A Common Misconception about Stock Prices
I cringe every time I hear a novice investor tell me that they only purchase low priced stocks because they offer higher potential gains. A common phase I hear is "I like to buy $1 and $2 stocks because they can double easily and I will make a 100% profit".
My reaction is to always let these people know that "stocks are priced low for a reason, just as stocks priced high are there for a reason".
Like anything in life, quality is never offered at a discount. When I am in the market for a car, I don't expect to purchase a Mercedes for the price of a Pinto. No pun directed towards Pinto car owners as I am just providing an example.
Stocks are valued at their current market value or perceived value under the current situations. A $1.00 stock is trading at this level because it is only worth this much in investor's eyes. A stock priced at $50 or $100 is trading at these levels because of a quality that the lower priced stock does not have. Institutions, such as mutual funds, will not purchase a stock at $1 based on strict internal rules and fund guidelines. Stocks move based on vast amounts of support from institutions that have the buying power to propel prices 100%, 200% or more in less than 12 months.
A quick study of stock market history will prove that the majority of stocks priced at $2 or less will be de-listed or bankrupt before they ever give an investor a triple digit return. High quality stocks are typically representative of high quality companies that usually have innovative products or services that are increasing revenues and earnings thus peaking institutional interest. I have seen more stocks double or triple from the $20-$50 range than any other price level during the past five years.
A stock going up 25% in one month's time is the same whether it is from $5 to $6.25 or $60 to $75. It happens every year. The novice investor is usually hesitant to buy a stock that is priced at $50 or more as it looks too expensive to the untrained eye. What's expensive to an uneducated investor may be a bargain to an educated investor.
Always buy the stock that presents the highest probability of success based on both fundamental and technical analysis. The price should never matter nor should the lot size. A 25% gain will always be the same whether you buy a $2 stock with 5000 shares or a $100 stock with 100 shares.
I agree that the chances for a quick 25% gain on a $5 stock seems greater than a 25% gain for a $100 stock but it's also much greater for a 25% slide on the $5 stock than it is for $100 stock. Your downside protection is limited with a low priced stock as it can move quickly and present you with an illiquid position that a higher quality stock may not present.
Here is a very basic example:
If you buy a $2 stock and it gains $1 in two months, you now have a 50% gain. But, if the stock falls $1 in two weeks, you now have a huge 50% loss in your portfolio, a number that usually devastates most traders.
If you buy a $60 stock and it gains $30 in two months, you will have a 50% gain. Now, if the stock starts to fall rapidly and is now down $10 in a few days, you still have a chance to sell the stock within 10% of your purchase price and prevent further loss and devastation to your portfolio. You, the investor will most likely be able to spot negative action or red flags and get out quickly enough without the sudden 50% drop that the lower priced stock could blindside you with.
Don't buy a stock based on low prices or a quantity of shares. Always buy a stock based on quality looking towards the fundamentals and technicals and the price and volume action. Study our archives and look at the number of stocks that have gone on to tremendous gains from the $20, $30 and $40+ levels.
Chris Perruna - http://www.marketstockwatch.com
Chris is the founder and CEO of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don't stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
The 401(K): How The Insider Has Stolen Your Retirement!
Mutual funds were moderately successful in creating a presence in the stock market until the advent of the investment retirement account and in particular the 401(k). Corporate insiders persuaded the federal government to allow for the 401(k) in lieu of offering employees the traditional pension.
Peer Groups
Whenever I see mutual fund comparisons in the trade publications and in the financial section of the newspaper they almost always mention a specific fund and tell you how good it is in relation to its peer group. A peer group is a specialized sector of mutual funds that all invest in about the same type of stocks or areas of the world or size of companies or some such categorization.
The Stock Market Investor's Worst Enemy
Every stock market investor faces one primal enemy. An enemy so perverse, it will drive thousands of investors from the stock market through its ability to defeat even the most practiced investment strategy.
Analyst Reports
When you become interested in a stock or mutual fund you can call your broker and he will send you reports on how the company is doing, what their management is like and what might be the projected earnings for the company and how the industry is doing. Great information.
Roller Coaster
I love roller coasters. The steeper the better.
Expense Ratios
Mutual funds and brokers are always preaching not to buy any fund with a high expense ratio. That is the annual costs of the fund to pay for trading of stocks within their portfolio, salaries, rent, telephone, analysts, etc.
Dont Fight The Fed
One of the great truisms of Wall Street is "Don't fight the Fed". For the long term investors this has resulted in greater profits.
Understanding Stock Market Indexes
A stock market index is a statistical measure of changes in the securities markets. An index represents a portfolio of securities traded on the market that is considered to be reasonably representative of the market as a whole.
Pamplona, the Wild Investment Bulls
You remember (they show it on TV every year) the running of the wild bulls in Pamplona, Spain. Some of the nuttier people get out their capes and stand in their path as they come roaring down the street.
Municipal Bonds
Because there are so many stocks that are NOT paying dividends and also going down people are looking for a safe investment that will pay a decent return and also won't lose money. Slowly folks are beginning to think about bonds of which there are all kinds.
Buy and Hold: How to Perpetuate Your Investment Losses
A recent cartoon in my daily newspaper showed two guys sitting in a bar. One is saying to the other: "I did learn something from my broker.
Low Expense Ratio
One of the big advertising kicks today from mutual funds is to tell how low their expense ratio is and that you will make a great deal more money if you buy and hold with them. Partly true, but that is not the whole story.
Inertia Syndrome
When it comes to buying a stock or mutual fund most people act pretty quickly. There are some who will take the time to get a report from Morningstar (it is worthless) or get reports from their broker (also worthless) or even do a search on the Internet (if you know what you are doing).
Its A Duck
If it walks like a duck, quacks like a duck and looks like a duck it must be a duck.In the stock market if there are more buyers than sellers, more stocks are going up than down and the trend of the general market is higher it must be a bull.
Stock Analysis
I receive emails from Morningstar. This company provides statistics and analysis of just about every publicly traded stock company you can think of as well as voluminous information on mutual funds around the world.
Your Job
There are so many kinds of work that needs to be done and you are doing one of those jobs right now - unless you are one of those two and a half million that have been laid off during the past 3 years. The press continues to blame China and India for stealing away all these forms of employment, but they don't have it right.
What Are You Waiting For?
Do you own any mutual funds? In an IRA or 401K or wherever. Privately or at work.
Will the Stock Market be Lower in October?
The stock market often closes a week in the middle of a "perceived primary-trend range." SPX closed at about 1,234 Fri, which is between a multi-year Fibonacci level at 1,253 (i.
The Shadow
The Shadow knows. There used to be a radio program called The Shadow where the hero, Lamont Cranston, the Shadow, would overcome the shadowy forces of doom by clouding the vision of those around him.
Trend Trading - Trading Stocks Using Technical Analysis and Swing Trading Strategies
Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not.