Many investors mistakenly believe that a $500 stock is "expensive," while a $10 stock is more of a bargain. While that's totally wrong, a $500 stock may still seem out of reach for investors of limited means. Fortunately, there are ways to get around that.
Let's get that value misconception out of the way first, though. A stock's price alone doesn't really tell you anything about its actual value. Consider Star Scientific (Nasdaq: CIGX ) , a company working on reducing carcinogens in tobacco, among other things. Its stock might seem fetching at less than $5 per stub, but the company has been losing money for years, despite having various technologies that might deliver profits one day.
Meanwhile, robotic surgical equipment maker Intuitive Surgical (Nasdaq: ISRG ) , with its shares around $340 apiece, has been averaging almost 30% annual revenue growth over the past three years, and growing its earnings even faster. Its forward price-to-earnings (P/E) ratio is a far-from-astronomic 26.
The poster child for this lesson is Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) , with its class-A shares topping $110,000 apiece. Remember that they surely looked pricey at $1,000 per share, and then at $2,000, and so on. Even today, many find the company undervalued, given its strong businesses in insurance, railroads, and more.
Ways around high prices
If you want to buy into Intuitive Surgical, or $500-plus Google, or $300-plus Apple, but you don't have that full sum to invest, you're not out of luck. You can always buy just one share of a stock, although you should ideally aim to spend no more than 2% or so of your investment in commissions to your brokerage. After all, spending $10 to buy $100 of a stock puts you 10% in the red from the get-go.
Consider simply saving up. If you can accumulate $400 or $500 to invest over a few months, you can buy one or a few shares of a high-priced stock while keeping your commission in check (if you use a solid, inexpensive brokerage).
Online broker ShareBuilder offers another affordable way to set up automatic investing plans to buy fractional shares of high-cost stocks. With its low-cost plans, you can put small amounts of money to work, slowly accumulating shares over time, no matter how much individual shares cost.
In addition, you can also invest in certain companies via dividend reinvestment plans or direct investment plans (often referred to as DRIPs or DSPs), which let you plow dividends into additional shares or fractions of shares of stock and inexpensively buy fractions of shares with small sums such as $25 or $50. Some brokers, including TD AMERITRADE (Nasdaq: AMTD ) and Schwab (NYSE: SCHW ) , have aimed to attract and retain more customers by offering dividend reinvestment. Just bear in mind that you'll still have to pay regular commissions to buy the initial shares.
Don't let a high price deter you from investing in the stocks that look best to you.
To find the best broker for your money, be sure to check out the Fool's Discount Broker Center.
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