You shouldn't, as the adage goes, "judge a book by its cover." Don't judge a stock by its share price is another timeless investment adage. It's a common misconception that a stock with a low dollar price is inexpensive, whereas one with a higher price is quite costly.

In reality, the price of a stock reveals very little about its true worth. Plus, it doesn't indicate anything about the stock's future performance.

Comparing Stock Market Value with Stock Price Penny stocks are also the cheapest as the riskiest equities get called. While a stock that doubles in price from $10 to $20 has a good chance of doubling again to $40, one that falls from $40 to $4 has a good chance of dropping to $0. The share price of a stock is only meaningful when considered in conjunction with several other variables.

Choose a date of purchase.

It may seem obvious at first that some of these factors are important. A corporation has developed a revolutionary new product or service. Another business is cutting costs by eliminating jobs and eliminating departments. What company shares do you want to own someday?

There's a chance that you'll be amazed. When possible, one should look deeper into a topic. It's unclear whether or not the firm changing the game has any plans to expand upon its current popularity. The value of that revolutionary product has already been factored into market prices. It better be working on something worthwhile.

A successful streamlining of the company's operations could be the key to its revival if its cost-cutting measures are successful. It's possible the herd left too quickly. The objective is to find undervalued equities whose current prices are too low relative to their intrinsic worth.

You Can Learn From the Price

Therefore, the price is the amount the stock is currently trading or the amount a buyer and a seller have settled on for the transaction. The stock price rises when there are more buyers than sellers. A falling price results from a greater number of sellers than buyers.

On the other hand, a company's intrinsic value is its true monetary worth. These include fundamental analysis insights as well as more abstract elements. An investor can learn about a company and its worth through research. The public financial statements of the company contain all of the relevant data. Most online brokers provide summaries and analyses of such data from various sources. Consider the evidence.

When Cost Is Crucial

Businesses can acquire capital by issuing shares or bonds. The cost of debt is averaged with the cost of equity to arrive at the weighted average cost of capital (WACC). Only concerning its growth prospects can a stock be considered cheap or expensive (or lack of it).

When a company's share price drops, it raises its cost of equity, which in turn raises its weighted average cost of capital. Capital-intensive businesses, such as banks, are particularly vulnerable to sudden increases in the cost of capital, which can force them to shut down.

Hold Your Horses on Price

Due to its prominence in the financial media, investors frequently make the mistake of focusing solely on the stock price. It is context-dependent. Company A, with a market cap of $100 billion, and Company B, with a market cap of $1 billion and 100 million shares, will have a share price of $10. In contrast, Company A is worth 100 more than Company B.

Individuals starting to build their investment portfolios may balk at a stock's $100 per share price. Perhaps they believe a stock trading at $5 has a better chance of doubling than one trading at $100.

The stock priced at $5 may be grossly overvalued, while the stock priced at $100 may be grossly undervalued. While the converse is possible, it is important to remember that stock price is not necessarily indicative of value.

Compared to individual stock prices, a company's market capitalization provides a more accurate picture of the stock's worth. Market capitalization (or simply "cap") is a number that appears next to the price of every stock.

What You Need to Know About Market Cap and Share Price

Separate and identifiable pieces of a company are created when stocks are split into shares. The investors then acquire a stake in the business equal to their purchase of shares. There is a wide range of variation in the actual number of shares outstanding among publicly traded companies.

Stock splits and reverses are tools corporations use to manage the supply of their shares and the demand from investors. Companies will sometimes implement stock splits to appeal to the emotions of investors.