Today, we’re going to have some fun and while having some fun, I will clarify a very important misconception that I have seen among a lot of budding investors. Let me ask you guys a simple question. As on date, the stock of Idea is trading around 10 rupees per share whereas that of MRF is somewhere around 66,000 rupees.Which of these two stocks is more expensive? Now, obviously Idea looks much cheaper, but you also realize that this might be a trick question because why else would we make a video about it? There is something more to it than just the price, isn’t it?

Yes, there absolutely is. Let me explain that with an example. Assume you are in a market for a brand new car and you get two offers. You can buy car X for 5 lakh rupees or you can buy Car Y for 10 lakh rupees. If budget is not a problem and you can afford either of these cars, which of these two cars would you say is giving you a better deal?

Now, what are you going to say? You will say there is not enough information. So what exactly are these X and Y? What exactly am I buying? It is because if they happen to be comparable cars like Maruti Swift and Hyundai i10, that decision would be easy to make because clearly Swift looks much more reasonably priced as compared to Hyundai i10.

However, what if instead of the Hyundai i10, the other car happens to be a Ferrari. Now, tell me which of these two cars is a better deal? Will you spend on Swift or would you rather pay 10 lakh rupees for the Ferrari? Of course you will go with the Ferrari because this is a deal of a lifetime.

The point I am trying to make here is that the question is not so much about the price. The question is about the value that you are getting for the price that you are paying. In the same way, we cannot compare two companies just on the basis of their share prices, because prices do not tell us anything about the value that we are getting.

The real value of a company is determined by the profit that it is generating and its future prospects. There are companies like Idea that offer little to no value because they are not even profitable and that is why their stock price is so low, whereas profitable companies like MRF command a much higher stock price because they are leaders in their sectors and they have a solid track record of consistently growing investors’ money.

This is the main reason why I made this video because I see a lot of innocent investors who are starting out in the market and  see some of these penny stocks that are trading at one, two or even three rupees and these investors perceive these companies to be cheap. Whereas the reality is that these stocks are actually not cheap because the intrinsic value or the fair value of most of these companies is basically zero.

So my message is very clear. Don’t just blindly look at the price. Look for the value that the stock is offering and remember that most of these penny stocks are like a junk car/ Even though they might be selling for a hundred rupees, it will still be a bad idea to buy them.