I’m always amazed at how often I hear people say that they can’t afford “expensive” stocks. When they say “expensive” they really mean high-priced, as in price per share as opposed to truly expensive based on P/E ratio or some other valuation metric. So these same people would be all over the stock if they simply split the stock so that the price per share was lower. That logic befuddles me because it’s still the same stock with the same valuation. I guess the same people that go nuts over stock splits also are thrilled when they break a $100 bill into five 20s.

The way I see it, if you can afford to buy one share then you can afford to be in the stock. Google is a perfect example of this. Even if you only had $1000 you could have purchased GOOG. I bought well under 100 shares when I bought it at $280 in August in my IRA. As always, I divided up my total equity and bought $X worth of stock — however many shares that worked out to. Right now I’m up 35% on that position. So if a person used their $1000 to buy 3 shares GOOG when I got in they’d be sitting on a nice percentage gain from a stock that they supposedly couldn’t afford.

I always think about investing in terms of dollars and percentages instead of number of shares and points. That’s the only way to equalize things across high and low-priced stocks.

There’s an article in today’s USA Today that discusses this topic:

Beware of ‘bargain’ stocks

Q: I’m looking for some low-priced growth stocks around $5 a share that might be worth the risk. Any suggestions?

A: Your question concerns me. And even more troubling is how many other Ask Matt readers ask the same thing.

I don’t know what it is. Maybe it’s the desire of all of us to get a deal. But for whatever reason, people are always looking for “low-priced” stocks. And when I say “low priced” I mean stocks with really low share prices.

This strategy makes no sense. If you pay $1 for 1,000 shares of stock, that is the same as paying $10 for 100 shares. It’s still a $1,000 investment. A low share price doesn’t mean the stock is a potential bargain.

Rather than focusing on a company’s share price, you should examine things that actually affect the future stock price, such as profitability, growth and valuation.

Keep in mind a company’s valuation is not the same as its stock price. Valuation is how much you’re paying for the company relative to some aspect of its operations. A popular valuation measure is the price-to-earnings ration (P-E), which describes how much you are paying for each dollar of earnings generated by the company. The higher the P-E, the more you are paying for earnings. And keep in mind that even a stock with a low share price can be expensive on a P-E valuation basis.

My advice: Forget about share price and focus on valuations. You’re better off with just 100 shares of a good stock trading for $10 than 1,000 shares of a bad company trading for $1.