A Common Misconception about Stock Prices

I cringe every clip I hear a novitiate investor state me that they only purchase low priced pillory because they offer higher potentiality gains. A common form I hear is “I like to purchase $1 and $2 pillory because they can duplicate easily and I will do a 100% profit”.

My reaction is to always allow these people cognize that “stocks are priced low for a reason, just as pillory 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 anticipate to purchase a Mercedes for the terms of a Pinto. No punning directed towards Pinto car proprietors 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 degree because it is only deserving this much in investor’s eyes. A stock priced at $50 or $100 is trading at these degrees because of a quality that the lower priced stock makes not have. Institutions, such as as common funds, will not purchase a stock at $1 based on hard-and-fast internal regulations and monetary fund guidelines. Pillory move based on huge amounts of support from establishments that have got the purchasing powerfulness to impel terms 100%, 200% Oregon more than in less than 12 months.

A quick survey of stock market history volition turn out that the bulk of pillory priced at $2 or less will be de-listed or bankrupt before they ever give an investor a ternary figure return. High quality pillory are typically representative of high quality companies that usually have got advanced merchandises or services that are increasing grosses and earnings thus peaking institutional interest. I have got seen more than pillory double or ternary from the $20-$50 range than any other terms degree during the past five years.

A stock going up 25% inch one month’s clip is the same whether it is from $5 to $6.25 or $60 to $75. It haps every year. The novitiate investor is usually hesitating to purchase a stock that is priced at $50 or more than as it looks too expensive to the untrained eye. What’s expensive to an uneducated investor may be a deal to an educated investor.

Always bargain the stock that nowadays the highest chance of success based on both cardinal and technical analysis. The terms should never matter nor should the batch size. A 25% addition will always be the same whether you purchase a $2 stock with 5000 shares or a $100 stock with 100 shares.

I hold that the opportunities for a quick 25% addition on a $5 stock looks greater than a 25% addition for a $100 stock but it's also much greater for a 25% microscope slide on the $5 stock than it is for $100 stock. Your downside protection is limited with a low priced stock as it can travel quickly and present you with an illiquid place that a higher quality stock may not present.

Here is a very basic example:

If you purchase a $2 stock and it derives $1 in two months, you now have got a 50% gain. But, if the stock falls $1 in two weeks, you now have got got a huge 50% loss in your portfolio, a number that usually devastates most traders.

If you purchase a $60 stock and it derives $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 got a opportunity to sell the stock within 10% of your purchase terms and forestall additional loss and devastation to your portfolio. You, the investor will most likely be able to descry negative action or reddish flags and get out quickly adequate without the sudden 50% driblet that the lower priced stock could blindside you with.

Don’t bargain a stock based on low terms or a measure of shares. Always bargain a stock based on quality looking towards the basics and technicals and the terms and volume action. Survey our archives and expression at the number of pillory that have got gone on to enormous additions from the $20, $30 and $40+ levels.