That’s right. The fact remains:
Stock price does not matter.
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]