QUALITY VERSUS PRICE AS FACTORS INFLUENCING COMMON STOCK PRICE FLUCTUATIONS

Abstract

THE FIELD OF STOCK-MARKET PRICE BEHAVIOR is probably unique among all areas of economic study in at least two respects. First, it has by far the largest number of universally known and accepted Second, these accepted facts are often unproven and all too frequently untrue. This article is chiefly concerned with one of the untrue facts. For many years the writer has read and has been told that low-priced stocks move faster and farther than high-priced ones. More specifically, it is said that low prices per share are conducive to volatility, that the percentage price fluctuation in a low-priced stock is commonly greater than it would be in a higher-priced stock of similar quality and prospects. The obvious implication is that low-priced stocks provide the ideal hunting area for profit-minded investorspeculators. The truth of the matter is that the percentage price fluctuations in most low-priced stocks are about the same as those in high-priced stocks of the same quality. The price instability which characterizes so many low-priced stocks should be attributed to their speculative quality, not to the fact that they are low priced. These conclusions seem to be amply supported by the statistical charts and tables which follow. Our demonstration logically begins with the routine calculations represented in Chart I. Everyone knows that low-quality stocks fluctuate more widely than high-quality ones, but few people know how much more, nor how much in absolute terms. Chart I presents rather definite answers on both points. The qualities of stocks represented range from the best available (Aa) to the poorest which can be classed as dividend producers-those which pay, but without certainty as to amount or time (C). The time periods used are periods in which the price ranges (differences between highest and lowest recorded transactions) represent mainly market fluctuations rather than secular growth or basic economic changes. The general results presented in Chart I are not surprising. Most