Ignoring Share Price

October 6, 2008 at 7:33 am · Filed Under Educational 

Often times newbies lose interest when they see a stock with a high share price because they like owning more shares of a cheaper stock.  I can’t count the number of times I’ve heard someone comment about how a $200/share stock is too expensive for them, but a $10/share stock is in their price range.  They’re probably thinking that if they own 1000 shares of XYZ instead of just 10 shares of ABC, they’ll be able to make 100 times more money.  But would you rather have 10 shares of BRKA (currently trading at $140,000/share) or 1000 shares of STEM (currently trading at $1/share)? 

Does a stock with a high share price have less potential for growth though?  At one point, BRKA was less than $75.  As it passed $100 some people probably thought it was expensive (this was in the 1970’s).  As it passed $200 the next year, even more people probably started to think that.  Passing $400 a couple years later must have been ridiculous at the time, but going over $1000 a few years later is insane, even by today’s standards.  I could do this all the way up to $140,000 a share in 2008, but I think you get the point. 

Looking at things like how much a stock earns per share (aka the EPS) and market cap are much more important in determining if a stock is "cheap" or "expensive" than the share price.  If you have x shares at a stock price of y, your total value of the position is x times y and it doesn’t matter what the values of x and y are individually.  The thing that matters is the total value and how much percentage is gained or lost overall.

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