When you're researching stocks, price is one of the most common factors to consider. But it's easy to get hung up on how much the price actually matters.
Common sense says that the higher a company's stock price, the better the investment. After all, a rising stock price must mean that the company is growing, and therefore worth more, right?
In reality, it's a bit more complicated than that. Price is certainly one factor to keep in mind, but it doesn't matter as much as you might think. Here's why.
1. Price doesn't equate to value
It may seem counterintuitive, but a stock with a higher price isn't necessarily more valuable than its lower-priced counterparts.
Consider Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL), for example. As of this writing, Amazon's stock price is around $3,330 per share. Apple, on the other hand, is priced at around $127.
Based on stock price alone, it may seem like Amazon is far more valuable than Apple. But Amazon has a market capitalization of around $1.65 trillion, while Apple has a market cap of around $2.116 trillion. Market cap is the number of shares outstanding multiplied by the stock price, and it's one of the best representations of how much a company is worth. By this metric, Apple is worth more than Amazon, despite its significantly lower price.
2. Stock price fluctuates day-to-day
Stock price is always changing, and those day-to-day fluctuations don't necessarily relate to how the company is performing. If there's big news surrounding a particular company, that could cause its stock price to increase or decrease more dramatically. But it doesn't necessarily change the company's long-term trajectory.
Let's consider Amazon again. Looking at its stock price over the past six months, it seems like a roller coaster.
If you're only looking at the day-to-day data, any stock will look volatile. But it's important to base your investing decisions on how a stock is likely to perform over the long term, not the short term. Looking at Amazon's performance over the past five years, the stock price appears less rocky.
No matter where you choose to invest, remember that the stock price will fluctuate (sometimes wildly) in the short term. That shouldn't deter you from investing, however.
Rather than getting hung up on short-term stock price changes, focus on the company's underlying fundamentals to determine whether it's likely to continue growing over time.
3. Stock price can be manipulated
While stock price will change regularly on its own, it can also be manipulated. Meme stocks have proved this in a big way, as stocks like GameStop and AMC Entertainment Holdings have seen their prices explode overnight.
With meme stocks, investors artificially inflate the stock price by encouraging many people to buy it. Then once the price has increased, those investors sell their shares to make a quick buck. These stock price increases have nothing to do with the company's fundamentals. In fact, both GameStop and AMC are struggling companies, and their explosive returns don't necessarily make them strong investments.
Meme stocks may be a shady investment practice, but there are legitimate reasons companies may manipulate their stock prices, too. Take stock splits, for example. A company may issue a stock split to increase the number of shares outstanding and lower the stock price — which makes the stock more affordable and attractive to investors.
For example, if a company issues a 2-for-1 split, that would double the number of shares outstanding and cut the stock price in half. Because the market cap hasn't changed, the company is not worth any more or less after a stock split. But its stock price is lower.
Stock price is one factor to consider when investing, but there are other metrics that are more important. Rather than focusing too much on price, you're better off researching a company's fundamentals and investing in strong stocks with solid growth potential.
10 stocks we like better than Amazon
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Amazon wasn't one of them! That's right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 7, 2021
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.