Don’t Get Apple ‘Sticker Shock’
If you had $2,000 to invest in a company’s stock, would you rather buy $2,000 worth of Apple (NASDAQ:AAPL) stock that currently goes for $461.91 a share, or would you rather buy $2,000 worth of 3D Systems (DDD) stock that goes for a mere $31.53 a share?
According to two analysts from The Motley Fool, you could not make an informed decision about which stock would be better for you to buy if the only information you had was the current selling price of the stock. That is because analysts Matt Thalman and Isaac Pino believe that you should ignore the stock price altogether and focus on the most important metric of all: the price-to-earnings ratio.
Thalman believes that many inexperienced investors go through a psychological phenomenon known as “sticker shock” when they are exploring purchasing relatively high-priced stock from well-known companies. In other words, investors may miss a great investment opportunity just because they are alarmed at the high price of the stock.
Thalman advises investors not “get caught up on the actual price of a stock,” but rather “dig a little deeper” and carefully examine a stock’s price-to-earnings ratio, or P/E. Google (NASDAQ:GOOG) currently trades at a relatively high price of $810.31 a share, but has a P/E of 25. As reported by The Motley Fool, this means that the investor is paying “$25 for every $1 of current earnings.”