Lesson 7: Don't buy in lots of 100, that's dumb

LESSON #7: DO NOT BUY STOCKS IN LOTS OF 100 SHARES! This is probably the dumbest thing I see, and I used to be one of the dumb people who did this until I pulled my head out of my ass. Everyone I know always buys shares in even hundreds. Why? Because it's easy to follow how much you made. Every $1 the stock goes up, you've made $100 (a dollar per share.) This is stupid. Here's why: Lets take two stocks, World Wrestling Entertainment (WWE) and IBM (IBM). Today, WWE closed at $11.52 and IBM closed at $90.54. If you bought in 100 share lots, like a major majority of people do, you'd have $1152.00 at risk in WWE and $9054.00 at risk in IBM. Is IBM really worth risking 9 times the cash for? I don't think so! That's a dumb bet! What you need to decide is how much MONEY you're willing to put into a company. If you're willing to risk $5000 on WWE going up, then divide $5000 by the current price of the stock to find out how many shares to buy, in this case 434 shares. If you did this for IBM you'd buy 55 shares. If you had $10,000 and bought $5,000 of each, you'd be EQUALLY AT RISK IN BOTH even though their prices are $80 apart! Now, here's the fun math. Because you own 434 shares of WWE, it doesn't need to go up $1 to make $100 anymore, it only needs to go up $0.12! Isn't it easier for a stock to go up $0.12 than $1.00? I thought so. This will be covered in a future lesson, but just so you know, THE NUMBER OF SHARES YOU OWN DICTATES HOW MUCH A STOCK NEEDS TO RISE TO GET THE PROFIT YOU WANT, NOT THE PRICE OF THE STOCK. That is very important to grasp! In any event, we won't skip ahead of ourselves, just realize that when buying a stock, don't think in terms of number of shares or the price of the stock, think in terms of how much money you're willing to put in to that company if you were to bet on it going up, then you can figure out how many shares that will get you.