How Much Should You Invest?

4.6% "in and out" costs on a £500 trade is pretty steep when we complain about getting scalped on commissions, management fees and so forth. Particularly if you're talking about a blue chip, which by its nature is going to have a more stable price.

Everyone will have their own minimum of course, but awareness of "in and out" costs as a percentage can focus the mind and encourage patience.

A clear benefit of a higher minimum trade (in your own personal context) is that you have to wait for funds to build up. So you have more time for window shopping, you're less inclined to be blown around by market fashions, your research tends to be broader and more thorough and your trigger finger less itchy.

Investors have to look for opportunities to control what little is actually controllable. Costs are.

If buying at full cost (£10-£15 a trade), and ignoring stamp(!!) I reckon £1500 is the minimum. Just a rule of thumb.

One point not mentioned is using cheaper or free commission buying. Also, as I'm usually investing for the long-term and holding the share for dividends, I'm less focused on the selling costs.

For my Stocks & Shares ISA I used iii (there are other ISA providers!) which offers a once-a-month day with £1.50 commission, not the usual £10 (it's still £10 to sell). So on £500 that's £4.00 (£1.50 comm + £2.50 stamp duty) or 0.80% to buy. At £1,000 this goes to £6.50 (£1.50 comm + £5.00 stamp duty) or 0.65%. Above £1,000 there's not much further gain in the total costs - a £10,000 block would be £51.50 (£1.50 comm + £50.00 stamp duty) so 0.52% - i.e. you reduce costs 0.15% moving from £500 to £1000 purchase blocks, but only a furher 0.13% going from £1,000 up to a potentially whopping £10,000.

But, the cheaper £1.50 is limited to buying on 23rd of each month - which might not be an optimal day to buy - although otherwise I'm tempted to time the market. Otherwise, at the £10 commission I'm at 2.50%, 1.50% and 0.60% respectively at £500, £1,000 and £10,000 - still more gained going from £500 to £1,000, than £1,000 to £10.000.

So if I'm looking to buy £1000 of a stock I have to consider do I wait until 23rd of the month and buy at 0.65%, or buy in real time at 1.50%. My consideration is do I believe the price might be down by the differential of 0.85% - perhaps some Euro-wobble affecting prices in the short-term - that means I'll buy today for the full £10 commission, in the expectation the share price will increase by at least 0.85% to justify not waiting for the next cheaper buying day on 23rd.

I played around in a spreadsheet looking at ratios of costs to investment blocks. I'd recommend you doing the same to understand where you're comfortable investing. For long-term buy & hold (LTBH) I'm at £500 if I can buy on a cheap day, or more generally £1,000, but that's also reflective that I'm trying to build an ISA portfolio of 15 to 20 companies, so £1,000 each will build up nicely over a couple of years. At £2,000 per company it would take twice as long to get a diversified portfolio together. Later on I can go back around my portfolio and add further £1,000s to 'double up' holdings, at not much more commission costs.

I dabbled in trying to trade on a FTSE100 ETF (ETFs are commission only, with no stamp duty, so slightly cheaper again). I learned here that to buy and sell quickly, made no sense at less than blocks of £2000 (where £10 in, £10 out, no stamp, meant 1.00% costs - a 3.00% price rise would give me a 2.00% net return). Trying at £1000 has 2.00% costs - and that extra 1.00% erodes too much of the potential trading gains to be had. At blocks of £4000 that £20 drops to 0.50% but doesn't improve more at bigger blocks.

Hope this helps new investors. I'm not a total rookie, but have been seriously looking at investments - and investing - over the last 18 months, so I've been learning by doing.

Regards
John

For someone starting their portfolio with (say) £5000, perhaps a reasonable minimum would be £1000 per stock, giving five stocks & a balance between diversification and trading costs.
If that person's going to add extra funds soon after, then perhaps they should divide that £5000 into three portions, on the basis diversification will soon follow with subsequent purchases.

Someone with a 10 year old ISA might be thinking of trade sizes of £5000 & sometimes topping up a holding with sums of £2~3000.

I'm pretty new to investing, only been putting money into my isa since I started work in october. So currently I can't afford to put a significant amount into the market each month.

Most of my shares I've bought have been at around £500 worth. Mainly with the iii regular investing £1.50 commission and a few at £10 full price.

I'm in for the long term and intend to add to these holdings as I earn more money, I've noticed the effect that commission has on my returns so am trying to increase my average buy but on the whole I think the ability to have a more diversified portfolio and the also the fact that I think I'm learning more through these small investments that I perhaps would if I saved my money up to buy in one lump sum.(also potentially dollar cost average comming into play once I eventually start adding to my existing holdings). I'm hoping that what I learn now by investing in £500 chunks puts me in a good postion when I hopefully can afford to be investing £5000 chunks! If I was investing all my money I have now(5 grand in the ISA) and wanted to minimise my costs I'd wack it all into the same Investment trust, and wouldn't be learning what I am now .

Hi Everyone,
Just been reading up on this series and your comments and I have a question that hasn't been asked / answered yet:

The examples above work on the assumptions that you buy an amount of shares of a company and sell them at a later time. So far, so good.

My question is this:
If I buy shares of the same company to different prices throughout a period of time how do I work out my break-even price? Do I take an average of the prices paid for these shares or do I take only the highest price paid or is there any other way of working this out?

Thanks for your help and time.

@RobinnBanks,
Thank you very much - much appreciated.