0

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?

  • 1
    "in gambling you are more likely to win if you spend more money" That doesn't seem right to me. That's sort of true with some progressive schemes in particular gambling strategies. But being very likely to win is not necessarily good. (Consider, 99% likely to win $1, 1% likely to lose a million dollars. High likelihood of winning. Bad idea.) – David Schwartz Sep 13 '16 at 17:43
5

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%).

  • Good point re commissions. I tend to forget them because nothing I'm currently invested in has few at the time of purchase or sale, but if you are going to work with a broker they have to get paid somehow and it'll either be fees on transactions or on balance. – keshlam Apr 26 '16 at 23:25
  • correction: 20% or $200 – not_a_comcast_employee Apr 27 '16 at 1:40
2

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.

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.
0

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.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .