Apr 1, 2005|
Which is attractive: Rs 10 or Rs 50?
There are some myths at the retail investors end when it comes to investing in stock markets. In a series of articles aimed at addressing these issues, we will focus on what is important when it comes to selecting a stock i.e. the stock 'price' or the stock 'value'?
Read our first article: Does Sensex trace GDP growth?
It is a common perception among retail investors, based on various feedbacks that we receive from our subscribers and visitors on our website, that a company's share is supposedly 'cheaper' when it is trading at Rs 10 as against Rs 50 i.e. after it appreciates. The interest level for low price stocks seem to be disproportionately higher these days because of two reasons. One, the stock market has been going up and secondly, prices have run up significantly in the last two years, thus the craze for small and mid-caps. The major attraction when it comes to mid-caps among retail investors, besides the upside, is that one could buy a lot more shares for the same outlay.
We take a practical example and bring forward what is important. Here we compare, Tata Motors and Ashok Leyland. Remember, we are not recommending any stocks by this comparison.
What is 'cheap'?
*Based on trailing twelve months earnings. **FY04
|Current price (Rs)
|Face value (Rs)
|Price to earnings (times)*
|Price to book value (times)**
|Net profit margin
|Return on net worth
As a retail investor, it is possible that with a sum of Rs 1,000, one can buy 47 shares of Ashok Leyland whereas for a similar outlay, investors can get hold of only 2 shares of Tata Motors. But does that mean Ashok Leyland is 'more attractive' than Tata Motors? The answer is a clearer no! Though one may be buying fewer shares of Tata Motors, this should not be the governing factor for investing. What matters is 'at a price', what is the underlying 'value' that the investor is getting. The stock may be trading at a higher valuation also because the fundamentals are stronger.
Price is governed by value: The stock price (governed by value) is supposed to indicate the long-term earnings growth potential of the company. What is history is already into the stock price because everyone knows it! This long-term growth potential has to be 'valued', taking into account the industry dynamics, the past track record of the management and what the future looks like. It is for this reason that high-growth sectors (software and pharma, for instance) generally tend to command higher valuation as compared to a textile stock.
FIIs do not care about pennies: If you think the penny stocks will go up because Foreign Institutional Investors (FIIs) are going to buy into these, then we must point out that you are most likely to be wrong and are being misled if you are being told that this is true. Serious FIIs and domestic mutual funds have stringent criterias like floating stock (% of shares not owned by promoters and is liquid), minimum level of market capitalisation and sales turnover and so on. If any broker is suggesting buying into a penny stock because growth prospects are good and FIIs 'would' buy, then it is time to exercise caution.
Face value: Investors have also got to keep in mind as to the face value of the share they are buying. Like in the case above, Ashok Leyland may be trading at Rs 21. But its face value is Re 1 (if we equate it, the buying price is actually Rs 210). Some companies change their face value to increase liquidity in the stock market with a good intention.
Same is the case with Mutual Funds: Just because the NAV (net asset value) of a mutual fund scheme is below par or at par (i.e. less than or equal to Rs 10), it does not become attractive.
To conclude, focus on the 'value' and not on the 'price'. So, what is attractive? Rs 10 or Rs 50!
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407