When Cheap Stocks Are Just Cheap Stocks

Many investors have used the purchase of cheap stocks to increase the value of their portfolios over time. By finding bargains, you can save significant amount of money on the purchase of the securities. When they increase in value, you stand to make a great deal of money. However, sometimes these stocks that appear to be bargains turn out to be nothing more than cheap stocks.

Cheap Stocks vs. Bargains

If you are going to be a successful value investor, you need to be able to tell the difference between cheap stocks and bargains. When you look at a stock and it has a low price, you may not be able to tell the difference between a company that is on the rise or one that has already fallen down. You need to be able to find companies that are on the way up and have great future prospects. The fact that the stock price is cheap does not necessarily mean that a company is a good investment.

Research

In order to tell the difference between cheap stocks and bargains, you need to conduct a thorough amount of research. The only way to separate the good from the bad is to find out what makes these companies tick. Looking at the stock price is truly not enough. You need to look at financial ratios, patents, strategic partnerships, and so much more. 

Example

In order to understand the importance of doing your homework in this area, an example can be helpful. Let's say that you are looking at two companies that both have a share price of $1. Company A is a company that has been in business for 2 years and they have a share price recently patented a drug that has been very promising in trials with cancer patients. They are yet to be profitable, but with this new drug going into production within the next few years, it could potentially be a gold mine.

Company B is a company that has been in business for 15 years. They are a company that manufactures pagers and had a high stock price of $70 per share about 10 years ago. This company is obviously on the way down.

When you just look at 2 companies that both have a share price of $1, it really does not tell you the whole story. One company could be sinking while another company could be on the rise. You need to get as much information as you can about both companies before making any decisions as an investor.

Finding a Bargain

One of the best things about investing in good companies with cheap stock prices is that you can realize a substantial return on your investment. For example, when you purchase shares at $1 a piece, it only takes a $0.50 rise in the stock price to get a 50% return on your investment. This makes it possible to bring in nice returns in a very short period of time. 

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