The stock price reflects the market capitalization and the overall shares available.
Extreme stock prices often lure trades in, like Amazon or Google. These are called “Blue Chip” stocks (Like poker). There is some security buying an expensive stock simply because it has proven itself in market conditions. However, when you are trading stocks the price is mostly irrelevant. What actually matters is the percent gain or loss. For example, if you buy a stock that is $1000 and it increases in price by 5%, you will have made 5% on your investment. Likewise, if you buy a stock that is $1 and it goes up 5%, you will still only make 5%. Blue chip stocks normally are not as volatile as cheaper stocks, meaning a 15% move is much less likely. If a $1000 stock swung 15% daily not many investors would be interested. Using the theory of anticipating opportunity, the cheaper stocks are more likely to have a profitable move. Opinion: buying any stock under $1 is a unnecessary risk and not a good idea. More about this later.
It is important to not get tricked by the price of a stock when you are trading for profit. Remember that volatility is your friend, and the way that you will make money. However, there are ways to make money on “Blue Chip” stocks, sometimes greater amounts than more volatile stocks. This is achieved by leveraging margin. The most profitable, yet risky way to trade a less volatile stock is to leverage a market at 100% of your investment amount. This means that for ever $1 you put in, your broker has matched you. Using this method allows every gained percent to be doubled. The 3% moves become 6%, up or down. This is also a quick way to lose money.
A margin is a loan and you will be charged interest and be expected to pay it back in full. The interest for margin is usually a fractional amount and you will likely not notice the cost. For instance, while writing this post my current charge for margin used earlier is $0.03. Its all about risk and reward, in some instances you can make a lot of money leveraging with margin. For instance, Tesla’s shares jumped 60% recently. With a $3000 investment and a matched margin, the total gain would have been 120% of $6000 – incredible.
Stock Price: What it means
The stock price reflects the market capitalization and the overall shares available, which is called the float. A Company with a “blue chip” price tag may appear to be successful, but the float could be small.
As you can see above, both companies have the same market capitalization with vastly different stock prices. Large price tags can trick investors into thinking the company has a large market, and by extension – makes a lot of money. However, some companies will reverse-split, which takes their shares and combines them. This is often done to maintain minimum compliance in the NASDAQ or equivalent (Must be over $1 for six months in a row to be listed). Always do your research and evaluate the market capitalization before buying a stock.