If you want to invest in a high-priced stock and can only afford to buy a few shares, you may want to consider other investment choices that give you similar exposure without paying the high price tag.
You can use derivatives, funds, and even ancillary stocks
Just remember that a high price tag doesn’t necessarily mean that a stock has an expensive valuation
So, you found a promising stock that you really want to add to your portfolio. But there’s a slight problem: It can cost hundreds of dollars to buy a single share when the price per share is high. If you buy just a few shares, which is pretty much all you can afford, you’ll be holding a pittance of a position. But if you spend more to grab a larger stake, then your once-diversified portfolio may end up all skewed and out of balance.
Isn’t there another way to participate in these high-priced stocks?
As you might guess, the answer is yes. But before we jump into ways to overcome the price per share, let’s put first things first and make sure you’re seeing the situation from a clear perspective.
Okay, so you can only afford a few shares of an expensive stock. Ask yourself: given the price per share, how many do you really need—five shares? 10 shares? How about 25, 50, 100, or more?
As TD Ameritrade investment coach Michael Kealy said: “Gone are the days of many investors building a portfolio based on the number of stocks you’re holding.” There are way too many stocks and other financial instruments out there. And they all move differently.
“You don’t necessarily need 10 or even 100 shares to see potential results—it depends on how the stock moves,” Kealy explained. Some stocks are more volatile than others. If you can afford a few shares of a high-cost stock and if it happens to be more active than other, less expensive stocks, then just remember that you’re investing for the overall percentage gain, not for the quantity of stock shares.
Another way to get exposure to high-cost stocks is through options. But this is a much riskier approach than taking a stock position, and can get complicated, with plenty of strategies and lots of decisions to make for each one.
If you’re interested in trading options on a high-cost stock you want to add to your portfolio, your first step is to get some solid options trading education. TD Ameritrade clients have access to an options trading curriculum that starts with the basics of trading options and progresses to advanced strategies. Once you’ve learned about options and the different ways they can be traded, you can consider applying for options approval making your first options trade.
Okay, not everyone can buy into a stock like Amazon (AMZN) that costs more than $1,000 a share. But you may be able to find an exchange-traded fund (ETF) or mutual fund that holds AMZN. One way to start research is to sign in to tdameritrade.com and go to Research & Ideas > ETFs: Market Center (see figure 1).
Note that some ETFs will have a larger or smaller exposure to your stock of choice than others. Plus, each ETF will have a slightly different basket of stocks in addition to the high-cost stock you’re targeting.
During the San Francisco Gold Rush of 1849, there were two ways to make a fortune: dig for gold (most people did this) or sell shovels and other equipment to gold miners. The railroad magnate Collis Potter Huntington, of Central Pacific Railroad fame, chose the latter route.
Transferring that concept to high-cost stocks, some investors might prefer to trade the stocks that make up a company’s supply chain if the company’s stock is trading too high.
A couple of caveats, though. Not every company might be investment-worthy. Some companies are emerging, while others might be more mature and established. Some companies are publicly traded in the United States, while others may be based abroad and inaccessible to U.S. investors. Some companies are private and not publicly traded.
Take Tesla (TSLA), which has traded as high as $968 per share in the past year. Michael Kealy said: “If you were interested in trading Tesla’s supply chain, then you’d have to sift through each ancillary company to determine which are publicly traded, which stocks are tradable according to your locality, and which stocks might be investment worthy.”
Tesla’s supply chain consists of nearly 50 companies, including Gentex (GNTX), which manufactures automatically dimming rearview mirrors, and Burlington Northern Santa Fe Corp (BNI), which likely delivers Tesla’s parts. You also have a number of international companies such as Brembo (BIT: BRE), an Italian brakes manufacturer, and Sika (OTCMKTS: SXYAY), a Swiss chemicals company that produces acoustic dampers for Tesla. Not all of these may be investment worthy or even accessible to U.S. investors. But they give you an idea of the range of companies you might come across when investing in a supply chain.
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Should the high-cost stock underperform, or if the company might be vulnerable to “personality risk” or “product risk” in the mainstream media, then investing in ancillary companies could dampen your risk exposure to a given stock.
Many investors will do research to make sure the ancillary stocks you’re investing in are worth holding. In short, you have to do your homework.
The answer here is no. As Kealy commented: “First of all, it’s important to distinguish between high-cost price and a high-cost valuation. And one way to do this is to look at a stock’s price-to-earnings ratio, or P/E ratio.”
If you’re not familiar with this “granddaddy” of a metric, you can learn about the P/E ratio here. A high P/E ratio could mean that a stock is overvalued, or that investors are expecting it to perform well in the future, or both. It doesn’t indicate anything definitive, and it’s sort of subjective, so you really need to know the other fundamentals behind a stock to make a sound assessment.
But here’s another important thing to know: It’s also possible for a high-cost stock to have a low P/E ratio, and a low-cost stock to have a really high P/E ratio. So just remember that high cost in price is not the same thing as high cost in valuation. Assessing the difference is more of an art than a science.
There are many low-cost ways to invest in high-cost stocks. Some may use options, funds, or invest in ancillary stocks. Remember that the quality of the stocks you hold is much more important than the quantity or size of your positions. And remember that a high price tag can still be either expensive or cheap in valuation. Invest wisely.
Karl Montevirgen is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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