Understanding Stock Investments: Why Dividing 100,000 by 1.50 Won’t Get You 150,000 Shares

Many investors, particularly beginners, often misunderstand the relationship between the amount they spend on a stock and the number of shares they acquire. Let's delve into this misconception with clarity and precision. Examples like buying '100,000 into a stock and the price of the stock is 1.50' are illustrative of common pitfalls in the stock market.

Is It True You Get 150,000 Shares for 100,000 if the Stock Price is 1.50?

This hypothetical question is flawed, and understanding why is crucial. If you spend 100,000 on a stock priced at 1.50 per share, you would not receive 150,000 shares. In fact, the math is quite simple if you follow a few key steps. The correct calculation would be 100,000 divided by 1.50, which equals 66,666.67 shares.

Breaking Down the Math

To have 150,000 shares at 1.50 per share, you would need to spend:

150,000 * 1.50 225,000

Which means that spending 100,000 would give you:

100,000 / 1.50 66,666.67 shares

Now, considering market fees and commissions, the actual number of shares you acquire might be slightly less than this number. However, this example is still a stark reminder of the importance of understanding the basic principles of stock investments.

Using the Potato Example to Clarify

Let's use a more tangible example to illustrate this further. Imagine you want to buy potatoes at a market where each kilo costs 1.50 dollars. Would spending 100,000 dollars get you 150,000 kilos of potatoes? Of course not! It would get you only:

100,000 / 1.50 66,666.67 kilos of potatoes

The same logic applies to buying shares in the stock market.

Myth or Real Wealth Opportunity?

Some conspiracy theorists might suggest that buying 100,000 worth of potatoes at 1.50 per kilo and selling them at the same price would result in a 50,000 profit, which if repeated endlessly could lead to unimaginable wealth. However, this logic is unsound for several reasons:

Misunderstanding the relationship between price and quantity. Oversimplifying the market and forgetting about supply and demand. Ignoring transaction costs and liquidity constraints. Not accounting for inflation and time value of money.

While the stock market can be profitable, such strategies do not work in reality and are more likely to lead to financial ruin when you lack a deep understanding of the market dynamics.

Conclusion

Understanding the basic principles of stock investments is crucial. Buying 100,000 worth of a stock at 1.50 per share will get you approximately 66,666.67 shares, not 150,000. This example is illustrative of why it's essential to approach the stock market with a rational and informed mindset. Always seek to understand the fundamentals and consult with financial experts or conduct thorough research before making significant investments.