Ask Colin

I find it confusing to see that one share is less than $5.00 and the other is above $30.00. Should the price of a stock have any bearing on your decisions?

The short answer is no.

 

The price of a share in theory is the total value of the company divided by the number of shares. So, if one company is worth $100m and has 100m shares, its price will be $1 per share. If a second company is worth $100m also, but has only 10m shares, its price will be $10 per share. All other things being equal, they are the same thing.

 

The difference in price should have absolutely no bearing on your decision. Instead you should look at per share ratios that enable you to make valid comparisons between the companies. The direction and strength of the trend is also important in your decision.

 

So, if you are thinking that, for the type of company that you are considering, the relative cost of the assets is important, you might consider the price to NTA ratio. If one company’s price is 70c for every $1 of assets it might be a better buy than another company whose price is $1.30 for each $1 of assets.

Keyword: