Are Low Price Stocks Really Cheap:In an environment of stock market volatility, many investors think that low-priced stocks are always ‘cheap’. But the truth is completely different from this. Just because a stock’s price has fallen does not indicate that it is a better investment. Similarly, an increase in price does not mean that the share has become expensive. When the stock market is unstable, changes in prices are seen every day. In this situation, investors often forget that prices only matter when considered taking into account every aspect of a company’s fundamentals and prospects.
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Look at valuation, not share price
Many investors think that if a stock’s price is low, it is cheap to buy. But thinking like this is not always right. For example, the price of a share may be Rs 15, but it does not mean that the share is cheap. On the other hand, considering a stock worth Rs 500 as expensive can also be a mistake. The share price should be seen on the basis of its valuation. To understand whether the current valuation of a share is right or not, it is important to keep in mind many things like the fundamentals of the company, its revenue and future prospects.
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The allure of ‘cheap’ stocks
The popularity of low priced stocks is so high that special research tools and websites exist for it. These are also called ‘penny stocks’. But choosing shares only on the basis of price can be a big mistake. Here it is important to understand that in reality, a cheap and good share is one which is available at a reasonable price keeping in mind the company’s financial condition, growth prospects and industry performance.
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How to make the right decision
It is important to use the right parameters to understand share prices. These ratios can be very effective for this:
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Price-to-Earnings (P/E) Ratio:It shows the share price compared to the company’s profits.
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Price-to-Book Value (P/B) Ratio: It shows the price of the company compared to its net asset value.
These ratios help investors evaluate share prices in the right context.
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What precautions to take in a turbulent market
In an unstable or turbulent market, investors may become confused by price fluctuations. A 5% fall or rise in prices every day does not indicate that a stock has become cheap or expensive.
In such a situation, investors should keep the following things in mind:
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Take a long-term perspective: Ignore short-term market fluctuations and focus on long-term goals.
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Consider fundamental analysis: Understand the fundamentals of the company such as revenue, expenditure and management strategy.
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Use Ratios: Use the right parameters to evaluate stocks while making investment decisions.
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to the pricesin the right contextimportant to understand
It is important to always look at the price in context while investing. Prices make sense only when they match the company’s financial position and market conditions. In times of market volatility, it is important to understand that every price has a context. Investing just by looking at the price can take you in the wrong direction.
While investing in the stock market, it is not right to take decisions only on the basis of price. A low priced share is not always cheap and it is also wrong to consider a high priced share as always expensive. Investors should take decisions keeping in mind the company’s fundamentals, valuation ratios and market conditions. For smart investment, it is important to give priority to valuation rather than prices. This will not only provide better returns but will also reduce the risks associated with investment.
