How to Trade Low Priced Stocks
Investing in low-priced stocks does not differ in method from investing in other stocks. However, there is a considerable number of people who believe that a low-price automatically translates to meaning a bargain. This is absolutely untrue. Penny stocks, i.e., stocks under about $2 per share, in fact are often very risky and are speculative at best.
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Instructions
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Investing in Low-Priced Stocks
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Avoid penny stocks. Penny stocks are highly speculative and should not be part of an investment portfolio. There is a reason that the market has valued the stock so cheaply. Also, penny stocks risk being delisted from markets like the NYSE if the price remains low. A delisted stock becomes much harder to sell because it is only available in over-the-counter markets.
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Research the financials of the business. Sometimes a low-priced stock has a low price because it has a poor balance sheet. For example, a company that has incurred a significant amount of debt is likely to have a lower price than a company that is debt-free. Large amounts of debt on the balance sheet means that the company must pay more in interest expense than other companies and as a result will have smaller profit margins than others. This may also limit the company's ability to grow or to pay out dividends.
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Understand the business' operations. A low-priced stock is only a value when one expects the company to produce reasonable returns for an extended period of time. The ability to make money is generally a function of producing a good or service that is in demand and doing so in a manner that is efficient.
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Open a brokerage account. Once you have determined which small cap investment you want to make, you need a brokerage account. To the extent that you already have one, then it is simply a matter of making the trade in that account. If you do not have one, the easiest way to open a brokerage account is through an online broker of which there are many. Smart Money magazine ranks them annually and this may be a useful resource in selecting one.
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Execute the trade. Each broker is slightly different in how the trade is executed. With online accounts, the website should have instructions and should have a phone number to contact if you have questions.
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