Why Would Any Small Investor Consider Buying High-Value Shares?
Investing in the stock market is a strategic decision with varying degrees of risk and reward. While high-value stocks such as those trading above Rs 10,000 can potentially offer substantial returns, they also present unique challenges and risks that may not be suitable for every investor. This article explores the pros and cons of investing in such shares, focusing on their suitability for small investors.
The Realm of Billionaires and High-Value Shares
High-value shares, often quoted above Rs 10,000 per share, are typically the domain of investors who possess significant capital. These investors include wealthy individuals and institutions with substantial financial resources to navigate the volatile nature of the stock market. The rationale behind investing in such high-value shares is straightforward: the potential to earn commensurately large profits, along with the ability to withstand significant market fluctuations without severe financial impact.
Impact on Investors of Different Scales
While high-value shares can offer substantial returns, they come with unique challenges. For example, the stock of Berkshire Hathaway, a prominent company holding, was quoted at approximately Rs 24,612,256.68 per share on 20 February 2020. Even in this context, the shares experienced volatility, losing USD 1,878 in a single day, equating to an approximate loss of Rs 135,103 per share for any investor.
This volatility poses a significant risk for smaller investors, as a single share loss of lakhs of rupees can be financially devastating. Small investors are advised to consider whether they can bear such losses, given their financial circumstances. Investing in high-value shares requires a level of financial stability and risk tolerance that many small investors may lack.
Evaluating Growth Potential Beyond Share Price
When assessing investable opportunities, potential investors should look beyond the current market price (CMP) and focus on the growth potential and fundamental strength of the stock. For instance, when MRF and ITC both have a P/E ratio of 24, it indicates that both companies are performing well irrespective of their current share price. This suggests that a stock's performance is not solely determined by its value but rather by its underlying fundamentals and growth potential.
Price-to-Earnings (P/E) Ratio: A Critical Indicator
The P/E ratio, or Price-to-Earnings ratio, is a key financial metric that reflects the price paid for a stock relative to the company's earnings. For example, if MRF's share price is Rs 64,000 and its earnings per share are Rs 2,400, the P/E ratio is 24. Similarly, ITC's share price of Rs 246 with earnings per share of Rs 10 also results in a P/E ratio of 24. This comparison shows that while the share prices differ, both companies offer similar value and performance metrics. Thus, the P/E ratio can be a helpful indicator for evaluating a stock's potential.
Considerations for Small Investors
For small investors, a key consideration is the liquidity and market impact of high-value shares. Due to their higher valuations, these shares may have lower liquidity, meaning fewer opportunities to buy and sell them at favorable prices. Additionally, high-value shares are less likely to be affected by short-term market fluctuations and more influenced by the companies' performance and earnings reports.
Investing in high-value shares requires careful consideration of one's financial capacity to bear potential losses and the long-term growth potential of the stock. Small investors should focus on diversifying their portfolio and selecting stocks based on solid fundamentals, rather than solely based on their high share prices.
Conclusion
While high-value shares like those quoted above Rs 10,000 present opportunities for significant returns, they also carry unique risks that may not align with small investors' financial objectives. By evaluating the growth potential, financial metrics, and liquidity of a stock, small investors can make more informed decisions about their investment strategies. Whether to invest in such shares should be based on a comprehensive understanding of the market, financial capabilities, and long-term goals.