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How many shares should I buy?
In answer to how many shares to buy, this is what I do. Before I buy, I decide how much I am willing to risk on this stock. I weigh it against the strength and history of the company, along with the potential return, and potential loss. I also look at the estimated amount of time the funds will be tied up in the investment, because often there is another deal that may produce less of a return but is much quicker (less days).
Next I multiple the # of shares by the estimated cost per share of the stock, and then I add what I call round-trip fees (RT). This is Etrade's charge to buy and sell the stock, which varies depending on the stock market to which the stock belongs. Now I divide the total by the # of shares, and get what I call my BE point (BREAKEVEN point). This is the share price that I would need to sell my stock at to breakeven on the investment. This is good to know before you go into the deal, because if you are buying only a few shares, the fees may eat up all your profits.
COULD YOU GIVE US AN EXAMPLE AND MAYBE BREAK IT DOWN INTO A BIT MORE DETAIL, SUZANNE?
When deciding whether to purchase a stock or not, it is important to study the stock first. Is there any news out on it? Does it tend to split somewhat predictably (such as DELL)? Go to www.companysleuth.com for a very good source of research. Etrade just took away our interactive charts (sob). It was one of the reasons I kept my Etrade account. I'm sure some other readers can refer some free chart sites (perhaps BigCharts?) My point is that it is imperative to do your research prior to buying any stock.
About my Breakeven point: when I am considering a stock purchase, part of my research is to determine my entry and exit points, as well as what I call my breakeven point (BE). Here is an example: I researched Oracle on Thursday when it began to nose dive. I decided that it would more then likely go back up over the next month. This belief was based on the strength and history of the company. I wasn't comfortable with the price just yet, so I waited. On Friday, at 10:47 EST the stock was at 29. I was watching it closely, and it hovered around that price for awhile. I decided it wasn't going to go much lower, so I purchased 100 shares. Prior to buying it, I did this simple math to get my BE point: 100 shares * $29.00 per share cost = $2,900.00; $2,900.00 + $14.95 buying fee = $2914.95 total cash outlay.
When I sell the stock, I will have to pay another brokerage fee of $14.95, so I add this onto the cost of the stock. $2914.95 + 14.95 = $2929.90 total cost of stock, with RT fees (RT fees -- RT stands for round-trip. It means the buying and selling fees). Next I divide the total cost of the stock by the number of shares. $2929.90 / $100 = $29.30 (about 29 5/16) this is my BE. This is the dollar amount that I would have to sell the shares at to just breakeven, after paying all the commissions. This is an important figure to have at your fingertips, so you don't get excited at a stock price increase and find out when the dust has settled that you've sold at a loss.
Another important number I like to calculate prior to the purchase of the stock is what I call "Net Return Percentage." I take the total cash received from selling the stock minus the RT fees and minus the initial cost of the stock (which would be the net profit) and divide it by the total cash amount that was tied up for the duration of the transaction (this would be the cost of the stock plus the buy fee), then multiply by 100 and you have your net return percentage.
Example for above jibberish: I bought ORCL for $29 + 14.95 buy fee = $2914.95. Let's say I sold it today at 30-3/8. That would be $30.375 for each share. Therefore, $30.375 * 100 shares = $3037.50 received for stock. But I have to subtract the sell fee of 14.95, so $3037.50 - 14.95 = $3022.55 proceeds credited to my account. Taking the $3022.55, I subtract my initial cash out of $2914.95 for a grand net profit of $107.60, not bad for 4 day's holding! Now to calculate the Net Return Percentage: $107.60 / $2914.95 * 100 = 3.7% NRP (net return percentage). So for my cash output of $2914.95 for four days I received a net return of $107.60, or 3.7%.
I hope this is not too confusing. I calculate these figures because it strongly influences my decision to purchase a stock or not. If I have isolated 3 stocks that interest me, and I think they would all be good decisions, then of course I will go with the stock that will give me the greatest estimated return in the shortest amount of time. I am a firm believer in getting in and getting out as fast as possible. I don't like my money to be tied up one day more then needed.
MORE ON "HOW MANY SHARES SHOULD I BUY?"
As far as determining how many shares of a stock to buy; yes, of course the thickness of your wallet plays a large part in how many shares you're going to buy. However, no matter how much you can afford to spend, you should consider the fact that it ALWAYS thought of as a bad idea to put all your eggs into one basket. Always try to spread you money around as much as possible. That way if one of our "Wonder Stocks" goes belly up, you haven't lost the whole farm over one bad investment!
With that said; the larger the number of shares that you purchase, the less the price of that stock has to rise before you can envision a profit. The spread is a way for the market setter to profit off the difference of the ask and bid prices of any given stock. The better a stock is doing, the narrower you find the spread is. Hence, you always want a narrow spread, it's signifies nothing but GOOD. Obviously the price needs to move just that much less to reach your profit zone, if the spread is very narrow or even zero.
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