How much is enough

Apurva Sheth
Last time I spoke to you about the  myth of high priced stocks. Retail traders generally avoid buying high priced stocks because they think it to be an 'expensive' deal for them. From a fundamental perspective a stock's Price to Earnings ratio gives us a picture of how expensive or cheap it is.

I elaborated the technical perspective or the way I look at these stocks. Most of these stocks have a low beta and one of the possible reason for that could be high promoter and institutional holdings. These two groups generally remain in the stock for a longer term. Promoters are strategic investors and do not sell their shares frequently in the open market. The Institutions do not participate in the markets as often and whenever they do, the change of hands will be mostly from one institution to another. This results into a lower beta for these stocks as majority of the shareholders do not sell shares when the markets go down. Thus, the 'actual' free floating shares in the market are very less.

The Non-Institution traders are left with very little number of shares that they can deal in. This results into too much money chasing too little stock. One of the requirement for a stock price to go up is that there should be more buyers than sellers which is the case all the time with these high priced scrips. The second thing to look out for is whether at a given point of time there is more enthusiasm amongst buyers than sellers.

When both these requirements are fulfilled then it becomes an excellent setup for a long trade. So instead of shying away retail traders should happily latch on to such stocks whenever they find a similar setup.

But this is not the case with retail traders. They have been avoiding high priced shares despite knowing these facts. What could be the reason behind it?

A reason which one of our reader Mr. Tejinder mentioned and I think that could be the likely cause. Retail Traders normally think more in terms of the quantity of shares that they buy rather than the total amount they are investing in the stock.

Normally, traders buy shares in multiples of 100, 500 or 1,000. A round figure quantity is better to remember than an odd figure. However, this thing doesn't work when one is buying shares which are high priced. For example if one were to buy 100 shares of a stock priced Rs 3,000 then this would amount to a total investment of Rs 3 Lakh which many traders may not be able to afford.

More important than affordability is sticking to the position sizing rule which every trader should follow. Without a proper position sizing strategy a trader is doomed for failure. Thus it is very important to stick to a position sizing strategy and buy only as many quantity of shares which this rule suggests.

But, unfortunately our mind is concentrating more on the quantity rather than amount invested. We are so hard-wired with buying in multiples of 100's and 500's that the idea of buying 1, 5 or 10 odd shares of those high priced scrips do not appeal much to us.

This keeps us away from these 'high priced stocks' and draw us more towards the cheaper stocks. The definition of cheap will vary from person to person. Most people think that a cheap stock can rally more than a high priced stocks. For example one would argue that a 100 Rs stock can become 200 Rs stock quickly than a 10,000 Rs stock to become 20,000 Rs stock. Stocks like Eicher Motors, Bosch & Page Industries have proved this wrong. The have doubled and tripled despite being high priced while many other cheap stocks have languished.

I think one should always look at the potential of percentage returns that a stock can deliver rather than the absolute value by which it moves up. Thus, a total investment of 30,000 Rs in a 3,000 Rs stock should be no different from a 30,000 Rs investment in 300 Rs or 30 Rs stock.

I think one should look at stocks from this point of view only otherwise one wouldn't be able to buy a high priced stock ever and always be left with a feeling of not able to buy enough.

This will require a huge shift in the psychology with which we look at markets. And to do this a trader needs to educate himself. But, you don't have to worry. I have a good news to share with you, my colleague and Editor of Daily Profit Hunter Asad Dossani is working on something which will benefit you. He will deliver a Master Series of educational videos in a couple of days from now. He will speak about trading and share insights on a wide range of topics related to trading. So just watch out for it.

Do you buy shares in multiples of 100's, 500's only? Share your views in the Club or share your comments here.

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13 Responses to "How much is enough"
MALAKONDAIAH PANTAGANI
30 Apr, 2015
Dear Sir, I am new to stock market. I am a Officer. I took it as my profession for earning some additional amount to my pension.I am glad at last, I could understand some thing about stock market by Ur valuable and correct way of describing. My view on quantity (more lower priced stocks) super seeds the quality ( less higher priced stocks).Now on reading the article posted on 22-04-2015,i.e on how much is enough, every one should accept Ur analysis . Great going Sir. I will change my attitude from now on wards and will follow the position sizing rule. MALIKLike 
manjunath
26 Apr, 2015
All of your articles are very much interesting and very much educative for newcomers like me. I am trying to learn the trade skills. I have burnt my fingers many times. Recently when I was watching the price movement of SRF, I found that the value was coming down inspite of low volumes and there were more buyers than sellers. The price should have gone up but has gone down. What are your comments, Sir?Like (1)
Siddharth Sanyal
24 Apr, 2015
I am new to the stock market and took this up as a post retirement activity. For me everything is new and fascinating. I enjoy reading your articles and learn a lot from them. I have been buying shares that are "cheap" so that I could buy more of them in the hope that they will give me some returns and if they don't, then I don't have much to lose! I believe that if I have 1000 "cheap" shares (which I can afford with my pension) I will earn Rs 1000 if the share prices go up by even one rupee. Whereas if I buy 5 "expensive" shares for the same amount of money, I will have to wait for the share prices to rise by at least Rs 200 to earn the same amount of money! Am I wrong in thinking this way?Like 
Siddhartha Guha
23 Apr, 2015
One of the main reasons for purchasing shares in sizes of 100 is the idea that in case of price rise, you can recover your investments by selling some and retaining the other as profit.Like 
Siddhartha Guha
23 Apr, 2015
One of the main reasons for purchasing shares in sizes of 100 is the idea that in case of price rise, you can recover your investments by selling some and retaining the other as profit.Like 
Sudhakar K
23 Apr, 2015
Not relevant to this topic. One thing I observed in this correction. Last time in March'15 when nifty was @ 8300-8400, my portfolio down by 13-14%. Now in this correction, it is down by 3% only. What could be the reason??Like 
DIVEKAR
22 Apr, 2015
I had a feeling earlier that we should not or we can not purchase high priced stocks. but after after going through Mr Apoorvas articles now I am purchasing even high priced stocks let it be 2 or 3.Like 
P k saha
22 Apr, 2015
I buy shares by PE method and normal funds are around Rs 10,000/- . Thus if I select a share which costs 3000/- then I will by 3 or 4 shares. Only problem is when the share goes above 10,000. Then I can never buy since my investable funds are in the ten thousand range at any time. This is the reason that I have not bought shares like Bosch for quite some time although I used to buy 1 share in old days.Like (1)
pandey
22 Apr, 2015
I DO agree. Trading and psychology goes together. Corporate cash this psychology by splitting high value shares. Like 
raju
22 Apr, 2015
High price stocks usually have high P/E and high P/B ratios. Should we worry on these ratios to invest in Trading?Like 
rajesh
22 Apr, 2015
It is not a comment but a querry. I am a new person in this field and trying to understand the market. If the holders of high priced stocks do not trade/sell quite often as per your article, what is the interest that they have? are these stocks paying high dividend ? Except for certain exceptions the price variation in such stocks is not much as compared to the investment amount.Like 
A.Muruganandan
22 Apr, 2015
A very interesting and thought provoking article. You could have included LMW and MRF in that example.Like (2)
Jayashankar
22 Apr, 2015
I accumulate shares like page Indus richer motors Bosch pandg glaxo glaxo smith Kline nestle in small quantities like 2 each or 5 as and when prices dip.This method proves to be beneficial in the long run.jayashankarLike (1)
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