A Common Misconception about Stock Prices

I cringe every time I hear a novice investor inform me that they only buy low priced stocks because they offer greater potential profits. A frequent stage I hear is”I love to buy $1 and $2 shares as they can double easily and I’ll make a 100% gain”.

My response is to always let these folks 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 not provided at a discount. When I’m in the market for a vehicle, I do not expect to purchase a Mercedes for the price of a Pinto. No pun led towards Pinto car owners like I am simply providing an example.

Stocks are valued at their current market value or perceived value under the present situations. A $1.00 stock is trading at this level since it’s only worth this much in investor’s eyes. A stock priced at $50 or $100 is trading at these levels due to a quality which the lower priced inventory doesn’t have. Institutions, such as mutual funds, won’t buy a stock at $1 based on rigorous internal rules and finance guidelines. Stocks move based on enormous amounts of support from institutions which have the purchasing power to propel costs 100%, 200% or more in under 12 months.

A fast study of stock exchange history will prove that nearly all stocks priced at $2 or less will be de-listed or bankrupt before they give an investor a triple digit return. Premium quality stocks are usually representative of top quality companies which normally have advanced products or services which are increasing revenues and earnings thus peaking institutional interest. I’ve seen more shares double or triple from the $20-$50 range than any other price level during the previous five decades.

A stock going up 25 percent in 1 month’s time is the same if it’s from $5 to $6.25 or $60 to $75. It happens each year. The novice investor is generally hesitant to get a stock that’s priced at $50 or more as it seems too expensive to the untrained eye. What is costly to an uneducated investor might be a deal to an educated investor.
Always purchase the stock that presents the maximum probability of success based on both technical and fundamental analysis. The purchase price shouldn’t matter nor if the lot size. A 25% profit will always be exactly the same if you purchase a $2 stock with 5000 stocks or a $100 stock with 100 shares.

I agree that the odds for a quick 25% profit on a $5 stock seems greater than a 25% profit to get a $100 stock but it’s also much greater for a 25% slip on the $5 stock than it is for $100 stock. Your downside protection is restricted with a low priced stock as it can move fast and give you an illiquid position a higher quality inventory may not present.

This is a very simple example:
If you get a $2 stock and it increases $1 in 2 months, you finally have a 50% profit. Butif the stock falls $1 in two weeks, you now have a substantial 50% reduction in your portfolio, a number that typically devastates most traders.

If you get a $60 stock and it increases $30 in 2 months, you’ll have a 50% profit. But if the stock starts to drop rapidly and is now down $10 in a couple of days, you still have a opportunity to sell the stock within 10% of your purchase price and prevent additional loss and devastation to your portfolio. You, the investor will almost certainly be able to spot negative actions or red flags and get out fast enough with no sudden 50% fall the lower priced inventory could blindside you with.

Do not buy a stock based on reduced rates or a quantity of stocks. 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 amount of shares that have gone on to enormous gains in the $20, $30 and $40+ levels.