Bull market, bear market, or trend-less market? Regardless of what stage of the market cycle we’re in, some folks never tire of searching for cheap stocks to buy.
And who doesn’t love a bargain?
After all, the lure of finding a stock that triples from $1 to $3 a share, or quintuples from $5 to $25, may prove irresistible.
However, are there any unique problems or subtle challenges with this strategy of hunting cheap stocks to buy? Yes. Let’s consider a few.
Hundreds of stocks trade at a “low” price on both the Nasdaq and the NYSE. So, how can you pick the winners consistently?
Here’s another problem: IBD research consistently finds that dozens, if not hundreds, of great stocks each year do not start out as penny shares. Most institutional money managers don’t touch cheap stocks. Imagine a large-cap mutual fund trying to buy a meaningful stake in a stock that has been trading at 30 cents a share. If it has thin trading volume, the fund manager will have an awfully tough time accumulating shares without making a big impact on the stock price.
Solid, increasing institutional buying makes up the I in CAN SLIM, IBD’s seven-factor paradigm of successful investing in growth stocks.
Which Fast-Growing Large Caps Show Strong IBD Ratings? Check Here
Cheap Stocks To Buy: First, Understand These Pitfalls
Another cold, hard truth that proponents of penny stocks don’t tell you? Many low-priced shares stay low for a very long time.
So, if your hard-earned money is tied up in a 50-cent stock that fails to generate meaningful capital appreciation, you might not only be nursing a losing stock. You also face the lost opportunity of investing in a true stock market leader in Leaderboard or a member of the IBD 50, IBD Sector Leaders, the Long-Term Leaders, or IBD Big Cap 20.
Let’s consider Zoom Video (ZM) and telemedicine pioneer Teladoc (TDOC) in 2020, after the coronavirus bear market ended. These two and many others traded at an “expensive” price when they broke out to new 52-week highs and began magnificent rallies. But the quality of their business, the…