokers may require a minimum initial deposit to open a trading account.
Once an investor identifies a stock worth purchasing, an online trade should be executed using a brokerage account. There are two types of trades that can be made in this scenario: a market order and a limit order. Stocks that trade in multiples of 100 shares are known as a round lot. For fewer than 100 shares, the orders are called odd lots.
If the investor makes a market order, they are choosing to purchase the stock at the current market price. If the investor makes a limit order, they are choosing to wait to purchase the stock until the price falls to a specific limit. While purchasing a single share isn't advisable, if an investor would like to purchase one share, they should try to place a limit order for a greater chance of capital gains that offset the brokerage fees.
Commission fees are usually charged on a per transaction basis up to a specified number of shares that are purchased/sold. Most people prefer to reduce the average commission costs by spreading them over the purchase of many shares.
Buying a small number of shares may limit what stocks you can invest in, leaving you open to more risk.
How to Buy Fractional Shares
There is a way to purchase less than one share of stock. A fractional share is a share of equity that is less than one full share and usually is the result of a stock split, dividend reinvestment plan (DRIP), or similar corporate action.
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.
The reason DRIPs are so popular is that most of them don't have commissions or brokerage fees, so it is cheaper for investors to increase their holdings and use their dividend payouts without having to pay extra fees.
- There is no minimum order limit on the purchase of a publicly traded company's stock.
- Because there are fees and commissions added to the price of stock, investors should consider buying blocks with a minimum value of $500 to $1,000.
- Opening a trading account with an online broker is a great idea.
- Investors may consider buying fractional shares through a dividend reinvestment plan or DRIP, which don't have commissions.
Fractional shares are also being utilized by automated investment companies and apps such as Betterment, Stash, and Stockpile. By allowing people to trade fractional shares, such companies provide investors—many of them beginners—with access to stocks they may otherwise not have been able to afford to trade. Due to the growing popularity of such investment platforms, fractional shares are also likely to increase in popularity.
Buying on the Open Market and Fractional Shares
If a brokerage firm charges $20 per trade and an investor purchases one share of ABCWXYZ Corp. for $10 per share, then the total cost would be $30 per share—the cost of the commission plus the cost of the one share. If the investor decides to buy 100 ABCWXYZ shares instead for the $10 per 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 ABCWXYZ stock price rose $0.20 to $10.20 to break even. As for the investor who purchased just one ABCWXYZ share, they would have to wait until the stock price soared 200% to $30 before breaking even.
But what if you were looking to take part in a DRIP? Let's say you were enrolled in 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 an additional 0.05 ($2 / $40) shares of CTC.