Is It Worth Investing in Expensive Stocks?


Investing in the stock market is an exciting venture for some while seemingly out of reach for others. This is partly because the stock price of companies that many beginning investors trust is usually too high for the average investor. Yet, the stocks that are within financial reach often don’t elicit confidence for beginning investors. Thus, many investors decide not to invest at all, but it’s usually worth investing in expensive stocks with research.

It’s worth investing in expensive stocks, particularly if you’re committed to long-term investments. Expensive stocks have a high price-to-earnings ratio which equates to how much investors are willing to pay for the stock based on the company’s financial performance.

The rest of this article will explain a few main topics related to this question, including:

  • Questions all investors must answer before investing
  • Things to consider before investing
  • What is a price-to-earnings ratio?
  • What does the number of shares mean overall?

Questions All Investors Must Answer Before Investing

Most investment strategies are best when looked at over time, because generally speaking, stocks recover from market volatility when given enough time to rebound. 

Regardless of the stock that interests you, and regardless of investor level, you need to determine several factors before investing in the stock market, like:

  • What is your purpose for investing? For example, are you investing to achieve financial security or to develop a passive income for retirement?
  • How long do you plan to hold onto the stock? Some may be investing for a short term, such as five years, for a one-time purchase, while others may be investing for retirement. The answer to this question dictates the type of stock you purchase.
  • Are you aware of potential changes coming that’ll make the company more profitable in the future? It could be that Apple is releasing a new iPad or that Amazon has plans to build in another state. These changes will impact interest in the stock and the price-to-earnings ratio.
  • What is your personal risk level? If you’re unable to wait out a loss in the market, you’ll want to look at more conservative stocks, but that doesn’t mean that the expensive stocks are off-limits. In fact, they might be the ones to consider seriously.

Once you answer these questions, you can determine if expensive stocks are worth the investment. Perhaps the most important takeaway is that investors shouldn’t shy away from expensive stocks without first doing their homework. Many beginners are surprised by what they learn regarding the value of expensive stocks.

Things To Consider Before Investing

If you’re reading this article, you’re likely ready to invest. You’re looking into a company like Apple or Amazon that has a high price tag versus investing in a company like Zynga that has a considerably lower price tag. It’s important to realize that just because a company’s stock has a high price tag, price alone doesn’t determine its value to your portfolio, nor does it indicate how the stock will actually perform.

Before deciding on which stock to purchase, there are many things you need to consider. The first is simple: Don’t invest until you’ve paid off credit cards and have built an emergency fund. Financial advisers like The Motley Fool and many others make this emergency fund the number one step in any investment strategy. 

The next step is to make sure you only invest money that you can afford to lose. There are various levels of risk versus reward in the stock market, and ironically, the more expensive stocks may have lower risks with higher rewards. But a greater risk is to invest money in the stock market that you need to pay bills or cover emergencies.

Price-to-Earnings Ratio

If you’re ready to invest, the real question to investigate is not “is it worth it to invest in expensive stocks?” but rather, “what are the potential earnings of the stock?” Remember, the amount of money you’re investing is the same whether you buy one stock for $100 or 100 shares of stock for $1. The earnings, however, likely will not be the same.  

Many investors know that they should research companies before investing in them, but beginning investors rarely know where to start this research. The best place to start is determining the company’s value, and you can do that by researching the relationship between the company’s net profit and its stock price. This relationship is called the Price-to-Earnings ratio. 

This relationship is calculated using a simple mathematical formula: P/E, where P is the stock’s current price, and E is the earnings per share. Investors look at the P/E to determine if the stock is overvalued or not. Depending on the situation, sometimes, the lower the P/E, the safer the stock. However, that doesn’t guarantee the stock itself is safe; it just means that this is a more conservative stock purchase for those with a lower tolerance for risks. 

Differences in Number of Shares Owned

Given that most people believe it’s better to own more shares of something at a lower price than to own just one share at a higher price, many believe it’s not worth investing in expensive stocks. Likely, most people who ask this question don’t have large sums of money to invest and believe that owning stock in companies like Amazon or Tesla is impossible. Today, however, it’s quite possible and often advised.

Investors must realize that the actual dollar amount spent is the same, but the potential earnings are often vastly different. For example, if ABC Company sells its shares for $100 and XYZ Company sells its shares for $10 each, regardless of the company you elect to go with, you’ll have $100 invested. The question is: what return might you expect on the initial investment?

You can only answer that question by knowing what profit the company is expected to make. If Company ABC has a $20 profit, but Company XYZ has a $1 profit, you’re going to get more return on your $100 by having invested in Company ABC because your one share is now earning you $20 where your ten shares would be earning you $10. In this scenario, clearly, it’s worth investing in the expensive stock.

The key to deciding on any stock purchase is selecting a company with a product and a management style you believe in. There will be highs and lows in the market, but if you believe in the company, you’ll be more apt to ride out the lows because you’ll be better able to conquer your emotions.  

How Most People Can Invest in Expensive Stock?

If you believe in the company, it’s worth investing in expensive stock, particularly when you can purchase that stock in fractional shares. Many social media-type investment apps like Public and Robinhood have made investing less threatening and more accessible to beginners. In addition to the fractional share option, they are also commission-free and have no subscription fees.

Another reason these companies have gained popularity is that they’ve made investing a social space, gathering investors of all levels in one place where they share investing ideas and strategies. 

Conclusion

Much of investing is knowing how to research the company you believe in to make sure it’s a solid investment, and part of that research is in calculating the price-to-earnings ratio. 

Another part of investing is controlling emotions involved caused by market volatility and the stock’s initial cost. Fortunately, purchasing fractional shares takes care of the sticker shock aspect, making expensive stocks both accessible and worth the investment.

  1. Fractional share investing – Buying a Slice instead of the whole share. (2020, November 9). SEC.gov. https://www.sec.gov/oiea/investor-alerts-and-bulletins/fractional-share-investing-buying-slice-instead-whole-share
  2. Price-earnings (P/E) ratio. (n.d.). Investor.gov. https://www.investor.gov/introduction-investing/investing-basics/glossary/price-earnings-pe-ratio
  3. Stoffel, B. (2013, October 12). Investing for beginners: Don’t make the mistake of avoiding “Expensive” Stocks. The Motley Fool. https://www.fool.com/investing/general/2013/10/12/investing-for-beginners-dont-make-the-mistake-of-a.aspx
  4. Taking stock of overvalued stocks. (n.d.). Investopedia. https://www.investopedia.com/terms/o/overvalued.asp

Navdeep Singh

Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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