Price of a Stock

Oct 17, 2007 -

The reason companies split stocks is to make their stocks appear inexpensive. If you own two shares of ABC and the company decides to split the stocks, you now own four shares of ABC. Each share costs you $5.00. Whether you have two shares before the split or four shares after the split, the total value of your stocks remain the same ($10). Splitting a stock increases the number of outstanding shares, which increases the liquidity of the stock. Ultimately this results in the bid/ask spread being different… yada..yada…These are the main reasons for a stock split.

As an investor, you shouldn’t let whether a stock appears to be “expensive or inexpensive” (in real value terms) affect if we buy a stock or not. What I mean is, just because one share is trading at $100, it doesn’t make its overvalued. Take GOOG for example, many people believed it was trading too high at $200, $300, $400, and now it’s trading upwards to $650. Similarly a stock trading at $1.00 is not necessarily inexpensive. Oftentimes traders won’t take a trade like GOOG because it’s trading so high. Then they end up buying junk stocks at $1 a share hoping they somehow sky rocket.

It’s better to buy a stock you know has a fairly good chance of going up in value than blindly buying cheap (monetary value) stocks and hoping that they go up. When I first started trading stocks, I took the idiot approach and bought cheap stocks instead of quality stocks. I ended up getting burned many times.

1 comments :

Nick M. H. said...

Kevin,

So true. Many people do not realize that the stocks actual trading dollar value is not a true indicator of whether it is expensive or not. You are right about cheap stocks. Cheap stocks are usually cheap for a reason and it is usually not a good one. Still, as a trade (and if you are careful), there is money to be made in stocks of all prices, even the low priced varieties.

 
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