Fight The Allure of Low Prices
The advice I hear most often is to stay away from high-priced mutual funds and go for the low cost index funds instead. The logic behind this is that you pay for fund management with no guarantee that the fund will beat its index.
Extending this logic, one might think it would make sense to buy "cheap" stocks. Tons of equities are under $5.00 while some, which may not perform better in the long run, can cost $400 or even $90,000. So if you buy the cheaper stocks, you're getting a bargain, right?
Not really, according to this article from Investor's Business Daily. In fact, Nacy Gondo, the author of the article, suggests avoiding cheap stocks. Here are some of her reasons:
Cheap stocks often end up at fire-sale prices for a reason. They may keep missing profit or sales views. They might be the target of a lawsuit or probe. Or they could hail from an ailing industry. Another risk with penny stocks: lower trading volume. Mutual funds and other big investors are less likely to buy cheap stocks, since they can't take big stakes without drastically moving the stock price.
It seems to me that when it comes to stocks, the absolute price of a share should not be the main factor when deciding what companies are the best for investing. A better indicator of "cheap vs. expensive" would be the price-to-earnings (P/E) ratio and how it compares among similar companies. A lower relative P/E ratio likely denotes the better buy, barring any abdormal circumstances.
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This is an extremely flawed argument. You appear to be comparing the price of fund management with the price of a stock.
First of all stock price by itself at a single point in time means almost nothing. Looking at the history of that price over time can tell you something. Multiplying that price by the number of shares outstanding to obtain the market cap and then comparing that with your opinion of the company's value can tell you something. Dividing the price by earnings and comparing that with other's in the same industry can tell you something.
The only thing that price at a single point of time can tell you is a possible glimpse into its past. A stock priced well above the avg is more likely to have grown to that point. Stocks below the avg are may have lost value to that point. This is far from a rule as a $1 stock may have grown to $5 while a $100 stock may have shrunk to $50.
