Big mistake new investors make

When I first started investing, I would look for companies with share prices under $20. My reason: because I could buy more shares… duh!

But is this the smartest approach? Let’s see…

You, the investor, want to get your money working for you, so you put $1,000 in a brokerage account (or IRA). You know you don’t have anymore money to invest, because you have done your due diligence and know that $1,000 is all you have to invest and still be able to pay your bills.

So after tons and tons….and TONS of research, you determine that Company XYZ, and company Investor Blitz (yes, I’m publicly traded for this scenario), are 2 awesome companies! You want to buy shares in one of them. Company XYZ is selling for $10 a share, but Investor Blitz is selling for $100 a share… here is your dilemma.

You could purchase 100 shares of company XYZ with your $1,000, but only 10 shares of Investor Blitz.

The decision has been made. You decide to purchase company XYZ because you can own more shares, which means more profit down the road. You place your order with your broker, it is filled, and you are now the proud owner of 100 shares of company XYZ. Yay!

A year goes by, and your shares are now worth $12 per share now. Since you have had your eye on Investor Blitz this whole time, you know investor blitz shares are selling for $120, not just $100. So both companies have increased 20% in value.

This doesn’t phase you, because you have made $200 on your 100 shares of company XYZ. Easy math, right: bought them at $10, they’re currently worth $12 which is a $2 gain. $2 times 100 shares equals $200.

So, after thinking a little bit, you realize something… Had you purchased 10 shares of Investor Blitz, you would also have made $200 on your $1,000 investment. Investor Blitz is now selling for $120 because they also gained 20% over the same time period. That $20 increase, times your “measly” 10 shares, is a $200 gain. What??? Ya, it’s the same gain, even though you bought less shares.

Ahhhhh! Que the knowledge lightbulb above your head. Because, you just learned something.

It doesn’t matter how many shares you own. What matters is the percentage you gain. That $1,000 total you originally invested could care less how many shares you own. What it cares about is the gain it receives. A 20% gain is a 20% gain, regardless of how it gained it. Get it?

I do not let the price of a share determine which direction I go when deciding which company to buy. I strictly follow my fundamental analysis of the companies. If the company selling for $100 a share is better than the company selling for $10 per share, then I will buy the $100 shares. Your total investment amount is what matters. Not how many shares you own.

Categories: Investing

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