Some investors are very hesitant when it comes to buying cheap stocks under $10, and some investors are hesitant when it comes to buying expensive stocks that are over $100. Investors need to get out of the mindset of how much a stock cost, but instead think about the percentage gain they can make from a company or the future outlook of a particular company, regardless of its price. If you buy a $10 stock, selling at $11 is a 10% gain. If you buy a $100 stock, selling at $110 produces a 10% gain. It doesn’t matter how many shares you can buy of a company, but only the percentage gain you can attain from purchasing any given amount of shares of a company. Producing a 25% gain for your entire portfolio during any given year would be wonderful, and it shouldn’t matter how much you paid per share.
Consider the two following stock purchasing scenarios with an original investment of $2000:
Regardless of the two scenarios just mentioned, a 20% gain and a $400 gain has been achieved. Doesn’t matter if you have an odd lot amount of shares or an even 100 shares or how much the original share price is. The 20% gain is all that matters.
Stocks with a market capitalization (outstanding shares times stock share price) under a billion dollars are considered small cap companies that usually have the best possibility to be growth stocks. Companies with over 10 billion dollars in market cap are labeled as large cap companies, and much of their primary growth phase has generally passed. It is more difficult to sustain such a large level of growth when the company is already so big. On the other hand, some examples of large cap companies in recent years that have shown much growth despite their worldwide presence are companies like McDonalds (increased 65% since the middle of 2005) or Chevron (increased 45% since the middle of 2006). McDonalds (MCD) and Chevron (CVX) represent markets caps of 58 and 157 billion respectively with dividends above 2%.
Even though I stated that small cap companies have the opportunities for the largest amount of growth, they are also more susceptible to volatility if they don’t grow as fast as investors anticipate. They will generally fall faster than large cap companies in bear markets because they won’t have as much cash flow as large companies and will probably have a higher debt-to-equity ratio. When earnings come out for these high-growth small cap companies, investors will look for earning to exceed expectations. Even just meeting expectations may not be good enough to propel the stock higher.