Why Should Not You Buy Shares At Share Prices

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Time for an Investment Pope Quiz If you have $ 1,000 for investment and you have an option between the ABC 100 shares per share or $ 5 for the $ XYZ company, who do you choose? Many investors will go for one hundred shares of ABC because the share price is low. They argue that “$ 10 stock is cheap,” the price of $ 125 per share for other stocks is very risky and is rich for my taste. “

If you agree with this argument, then you are in shock. The truth is that there is not enough information to determine which stock you should buy based on the stock’s price. After the analysis, you can see carefully, $ 125 stock is cheaper than the $ 10 stock! how? Let’s look a closer.

An experimental example of evaluating the share price

Each part of the shares in your portfolio represents incomplete ownership in the business. In 2001, Coca-Cola made a profit of $ 3.696 billion Soft drink giant had around 2.5 billion shares

This means that it represents the ownership of one or two billion shares of each stock business (or 0.0000000004%) and authorizes $ 1.48 ($ 2.5 billion $ 3.696 profit = $ 1.48 profit) to benefit you .

Suppose that the company shares $ 50 per share and the Coca-Cola Board of Directors believes that it is a little valuable for the average investor. As a result, they declare stock split. If Coco has announced a 2-1 stock split, the company will double the number of outstanding shares (in this case, the number of shares will increase from 2.5 billion to 5 billion).

The company will issue a stock for every pre owned portion of the investor, by dividing the share price in the distribution (i.e., if your portfolio has 100 shares on $ 50 on Monday, then split it, you have 200 shares per share ).

Each share is now just 1 / 5,000,000,000 or 0.0000000002% of the value of the company. The fact is that each share represents half ownership before sharing, it only gets half the profit or $ 0.74.

Should the investor ask himself that it is better: pay $ 50 to $ 1.48 in earnings, or pay $ 25 for $ 0.74 in earnings? Do not! Finally, the investor comes in exactly the same way.

This transaction is equivalent to $ 2 to $ 50 people with $ 100 bills. Although now it seems that he has more money, his financial reality has not changed. Waiting for stock split before buying a company’s shares is inconsistent.

Related examples related to stock prices for price

It all makes a very important point: the price of the stock is nothing. It is the price of shares in respect of earnings and net assets, which determines whether a stock is high or low. Returning to the question asked at the beginning of this article, the following assumes:

Company ABC traded on $ 10 per share and its EPS is $ 0.15.
Company XYZ is trading at $ 125 per share and its EPS is $ 35.

ABC’s stock trading at 67 earnings ratio (P / E ratio) ($ 0.15 EPS = $ 66.67 per share). On the other hand, XYZ is trading at $ 3.57 P / E (125 shares per 125 shares = 3.57 divided by P / E).

In other words, you are paying $ 66.67 for every $ 1 in earnings from ABC, while the company XYZ gives you $ 1 in earning the same $ 3.57. Everything else is the same, until ABC does not expand quickly, many high fluctuations are inappropriate.

Some companies do not have any policy to divest their shares, which provide a stock price to low-known investors with total valuation. For example, the Washington Post recently shared between $ 500 and $ 700 with $ 22 to $ EPS. Berkshire Hathaway has traded as much as $ 2000 to $ 70,000 per share. Therefore, Berkshire Hathaway, if it was shared $ 45,000 per share, then Wal-Mart could be better than $ 70 per share. The share price is completely related.

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