Bull market, bear market, or trend-less market? Regardless of what stage of the market cycle we’re in, some folks never tire of searching for cheap stocks to buy.
And who doesn’t love a bargain?
After all, the lure of finding a stock that triples from $1 to $3 a share, or quintuples from 50 cents to $2.50, may prove irresistible.
But do you know the unique problems and subtle challenges of hunting cheap stocks to buy? Let’s consider a few.
Hundreds of equities trade at a “low” price on both the Nasdaq and the NYSE. So, how can you pick the winners consistently?
Another challenge? Most institutional money managers don’t touch cheap stocks. Imagine a large-cap mutual fund trying to buy a meaningful stake in a stock that trades at 30 cents a share. If it has thin trading volume, the fund manager will have an awfully tough time accumulating shares — without making a big impact on the stock price.
IBD research also finds that dozens, if not hundreds, of great stocks each year do not start out as penny shares.
Solid, expanding institutional buying among fundamentally strong companies with double-, triple- and even quadruple digit share prices makes up the I in CAN SLIM, IBD’s seven-factor paradigm of successful investing in growth stocks.
IBD’s Big Picture: Market Endures Chopfest: Is Value Investing “Dead?”
Cheap Stocks To Buy: First, Understand These Pitfalls
Another cold, hard truth that proponents of penny stocks don’t tell you? Many low-priced shares stay low for a very long time.
So, if your hard-earned money is tied up in a dollar stock that fails to generate meaningful capital appreciation, you might not only be nursing a losing stock. You also face the lost opportunity of investing in a true stock market leader such as those that enter IBD Leaderboard or a member of the IBD 50, IBD Sector Leaders, the Long-Term Leaders, or IBD Big Cap 20.
Let’s consider Zoom Video (ZM) in 2020, after the coronavirus bear market ended.
Zoom and many other institutional-quality firms traded at an “expensive” price when they broke out to new 52-week highs and…