Beware Of The Low Price Illusion

The absolute level of a firm’s stock price is arbitrary, as it can be easily manipulated by altering the number of shares outstanding (for example, by splitting the stock). Despite this obvious fact, research into investor behavior has found a strong preference for low-priced stocks on the part of individual investors.

For instance, research has shown that individuals tend to hold lower-priced stocks than institutions. And there is additional evidence demonstrating that the number of small shareholders in a firm’s stock increases following a split to a lower price level.

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