Low Price Stocks Bullish For Some

Individual investors have always shown preference to buy low price stocks over high price stocks especially in challenging market conditions amid the chase for higher returns during an upturn due to the former’s lower base. Geyatee Deshpande finds out whether this strategy serves the purpose.

- Geyatee Deshpande

‘Old habits die hard’. This saying is often used by us in our daily lives and in many circumstances. It only means that it is hard to stop doing things that one has been doing for a long time. Likewise, most equity investors also have developed many habits that stick with them for the rest of their investment horizon. One such common habit is temptation to buy ‘low price stocks’.Here we mean lower denominated stocks like single digit (₹5), double digit (₹10) and so on.

The reasons for choosing low price stock over a high price stock is mostly due to expectation of a better chance for quick return given the low base and getting more shares by investing the same amount. Investors are willing to face higher volatility for the greed of higher return.

While this buying trend is very common among most investors, it will be interesting to know if the strategy of buying low-price stocks as against high-price stocks holds good in long term. Says Rameshbhai Mehta, a stock market veteran, “Practically it does influence one’s buying decision as to whether to go for a low- price stock or a high-price one. It is more psychological than anything. I preferred investing into Ashok Leyland as it used to trade at less than ₹15 per share while MRF traded close to ₹15,000 per share in first half of 2013. However, MRF has outperformed Ashok Leyland. I still find it little difficult to buy stocks that are trading above ₹1,000 per share. I aggressively hunt for low priced scrips but at the same time I do not totally ignore the high-priced scrips especially when there is enough merit in the growth story.”

Having said that the question is still relevant – whether focusing on low priced stocks can help generate extra returns without compromising on the risk (volatility) component.

OUR ANALYSIS