The biggest mistake a new investor makes in the stock market is – to think a share that costs ₹ 100 is cheaper than a share that costs ₹ 500.
Remember this always: The price of a stock does not matter in investing. It’s just a number.
Reliance vs MRF
For example, on January 2nd 2020, one share of Reliance Industries costs ₹ 1,534 and a share of MRF (Tyres) costs ₹ 67,300!
Is MRF bigger than Reliance? No, it isn’t.
Reliance is the biggest company in India today. The entire value (market capitalisation) of Reliance Industries is ₹ 9,73,289 crore. Whereas the market cap of MRF is ₹ 28,547 crore.
Reliance is nearly 35 times bigger than MRF, but the share price of MRF is 43 times more than Reliance!
This proves that the price of a stock is actually meaningless.
You might be thinking – If stock price is just a number, how to identify which stock costs less and which are expensive. Well, there are ratios like P.E (price to earning), P/B (price to book value) etc, that can be used to compare the valuation of different companies. More on that in another article.
Avoid Buying Penny Stocks
Tip: New investors should avoid buying stocks that cost ₹ 20 or less. These are called ‘penny stocks’ and buying them is another mistake that most inexperienced investors make. Most of these ‘penny stocks’ are low-quality businesses.