Making Money From Shares - A Lesson About Share Prices And Valuations
Lots of people want to make money from stock market investing
, but some people are completely clueless when they first start thinking about investing their own money. One of the most basic mistakes relates to the actual share price of a company.
It may sound completely ridiculous but some people will look at the share price of some of the large-cap stocks and make investment decisions based on how high or low it is. The goal is to buy low and sell high, so many people are automatically put off investing in shares with really high prices, and will instead look for stocks that are a lot 'cheaper' because they mistakenly believe that there is more scope for the price to go up in the future.
So if they were looking at the FTSE 100,for instance, they would probably disregard companies such as BHP Billiton, AstraZeneca and Rio Tinto because they are all priced in the XXXXp range. They may instead choose to look at companies such as Lloyds TSB and Vodafone that are just 65p and 165p respectively.
However this is a silly way of thinking because a stock whose share price is in the thousands could rise just as much as one in the hundreds with regard to large-cap stocks. The price per share doesn't tell you anything about how cheap or expensive a stock is. It is just a way of putting a price on the company's stock based on earnings per share.
For example if a company has yearly earnings of 1000p per share, then it could easily be valued at 10000p, putting it on a P/E ratio of 10, for instance. Similarly you could have a similar company in the same sector that has earnings of 10p per share but is currently trading at 200p. This would put it on a P/E ratio of 20, so it is effectively twice as expensive as the one with the much higher share price.
The value of a company, ie it's market capitalisation, is based on the number of shares in issue multiplied by the current price. So in reality it doesn't really matter what the price per share is. Just look at Vodafone as a classic example. Their shares are priced at just 165p at the time of writing and yet they are the third biggest listed company in the UK in terms of market capitalisation.
So the point is that the share price of a stock does not reflect the value of a company in any way, and it certainly shouldn't affect your investment decisions. Ultimately you should look at price/earnings ratios and other financial data as well as future forecasts in order to make some good profits from investing.
by: John Robertson
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