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.