Cheap vs Expensive Stock Debate

Cheap vs Expensive Stock Debate

Say you had $1,000 to invest, you are given two options :

Option A :  Invest $1,000 if the trade is successful you will have $1,480 after, if it fails only $520

Option B : Invest $1,000 if the trade is successful you will have $1,470 after, if it fails only $950

Which would you pick?

If you picked option B, you are correct and  you purchased the expensive stock. If you picked option A, keep reading!!

We are constantly being told that new investors cannot afford to buy expensive stocks because they can only afford to buy a few shares.  We will break down a case of a cheap stock vs an expensive stock and will debunk how it's a load of crap!

The two stocks in this example will be ARGS (cheap stock) ARG (expensive stock)

ARGS (Cheap Stock)

ARG (expensive stock)

Both formed nice bull flags, the main difference is that with the ARGS (cheap stock) you had $3 risk for $3 of gain. While ARG (expensive stock) you had $3 risk with a $50 gain.

$1000 investment in both

ARGS (cheap stock) $6 stock                       ARG (expensive stock) $100 stock

ARGS 160 shares bought                             ARG 10 shares bought

ARGS Entry $6                                                 ARG Entry $98

Risk If Trade Fails

ARGS Stop $3                                                ARG Stop $93

ARGS Risk $3                                                ARG Risk $5

Dollar Risk $480                                            Dollar Risk $50

(160 shares x $3 )                                         (10 shares x $5)

Profit If Successful

Stocks at $9                                                 Stocks at $140

$3 gain  per share                                     $47 gain per share

$3 gain X 160 shares                              $47 gain x 10 shares

$480 gain                                                   $470 gain

Risk Reward

1:1                                                                    10:1

$3 risk $3 gain                                               $5 risk $47 gain

“To make money successfully long term, you need to take trades where the risk reward is 5:1 or greater.” Ray Dalio (regarded as one of the most successful hedge fund managers)

This is why in most cases, trading cheap stocks the risk is far too great, there will always be exception to the rule. But regarding trading long term, we need to manage our risk to stay in the game. If the cheap stock fails and you loose 50% of your investment account, you will need a 200% gain just to break even. With the expensive stock and a proper stock, when you risk 5% and loose you only need a 6% to gain back to break even.