Searching for quality stocks under $5 is a lot like bargain hunting. Low prices allow you to buy these stocks in large quantities without stretching your wallet. The payoffs can be huge, but so can the volatility.Â
Weâ€™ve put together everything you need to know about stocks under $5. Take a look at our top picks for bargain stocks that show the most potential.
Overview: Stocks Under $5
Stocks that trade under $5 are considered cheap stocks. But unlike stocks under $10 or stocks under $20, stocks under $5 are in a separate category. The Securities and Exchange Commission (SEC) considers stocks that trade under $5 to be penny stocks.
Letâ€™s say you invest $300 for 100 shares of a stock trading at $3. If that stock price goes up by only $3, you will have made 100% in profit, or $300. Huge payoffs for little upfront capital is what makes cheap stocks an attractive investment.
A strategy for spotting potential in stocks under $5 is to look out for undervalued companies. Companies that have suffered a crisis might see stock prices dip into the low single digits. Executive mismanagement, high debt, pricing pressures and increased competition are some of the factors that spook investors and send a companyâ€™s stock sinking.
But the company might be able to turn things around. Management can change, debt can be restructured or the market could shift in the companyâ€™s favor. Everyone loves a comeback â€” especially if youâ€™ve scooped up that stock for a bargain.
Another way to spot a potential winner is by looking at companies that have major growth potential. A stock could trade under $5 because the company is small. But that small company could also be rapidly growing.
Take a look at how the market is performing. These strategies are just the beginning. Always do your due diligence when investing in stocks under $5.
Best Online Brokers for Stocks Under $5
The right online broker can help you execute your investment strategy and make trading cheap stocks seamless. Take a look at some of Benzingaâ€™s favorites.
Features to Look for in Stocks Under $5
Here are some things you may want to consider as you gather stocks under $5 into your basket:
- Earnings per share: A great way to get a sense of a companyâ€™s profitability is by looking at its earnings per share (EPS). You can find a companyâ€™s EPS by subtracting the preferred dividends from net income and then dividing the difference by outstanding stockholder shares. If you spot a stock with EPS that has been growing, it can signal growth potential.
- Trading volume: A stockâ€™s trading volume will tell you how many shares are traded during the day. If the trading volume isnâ€™t high enough, you may not be able to sell your position. Stocks that have a trading volume of at least 1 million tend to be safer. Keeping an eye on the trading volume will also help you spot stocks that may be on the uptick.
- Management: A management team that is set on turning the company around can be the reason a stock under $5 enjoys a boost. A companyâ€™s focus on capitalizing on a growing market is another sign of potential. Look into the companyâ€™s strategic business plan to understand the mindset of management.
Weigh Risk for Stocks Under $5
Cheap stocks have potential growth and a fair share of risks. Stocks under $5 are notorious for major upswings and downfalls. Your risk for loss is also higher if the company hits a difficult roadblock. Itâ€™s not unheard of for companies with shares trading under $5 to go under and leave investors with nothing.
Avoid putting all your money into these stocks and diversify with safer assets like blue-chip stocks or bonds. Stocks under $5 can be a valuable addition to your investment portfolio with your due diligence and diversification.
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