How Many Shares Should One Buy?

The regulator re-categorised mutual fund schemes and uncluttered the mutual fund arena, but there are lot of myths about stocks. Last time, I shared an article which busted a myth about high priced stocks.

Today, I want to talk about another myth which goes hand in hand with the high-priced stocks. It's about the quantity of shares one should buy. Enjoy the read.

How much is enough

Apurva Sheth

Retail traders generally avoid buying high priced stocks because they think it to be an 'expensive' deal for them. From a fundamental perspective, a stock's Price-to-Earnings ratio gives us a picture of how expensive or cheap it is.

I elaborated the technical perspective or the way I look at these stocks. Most of these stocks have a low beta. One of the possible reasons could be high promoter and institutional holdings. These two groups generally remain in the stock for a longer term. Promoters are strategic investors and do not sell their shares frequently in the open market. The Institutions do not participate in the markets as often and whenever they do, the change of hands is mostly from one institution to another. This results in a lower beta for these stocks as a majority of the shareholders do not sell shares when the markets go down. Thus, the 'actual' free floating shares in the market are very less.

The Non-Institution traders are left with very little number of shares that they can deal in. This results into too much money chasing too little stock. One of the requirement for a stock price to go up is that there should be more buyers than sellers, which is the case all the time with these high-priced scrips. The second thing to look out for is whether at a given point of time there is more enthusiasm among buyers than sellers.

When both these requirements are fulfilled, it becomes an excellent setup for a long trade. So instead of shying away, retail traders should happily latch on to such stocks whenever they find a similar setup.

But this is not the case with retail traders. They have been avoiding high priced shares despite knowing these facts. What could be the reason behind this?

A reason one of our reader Mr. Tejinder mentioned and I think could be the likely cause is: Retail Traders normally think more in terms of the quantity of shares that they buy rather than the total amount they are investing in the stock.

Normally, traders buy shares in multiples of 100, 500, or 1,000. A round figure quantity is better to remember than an odd figure. However, this thing doesn't work when one is buying shares that are priced high. For example, if one were to buy 100 shares of a stock priced Rs 3,000, this would amount to a total investment of Rs 3 Lakh which many traders may not be able to afford.

More important than affordability is sticking to the position sizing rule every trader should follow. Without a proper position sizing strategy, a trader is doomed for failure. Thus, it is very important to stick to a position sizing strategy and buy only as many quantity of shares which this rule suggests.

But, unfortunately our mind concentrates more on the quantity rather than the amount invested. We are so hard-wired with buying in multiples of 100's and 500's, that the idea of buying 1, 5 or 10 odd shares of those high-priced scrips does not hold much appeal to us.

This keeps us away from these 'high-priced stocks' and draw us more towards the cheaper stocks. The definition of cheap will vary from person to person. Most people think that a cheap stock can rally more than a high-priced stock. For example, one would argue that a 100 rupee stock can become 200 rupee stock quicker than a 10,000 rupee stock becomes a 20,000 rupee stock. Stocks like Eicher Motors, Bosch & Page Industries have proved this wrong. Their stock price have doubled and tripled despite being high priced while many other cheap stocks have languished.

I think one should always look at the potential of percentage returns that a stock can deliver rather than the absolute value by which it moves up. Thus, a total investment of 30,000 rupee in a 3,000 rupee stock should be no different from a 30,000 rupee investment in 300 rupee or 30 rupee stock. I think one should look at stocks from this point of view only. Else, one would be unable to buy a high-priced stock ever and will always be left with a feeling of being unable to buy enough.

This will require a huge shift in the psychology with which we look at markets. And to do this, a trader needs to educate himself.

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2 Responses to "How Many Shares Should One Buy?"
20 Oct, 2017
IIt is true instead of following ur own quantity based mechanism accept the methodology in terms of benefit because it bought good returns in a day or else hold for 3 days. Sir, hats up to ur methodology, it has again increased my confidence.Like 
18 Oct, 2017
Apurva, APURVA Article !! Keep it up ! Happy Diwali ! == P.K.Muliyil =Like 
We request your view! Post a comment on "How Many Shares Should One Buy?". Click here!