Why Buying Cheap Stocks Is the Wrong Investing Strategy
Identifying cheap stocks in the market seems like an obvious move to execute the buy low, sell high strategy, but it can lead investors down unexpectedly treacherous paths. Cheap stocks are often priced that way for a reason, and overloading on these names can expose investors to bad companies, low-growth industries, and cyclical time bombs. Consider the following when adding cheap stocks to your portfolio.
Beginning investors might look at a $10 stock and determine that it is cheaper than a $20 stock since they can purchase more shares for the same dollar amount. In a simple sense, this is true, but that’s a backward approach to portfolio creation.
Investors should determine an overall amount of savings that should be deployed into the stock market, then spread that amount across different investments in proportions based on an investment strategy. Thus, each stock should have a predetermined percentage allocation in a portfolio, and a certain number of shares should be purchased to reach that amount. This gives the investor control over exposure. If your portfolio is not large enough to allocate in proportion across different stocks, consider mutual funds or ETFs instead.