Buying Low Priced Stocks: Cheap For a Reason

by | Jan 8, 2014 | Asset Management, Podcasts

In this week’s Mullooly Asset Management podcast Tom and Brendan pick up where they left off last week in their discussion of highly priced stocks. They talked about names like Apple, Google, and Precision Castparts to name a few. These expensive stocks cost a high dollar amount per share, and that scares off some investors. If you missed that discussion you can find it here. This week they cover the other end of that spectrum. A lot of investors love to gamble on low priced stocks. Find out why buying low priced stocks might not be part of a solid investing game plan.

There are plenty of investors out there that would prefer to buy 1000 shares of a $3 stock over 100 shares of a $30 stock. What this mentality neglects to focus on is if these stocks go up %50, investors will see the same amount of gains. People like to think that they can pick a stock off at the very bottom and make tons of money. However, when stocks are $3 they are usually that price for a reason. Buying low priced stocks (under $5) tends to be more of a lottery ticket than a good investment.
buying low priced stocks
Tom and Brendan discuss some technical issues investors should consider before buying low priced stocks. Institutions and big players in the financial industry normally cannot own stocks that are $3 a share. They often have guidelines that don’t allow them to own companies below a certain credit rating or share price. In turn this usually means less volume going to into stocks priced this low. Stocks under $5 a share aren’t marginable anymore. This is important for big players who trade on margin. There are probably a lot of sellers ahead of you when you buy something at $3 a share as well. People will be looking for a good exit point all the way up. This means that the stock will likely have strong selling pressure in the event that it does rise in price.

There are plenty of things to consider when buying low priced stocks, and today’s discussion is a good start to that. A lot of people get caught up in chasing cheap stocks they think will take off and make them millions. However, (in most instances) we view these low priced stocks more like lottery tickets, not sound investments. As always, this post is not a recommendation to buy or sell any kind of investment. You should always speak with an investment advisor before making investment decisions.

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