As stock valuations rise each day, Jim Cramer says investors need to figure out what they can handle in the market. He compared Amazon,Facebook and Microsoft to explain the concept of risk and reward amid elevated prices.
"As we go higher and higher, the risks grow and you need to know not just the rewards but what can go wrong after this historic run," the "Mad Money" host said.
Cramer chose these three stocks because they are well-known, and provide insight on the different ways that stocks can be valued in an overheated market.
Facebook hit an all-time high on Wednesday when it confirmed that its messenger service now has 1 billion users, with 200 million new users since the beginning of the year.
"That's a pretty monumental refutation to those who believe the world's abandoning Facebook in favor of competitor Snapchat," Cramer said.
The stock seemed expensive to Cramer at 31 times earnings, but he thinks the growth rate is actually accelerating, even with a 31 percent monster growth rate. That actually makes it cheap in Cramer's perspective, because growth stocks tend to trade between one or two times their growth rates and Facebook is at the bottom of the range.
"I pronounce Facebook as being relatively inexpensive versus a ton of other growth stocks in this market, suitable for those individuals willing to take on some risk in order to get a lot more reward than stock like Microsoft can offer," Cramer said.