At the end of the day we invest all the money, plain and simple. So it is not surprising that people look for the best ways to get more money and do it faster. Unfortunately, sometimes the ideas about how to make that happen just stupid.
Here's a little tidbit from an article which I chanced upon the other day that talked about stocks sell for less than $ 5 per share:
Part of the magic is simple logic: a company whose stock is selling for $ 2.50 a much simpler task in growing that price--and profits behind that price--than a megalith sell for a few hundred dollars per share. The cheaper stock can be a little growth is a long way to go.
Too bad "simple logic" left the building before this statement made its way to (digital) paper found.
To be sure, in some cases the above idea seems to be true. China nepstar(NYSE: NPD) stock sells for $ 3.65. It is a growing drugstore chain in China whose small size the more growth potential than a huge American similar like CVS gives. "A" shares ofBerkshire Hathaway's, meanwhile, sales for every $ 128,103. Berkshire is a huge conglomerate which pulled in $ 13 billion in profit in 2010. Rising growth is not in Berkshire's future.
But if the stocks under Show, the price tag on a stock often belies the size of the company.
CompanyStock PriceTotal market capitalizationSirius xm Radio (Nasdaq: SIRI) National Presto industries (NYSE: NPK) Source Package: Yahoo! Finance.Invest and pizza
Imagine you have a great, piping hot pizza for you and you're going to be split 50/50 with a friend. You can cut that pizza right in the middle and each one of you will get your half through a massive segment. Or you could cut it twice and each of you gets two segments--but still only half of the cake. Or you could go nuts and slice it 16 times, give each of you 16 very skinny pieces.
But each of you still gets only half of the cake.
It works the same way with a company and the stock. A particular company can slice in as many pieces as it wants by splitting shares or issue of new shares. But if the total number of shares of a company grows, each share represents less and less of the profits and so investors of the company will be the value of the shares at a lower price.
By way of example, if a very small business deserves $ 1000 profit per year, has one share outstanding, and investors give the stock a price-earnings ratio of 12, she would be willing to pay $ 12,000 for those a share--and, by extension, the entire company. But let's say that the company rises split crazy and ends with 4096 shares. Now each share of reduction of the profit is only $ 0.24 each, and, as investors value the stock at the same way, each share would sell for $ 2.93. The same company, same profit, the same total business value ($ 2.93 multiplied by 4096 is $ 12,000), but simply a different number of total shares.
The problem with low share price
There is no magic to a low stock price and, in fact, a lot of the time a low price of the share may just signal that the company in question was a much more powerful company that has fallen on hard times. Unfortunately, the article that the "simple logic" above contained this illustrated through the "5 best stocks under $ 5."
The list consisted of Pacific sunwear, Sirius XM, Crown Media Holdings (Nasdaq: CRWN) TranSwitch,, and Cowen group. It would be a monumental stretch to call one of these small, exciting up-and-comers. Only Sirius and Crown Media have shown a profit in the past year, and even in those cases, it is very modest.
In addition, each one of these stocks had a price tag at the top--and in most cases well above--$ 5 in the last five years, but the prices have continually beaten down as investors increasingly desperate about lackluster financial performance.
That's not to say that these companies cannot turn it around and big money for their investors. But for the most part, these cross-your-fingers turnaround stories that have banished to the abyss of the sub-$ 5 for a good reason.
There are a lot of ways for investors to search for files. Search based on stock price simply can be one of the worst out there.
Do you want a better five stocks to investigate? Check out the top five stocks on Fool co-founder Tom Gardner watchlist.
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