Affordable transaction costs drive investor portion size decisions. Those costs guide investors to right size stock portfolio purchases. Right costs means a low-cost per share that effectively puts a financial barrier or threshold for owning each share position.
Portfolio Building That Works Money course, Lesson 4 explains the need to consider acquisition costs when buying shares. Links at the end guide you to related content if you want to learn more.
What’s in this lesson for me?
Understanding the necessity of considering the costs to buy a share position gives you a way to keep more money working for you. By keeping cost per share low you immediately improve your rates of return.
Learning portfolio counts and sizes
You want to make sure your cost of buying shares has an acceptably low-cost per share. That means there is a practical smallest lot price. That is how costs drive the smallest practical position size.
For example, a $10 commission to buy 100 shares, the net cost to you is the share price + $0.10 per share. Simply divide the $10 commission cost by the number of shares purchased.
If your commission cost is higher, say $400, the cost per share becomes share price + $4. The same calculation applies. Divide commission cost by the number of shares purchased.
To buy 100 shares at a price of $2.50/share, the low commission cost above gives you a net cost of $2.60 and the high commission nets the cost as $6.50. If the share price is $28.00 the low commission cost nets $28.10 and the high, $32.00.
That means the $2.50 share has to increase by as little as $0.10 or far less than 1% before beginning to make money for the low commission account. For the high commission account the change has to be a huge 260% to just break even.
To buy the $28.00 share, the low commission account quickly begins making money and the high cost account needs the price to increase over 14% before going positive!
That first scenario immediately puts you in a negative situation. Beginning in a deep cost hole leaves little chance of seeing a reasonable rate of return.
Buying more shares changes the relative costs
You can radically change the unit costs by buying more shares. For example, move the number of shares purchased up to a 10,000 share lot. Costs per share quickly get reasonable. The $10 commission only adds a tiny fraction of a penny to the share cost per share. The $400 commission adds $0.04. Both affordable amounts with little portfolio performance impact.
Dollar amounts to consider
Rounding lot numbers up helps performance. That can mean buying a smallest position of $2,000 to spread the costs over enough shares to cover commissions of $10. When commissions are higher it could mean the smallest order you should consider is much higher. A $10,000 order can proportionally cover commission costs of $400.
Obviously the share price itself remains a major factor in determining the answer for each position size.
We buy in lots and multiples of 100 shares as well as dollar amount of $2,000 to $10,000, depending on transaction costs have to be considered when determining the number of shares held in each position. Because costs drive investor position sizes, each specific position may hold a substantially different number of shares.
Why this lesson matters
Considering costs when buying a share position lets you keep more money working for you. Low costs per share purchase improves your rates of return.
Key take away points from lesson 4,
Costs drive position size:
Affordable transaction costs drive investor portion size decisions. Those costs guide investors to right size stock portfolio purchases. Right costs means a low-cost per share that effectively puts a financial barrier or threshold for owning each share position.
- Portfolio counts and position sizes are related.
- Buying more shares lowers transaction cost per share.
- Lower transaction costs per share raise your rates of return.
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Costs drive position size
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Portfolio Building That Works Money:
Introduction to Building Money Working Portfolios Lesson 1
3 Portfolio success keys Lesson 2
Stock holding size matters Lesson 3
Costs drive portion size Lesson 4
Controlling emotions for investing success Lesson 5
Join exceptional wealth builders Lesson 6
Pyramid portfolio wealth building Lesson 7
Next lesson 5:
Investing success needs control
Have a prosperous investor day!
Bryan
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