Does Account Size & Share Price Matter When Buying Stocks?

[morpheustrading 10]

Whenever I receive a question I think will be beneficial to other traders who may be wondering the same thing, I share the question and my reply with other traders.

 

In this post, a trader is seeking advice on how to size positions within his portfolio, and also clarification on whether or not the share price of a stock is important.

 

His questions are below, followed by my actual reply…

 

Hi,

 

I signed up for a 3 month stint with your company. I think it is worth at least three months to see if it fits my lifestyle. So far I like the approach you have. It is a cautious approach, which is what I need. I think the slow and cautious approach fits me well.

 

I wonder if someone could share some philosophies with me and maybe answer some questions?

 

I have been trading off and on for years so I have a decent understanding of how things work. I am not an expert. I do feel that the more money you have to invest per trade the better return you get on the investment. What I mean is that if you buy 10 shares of a 100 dollar stock, or a $1000 investment and that stock moves to $101 that is a 1% return or $10 which is a profit, but after trading fees that is a loss. However if you can invest $100,000 that same trade give you a $1000 profit. So the size of the portfolio does matter. I simply explain this to setup my questions. I know you guys understand the above.

 

Honestly, my portfolio for this type of investing lingers between 25K and 30K. When I apply all your rules for the size of an investment I would typically be investing somewhere between $500 to $1000 per trade. So for stocks that trade around 10 or 11 dollars per share, I get more shares and a better opportunity to make a few hundred dollars if the swing trade is positive. Things become difficult when you suggest stocks that trade at 80, 90, or 100 dollars per share. Or even worse TSLA is above 200. Which is not a huge deal if you have a larger portfolio.

 

Now with all of this being said, I guess I am simply looking for advice about how I should be approaching things? Or how would you approach things if you were in my position? The more money you have the easier things get, to a degree, and I do understand this. As I try to learn it helps to just hear from experts like yourselves about where my head should be at with respect to my level.

 

Just thinking about it on my own I have wondered if I should make two or three investments that are worth 5K to 10K a piece and approach it like that. There is more risk, but with the stop loss approach I can minimize my risk to a degree. The larger investment give me a greater opportunity to make money, but it also has greater risk. Plus with my limited funds, I can’t always take advantage of a setup you suggest.

 

Hopefully my minor confusion is something you can advise me on.

 

Thanks,

 

D.S.

 

Hi D.S.,

 

Great questions.

 

With 25-30k, you may have to stick with fewer positions to make decent gains. Maybe 4 to 5 positions at 5k each.

 

Key here is that you want to take on more core trades when you can, which will enable you to hold stocks longer.

 

You may still be able to take on a few swing trades, especially if you are not fully invested.

 

So, for example, with 5 positions at 6k, you have 20% positions.

 

Say we grab 3 full 20% positions; that will leave you with 2 empty slots. Now, those 2 empty slots can be 2 core positions at 20%…or maybe 4 quick swing trades at 5%.

 

So you can grab 5 full, 10 half, or any sort of mix; it is a very fluid approach.

 

When you have a full portfolio, you do nothing. If we stop out and you have a 20% position open, and the next trade is a swing trade with 33% size, maybe you take a 5-7% position.

 

And you could even take another one until a new core position comes along and you need the money.

 

Regarding cheaper vs more expensive stocks, it really should not make a difference [in your overall return].

 

Actually, if you stick with expensive stocks, you have cheaper execution cost due to fewer shares.

 

With a $5 stock, you would need 1200 shares on a $6,000 position (resulting in $24 round trip at a broker like Interactive Brokers that charges 1 cent per share).

 

For $TSLA [just over $200 per share], you would only need 25 shares, resulting in a $2 round trip commission fee.

 

Now, if $TSLA were to go up 20%, then your $6,000 would increase to $7,200.

 

Similarly, if the $5 stock rallied 20%, then your $6,000 would also become $7,200. It is the same difference [in profit].

 

Also, you get the added benefit of holding an “A rated” stock like $TSLA [accumulated by institutions] versus some junk stock that is cheap.

 

Let me know if you have further questions.

 

Regards,

 

Rick

 

It’s a common mistake among newer traders to shy away from expensive stocks, based on the assumption that not as many shares can be bought with a smaller account.

 

But as explained above, this is a mistake because it does not make a difference to your bottom line; a 20% gain on a $100 stock is the same dollar return as a 20% gain on a $10 stock (actually, slightly more due to lower “per share” commission fees).

 

Remember that expensive stocks are expensive for a reason — institutions are buying them (you should too).

 

Also, if your trading account is not yet that large, you now have some ideas on how to be flexible with regard to buying stocks.

 

In this case, focusing on our intermediate-term core trades may be more profitable than trying to enter all the shorter-term swing trades.