Investing In Cheap Stocks

Investors are always looking to buy low and sell high. Buying low means looking for cheap stocks. This article will look how to select cheap stocks.

What is a cheap stock? By one measure it can be a stock that trades under a certain dollar amount. You can consider stocks whose share price is below a certain threshold such as $10 as a cheap stock. But just because a stock is cheap doesn’t make it a good value or investment.

That is the key to cheap stock trading. Knowing value in a stock as opposed to just looking at the share price. Look at what happened to Lehman Brothers 2 years ago. The stock was dropping practically everyday. Just because the stock got cheaper, did it make it a good value and a good investment? Certainly not. An investor, who kept buying Lehman stock because it got cheaper, eventually lost a lot if not all of their investment.

Benjamin Graham is known as perhaps the second best value investor. He was eclipsed by one of his students, Warren Buffet. Warren Buffet has made billions of dollars by determining the difference between a cheap stock and a cheap stock that is good value.

Warren Buffet has called Benjamin Grahams book The Intelligent Investor “the best book on investing ever written” In that book, Graham goes on to describe how and investor should treat buying stock as purchasing a piece of a business, not just hoping to catch price fluctuations. He was a long-term investor. Warren Buffet is quoted as saying his favorite holding period is forever. What a Graham/Buffet investor looks for is a companies stock prices selling for below its value. An overly simplified example would be a company whose stock is selling for less than the cash that the company holds. Believe it or not, there are times when that have happened! That would truly be a cheap stock to buy. What Grahman/Buffet look for is a margin of safety when investing. Ben Graham use to look to purchase a stock that traded at about 2/3 of the company’s intrinsic value. This would give the investor some room for safety. Some times a stock can get beat down so bad that it will sell for less than the total assets of the company!

There are other ways to measure for a cheap stock. Another way would be to compare its price/earning ratio, also know as P/E ratio with other stocks in its sector or comparing it to its own historical P/E ratio. If a stock has dropped a great deal due to bad news or perhaps a 1-time event, it may be trading at its lowest P/E ratio. If the underlying company is still in good shape, this may present a good opportunity to invest in shares of that stock.

There are now many screeners online to help you sort out stocks looking for cheap stocks. These will save you several hours of hunting for the right stock. You can also subscribe to newsletters that are devoted to just looking for undervalued cheap stocks.

Buying a cheap stock is more than seeing a low price for a stock. It will take some research on your part to determine if a cheap stock price represents good value.