Why a £2 share is not cheaper than a £200 one

A £2 share is not cheap. A £200 share is not expensive. Share price on its own carries almost no information, and the belief that it does is one of the most reliable ways for new investors to lose money.

Why price alone is meaningless

The price of one share depends entirely on how many shares the company decided to slice itself into. A company worth £10 billion can have a £2 share price or a £2,000 share price. Same company, same value, different number of slices.

Drag the sliders. Watch how easily the cheap-looking share turns out to be the bigger company.

The penny stock trap

"It is only 30p, it only has to get to 60p and I have doubled my money." This sentence has cost more beginners more money than almost any other. It contains a hidden and completely false assumption: that a low price means there is more room to rise.

There is not. A 30p share doubling requires exactly the same thing as a £300 share doubling: the business must become twice as valuable, or the crowd must become twice as enthusiastic. The price tag is irrelevant to the difficulty.

What to look at instead

• Market cap tells you the size of the company, and therefore what kind of growth is even plausible. A £2bn company can realistically become a £20bn one. A £2 trillion company cannot easily become a £20 trillion one.
• Valuation multiples such as the P/E ratio tell you what you are paying relative to what the business earns. That is a comparison worth making.
• Enterprise value adds debt and subtracts cash, which is what an acquirer would actually have to pay.