Is it silly to own odd lots/small amounts of stock?

Factual Questions
1

Sure, indexed mutual funds are preferable to spread investment money around.

But “penny stocks” are risky. Some stocks seem like a good, long term hold, but they are expensive enough per share that I couldn’t hope to acquire very many - for the Great Teeming Masses of investors, I’m probably not alone. Stocks can be traded, unlike IRAs’ and 401k. But $50-$500 a share puts any significant number of shares out of my “mad money”. Is there a place for such small numbers or total investment in a single stock or groups of stock in a total portfolio?

2

The best way to go about odd lot investing is use a “DRIP” or Dividend Reinvestment Plan. If you purchase small amounts of stock thru a broker, you will pay too much in fees to make it worthwhile.

Google “DRIP Investing” for more info.

3

You can hold and trade stocks in an IRA.

4

The extra charge for buying or selling an odd lot (less than 100 shares) is not much. It’s twelve and a half cents per share. For 50 shares, it’s $6.25, regardless of of the share price. That’s on top of the commission.

5

OK, I’ve heard of DRIPS, will check that out. My online broker charges about 17 bucks per round trade. But the concept itself is alright?

6

The thing with a DRIP though is, you have to already hold stock in the company, and the stock has to be held in your own name rather than in a brokerage house’s name. Also, many companies that even offer DRIPs require a minimum number of shares. We looked into doing that with a few shares of Disney (I think that was the company) a while back and the minimum number was, say, 10 shares. I think we could then have purchased additional shares directly with little-to-no commission (we can with some other stocks we already own).

Another way to emulate a DRIP, interestingly, is to buy your handful of shares of stock through one of the brokerage houses, and let them maintain the shares on their books. Then, dividends received can be used to purchase additional shares of the stock, including fractional shares, without any fees at all. We did this for my son. Used Fidelity to buy him 5 shares of a freight railway stock. Every few months, he gets some small amount of money in dividends, which has now bought him an additional .086 shares of that stock :slight_smile: Of course, if we buy additional shares on our own, there’s a commission which really eats into the potential profits, at 11 bucks a trade. So that angle doesn’t work quite as well as a true DRIP.

7

Forgot to say: as far as I know, we didn’t get charged any additional fee for the handful of times we’ve bought stock on our own, even though each time the total shares were less than 100; we just got charged the flat fee each time.

8

Yes. Vanguard has a similar program. As for not having much money to buy stock, many places let you set up Direct Deposit or link to a checking account and set up automatic deposits. A great way to save.

9

Do the math. Over time, commissions can eat into your returns, especially for small lots.

Then again, mutual funds charge an annual expense fee, which should be factored in.

Let’s take a look at Vanguard’s S&P 500 index fund, a large-cap fund which by definition does not invest in penny stocks. The expense ratio is 0.18%, which amounts to $5.40 per year on $3000.

Three stocks at $17 round trip will put you back $51. So figure that commissions will be about equal if you hold your shares for 10 years. In this example.
What’s the point though? The only reason to buy a stock on the open market would be if you believe you have better insight or information than the average full-time professional investor. That can happen. But casual investors should also be wary of buying into fads, or buying stocks that are highly correlated with one another, so that their entire portfolio is less diversified than it seems.

Then again, maybe you like analyzing individual stocks, as a hobby. If this is the case, I might still recommend devoting a sizable share of your portfolio to an index fund – it’s a good cornerstone.

10

Woops: you said, “round trade”, not “round trip”.

You have to remember that you will have to sell the stock someday. So three stocks with a $17 commission will put you back 17*6=$102, assuming that commissions don’t increase over time. Which is optimistic.

That equates to 19 years of Vanguard-level fees.

And you may get bored with some of your stocks – if you flip them every five years, your expenses will mount accordingly.

11

I don’t pay any extra for odd lots.

12

Yes, I have a 401k and a Roth IRA. Right now allocated about 60 per cent in US equities - a 70/30 mix which roughly tracks the entire market via S&P500 and Wilshire 4500 respectively. 40 per cent allocated to an index which tracks international funds or the EAFE.

Index funds are great, and form the core of my investments for retirement. But I like the idea of stocks as a method of diversification. So again, I see a lot of potential long term “buy and holds” but maybe I am just chasing past performance.

Maybe a collection of “mad money” penny stocks might not be such a bad idea, assuming that I only allocate a tiny percentage of overall investment $$$?

13

Take a look at ShareBuilder.com. It allows you to invest small amounts of money in many different stocks.

14

This is true if you want to set up a DRIP directly with the company issuing the stock. Some brokerages, however, will let you set up a DRIP for stocks you’ve purchased through them. TD Waterhouse (now part of Ameritrade) does this at no charge.

15

What is the advantage, if any, of having a stock issued in my name versus held by the “street”? Sounds like a fee would be incurred, and then I would have to worry about losing them, storing them safely, and then selling them at a future date would probably mean yet another fee, etc.

16

Just remember – one tool used to forecast the stock market is sale of odd lots, and it assumes that those who buy and sell odd lots are morons. Really – if odd lot sales are bullish, it means the market is about to go down.

17

Yes, I’ve read that somewhere. I promise not to crash the market, honest!!

18

I have several DRIP accounts, and they CAN be great- but different brokers have different fees, and depending on what you choose to invest in and for how long, it may or may not be worth your time.

It’s not always true that you have to own one share of stock before you can join a DRIP plan, but in some cases it is. You can find that out on-line before you make an investment. SOME big companies have DRIP plans that allow yopou to enroll and make your initial investments on line. Some will even pay all your fees (except for the fee you’ll have to pay when you finally sell). There are no fees when I invest through my ConocoPhillips DRIP, for instance. But SOME plans charge heft enough fees that small investments may not be worthwhile. Do the math.

I probably can’t/shouldn’t provide direct links to commercial sites, but Computershare, Mellon and JPMorganChase are among the firms that will let you invest in DRIP plans for major companies on-line for relatively small amounts of money.

The question is, does it make sense for you? It might- but…

It only works if you’re buying blue chip stocks that pay hefty dividends AND if you plan to keep those stocks a long time. Do that, and you can find that your initial small investment has grown enormously in five years.

But if you’re liable to need the money before that, fees and fluctuations in the stock market can cut down on your profit substantially. Enough so that, maybe, you’ll find you’d have done better buying a CD.

The other problem with such DRIPs is, you usually can’t make immediate purchases. So, if you see that, say, Bank of America (which has a very good DRIP plan) is selling for $51 today, and you want to add to your drip holdings, well, it’s quite possible that transaction won’t post for a few days, which means the price MAY have gone up by the time it goes through.

And obviously, if you’re a speculative type who likes playing penny stocks, a DRIP approach is most definitely not for you. Just bear in mind that penny stocks are just that: a speculation, a gamble, rather than an investment.

19

DRIPS and/or DIPS? Still, I can buy any number of blue chips, and one single share, except stock shares that haven’t split in since golly knows when, and get started through sites like sharebuilder. l suppose, through my online broker, but as I mentioned it seems silly. I remember going down this path a few years ago and got frustration then, it’s just easier to open an IRA or online brokerage and purchase indexed mutual funds.

OK. So in general, if I happen to choose a clinker, it really puts the whammy in the overall portfolio, because the indexed funds are so closely correlated with the overall market(s), but on the other hand a nice stock on a tear puts a little whang on the upside too.

No, using money I am willing to put aside for a few years at least. Have been regularly buying I-series savings bonds for a few years and as they aren’t spendable for a year and pay so-so interest, so I have ready cash for buying or repairing a car or other normal financial semi-catastrophes in the household. I don’t play lottery tickets, and live way too far from Vegas, don’t drink a lot so I figure I can afford a small percentage of my overall income to what is definitely speculative. A couple of my “mad money” stocks shot up real nice - and then I think “Well hell, I should hang on to that, maybe it will go even higher, happy days are here again, etc.” and then it shoots down twice as bad. Stops and limit orders work but then I have those transaction charges again. WAY more fun that bonds, though.

20

It doesn’t matter what the price is as long as you can afford up to what you want to invest. So if you have 1k, you can buy 2 shares of Google @ $500 per share, or 20 shares of ABC company @ $50 per share. If you’re goal is to gain 10%, and it actually happens, you can then sell Google for $550x2 per share ($100 gain, minus fees). Or you can sell ABC for $55x20 per share ($100 gain, minus fees). Either way the result is the same.