Price Vs Value – The difference between Price and Value by investment perspective

POSTED BY manish ON October 8, 2008 COMMENTS (17)

A Rose can be of more value than a Dress to your Wife or Girlfriend on Valentines Day. Even though that Rose was very less in Price compared to a Dress.

Today we will discuss things about investment products from a different perspective – Value and Price.

Price Vs Value

What is Price and Value?

Price : Price is the amount of money needed to purchase something.
Value : Value is the worth or Importance of something.

An Example

We pay Rs.8/Kg (20 cents/Kg) for Salt as part of our Groceries, Will we stop using it if its price rises to Rs.100/Kg or even Rs.400/Kg. May be not !!! Why ? Because the Value of Salt even then will be Very high, compared to the price we pay for it. Considering that, its a very cheap product.

As a personal Example, I recently bought a second hand mobile (Nokia 6610) to keep at my home as a land line just for Rs.800 (worth 8,500 at time of buying, excellent condition). The price i paid for it was much much less than the value it would provide to me. So i consider it as one of the best investments made till date.

By cheap I mean its Price vs Value is very high.

Cheapness (P) = Value provided by P / Price we pay for P.

The same way there can be things for which we pay high amount, they don’t have high value for us.

Please understand that it depends on individual where something is of great value or not. For example for me, an expensive Mobile set with 134 different things costing Rs.10,000 is low in value and high in price. I don’t buy things like that, but a digital Camera worth 12K a value buy for me (because of my interest in Photography)

So, in short we can say “Price is What we pay actually, and Value is what are ready to Pay”

We understand this in our daily Life, but we forget this simple rule when it comes to money and investing. Most of the time we invest in things which we should not because of this basic rule, but we are carried away by emotions or simple stupidity.

Watch this video to learn more about the difference between Price and Value:

Let us now see Some of the products which are really High Value, Low price

Term Insurance :

Term Insurance is one of the best example for this.

“How much are you ready to pay as yearly premium for Rs.50,00,000 Cover for 25 yrs tenure?”.

This is a question I ask a lot of my friends in there 20-30’s. And I am amazed to see that even with a miser mind they tell me at least twice the amount what it really costs. Everyone said 2k/month or min Rs.20,000/year. The actual cost is not more than 13-14k, in fact the best price is 10,112 for 30 yrs tenure from AEGON RELIGARE Life Insurance (Click Here to read more on this).

This clearly shows that it cost way less than the expectations of people and what people are ready to pay for it. The value offered by Term Insurance is more than what it costs.

Endowment Policies :

I am not sure if its my hatred for Endowment Policies or they really deserve my criticism every time, Or may be there are both the reasons. We pay so heavy price for Endowment polices and the value provided by them is almost nothing. Its a product designed for Wealth Creation, but wait … not for investor but for the Insurance company. (Click here to read more on Badness of Endowment Policies)

The other products I would rate in category of Cheap and Expensive are :

Cheap financial products:

  • Term Insurance
  • SIP investments in Equity Mutual Funds
  • PPF
  • Good Stocks in low markets (Like current markets, Buy Reliance, Infosys and Jaiprakash Associates for Rs. 1,00,000 each today and your retirement planning is probably Done !! If you are around 25 and retiring at 60)
  • An interest free loan given to a close or a very good friend. (even if you don’t get any interest, you get some emotional satisfaction or valuable relationship which is more important).

Expensive financial products:

  • Endowment Policies
  • Bank FD (at the time of High inflation)
  • NSC
  • Most of the stocks in High Markets ( not true for all stocks but most of them) – A high interest loan given to someone whom you don’t trust much. (Even if you get good interest, there is risk of loosing money)

Every time you invest your money its important to understand the price of it and value of it. If you find that its cost is less than what you are ready to pay, consider it cheap and go for it and not in the other case. Price and Value depends on Situation, time, age and other factor, don’t forget it.

Stock Market Investments

Most of the successful investors become one because they invest in stocks which are trading at price lower than they deserve, which market eventually finds out later. Currently In this markets Reliance is trading at 1400 (Oct 11, 2008), the it was trading at 2300 before a month, and has lost almost 40-50% in a month.

Considering it is going to start its OIL exploration and other things, its a good stock to own and at an excellent price. Its price is less and its value. Which makes it a good investment regardless of what is going to happen next month or next quarter. Sooner or Later it will turn out to be a good investment and reward its investors.

Same is with Jaiprakash Associates, ICICI Bank, DLF, Ranbaxy and other similar blue chip stocks.

Summary

When you analyse some product, stock, mutual fund, Home (Real estate) or anything for investment matter or even for general shopping, always consider value and price for it.

Disclaimer : Any stock discussed on this article is not a recommendation. Please analyse it yourself and then invest. It can also result in losses.

What do you think about this article? Do you like it?

Get FREE call back from Jagoinvestor Team

First Name*
Email*
Mobile*
City*
Yearly Income*
Time to Talk*
Which Package*
Your Requirement
Lead Source
Lead Status

17 replies on this article “Price Vs Value – The difference between Price and Value by investment perspective”

  1. Kripananda Chidambaram says:

    Maybe more knowledge can help in understanding value and price, especially in this confusing and complicated world of Personal finance

  2. Lakshmipathy says:

    Cheap = Worth Gained by reading this one /Time spent in reading this article. Thank you so much for the cheap article.

  3. shashank says:

    Hi Manish

    Just going through your blogs recently and landed up on this particular blog. Anyways niece perspective explained with day-2-day life examples.

    Please elaborate on P/E ratio

    regards
    shashank

      1. shashank says:

        thanks manish

  4. Halina says:

    In terms of stock investments, I always look at the P/E ratio in order to gauge the actual value of the stock. The lower the P/E, the more likely that you are getting a good deal on that stock. Typically, I won’t purchase anything that has a P/E value higher than 25.

  5. Manish Chauhan says:

    Brajesh

    i would rate both of them as long term players , DLF is badly beaten stock as of now , so its more down from its peak level , so from one angle it can be seen as more cheap stock …

    Even Bharti Airtel is a good one . I cant differentiate between both .

  6. Brajesh says:

    I Guess DLF is not that good a share. Bharti AIRTEL is a far better share for a long term investor. What do u think ?

  7. Manish Chauhan says:

    It may happen that mobile is correct example for everyone, there are people for whon it adds great value

    The point is a person should ask question to him/her self when they invest in something that weather they are happy to give the price what its asking for .

    manish

  8. Anonymous says:

    I like your simplicity, the mobile example happens in every person life, I have done that too going for fancy high price mobiles, but what value it get us. We never think that. Its a differnt perspective you have.

    Thanks
    Nitin Pillai

  9. Manish Chauhan says:

    Thanks for the comments

    Manish

  10. Rajandran Rajarathinam says:

    Currently In this markets Reliance is trading at 1400 (Oct 11 , 2008) , the it was trading at 2300 before a month , and has lost almost 40-50% in a month .

    — Nice Explaination

  11. Cheapest payday loans says:

    Looking very nice site and provides good content to us.good, keep up it.

Comments are closed.

Subscribe to Emails

More than 1,50,000 investors across the world trust & read Jagoinvetor articles. Subscribe for emails updates and get instant access to a free ebook.

Jagoinvestor is one of the most trusted personal finance websites which writes on various topics like financial planning, mutual funds, insurance and banking.

 

Download Our FREE Ebook!

Available only for first 100 people today

Download Our FREE Ebook!

Available only for first 100 people today