Newbie investors often think of cheap stocks as a lucrative opportunity. They believe that the lower the share price, the greater the potential for profit. If a stock that costs $ 1 only increases by $ 1, your investment will be doubled. To achieve the same result with a stock of $ 100, the stock would have to grow by $ 100, which is almost unrealistic. These calculations are correct, but they mislead the novice trader. The secret to successful stock market trading is patience. Investors look for cheap stocks (usually small cap or micro cap stocks) based on the calculations above.
If you believe the ads, people are making huge bucks on these titles every day. Yes, it can happen. But in general, when you buy cheap stocks, you are unlikely to get rich. On the contrary, you can lose money. Cheap stocks are hardly a profitable investment. They don’t behave like ordinary stocks. They are not listed on any of the major stock exchanges (as far as OTC securities are concerned). Even if you open a trading account with a good online broker, buying cheap stocks presents some challenges. Any normal broker will give you the option to trade them, but with special rules.
Selection of good inexpensive stocks to buy
There are three obvious ways to invest in cheap stocks. Each of them is difficult and does not guarantee income. It is much easier and less risky to make money if you invest in companies that meet the criteria for value. But it will take patience: first you have to find a good opportunity and then wait for the results.
Pump and dump
Pump & Dump is the most popular strategy for trading cheap stocks. You buy a stock at a low price and convince others that the stock should be worth a lot more. Then they sell the stock when a rush in demand increases the value of the stock. Unfortunately, this strategy is considered unethical and, in some countries, even prohibited. Its implementation is also very difficult.
Each investor has encountered advertising mailings, praising certain stocks quoted in pennies. They promise that their price will skyrocket. The stock is about to explode! Better buy now, or it will be too late! Calm down and think twice.
If the stock is really about to rise in value, there must be a reason for it. Maybe the business of this company has improved. Maybe this company is taken over by another company. Maybe they’ll get a huge exclusive order. If the person who sent you the marketing letter knows why the price should go up, ask yourself two questions. First, why is this person announcing this particular promotion now? After all, it is inevitable that such a solicitation will drive up the price. Why wouldn’t he take a more important position himself? Second, how does that person know the price is going to go up?
Most likely, your anonymous friend bought the stock for 25 cents. And now he wants as many people as possible to buy the stock at 50 cents. So it creates a frenzy and attracts as many buyers as possible. There has been no change in the activity of the company. The value of the paper is still 25 cents. This is a ploy to make multiple profits. It is not designed to help you get rich at all.
Catch the luck.
This is a much more ethical way to buy stocks because you buy the stocks of a valuable company and then hold the position until the price reaches a point where you are ready to cash. a profit (or a loss). Unfortunately, luck is an unpredictable matter. There is no easy way to generate a list of all the good, cheap stocks to invest in. Not all good deeds come cheap. And certainly, not all cheap stocks are good. After trying to start a business and a series of financial setbacks, a business may withdraw from the market. In doing so, the company will sell all of its assets to its creditors and only pay you a fraction of what you invested in its shares.
Of course, the business can get back on track. But cheap stock is valued this way for a very specific reason. You must realize this unless you are a gambling enthusiast. In Las Vegas or Atlantic City, you at least know your odds of winning before you bet. There is no such guarantee in cheap stocks.
Find a crisis exit stock
Sometimes companies go through horrible bankruptcy procedures. Such a procedure results in a restructuring (or takeover) at a good price. Perhaps such a company has freed itself from huge debts or has significant inventory, equipment, real estate, patents or other valuable assets that have attracted a buyer.
Perhaps with careful management the business will pick up.
Such investments are extremely rare and very risky. It’s hard to predict when an airline will get back on track, or when a Canadian plutonium mining company will find a new vein. But it can happen.
If you do your value analysis carefully, sometimes you can find a business with potential. Sometimes the market acts irrationally and undervalues a company. It’s unfair, but it happens, and good opportunities for investors are opening up.
Unfortunately, this rarely happens in cheap stocks, but nothing is impossible.
What does a business have to be for this to happen?
– Actually be profitable (you don’t want to invest in a business that is in loss)
– have sufficient assets or generate sufficient cash flow to pay its creditors and not exit the market
– Implement its strategic plan to return to one of the main stock exchanges.
All of these factors are necessary to reduce the risk of an investment.
Should I buy cheap stocks?
Even if a stock is selling for a very attractive price and you think the 25 cents invested could easily double or triple, stay calm and cautious. Do your research. Don’t try to get rich by spending all your time finding cheap miracle work. Strive to earn consistently by adhering to the principle of investing in value. It is best to select quality stocks at good prices, which you can learn by taking a trading training course.