How to Invest in the Cheapest Stock Shares
For the novice investor, buying cheap shares may be as simple as investing in penny stocks or stock valued under $5, but this isn't really the best way to go about finding cheap investments. While the actual dollar amount might be low, the value of the stock may be low as well. The trick is to find stocks that are undervalued by identifying those with a low share price in comparison to their earnings. Here's how to do it.
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Instructions
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Go to Yahoo! Finance and its Stock Screener (see Resources).
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Select the industry or category of stocks you are interested in. If you don't care and are just looking for cheap stocks, select "Any."
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Scroll down to Valuation Ratios. Select a range for price-to-earnings (P/E) ratios. For the minimum, select 0, and for the maximum, select 5. Scroll down to the bottom of the page and click "Find Stocks."
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Click on P/E to order from lowest to highest. These are all stocks with a low P/E ratio. This ratio compares the current share price of a stock to earnings per share. A low P/E indicates a low price per earnings, meaning the stock is undervalued or cheap. A high price indicates a high price per earnings, so the stock is overvalued or expensive.
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Choose at least five cheap stocks from the list. As of Dec. 5, 2009, 115 stocks had a P/E ratio between 0 and 5. Research the stocks and decide on an investment choice that suits your requirements. While conducting your research, try to understand why the stocks are undervalued in the market.
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Contact your broker and place an order for the stocks you've chosen.
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Tips & Warnings
It's wise to consult a financial adviser before making any stock purchase decisions.
