A $3 stock vs. a $30 stock?

[Blakamo]

Quick and possibly very simple question.

What is the incentive to investing in a share worth $30 which only fluctuates by a dollar or two (max) vs in a share worth $3 which fluctuates as much as 30 cents to a dollar at times.

Wouldn't the returns be more dear if you invested in the $3 share, and made the right call? I'm wondering what the difference is.

Thanks for your answers.

 

[dutchie]

So your saying a 10% return is better than a 6.7% return. If so you have answered your own question.

Always look at the percentages (not the money value).

 

[tech/a]

Volatility is king.

Easier to trade an Elephant
Than a mosquito

I personally like even cheaper stock.

Lots of sub 50 c stocks double in price in under a year.
Not many $30 plus stock do the same.

On the flip side many sub 50c also halve in price
While very few $30 stocks do.

 

[OmegaTrader]

Quick and possibly very simple question.

What is the incentive to investing in a share worth $30 which only fluctuates by a dollar or two (max) vs in a share worth $3 which fluctuates as much as 30 cents to a dollar at times.

Wouldn't the returns be more dear if you invested in the $3 share, and made the right call? I'm wondering what the difference is.

Thanks for your answers.

In general a smaller share price means more volatility and more potential for profits. Normally the company would be of a smaller size. This is not always the case but is in general.



1) Different investment objectives, risk tolerance and knowledge levels

A person in retirement may want to have a relatively risk free portfolio They do not want volatility. They have saved their whole life. Risky plays are not worth it to them they just want to enjoy their nest egg.
Also not everyone wants to make the risky plays. Not everyone has the knowledge to invest in smaller companies and stick to what they know or have experience in rather than potentially lose money in a smaller company.

2)Risk adjusted returns
More return is not always better. This is a cornerstone taught in financial education, especially tertiary level. Risk has impacts on the investment decision making process. Risk taken can only be limited because of a number of factors. Psychological factors such as fear and tolerance. Losses are worse than gains is another basic concept. This means that returns need to be adjusted for risk and also that generally not all of ones capital should be put into one bet or investment decision. Position sizing risk management and alpha/risk adjusted returns are some of the concepts that come from these ideas.
Another angle to look at it is can I gear a lower risk strategy to make it more volatile and would this be a better alternative.


3) Passive investing, losing and bias

Society pushes people to invest in certain ways. People are more comfortable with a well known name and well accepted asset class. Also Passive investing has time, transaction and tax advantages. The investor/ trader has to overcome these disadvantages.



It is not as simple as going for a more volatile cheaper stock.
Risk has to be factored in as well as investment objectives and a rational perspective of ones ability and psychological aspects

 

[Valued]

You want to look more towards market capitalisation than share price. A company with shares worth $20 may be much larger than a company with shares worth $30. When people here say a smaller share price means more volatility they are talking about companies with shares like you mentioned, $3. A company with a share price of $20 may have less volatility than a company with a share price of $30.