Fools Isaac Pino and Matt Thalman discuss one key investing point that both new and old investors need to keep in mind when searching for stocks to buy.
The "sticker shock" of such high-profile companies as Google (NASDAQ:GOOGL), which trades at $810 per share, and Apple (NASDAQ:AAPL), which trades at $450 a share, can turn investors off and lead them to miss a great opportunity. But a high share price alone doesn't mean a stock is expensive or that the price can't go higher in the future.
One metric investors should be looking at is the price-to-earnings ratio. Google trades at a P/E ratio of 25, while Apple is even cheaper, at only 10. Compare that with 3D Systems (NYSE:DDD), which has a shares price of only $31 but trades at a P/E of 66.
In Apple's case, an investor is paying $10 for $1 worth of earnings. With Google, it's slightly more expensive, at $25 for every $1 of current earnings. With this sort of thinking, 3D Systems' $31 share price doesn't look cheap anymore, even though it is 14 times less expensive on a dollar basis than Apple.
One more thing to remember is that a 10% return on $2,000 in Google is the same as a 10% return on $2,000 in a $31 per share stock. What you must determine is this: Which one carries more risk?
Isaac Pino, CPA owns shares of Google. Fool contributor Matt Thalman owns shares of Apple and Google. The Motley Fool recommends and owns shares of 3D Systems, Apple, and Google. It has the following options on 3D Systems: short Jan. 2014 $36 calls and short Jan. 2014 $20 puts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.