Posted On: 8/10/2015 4:22 PM
Reason #1! Investors Don’t Like to Purchase Less than 100 Shares of Stock
Most investors purchase lots of 100 when adding to their portfolio since stocks are priced in 100 lots. So, over the years, investors have been conditioned to buy 100 shares rather than, for example, owning only 10 or 15 shares. Let’s look at Google stock when it first came to market. When a company first goes public it is called an Initial Public Offering (IPO). The stock was priced at $85 per share but actually opened at $100. One hundred shares would have cost $10,000 and many investors couldn’t have or wouldn’t have paid that much for one stock, especially a stock that just went public. However, an investor who purchased only 30 shares of Google for $3000 would have gained over 1000% in just 10 years. The stock split in 2014 and two classes of shares were created, Google A (GOOGL) and Google C (GOOG). Investors who owned Google received both classes of stock. Now as an investor you can purchase either one individually but be aware that shareholders of “Class C” cannot vote. One of the best stocks to buy at the time was definitely Google.
Reason #2! When Asking How To Invest In Stocks, Keep In Mind That A High Stock Price Signals to Investors that the Stock is Overvalued.
Let’s look at a stock to buy even today. For example, Apple (APPL), is one of the most talked about stocks on a daily basis. I don’t think a day goes by that an analyst doesn’t comment on whether Apple stock is a buy or sell. Prior to Apple stock split on June 9, 2014, the stock traded at $645.57. Many investors who hadn’t purchased Apple stock at $200, $300 or even $400 because they thought it was “overvalued” certainly wouldn’t buy it as the stock price moved higher. As a word of caution when determining how to invest in stocks, sometimes stock prices do get ahead of the fundamentals (the value of the company if it were to be liquidated) and the stock will correct to a lower price. That is why I repeatedly advise investors to research a stock they intend to purchase.
On June 9, 2014, Apple stock split 7 to 1; so, as an investor, if you owned 100 shares of Apple, you now own 700 and the stock price reflected the split. Now instead of $645.57 per share, it could be purchased for about $93. At the lower price, more investors could purchase it and the stock now didn’t seem expensive.
Reason #3! Investing in Lower Price Stocks Makes them Less Risky
Penny stocks are the cheapest stocks you can purchase. Most of them sell for under $5 and the attraction to the investor is that you can load up on them. An investor can purchase 1000 shares at $5 each and if the stock price goes to $10, you have doubled your investment. But the question you have to ask is “Why is the stock price so low?” If you have been a long term investor, you are aware of two stock names that no longer trade: Enron and WorldCom. Both companies eventually went bankrupt. WorldCom was the largest bankruptcy in history in 2002; Enron had filed in 2001. Before the companies declared bankruptcy, the stock prices continued to slide until you could purchase either of them for less than $1.
If you are a new investor or a seasoned one, these three principals of investing can help you determine why you are purchasing a stock and how to invest in stocks for the future.
For advice on how to invest in stocks that’s specific for your portfolio, let’s talk.
