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.
Highlighted Stocks Under $5
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.
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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.
Stocks Under $5 to Watch Out for This Year
There’s no guarantee that a stock trading under $5 will skyrocket. Some are likely to be more successful investments than others. These stocks are all trading for a few dollars at the moment but show the potential for more.
1. Aphria (NYSE: APHA)
Aphria is a pharmaceutical company based in Leamington, Canada, that researches, produces and distributes marijuana. It is 1 of the largest marijuana companies in the Canadian market, which recently legalized recreational marijuana use. The company targets both the medical and recreational marijuana market segments.
Aphria remains committed to capitalizing on the emerging Canadian and global marijuana market. The company has invested heavily in product innovation and expanding operations worldwide. Acquisitions of LATAM holdings and CC Pharma have allowed it to enter Latin American and German markets.
2. Catalyst Pharmaceuticals Inc. (NYSE: CPRX)
Catalyst Pharmaceuticals is a biopharmaceutical that researches, develops and commercializes FDA-approved treatments for patients with rare neuromuscular and neurological diseases.
Located in Coral Gables, Florida, the company’s latest FDA-approved drug, Firdapse, treats adults with LEMS. LEMS is an autoimmune disorder in which the body’s immune system attacks the body’s own tissue. The drug is currently in clinical trials for the treatment of other diseases like myasthenia gravis and spinal muscular atrophy.
Catalyst Pharmaceuticals reported its 1st positive annual EPS in 2019. Its most recent EPS came in at $0.30. The company boasts a robust balance sheet with over $101 million in cash and investments with no funded debt.
3. Nio Inc. (NYSE: NIO)
Nio designs, manufacturers and sells premium electric vehicles, autonomous vehicles and related technologies and services.
NIO has competed in the ABB FIA Formula E Championship since its beginning in 2014. The company also secured the inaugural FIA Formula E Drivers’ Championship in July 2015. Its most recent initiatives include a clothing line collaboration with fashion designer Chalayan.
The Shanghai, China-based company focuses heavily on product innovation and customer experience. The lack of accessibility to charging stations is 1 of the major roadblocks to large-scale electric vehicle adaptation. NIO helps eliminate this problem by offering charging solutions that include home charging stations, battery swaps and a 24-hour on-demand pick up and drop off service. The company reported an EPS of $-44.1.
4. Nokia (NYSE: NOK)
Nokia is a multinational telecommunications, information technology and consumer electronics company based in Espoo, Finland. Nokia engages with service providers, industry, public sector and consumers worldwide. It remains committed to innovation and next generation technology with a focus on developing and deploying 5G networks.
The company has undertaken many acquisitions to cement its position as a global leader in next-generation technology innovation. These include award-winning Bell Labs, SpaceTime Insight and Elenion. The company has recently reported an EPS of $-0.19.
5. Plug Power Inc. (NASDAQ: PLUG)
Plug Power is an electrical equipment manufacturing company based in Latham, New York. The company designs and manufactures hydrogen fuel cell technology. Hydrogen fuel cell technology is a sustainable energy alternative to traditional batteries that vehicles and heavy equipment machinery can efficiently use.
Plug Power’s largest customers include Amazon and Walmart. Its technology helps power forklifts and other machinery in the warehouses of these retail giants.
The company has achieved over 300% revenue growth since 2013. Its EPS has significantly increased over the past several years. It’s most recent EPS came in at $-0.35.
Biggest Stocks Under $5 Movers of the Day
Make sure to periodically check premarket movers of the day to identify stocks that are outperforming others.
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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.
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