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A stock priced at $50 or $100 is
trading at these levels because of a quality that the lower priced
stock does not have. Institutions, such as mutual funds, will not
purchase a stock at $1 based on strict internal rules and fund
guidelines. Stocks move based on vast amounts of support from
institutions that have the buying power to propel prices 100%, 200% or
more in less than 12 months.
Tip!
With this in mind, stock prices should rise with falling interest
rates because it becomes cheaper for companies to finance projects
and operations that are funded through borrowing. Lower borrowing
costs allow higher earnings which increase the perceived value of a
stock.
A quick study of stock market
history will prove that the majority of stocks priced at $2 or less
will be de-listed or bankrupt before they ever give an investor a
triple digit return. High quality stocks are typically representative
of high quality companies that usually have innovative products or
services that are increasing revenues and earnings thus peaking
institutional interest. I have seen more stocks double or triple from
the $20-$50 range than any other price level during the past five
years.
A stock going up 25% in one month's
time is the same whether it is from $5 to $6.25 or $60 to $75. It
happens every year. The novice investor is usually hesitant to buy a
stock that is priced at $50 or more as it looks too expensive to the
untrained eye. What's expensive to an uneducated investor may be a
bargain to an educated investor.
Always buy the stock that
presents the highest probability of success based on both fundamental
and technical analysis. The price should never matter nor
should the lot size. A 25% gain will always be the same whether you
buy a $2 stock with 5000 shares or a $100 stock with 100 shares.
I agree that the chances for a quick
25% gain on a $5 stock seems greater than a 25% gain for a $100 stock
but it's also much greater for a 25% slide on the $5 stock than it is
for $100 stock. Your downside protection is limited with a low priced
stock as it can move quickly and present you with an illiquid position
that a higher quality stock may not present.
Here is a very basic example:
If you buy a $2 stock and it gains $1
in two months, you now have a 50% gain. But, if the stock falls $1 in
two weeks, you now have a huge 50% loss in your portfolio, a number
that usually devastates most traders.
If you buy a $60 stock and it gains
$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 a
chance to sell the stock within 10% of your purchase price and prevent
further loss and devastation to your portfolio. You, the investor will
most likely be able to spot negative action or red flags and get out
quickly enough without the sudden 50% drop that the lower priced stock
could blindside you with.
Don't buy a stock based on low prices
or a quantity of shares. 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 number of stocks that have
gone on to tremendous gains from the $20, $30 and $40+ levels. |
