How to Choose a High-Value Stock Option

October 26, 2019

How do you know whether a stock is good value, or whether you’re making the wrong decision with your money? It’s not always easy, as you can’t always trust the price of a stock to tell you how valuable it is. For instance, just because you had the opportunity to buy Tesla stock for a low price doesn’t mean that the shares you received would be any less valuable. Provided the stocks were genuine, it just means that you’re taking advantage of a unique offer. However, most people will see a low-priced stock and automatically assume that it’s not worth buying.

Despite huge amounts of information now available for investors to help them make the right purchasing and selling decisions, there are still a lot of people in the market that make their decisions based on dollar price alone. The notion that a high dollar price means high value can lead investors down the wrong path when it comes to using their hard-earned money.

Understanding Price vs Value

The cheapest stocks aren’t always the best option for investors. Some of the least expensive assets, known as penny stocks, can also be the riskiest – particularly if they come from a young company that hasn’t spent much time in the industry yet. Small companies can quickly gain and lose value at break-neck speed, leading to plenty of potential losses.

However, cheap stocks aren’t all as risky as they seem. Most people believe that they can assess a stock’s value by looking at its price. However, this is only true to a certain extent. A stock’s price will only tell you the current market value of a company. However, the intrinsic value of a company shows you its actual worth. Intrinsic value highlights information on both tangible and intangible elements of value.

For instance, to calculate a company’s intrinsic value, you would look at not just it’s trading price, but also fundamental analysis of its performance over time, and the background it has in the industry. You might even consider the financial statements of a company over the last few years to see if it’s likely to grow in size in the future.

When Does Price Matter?

Despite common belief, price is far from the only factor worth considering when you’re looking at the right stocks to buy for your future investments. However, that doesn’t mean you should ignore the price of a company’s shares entirely. Remember that share price can sometimes have a big impact on a company. For instance, companies might raise cash through equity or debt, and in that case – a more expensive business wouldn’t necessarily be a more valuable one.

When you start trading stocks, it’s important to give yourself time to understand what actually equates to value for the shares that you’re interested in, and what you shouldn’t give too much weight to. Look at the price of the companies that you’re interested in trading with, but don’t forget to examine their background, the sentiment around the business, and other economic factors too. There’s more to successful trading than sticker price alone.

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