As investors we all like to think we can avoid the pitfalls that other people might suffer, but as many of us also know we can be our own worst enemy when it comes to choosing where to put our hard-earned cash.

Sometimes even things as basic as comparing share prices can lead us to the wrong conclusion, so here are three common mistakes and how to keep from making them.

1. LOW-PRICED SHARES ARE CHEAPER THAN HIGH-PRICED SHARES

Possibly the most common misconception of all, and one that from time to time we are probably all guilty of when scanning the market for ideas.

Say you have a choice of investing in two companies, A and B, which have the same market value and do exactly the same thing, but Company A’s shares are 30p while Company B’s shares are £30 each.

Optically, Company A’s shares look cheaper, or better value, than Company B’s shares, simply because they are 30p instead of £30.

However, Company A has 10 million shares and Company B has 100,000 shares so both companies have a market cap of £3 million.

True, you get 100 times more shares for your money in Company A, but that doesn’t make them cheaper or better value.

If both companies earn the same profit and pay the same amount in dividends, it doesn’t matter which one you own shares in – the earnings per share for Company B may be 100 times those of Company A, but in pounds, shillings and pence they are the same and so is the price-to-earnings multiple.

Alternatively, if Company B makes twice as much money as Company A and pays twice as much in dividends, shares in Company B are actually half as expensive as shares in Company A and have double the yield to boot. Finally, low-priced shares aren’t safer than high-priced shares, if anything we would argue the opposite.

Just because Company A’s shares are only 30p, it doesn’t mean you can’t lose money in them – in fact, as this investor can readily testify, it’s quite easy for a low-priced share to lose value without you really noticing.

If Company A’s shares drift from 30p to 20p it’s unlikely to create a great deal of fanfare, but if Company B’s shares fall from £30 to £20 it is a lot more obvious because optically – and in reality – investors have lost £10 per share not 10p per share. However, in percentage terms there’s no difference.

WHEN SMALLER SHARE PRICES ARE RELEVANT

If you want to invest relatively modest sums in individual stocks, for example through a regular investment instruction, a really large share price might render this impractical.  

2. SHARE SPLITS INCREASE THE VALUE OF YOUR HOLDING

This is a nice idea but all that happens when companies have a stock split is your holding gets divided into a greater number of shares.

Yes, you end up with more shares than you had before, but the market adjusts the price downward to take account of the increased share count so there is no net benefit and the value of the company remains the same.

Nor does a stock split count as ‘compounding’, unfortunately – that would be the case if you received a bonus share instead of or on top of your regular dividend, as that extra share would then entitle you to more income the next time the dividend was due.

In fact, as we discussed some time ago, companies which split their shares tend not to do as well as companies which don’t, which rather neatly brings us back to the first point – low share prices don’t always mean something is a bargain or that the share price can’t go lower.

3. TIMING THE MARKET IS IMPORTANT IN INVESTING

Timing the market is one of the most difficult things investors can try to do, and even some of the greatest names in the business admit they have no edge when it comes to knowing when markets will rise or fall.

When it comes to trading, timing is certainly important as it can determine whether a trade makes or loses money, but when it comes to investing for the long term it actually makes little difference.

Even if you had bought a FTSE 100 tracker fund at the very height of the tech bubble in 2000 you would still be in the money today, and the same applies if you had bought in 2007 before the global financial crisis or indeed in 2020 just days ahead of the pandemic.

While there are often large sell-offs, being able to predict when they are going to happen is nigh-on impossible, and over the long term share prices tend to go up regardless as the companies which make up ‘the market’ increase their earnings.

Time spent in the market is far more important, and the ability to ride out the sell-offs and still be there to take part in the rallies which follow is what marks out true long-term investors.

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