How Should Small-Money Investors Buy Big-Price Tag Stocks?

It's been a busy month for the Rule Breaker Investing podcast team: Between the regularly scheduled episodes and the bonuses, listeners have gotten more David Gardner than ever. But he's not done quite yet, because as is his wont, he's wrapping up by responding directly to questions and comments. In this mailbag episode segment, he brings in a second Dave -- Fool analyst David Kretzmann -- to help him tackle a question from a third Dave.

Listener Dave is ready to start building his portfolio, but with the amounts he can direct toward it, he'd be buying perhaps a single share of a company like Intuitive Surgical -- and he'd have to wait to gather enough for a single share of Amazon . Given that a diversified portfolio is best, what's the right way to get there when limited resources restrict what you buy? The Daves offer some options that can help you sidestep the stock-price barrier.

A full transcript follows the video.

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This video was recorded on May 30, 2018.

David Gardner: Mailbag item No. 3. I'm joined by a special guest, a multi-time cameo appearance guy on this show, David Kretzmann.

David Kretzmann: That's right! Yeah, absolutely. Thanks for having me back, David!

Gardner: You and I partnered on the Gardner-Kretzmann Continuum in the past mailbag.

Kretzmann: I think it's still going strong. I don't know if I've seen many people share their score with us on Twitter, but hey, you and I can at least use it.

Gardner: And, David, maybe we're going to launch an appeal this week. Because, while I have you here for mailbag item No. 3, I now realize that if you have a little extra time hanging around, because there's at least one mailbag item after that that's directly relevant to you and to me --

Kretzmann: Oh, let's do it!

Gardner: Let's go after this one. I sent you the email from David Creighton. When I saw David's mail, I thought two things. First of all, great question and a very common question about getting started investing. No. 2, another Dave.

Kretzmann: Great name!

Gardner: I'm Dave, and I had to have Dave, you, Dave, on the show to talk to Dave. And I'm going to resist the temptation to reread the Too Many Daves poem from Dr. Seuss, which I've done on this podcast before. For anybody who doesn't know it, just google Too Many Daves by Dr. Seuss, and please enjoy that poem, and think about mailbag item No. 3 as you do it.

Kretzmann: A Dave-heavy week, I love it.

Gardner: It is, Dave. Good to have you on the show. I have a question from Dave, and I'm going to read it. Here we go.

Kretzmann: Alright, let's do it.

Gardner: It starts this way, appropriately so. "Dave, you often say that the goal in beginning a portfolio is to get to 20 stocks as quickly as possible." By the way, that's not necessarily exactly what I say, just to make it clear. I typically will say 15 stocks. It's all contextual. Our fellow Dave here has it generally right, directionally right, but I wouldn't want all of my listeners thinking, "Oh, yeah, I have to get to 20, because that's what David always says."

He goes on from there. "I have $500 in my Fidelity account, and I'm ready and eager to put it to work." Awesome. "I have my eye on a share of Intuitive Surgical," ticker symbol ISRG, one of our favorite longtime Rule Breakers. I own some shares. Dave, do you own any ISRG?

Kretzmann: Unfortunately I don't. I missed this one. But, hey, I should probably look at starting a position.

Gardner: Well, you have a lot of stocks already, which we'll talk about a little bit later. "But, today," Dave goes on, "it would be a $450 investment." That's right, because the stock is around $450. So, here's Dave with $500 in his Fidelity account, looking at one share of Intuitive Surgical. He goes on to say, "However, I could also split that $500 between several stocks at lower price points. Or, I could save that money, and then just add to it, and when able, let's say, buy a share of Amazon," which, last I checked, is trading more like $1,000 a share.

So, here's the situation, David. Since our friend Dave can only put about $100-200 a month toward investing at the moment, is it a better strategy to knock out larger-cost stocks first? So, like, buy one share of Amazon once you get to $1,000, and then save to get to one share of Alphabet , etc., which will take longer to do? Or, should our friend Dave start with the lower-cost ones and work his way up?

He concludes by saying, "I've been listening to all The Motley Fool podcasts for over two years now. I'm thrilled to finally be at a place where I can jump in. Thank you for all you and your team do." We're thrilled for you, Dave, not just because you're a fellow Dave, but that you've gotten to the point where you're ready to invest. That's tremendous, because for a lot of us, just saving to get to that point is the hardest of all.

David Kretzmann, as you hear Dave's story, your reactions?

Kretzmann: It's a great question. It kind of reflects the situation we're in today, where it seems like fewer great companies are splitting their shares. On one hand, that's great, because it shows that they're not so focused on the stock price. But on the other hand, for us smaller retail investors, it can mean we have to think a little bit harder about how much we're allocating to these companies, because it takes a lot more to buy a single share, in some cases.

In this situation, it does depend on your context. I think, we'll talk about today, there are a couple other options for how you can go about buying shares. There are some brokerages out there where you can actually buy fractional shares or partial shares. That would mean, in this case, you could invest a flat amount, $50, $100, $200, regardless of the share price, and still get exposure to an Amazon or an Intuitive Surgical, stocks where you might have a little bit harder time buying one or two shares.

Gardner: Right. And the way that works, David, as I understand it, I don't use a brokerage that has that, but I've always loved that feature. I know a bunch of Motley Fool members have started that way. The way it works, I think, is that, let's say we take your $50 and my $50 and Dave's $50, so we're at $150, and we're taking some other $50s. And finally, as a brokerage, we can buy a share. Then we just say, "Well, you own one-tenth of it, and you own one-twelfth of it." You just allocate fractionally to all of your customers how much they own of each share.

Kretzmann: Yeah. Essentially, the way that I understand it, I don't know all the technicals of it, but you're essentially, like you mentioned, pooling money together with other people who are buying fractional shares of a certain security or stock. Then, that way, you still have exposure. You might think about that and it's like, "Do I really want to only own one-sixteenth of Amazon?" Of course, what counts isn't the number of shares that you own, or the fraction of shares that you own. The dollar amount is what counts.

Gardner: Exactly.

Kretzmann: Whether or not you own one share or a tenth of a share, if it doubles, your money is still going to double, regardless of how many shares you have.

Gardner: That's right. If you're $200 in and it doubles, you'll make $200 more.

Kretzmann: Exactly. So, you want to focus on the dollar amount invested. I think David is thinking about that in the right way. A couple brokerages out there that you might want to consider, one is Stockpile. This is a company that some of you might be familiar with. This is a company that, in the past couple years, has popularized stock gift cards -- essentially giving someone $50 of Disney for Christmas or something, just a flat amount that you can give to someone. The commissions are cheap. I think it's $0.99 per trade. So, realistically, there, you could invest as little as $25 or $50 into a company. I don't think you can invest in all several thousand publicly traded companies in the U.S., but any of the big-name companies out there, you could probably buy shares with Stockpile. That might be one option you want to look at to get started, initially.

Another one out there that I believe still exists is ShareBuilder, although now it's under the umbrella of Capital One . This is actually how I got started 12 or 13 years ago when I first started as an investor. What they do, at least at the time, and I think they still have this fee structure, where you could submit flat dollar amount trades on Tuesdays and pay $4 to buy a flat amount of a stock. That's another way where you can invest a flat amount, get exposure to some of these companies, even if you don't have enough money to buy a whole share.

Gardner: You're not timing your way in in any precise manner with this kind of approach to investing, but that suits us as investors anyway, because the long-term returns are all that really matter. We don't need to necessarily pick our price to the penny at a certain minute of the day. So, yeah, as they pool our money together, often they're just buying once a day and fulfilling customers' needs that way.

Kretzmann: Exactly. Something else to keep in mind, Stockpile at this point doesn't support retirement accounts. So, this would just be for your individual taxable account. Dave, I don't know, in your particular situation, if that money is within, say, an IRA with Fidelity, which might make it a little bit trickier to switch over to another brokerage. I believe, with ShareBuilder under Capital One, you can buy partial shares within a retirement account. That's something else to keep in mind, what type of account you're going to be buying shares in.

Another popular brokerage out there, especially for younger folks these days, is Robinhood. Now, you can't buy partial shares with Robinhood, but they do charge zero commissions. For me, that's becoming my go-to individual taxable account, because the app is just so seamless, it's a great user experience, and it's just kind of nice to not be paying commissions as you build up positions.

Those are a few options for you. I would say, if you've listened to all of this and you're still at the point where, "Well, I have an account with Fidelity, or one of these established brokerages, and I don't really feel like either transferring my account to another brokerage, or, I don't really feel like buying partial shares," then I would say, one approach -- David, I'm curious to get your thoughts on this -- would just be to rank companies based on which companies you want to own over the next five years. Just prioritize a list of companies. It might be Amazon, Alphabet, Intuitive Surgical. I don't think there's anything wrong with taking a few months to build up a position, or build up enough money to accumulate one share of any of those given companies. But just think about, which companies would I be happy to own if the stock market wouldn't trade for five years?

Gardner: Yeah.

Kretzmann: And just rank companies that way, and build up positions over time. So, a few different ways you can approach it.

Gardner: I like that a lot, David. Thank you. Dave, I hope that that's been helpful. I agree with my friend, Dave, that there is more than one way to win this game. A lot of younger people are starting with something like Robinhood because it's no commission cost at all and it's right off your mobile phone. Very attractive to many people.

On the other hand, if you could move your $500 from Fidelity to a place like Stockpile or Capital One ShareBuilder, if it's still happening, where you could buy fractional shares, I think that that's a great way to take that first $500 you have and buy ten stocks, $50 worth of each. Start with a portfolio. And, there's no doubt a third and a fourth way right there.

But, we wanted to give you some options and let you know. It's great to hear from David Kretzmann, because he was where you were 12 years ago when he started that way. And really, the purpose of The Motley Fool is to help the world invest better, and for a lot of us, to get you started. So, I hope that was helpful.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, Intuitive Surgical, and Walt Disney. David Kretzmann owns shares of Alphabet (C shares), Amazon, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Intuitive Surgical, and Walt Disney. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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