Why A Stock's Price Per Share Means Nothing!

One of the big differences between the novice investor and the professional investor is what they choose to focus on and

value.

For instance, it's common for the novice investor to get fixated on the "price per share" of a stock. At first glance, it seems reasonable to do so. After all, if a $1 stock goes up $1 per share then the stock has doubled and gained 100% in value. However, if a $50 stock gains $1 per share in value, it only gains 2% in value.

But focusing on the price-per-share is not wise. That's only focusing on how many slices are in the pie. You see, I can take the same sized pie and cut it into 2 pieces or 8 pieces or 20 pieces but it doesn't change the size of the pie nor the value of the pie.

It's essentially the same for companies. The stock price multiplied by the number of shares outstanding equals its market capitalization (it's size and worth).

Some companies will have less shares outstanding than others. They'll have cut the pie into fewer pieces than others have chosen to do.

So "price per share" doesn't change the value of the company and it's a horrible way to judge whether you should buy the stock or not...and it's certainly a horrendous way to determine whether a stock is cheap or expensive.

By the way, those that believe a cheap priced stock has an advantage (appreciation wise or percentage wise) over a higher priced stock would be mistaken.

Some of the biggest gains (dollar wise AND percentage wise) that we've had in previous portfolios that I've run were from the most expensive priced stocks (on a per-share basis) that we held.

Yet people think...yeah, but if I buy this $5 stock, I can get 10,000 shares of it and if it goes up just a little bit, it's going to be far better for me than if I buy this $50 and only get to own 1,000 shares. But once again, that's a novice mistake.

Take for instance, the price appreciation of Apple...it's had some of the best appreciation, percentage wise and yet it's historically been an expensive priced stock (on a per-share basis)

If you want to see an even bigger (extreme) example of this, you have to look no further than Warren Buffett's company, Berkshire Hathaway. He's never believed in stock splits because stock splits don't create any value. So he's never split his stock (which would create more shares or more slices of the same pie).

His stock recently hit $300,000 per share! Yes, it's presently overpriced and due for a massive correction just like the overall market. BUT this very expensive stock (on a price-per-share basis) has outperformed the market overall.

Additionally, I've seen $5 stocks that were expensive and $50 stocks that were cheap. How so? Because when you looked at the stock's price relative to its earnings (which is the smart way to look at it), the $5 stock might have a price-to-earnings ratio (P/E) of 50 and the $50 stock might have a P/E of 8. If so, that means the $50 stock is a value and the $5 stock is VERY overvalued fundamentally.

So when looking at a company, don't spend any mental energy at all on how much a stock is per-share but by more important metrics like how the stock is priced relative to its earnings.

God bless!

Comments
No. 1-9
Sean Hyman
Sean Hyman

Editor

Awesome! Thx Russ.

Russ
Russ

Sean, I appreciate your explanation on stock price. I talk about this topic on a regular basis with family and friends. It's about the value of the stock and potential gain, not on the stock price. I plan to use your examples as I continue to explain this widely misunderstood concept. Thank you for the clear explanation!

Sean Hyman
Sean Hyman

Editor

Thank you!

Sean Hyman
Sean Hyman

Editor

Yes, those are prime examples.

1mufasa
1mufasa

When I started investing with the ultimate wealth report back in July of 2013 I could only afford to buy 2 shares of apple at 433.00 each. But in 5 months I made 35% profit. Buying cig at 2 to 3 dollars I was able to get a lot of shares but it took about 2 years to make the same money. Thanks Sean, you have taught me so much in the last 4 years.

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