Sunday, December 31, 2006

Is Stock Share Price Alone A Good Indicator?

Our members know many people who truly believe that a $10 stock is cheap compared to a $100 stock. That delusive fantasy could not be farther from the truth. As an example, let us assume a case where the two companies have equivalent total earnings but that the company of the $10 stock had 10 times the amount of shares outstanding compared to the company of the $100 stock. That would mean that the $10 stock is actually no cheaper than the $100 stock. Here is an analogy that I hope everyone can relate to: Would you jump for joy if you were given 10 dimes instead of only one dollar bill?

To compare the cheapness or expensiveness of stock from different companies, we must turn our attention to their Price to Earnings (P/E) ratios. Usually companies with greater than average potential command higher P/E ratios than those companies with lower potential.

Saturday, December 30, 2006