Stock price does not matter

Shout 2

Accountinator! Say it isn't true!

That’s right. The fact remains:

Stock price does not matter.

Huh?

Many people think that the higher a stock price, the more “expensive” a stock.  The lower the stock price, the “cheaper” a stock.  Right now, as I write this (on April 19, 2012), Apple stock is trading at $595.55 a share.  Google is at $606.66 a share.  Berkshire Hathaway (Class A) is at $118,700 a share.  On the other hand, Research in Motion is at $13.55.  Nokia is at $3.86.  Qiao Xing Mobile Communication is at 88 cents.  It just doesn’t matter.

Judging that a stock priced over $100 is “expensive,” while a stock priced below $20 or even below $1 is “cheap,” is a dangerously simplistic approach to investing.  In fact, from an investor’s point of view, Apple stock ($595.55 a share today) looks “cheap,” while Nokia ($3.86) is “expensive.”

You see, stock shares are a way of splitting up a company into equal pieces that can be sold to shareholders.  The actual number of shares issued is actually quite arbitrary.  Therefore, you may have a small company split up into many many shares; this would result in a “low” price because each share is pretty small.  On the other hand, you may have a large company split up into very few shares; this would result in a “high” price because each share is very large.  Think of a large pizza pie split into two slices, and a small pizza pie split into 32 slices.  Would you describe the two large slices each as “expensive” and the 32 small slices each as “cheap?”

Therefore, to truly judge whether a stock is “expensive” or “cheap,” don’t just look at the stock price.  Consider what you’re getting for your money.  How large a share of the company does your stock actually represent?  Next I will show you how to determine that Apple is actually quite cheap, and Dell is actually exorbitantly expensive.

[Image: Shout 2 by andrew_mc_d, on Flickr]

6 thoughts on “Stock price does not matter

  1. Mark,

    As a long-time investor, I couldn’t agree more. Price is all relative and many factors are at play: dividends, stock splits, PE ratio, alpha and beta to name a few. You might also have noted that not so long ago, Apple was trading at around $4.00 per share. Was it cheap then? Yes, if one looked into their development pipeline. Same holds for Worldcom and Enron. Looked like good deals at the time, but underlying issues demonstrated otherwise…

    Excellent post. Thanks.

  2. The website is getting better and better. The little girl is adorable. Consider the dividends or lack of.
    dividends could mean they are making money or they could be losing money because of the dividends
    given out. Also a high price for a stock could mean the officers do not want to pay tax.

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