Is It Better to Buy Expensive Stocks?

So, you found a promising stock that you may want to add to your portfolio. But there's a catch: Expensive stocks can cost hundreds of dollars to buy just a single share.

If you buy just a few shares, which could be 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.

OK, 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?

The days of portfolio-building based on the number of stocks held are long gone. There simply are too many stocks and other financial instruments out there to consider. And they all move differently.

Besides, most market strategists agree, you don't necessarily need 10 or even 100 shares to see potential results—it depends on how the stock moves. Some stocks are more volatile than others. An active, expensive stock might clock a higher overall percentage gain than lower-priced stocks, regardless of the quantity.

Options also offer another path of exposure to high-priced stocks. But this is a much riskier approach than taking a stock position and they are not appropriate for everyone. It can also get complicated because there are plenty of strategies to consider and lots of decisions to make for each one. And owning an option does not provide you with certain benefits that can come with stock ownership, such as any future dividend payments from the company, or voting rights. Plus, options expire after a certain amount of time.

If you're interested in trading options on a high-priced stock you want to gain some exposure to in your portfolio, your first step is to get some solid options trading education. Schwab clients have access to an options trading curriculum that starts with the basics of trading options. Once you've learned about options and the different ways they can be traded, you can consider applying for options approval.

A fractional share is less than one whole share of a company. Fractional shares allow you to invest in stocks based on a dollar amount, so you may end up with a fraction of a share, a whole share, or more than one share.

Let's say you want to invest in a company, but the total cost for a share of stock may be higher than what you want to pay. Instead of buying a whole share of stock, you can buy a fraction, or slice, of a share. For example, if a company's stock is selling at $1,000 per share and you were buying $200 worth of it, you would own 0.2 (20%) of a share.

Schwab's Stock Slices^® offer a low-cost (starting with a $5 minimum), more accessible way for investors to get started investing.

OK, not everyone can buy into a high-priced stock that costs around $3,000 per share. But you may be able to find an exchange-traded fund (ETF) or mutual fund that holds a particular high-priced stock.

Keep in mind, some funds will have a larger or smaller exposure to your stock of choice than others. Plus, each fund will have a slightly different basket of stocks in addition to the high-cost stock you're targeting. Lastly, all ETFs and mutual funds are subject to management fees and expenses. Be sure to read the fund's prospectus before investing.

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.

For example, let's look at the stock of a car manufacturer—XYZ. This stock has traded at more than $1,000 per share over the past year and has a hefty global supply chain that ranges from rearview mirror manufacturers to heavy-duty transit manufacturers. If you were interested in trading this company's supply chain, it might be wise to sift through each ancillary company to determine which are publicly traded (some are international companies), which stocks are tradable according to your locality, and which stocks might be investment worthy.

Not all of these may be investment worthy or even accessible to U.S. investors, but they offer insight to the range of companies you might come across when investing in a supply chain.

If the high-priced stock underperforms, or if the company is 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. In short, do your homework.

The answer here is a solid no. It's important to distinguish between a high-priced stock price and a high-cost valuation. One way to do this is to look at a stock's price-to-earnings, 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 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 there's an element of subjectiveness to it. The key is to really understand 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-priced stock to have a low P/E ratio and a low-cost stock to have a really high P/E ratio. Always keep in mind 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-priced stocks. Some investors may use options, funds, or invest in ancillary stocks. Remember, the quality of stocks you hold is much more important than the quantity or size of your positions.

And keep in mind, a high price tag can still be either expensive or cheap in valuation. Invest wisely.