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Question 5: Which is better, a $40 stock or a $4 stock? Explain very briefly

Question 5: Which is better, a $40 stock or a $4 stock? Explain very briefly

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Answer #1

Price is not enough to analyse the attractiveness of the investment. Hence, just using price we cannot say that whether $40 stock is better or $4 stock is better. The reason is that attractiveness depends on the fair value, which in turn depends on many aspects-competition, industry prospects, management, business risk, financial risk i.e., capital structure, growth prospects, etc.. If price is less than fair value then the stock is attractive.

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