Misunderstood concepts can at times be huge liability to an investor’s portfolio. It’s often a misconception or rather myth that prices determines whether or not a stock is expensive or undervalued. Looking at stock prices alone is a bad way to determine if it’s overvalued or expensive. There are more practical ways of making such conclusions and one of those ways is by checking the valuation ratios like, price-to-book ratio (P/B) and price/earnings ratio (P/E). This unfortunate misunderstanding has led to some investors ignoring high trading stocks. In this article I will explore the three major benefits of buying high-priced stocks.
Investing in a tax efficient way is undoubtedly a prerequisite when it comes to wealth creation. U companies with high-priced stocks pay out very little to no dividend at all. This might not sound as incising as it should be because most people would expect to have the dividends distributed to the investors of the company. However this can be very advantageous to people with long term visions because these companies realize that the money can be used to further grow the business instead of distributing cash flow to investors. As an owner or investor you will later see the gains from reinvestment through appreciation of stock while smartly avoid triggering taxes on dividend income.
Lack of liquidity can be a huge blessing at times. A portfolio of high-priced equities can reduce cash reserves and prevent an investor from making rushed investment. This also lessens tendencies of selling out portions of shares intended to free up cash. In simple terms high-priced stocks stop investors from selling stocks triggering capital gain taxes. This can also slow down the compounding effect which as we all know leads to wealth creation. Additionally, it forces investors to think long term.
As mentioned earlier, stocks can trade for a large amount compared to others but not be expensive but unfortunately most investors do not poses this knowledge. As a result stocks that go for more than others are often ignored, reducing their level of volatility. People new to investing are without a doubt usually deterred by prices of as well. Therefore, fluctuations associated with trading barely affect these stocks because most of the investors are long-term investors.
To conclude high priced stock do not make the stock expensive. It is advisable to trade the high priced stock because they eliminate volatility and reduce speculators in great numbers. This is also good because it makes investors think long term rather than short term and helps reduce unnecessary selling of shares. You can always consult with the company who’s stocks you are interested in to get more information about high priced stocks.