【summary】
Overpriced stocks are stocks with a high price per share. Although there is no clear official standard for this term, it is generally used to refer to stocks that are worth tens of thousands of yen or more per share.
The important thing here is that a stock with a low price doesn't mean it's a "good company." We cannot say that a company is a good company because its stock price is high, and that it is an undervalued stock because its stock price is low. When looking at corporate value, you need to look at not only the stock price, but also the number of outstanding shares, market capitalization, profits, growth potential, and financial details.
| Misunderstood viewpoint | What you should actually see |
|---|---|
| A good company because its stock price is high | Performance, profit margin, finances, growth potential |
| Cheap because the stock price is low | PER, PBR, market capitalization, future profit |
| Overvalued stocks are dangerous | It depends on the brand. The problem is investment amount and price movement |
| Low-priced stocks are easy to buy | Price movements and performance risks are separate issues |
If you buy cheap stocks in units of 100 shares, the required capital tends to be large. If the stock price is 50,000 yen, 100 shares will cost you 5 million yen. This is a heavy amount for a beginner to suddenly concentrate heavily on one stock. There is also a way to start trading with one share using fractional shares, but the risk of stock price decline still remains.
This article is for general investment education purposes and is not a recommendation to buy or sell any particular stock. As stock prices, index compositions, and trading systems change, please check the latest information from each company's IR, securities company, exchange, and index calculation company before making actual investment decisions.
What are value stocks?
Low value stocks are a market term that refers to stocks with a high price per share.
For example, compare the following two stocks.
| Brand A | Brand B | |
|---|---|---|
| Stock price | 50,000 yen | 500 yen |
| Number of outstanding shares | Few | Many |
| Required funds for 100 shares | 5,000,000 yen | 50,000 yen |
Looking only at the stock price, A appears to be a larger company. However, if you look at the value of the company as a whole, the stock price alone is not enough.
The basic formula is as follows.
時価総額 ＝ 株価 × 発行済株式数Even if the stock price is high, if the number of outstanding shares is small, the market capitalization may not be that large. On the other hand, even if the stock price is low, some companies can have a large market capitalization if they have a very large number of outstanding shares.
In other words, the term "unvalued stocks" refers to the fact that the price of each share is high, and does not mean that the company has high corporate value, is expensive, or is safe.
Why are cheap stocks created?
There are several reasons why stock prices are high.
| Reason | Contents |
|---|---|
| Profit has grown over the long term | Stock prices have been rising for a long time, and stock splits are rare |
| Few shares outstanding | Value per share is easy to see |
| Don't do stock splits often | The price of each share tends to remain high |
| Market expectations are high | Growth expectations and profitability are factored into stock prices |
However, I would like to look at whether the reason why stocks have become cheap is "as a result of growth" or "just because expectations are too high." Stocks with higher stock prices are more likely to react not only to positive news but also to disappointment.
Advantages of value stocks
1. May include powerful companies
Overvalued stocks may include companies that have a long history of increasing profits or that are valued for their high profitability.
For example, in the Japanese market, stocks such as Fast Retailing, Tokyo Electron, and Keyence tend to be talked about as undervalued stocks. All of these stocks have high stock prices and are known to require a large financial burden for individual investors to purchase 100 shares.
However, what we should be looking at here is not `just because the stock price is high, it's good,'' but `why is the market allowing that stock price?'' I would like to check the profit margin, growth rate, competitiveness, shareholder returns, and future expected values.
2. Some stocks are highly liquid.
Large-value stocks are easy to buy and sell by institutional investors and overseas investors, and many have large trading values.
High liquidity has the advantage of making it easier to execute orders. However, just because liquidity is high does not mean it will not fall. There can be major fluctuations due to factors such as financial results, exchange rates, interest rates, overseas economies, and the semiconductor cycle.
3. The impact on the Nikkei average is easy to notice
The Nikkei Stock Average is a stock average type index. The Japan Exchange Group also states that the Nikkei Stock Average uses a stock average calculation method.
Therefore, stocks with high stock prices and stocks that make a large contribution to the index are likely to influence movements in the Nikkei 225. Movements in stocks like Fast Retailing and Tokyo Electron can change the impression not only of individual stocks but also of the index as a whole.
On the other hand, with market capitalization weighted indexes like TOPIX, the perspective changes. The influence of market capitalization and free float is greater than the stock price itself. When looking at indexes, we want to distinguish which index we are talking about.
Disadvantages of low value stocks
1. Buying 100 shares requires a large amount of capital.
For many Japanese stocks, one unit is 100 shares.
Therefore, if you buy low-priced stocks as regular unit shares, you will need a large amount of capital.
| Stock price | Funds required to purchase 100 shares |
|---|---|
| 500 yen | 50,000 yen |
| 5,000 yen | 500,000 yen |
| 50,000 yen | 5,000,000 yen |
If you buy 100 shares of a stock with a stock price of 50,000 yen, you will get 5 million yen. If you put this into one stock, it will likely become a fairly large proportion of your total assets.
2. The profit and loss amount due to price movements appears large.
If the stock price moves by 1,000 yen, the profit or loss for 100 shares will be 100,000 yen.
1,000円 × 100株 ＝ 100,000円However, we need to look at the percentages here as well. A 1,000 yen move for a stock with a stock price of 50,000 yen is a 2% change. On the other hand, a move of 50 yen for a stock with a stock price of 500 yen is a 10% change.
Look at not only the profit and loss amounts, but also the volatility. If we confuse this, only low-value stocks will look particularly dangerous, or low-value stocks will look safe.
3. Difficult to diversify investments
If you have limited funds, buying 100 cheap stocks can easily take up a large portion of your portfolio.
Concentration on one stock can be great if things go well, but it can also be very damaging if bad news comes out. If you are a beginner and want to handle stocks with low prices, realistic options include buying small amounts of shares in fractions of a unit, or focusing on investment trusts and using individual stocks as a learning framework.
Difference between high-value stocks and low-value stocks
The term low-priced stocks is sometimes used as the opposite of low-priced stocks.
| Item | Low-value stocks | Low-value stocks |
|---|---|---|
| Stock price level | High | Low |
| Required funds for 100 shares | Big | Small |
| Ease of diversification | Difficult depending on funds | Easy to diversify with small amounts |
| Price movement | Depends on the brand | Depends on the brand |
| Risk | Depends on company details and price | Depends on company details and price |
Low-ranked stocks are psychologically easier to buy because you can buy a large number of shares with a small amount of money. However, there is a difference between a stock price being low and being undervalued.
Some stocks have low stock prices due to deficits, poor business performance, concerns about dilution, and low liquidity. In the end, whether you're looking at low-value stocks or low-value stocks, you have no choice but to look at the balance between the company's substance and price.
Three misconceptions that beginners want to check
Misconception 1: Stocks are expensive because they are high.
A stock price of 50,000 yen does not mean it is expensive, and a stock price of 500 yen does not mean it is cheap.
When looking at whether a stock is overvalued or undervalued, look at PER, PBR, ROE, profit growth rate, cash flow, market capitalization, etc. Stock prices are just the beginning.
Misconception 2: Overvalued stocks are always good companies
Overvalued stocks may include blue-chip companies.
However, there are cases where stock prices remain high and only performance expectations are in the lead. A stock with high expectations may be sold even if its financial results are slightly weak. High stock prices often come with high expectations.
Misconception 3: Low-end stocks are better for beginners
When stock prices are low, it's easy to feel like you've made a profit because you can buy a lot.
However, having a large number of stocks in and of itself has no meaning. What matters is what percentage of the investment amount moves and how the company's value changes. Beginners want to decide `how much to invest'' before deciding `how many shares to buy.''
Ideas for beginners
When you see stocks with low prices, it is easier to organize them by thinking about them in the following order.
- First, look at the market capitalization
- Next, look at profits and growth rates
- Check market expectations with PER and PBR
- Calculate how much you need for 100 shares
- If you don't have a lot of money, consider investing in fractional shares or investment trusts.
There is no need to buy 100 shares of cheap stocks from the beginning.
If you are not familiar with individual stocks, you can learn about price movements by focusing on index funds and owning only one share of a stock with a low value. Stocks such as Fast Retailing and Tokyo Electron can also serve as teaching materials for understanding the movements of the Nikkei Stock Average.
However, even one share is still a stock. There will be losses. Don't invest in living expenses or short-term money, don't rely too much on one stock, and don't be too surprised by price movements before and after settlement of accounts. This is important in practice.
summary
Low value stocks are stocks with a high price per share.
A high stock price does not necessarily mean that the company has high value or is an attractive investment. What you need to look at are market capitalization, number of outstanding shares, earnings, growth potential, financials, and how well the market has priced in expectations.
If you buy 100 shares of low-priced stocks, the required capital tends to be large. It is easy to see that the profit and loss amount due to price movements is large. Therefore, it is better for beginners to manage their investment amount and diversification while using fractional shares and investment trusts.
Don't just look at stock prices. Look at the corporate value behind the stock price. The first step to understanding cheap stocks is from there.