Expensive share prices are a thorny issue for investors, particularly new investors with limited capital.
A high absolute share price is not a symptom of an overvalued stock. Rather, it simply represents a smaller issued share capital base available for investors to purchase.
Let’s consider food and beverage giants PepsiCo (NASDAQ: PEP) and Coca-Cola (NYSE: KO).
Both companies operate with similar business models and have roughly the same market capitalisation.
However, Pepsi’s shares cost nearly three times more than Coca-Cola’s.
This discrepancy is because Pepsi has a lower outstanding issued share count at 1.4 billion compared to Coca-Cola’s 4.3 billion.
The example above illustrates why absolute share prices may be higher even when two companies have roughly the same market capitalisation.
When the share price of a company goes too high, companies may decide to split the stock to bring prices down to a more palatable level.
For example, Nvidia’s (NASDAQ: NVDA) shares were trading at US$188 two years ago....