Contributor, Benzinga
May 19, 2022

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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. This is why the best stocks to buy now cheap must be monitored carefully. This is not a “set it and forget it” scheme. Do some research and start with the stocks listed below.

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. Yes, these are often the best cheap stock to buy even if they’re called “penny stocks”. When you do your research, a term like penny stock shouldn’t scare you.

For example, Costco (NASDAQ: COST) is a discount retailer that hosts customers in large warehouses. Even so, it’s stock regularly trades for several hundred dollars per share and the company is one of the largest retailers in the world. While this is an extreme example, it shows that terminology only paints a small part of the picture.

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. 

However, you must understand that cheap stocks are very close to 0 or being delisted. This does not mean that all cheap stocks will lose value, but a stock that isn’t all that expensive could easily plummet overnight, leaving with tough decisions to make.

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. Finding cheap stocks to buy right now doesn’t mean you should buy them all. Pace yourself to see the best results.

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. You have found stocks to buy now cheap, but you need a partner that makes the process simple.

  • Webull
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    Intermediate Traders and Investors
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  • SoFi Active Invest (Brokerage)
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    IPO Investing
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  • Moomoo
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    Active Traders
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  • eToro Stocks
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    Copy Trading
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  • ETrade
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    Desktop Trading
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  • IBKR GlobalAnalyst
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    GlobalAnalyst Product
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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.

Weigh Risk for Stocks Under $5

When you find a few cheap stocks to buy right now, they carry both growth potential and their fair share of risks. Even the best stocks to buy under $5 are notorious for major upswings and selloffs. 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. The best cheap stocks to buy can be a valuable addition to your investment portfolio with your due diligence and diversification. Stocks to buy now cheap can become a lovely addition to your portfolio, so long as you return to Benzinga often to research each new security.