Are Cheap Stocks A Good Investment?

In these days of economic distress, many people are looking for cheaper stocks to invest in

. The amount of liquid cash in the hands of ordinary investors is not much. So, at least a part of that cash can be used in buying lower value stocks. However, it is essential that you know the ins and outs of investing very thoroughly if you are to venture in the world of cheap stocks. You should know how to invest in penny stocks successfully and should be able to monitor the market closely.

How to choose cheap stocks

When you are looking for to invest in lower value stocks, penny stocks may be your primary consideration. These are stocks which are traded at $5 or less. Obviously, no large and well established business is going to issue penny stocks. These stocks are issued by new companies which are just starting in the business and are trying to raise their capital from the public. Of course there is nothing wrong with that. In fact, that is the basic economic rationale of floating stocks and bonds. However, the fact remains that few such companies are destined to succeed. Instead, most of them go bankrupt. So you need to choose your penny stocks very carefully.

The best and the safest way to choose penny stocks is to obtain sure insider information about the company. If you have a personal connection and are fully confident of the chances of success of the company, then only should you invest in these stocks. Since penny stocks are floated by the new companies, investors do not have any past yardstick to compare the performance of the company with. So, the company may take off or it may go bust.

Market indications are difficult to interpret with regard to cheap stocks. So, the best way to choose is to act on fundamentally sound personal information. If such information is not available, you can watch market movements closely before making your choice, but do not invest money that you cannot afford to lose because the risk is high with investments in cheap stocks.

Why should you choose cheaper stocks to invest in? If you have limited amount of money to spare, you may opt for cheap stocks. Sometimes, new investors want to start with a low amount in the market. Renowned companies offer much less risks, but the return is also not very high. Many investors choose lower value stocks because of their potential to give very high returns if the company takes off. The risks of loss are less for each penny stock. After all, if the share becomes valueless, you lose less than $5. To take advantage of this feature, you should not buy too many penny stocks. It is recommended that penny stocks should not constitute more than 10% of your total portfolio.

by: Marcus

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