Busting one of the biggest myth of new stock market participants
A 10 Rs stock is cheaper than a 100 Rs one
Let’s be honest, when we entered the markets, everyone thought of the above line as the truth.
A 10 Rs stock is cheaper than a 100 Rs one
Let’s be honest, when we entered the markets, everyone thought of the above line as the truth.
That is they prefer 10 Rs stocks over 100 Rs ones, as they thought a 10 Rs stock is cheaper.
The stock markets are simple, but not this simple. Let’s assume we have 2 stocks from same industry with same return ratios. 10 Rs stock is company A and 100 Rs stock is company B.
The stock markets are simple, but not this simple. Let’s assume we have 2 stocks from same industry with same return ratios. 10 Rs stock is company A and 100 Rs stock is company B.
Company A earns only 1 Rs per share, while company B earns 100 Rs per share. Now we know that if you pay 10 Rs for company A stock, you are paying 10 times its earnings (Stock price/earnings = 10/1) while for company B stock, you are just paying 1 time its earnings (100/100).
So over here we come to know that company B stock which is 100 Rs per share is in fact cheaper! Because one is getting 100 Rs of earnings paying 100 Rs per share.
Now we have taken a live example of 2 stocks from the same sector. We assume everything else to be same and we see that the strategy of buying the cheaper stock on basis of price would be wrong. 
In TVS motors, you are paying 25x its earnings whereas in Hero MotoCorp you are only paying 15 times its earnings.
Any doubts? Feel free to comment!
Any doubts? Feel free to comment!
