Does investing more money into stocks increase chances of profit?

Question

Assume someone wanted to invest in stocks for the sole purpose of profiting as soon as possible.

Given the risky nature of stocks, would investing bigger amounts of money increase the chances of more profitable returns over a short period of time (within years)?

I ask because some people have compared stock buying to gambling, and in gambling you are more likely to win if you spend more money, even though you'll most likely not profit.

Long stuff here; can skip::

Here's an example: Say I want to test the stock market, and try and buy stocks. I spend 100 on stocks and another person buys the same shares from the same company but buys more shares (spends 1,000). Are they more likely to see profitable returns or is there no difference?

I know that if you buy more shares and they pay dividends, you earn more money from dividends, but since you spent more money you'll have to earn more back progressively to profit over the initial amount -- so that makes it seem like the odds are not very different regardless of you spending 100, 1,000 or even $1,000,000. The only way I see the big angle of this is if you bought very many shares, and their value increased at least ten times, which would yield 1 x 10 * total shares -- and that could very well give you profit. The odds of this happening seems very, very low though.

Dividends can very well pay good money, but to profit from them alone is not something in the near future that's going to happen since they don't pay enough, and you'd have to progressively spend more to get more in dividends which always yields a larger, equal dividend return to initial investment ratio -- which means the profit to spending ratio with dividends alone will never change unless dividends pay very large amounts (I'm talking 25-50% of the share market value); thus, profiting over your investment in short periods of time from dividends alone is not possible it seems.

Share values fluctuate, but generally within the range of a dollar or less. It seems that, at this minimal value, possible profit is going to be very small unless initial investment is very high.

This is how I understand it though.

I very well understand the prestige value of shareholding -- but this question focuses solely on the monetary value that regards profiting in the near future.

Basically, are you more likely to see profitable gains faster if you buy more?

Answer 1

I think you are mixing up the likelihood of making a profit with the amount of profit.

The likelyhood of profit will be the same, because if you buy $100 worth of shares and the price moves up you will make a profit. If you instead bought $1000 worth of the same shares at the same price and the price moved up you would once again make a profit. In fact if you don't include commissions and other fees, and you buy and sell at the same prices, you percentage profit would be the same.

For example, if you bought at $10 and sold at $12, you percentage gain of 20% would be the same no matter how many shares you bought (not including commissions). So if you bought $100 worth your gain would have been 20% or $20 and if you bought $1000 worth your gain would have been 20% or $200. However, if you include commissions, say $10 in and $10 out, your net profit on $100 would have been $0 (0%) and your net profit on $1000 would have been $180 (18%).

Answer 2

Have a read of this PF&M article, which @Blackjack has an excellent answer that speaks around risk. Answers which suggest that the return is proportional to the amount invested is a very simplistic argument. It is far more complex than that.

I would content that your initial question Does investing more money into stocks increase chances of profit? is not the best question. The answer is it depends upon your investment methodology.

The following will increase your chance of overall profit in the stock market

• diversification across investment types - stock market, bonds, property, ETFs, Insurance, etc.
• diversification within stocks purchased - across industries
• applying some consistent metrics for purchase and sale of the stocks - remove the emotion of trading.
• choosing a tax efficient vehicle for your investments appropriate to your country.

Answer 3

The investment return for a given strategy is directly proportional to the amount invested. Invest twice as much, profit (or lose) twice as much. It's a straight multiplier.

However, there are some strategies which are less risky with a larger investment, and some investments which have a minimum unit of purchase that puts them out of reach of smaller investors.

Several people have mentioned broker fees. You should be aware that with index funds it may be possible to use the issuing bank as a broker -- the "house broker" -- and pay no transaction fees. There are yearly maintenance fees on the fund itself, periodically drawn from the balance, but with most index funds that's a small fraction of a percent and you pay that no matter how you buy and sell shares of that fund.

You don't get the fancier features of a retail brokerage this way (eg automatic rebalancing across your entire portfolio)... but if you aren't using those, this can be a good way to avoid paying for them.

Answer 4

With an important caveat that I'll get to in a moment: No, investing more does not increase your chances of making a profit at all. Stocks are priced per share. There are no "volume discounts". So if you buy a stock when it costs, say, $10, and sell it for $11, you will make a 10% profit. Of course the more you invest the more raw dollars a given percentage will be. But the percentage will be the same.

Whether a stock goes up or down has nothing to do with how much you invested. Assuming that you are a typical small investor, not someone who has a billion dollars to invest, your purchases and sales will make no different to the price of the stocks you buy. (Or more accurately, it will make a difference, but that difference will be a tiny fraction of a penny, lost in the rounding errors and all the other factors involved.)

If you have more money to invest, you can buy more different stocks, i.e. diversify. This tends to protect you against risk: the average price of 100 stocks tends to vary less than the price of 1 stock. That generally reduces the amount that you lose when you make bad decisions, but it also reduces the amount that you gain when you make good decisions.

The big caveat that I mentioned is this: broker fees. Discount brokers these days tend to charge a flat fee regardless of how many shares you buy. Say your broker charges $10 per transaction. You pay when you buy and again when you sell. So if you buy 10 shares at $10 per share and sell when it hits $13. So you pay $100 plus $10 broker fee = $110, then sell for $130 minus $10 broker fee = $120. You make $10 and the broker gets $20. You make 10%. If instead you bought 100 shares, then you buy for $1000 plus $10 broker fee, sell for $1300 minus $10 broker fee, you make $280 and the broker gets $20. You make 28%.

I think the moral of the story there is, don't buy very small blocks of stock. I usually buy $1000 at a time so the broker fee is a small percentage. If you don't have $1000 to start, save up a little. I'd say save up to at least $500 for each buy.

BTW "in gambling, more likely to win if you spend more money" Wellll .... If you mean, if you make more bets for the same amount, you're more likely to win at least once, that's true. If you play a game 20 times you are more likely to win at least once than if you play only 5 times. But the average amount that you gain or lose on each play is not changed. If you play the game 20 times, you will, on the average, lose 20 times as much as you would if you only played once. Yes, you will win more often, but you will also lose more often, and these balance out.

Answer 5

In gambling as well as stocks, the stake does not normally affect your probability of winning (there is an exception which I will cover).

If you're a high roller, playing with low stakes may become tedious in terms of work you must do. Imagine playing slots with $1 stakes when you have 100k - it will take a LONG time for you to see any movement either way. If you're in it for the win, you probably want bigger stakes (maybe not bet all your money every time, but 1-10% of it) so you can get to the win (or loss) faster. With small stakes, you'll still arrive in the same place, but it will take a lot longer. But if you're in it for the love of the game and don't have deep pockets, of course it makes sense to bet the minimum so you can keep playing as long as possible.

Also, casino games are deliberately designed so that the lowest stakes (slots) have the worst odds. Brokers used to be like this - for example, you'd pay a flat $7 commission on every trade, which can really sting if you're trying to trade small amounts like $50 or $100. Or Google shares would be 5k a piece, and if you only have 3k, you couldn't afford to buy a single one. These days most have commission-free trading and allow fractional shares so this is largely a thing of the past. I suppose there's still the problem that the big kids do insider trading but you can't.

Luckily with stocks, it's not a matter of betting on one stock at a time with a set time period, like a casino. You can hold a stock as long as you like, and you can hold multiple stocks. This is where the analogy falls apart, because investing or even trading isn't really like gambling. So what people do is spread their money over many different stocks. This means that if you buy 20 stocks and one of them drops, you only see 5% of that drop, but the same is true for the stock shooting up. In practice, it turns out that you end up slightly better off in the long run though, which is why you often hear the advise to diversify. Debate on this continues among researchers.

There is an exception in gambling, which is games like poker. Unlike dice, blackjack or slots, poker is not pure probability but has to do with predicting and influencing what other players will do. So the stake here does influence your win chance in complex ways. Similarly, in the stock market, if you are trading huge amounts of stock (for example, you sell 10% of the company's shares, which is worth billions) you begin to influence other investors in complex ways. Since most companies are very large, most people don't have the money to do this. But if you're in a situation where putting all your money into one stock could gain you a significant fraction of the market cap, you gain advantage in trading that stock which may be bigger than the advantage from diversification. Of course, you have to be careful as well about laws forbidding market manipulation, but the point stands that making a big splash can change the game and it may be desirable to prioritize it.

This is all academic, though. Unless you have a last name like Musk or Bezos, you probably are nowhere near having enough money to influence the market. So this doesn't realistically apply to you.