There are many factors to consider before buying a stock, but the sticker price shouldn’t be one of them.
This joke illustrates why:
A market analyst walks into a pizzeria and orders a pizza. When the pie is ready, he’s asked, “Should I cut it into eight or 16 pieces?”
The analyst replies, “I’m starving! You’d better cut it into 16 pieces.”
In both cases, the analyst is going to eat the same amount of pizza, so it doesn’t really matter how many slices he has; the total amount remains the same.
Similarly, a company can choose to issue eight shares or 16 shares. If they issue eight, each one represents a greater portion of the company than if they issue 16. If Company A issues ten shares at $10 each, and Company B issues four for $25 each, the higher price doesn’t mean Company B is a bigger or better company.
Look at market capitalization
A company with a high share price may be intimidating just because the number is large. Market capitalization (the total dollar market value of a company’s outstanding shares) is a better indication of a company’s value.
Take the example of two companies: The share price of Company A is $1000, and there are 50 million shares outstanding. Company B trades at a more comfortable $100 per share and has 500 million shares outstanding. Which company’s share is more valuable, A or B? Well, the total market capitalization of both companies is the same, even though company A’s stock price is higher.
Do individual shares matter?
Stock prices can fluctuate not only in relation to market movements, but a company can change share prices through stock splits, reverse splits, and stock dividends. These changes can significantly impact the stock’s price without affecting the company’s underlying value and fundamentals.
So before you buy a stock, don’t be either put off or encouraged by the sticker price. Look at what percent of the company one share buys. Just as you shouldn’t judge a book by its cover, don’t judge a stock by its share price alone.
To learn more about a stock’s value vs. price, read Profile-Financial.com/PE
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published January 15, 2018. Updated November 2021