Low priced stocks offer impressive growth potential. You see it all the time, the stocks that were once $5 jump to $15. The next thing you know, they go to $45 and then are over $100. Most investors think "if only I would have at least put a little in that stock when it was $5" or something along those lines.
The problem is, if you spread out even a large amount of money on all the stocks that are priced below $5, you will probably see many more losers that winners. The reality is that investment risks in stocks that are low priced are actually greater than their higher priced brethren.
Even seasoned investors have a hard time with these concepts. Those deep rooted beliefs on the prices and performance of stocks blind investors from the real potential of these rough gems. This article will address three of those beliefs and show you where to find the best low priced stocks.
1) "Low Priced Stocks Simply Have More Room To Grow"
The first time I heard this theory I figured it was total bunk. How can the price the stock trades at influence where it is going to be? That just makes no sense, right? Well the fact is that all stocks, those with both low and high prices, can only go down 100%. That is the worst case on the downside. The upside, however, is different for all stocks.
In fact, a low price often means there is that much more room for the stock to run higher. The higher the price of the stock, the less room is left for the gains to pile up.
One thing that is required of investors of low priced stocks is patience. It takes time to see a stock move from single digits to double. Then it takes even more time and patience to follow through for triple digits, but the point is it can and does happen.
2) "Single Digit Stocks Are Seldom Shorted"
A common belief in the investing world is that the shorts are eventually squeezed out of their positions when the stocks bounce back. In fact, nearly the opposite is true, as more shorts crowd into the stocks as they drift lower than $5. They are going for the ultimate reward in short selling, the $0.00 stock price.
It is often said that the short sellers do much more homework than the longs. Intuitively, this is true because, let's face it, they take on unlimited risk when they sell shares they don't own. Think about how many times you simply bought a stock on a hunch or a tip. Now compare that to how many times you took on unlimited risk doing the same due diligence. The truth is most investors never short stocks.
Those that short stocks for a living find out rather quickly if they are good at it or not. The nature of that business weeds out the underperformers as risk management dictates constant observance of the risk ranges. When looking at low priced stocks, make sure to avoid the ones with a significant short position.
More . . .
Zacks reveals the most exciting companies on its target list. Priced under $10 per share, they have outstanding prospects for long-term gains of 2X, 3X, and even more.
Why are they so much more promising than other "Under $10s" you may find? Which are deemed most likely for early movement? How can you ride them longer than other investors with greater confidence? Find out before the Sunday, November 15 deadline for access.
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3) "Big Buyers Avoid Single Digit Stocks"
Another common misconception investors have is that institutions are not allowed to buy stocks that are priced under $5. I have heard this said in many different ways over the years, from the trust department of a bank to a state run retirement fund.
Of course this is not true of hedge funds. They can buy or sell stocks at any price and for just about any reason. Keep in mind that hedge funds are vastly different than the trust department of a bank or a state retirement fund. They have different objectives, standards and rules.
Institutions have rules for investing, but more times than not they are based on the liquidity of assets and not about the price. Think of it this way, if a $50 stock only traded 1,000 shares a day, few big players would be willing to build a sizable position in it.
The theory states that it would take too long to exit the position without having a major dump of shares on the market that would severely impact their exit price. The more liquid the low priced stock, the more likely it is to have the big players backing it.
Where to Find the Best Single-Digit Stocks?
A good place to start is with the Zacks Rank system, which has nearly tripled the market since 1988 with average gains of +26% per year. Then when you look at strong Zacks stocks that are small caps (toward which our portfolio will skew), the gains have been even greater than that.
How do you narrow this list further? You might check into the Zacks' portfolio service I'm managing: Stocks Under $10.
My process is to select 15-20 companies that have the best long-term potential. I make sure that these stocks are diversified through several sectors so we don't put all our eggs in one basket.
We get in when the fundamentals point to success ahead, and will ride them out to their maximum potential. Certainly we will enjoy our fair share of doubles and triples as time rolls on. I also keep a sharp eye on the nasty dark side of these stocks to ensure we cut losses early in the game.
So if you are interested in low-priced stocks, with improving fundamentals and great upsides, then you are welcome to join me on this journey. I am about to add some new stocks with exceptional gain potential to the portfolio and you can be there at the beginning of their rides.
With recent market plunges and a bull market that is likely to run some more, this is a great time to snap up shares of stocks like these.
I must caution you, however, that demand for this service has been greater than for any other in the history of Zacks, and it is only open to new investors temporarily. It closes again this Sunday, November 15 at midnight.
by Brian Bolan
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