We often hear the terms ‘cheap stocks’ and ‘expensive stocks’ in the stock world. Both analysts, stock market media also often provide reviews of cheap stocks and high-priced stocks.
In buying stocks, you are often advised to look for stocks that are already cheap in price, and tend to be more wary of stocks that are already expensive, because expensive stocks are prone to falling.
Talking about high-end stocks and cheap stocks… In what ways can a stock be said to be expensive or cheap? How to judge high-cost and low-cost stocks?
Assessing cheap and expensive stocks can be done using two methods of analysis: Fundamental analysis and technical analysis. Both methods have different ways of determining high and low stocks.
Therefore, you must be able to analyze and distinguish between the two, according to your goals (you want to choose cheap / expensive stocks for trading or investing).
CHEAP & EXPENSIVE STOCK: TECHNICAL ANALYSIS
Cheap stocks can also be seen through technical analysis. The purpose of technical analysis is to get profit in the short term, namely minutes, daily to one month.
So if you aim to trade by looking for cheap stocks, then you can use technical analysis to see and screen which stocks are already cheap. Also learn: How and Strategies to Find Discount & Cheap Stocks.
The meaning of cheap stocks in technical analysis does not only mean that the stock has gone down/corrected. But technically cheap, it means that apart from the stock has gone down, the stock is READY TO UP aka rebound, so you can use it to get short-term profit.
To assess cheap stocks in technical analysis, you can analyze them through:
1. Indicator analysis
2. Support resistance
3. Trend analysis
Analysis of indicators and a combination of support and resistance can be used to determine at what price points the stock is at a discount, and has the potential for a rebound.
Here: Full Practice of Finding Discount Stocks, we have also discussed in full the ways and criteria for good discount stocks to trade, and have the potential to rise.
The combination of indicators and support-resistance stocks can provide a psychological price point that is often a reference for traders, so you can see cheap stocks that have the potential to be bullish or will continue their decline.
CHEAP & EXPENSIVE STOCK: FUNDAMENTAL ANALYSIS
Fundamental analysis aims so that you can choose stocks to invest in long-term, or keep stocks for the medium-term (above 1 month).
Therefore, the way to minimize cheap and expensive stocks based on a fundamental analysis approach is to assess the STOCK VALUATION. This approach is different from the technical analysis (graphs) we discussed earlier.
In fundamental analysis, cheap or discounted stocks are also known as UNDERVALUED stocks. While expensive stocks are called OVERVALUED stocks.
Then, what fundamental analysis can be used to assess whether a stock is cheap or still expensive? There are several general analyzes that are often used to assess the high or low prices of stocks:
1. Price Earning Ratio (PER)
2. Price to Book Value (PBV)
So a stock is said to be undervalued, if the PER/PBV is below 8 times or the PBV is below 1. But if you want to analyze more specifically, you can compare PER/PBV with one industrial sector.
If the stock you are analyzing has a PER that is at most/tends to be small compared to stocks in the same industrial sector, then the stock you are analyzing can be said to be cheap or undervalued, and vice versa. This also applies to PBV analysis.
You can also analyze the cheap price using the company’s fair share price. You can learn and apply further analyzes about assessing undervalued and overvalued stocks here: Ebook Fundamental Analysis of Stocks Beginner – Expert.
CHEAP AND EXPENSIVE SHARE IS NOT JUST A NOMINAL QUESTION
Through this post, we can draw the conclusion that judging cheap and expensive stocks is not only based on the nominal share price, or even based on feeling.
For example, in nominal terms, A’s share which costs Rp. 10,000 is indeed more expensive than B’s share which costs Rp. 800.
However, from a stock valuation perspective, or technical analysis, it’s not necessarily a stock that costs Rp. 10,000 more expensive, and a stock that costs Rp. 800 is not necessarily cheaper.
If stock A and stock B are company shares in the same sector, but the PER of A’s shares is 5 times and B’s PER shares are only 50 times, it means that in terms of valuation, A’s shares are clearly much cheaper, although nominally A’s shares appear to be more expensive than B’s. stock B.
From now on, if you want to find cheap stocks, don’t just look for cheap stocks in nominal terms. Look for stocks that are cheap by technical analysis or fundamental analysis, depending on