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.
We’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.
Let’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 company’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 company’s favor. Everyone loves a comeback — especially if you’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 Benzinga’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 company’s profitability is by looking at its earnings per share (EPS). You can find a company’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 stock’s trading volume will tell you how many shares are traded during the day. If the trading volume isn’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 company’s focus on capitalizing on a growing market is another sign of potential. Look into the company’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. It’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.