A common mistake among novice investors is confusing an undervalued stock with cheap stock. When a stock trades under $5 (often called penny stocks), it can be easy for an investor to understand why the stock carries such a low price. But when a stock trades below $10, a little more research is required. Finding the best stocks under $10 can be complex. But, well worth it.
Thoroughly Research Any Potential Investment
Before attempting to buy stocks under $10, there are some important things to know. A stock that is trading at $200 could decline by 25% and investors will swoop in to buy it “on-sale”. But if a $ 12 stock drops 20% it becomes untouchable.
The problem with this approach is it assumes a “high price good, low price bad.” mentality. And in fairness, that can be true. Many stocks that trade under $10 do so because they present obvious and fundamentally problematic issues that are suppressing their growth.
So the first thing I would say to investors looking to buy stocks under $10 is to be sure you’re ready and able to do some research. Simply throwing your hard-earned money at a stock because you’ve heard the mantra “buy low, sell high” is foolish.
But the same can be said of investing in any stock. And if you’re reading this article, I hope you already understand that stocks over time can be an excellent and sound investment. Stock prices no matter what the cost, can fluctuate erratically over time.
Investing in stocks can be a highly rewardable path to reaching your financial goals. And the simple truth is that a stock that is trading under $10 can offer you the ability to make huge gains. You need to know what to look for of course.
Fortunately, in this article, we’ve done a lot of that research for you. But there is one caveat about investing in stocks under $10. This should only make up a small portion of the stock portion of your portfolio.
Look for The Best Dividend Stocks
A substantial part of your portfolio should focus on stocks of strong, stable companies. And depending on your investment style, you should look for companies that pay a dividend.
HOW IS A COMPANY’S SHARE PRICE CALCULATED? If you’re a relatively new investor this may help answer a lot of questions. To understand why buying stocks under $10 can come with an elevated risk you need to understand how a company’s stock price is calculated.
There are two data points to look for:
- A company’s market cap (market capitalization). That is a rough estimation of how much a company is worth.
- The number of outstanding shares or shares outstanding – the meaning is the same. Which is the number of common shares available to buy.
To calculate a company’s stock price, you divide the company’s current market capitalization by its number of outstanding shares. Here’s an example that keeps the math easy. A stock that is valued at $ 100 million and has 1 million outstanding shares has a share price of $ 100.
Benefits Of Stocks Under $10
WHAT ARE THE REWARDS OF STOCKS UNDER $ 10? The reward of buying stocks under $10 is the opportunity for growth. If you can buy 1000 shares of a stock that is trading at $8, you would only need the stock to increase in value by $8 to double your investment.
However, it’s easier said than done. Many investors have seen that $8,000 investment evaporate as they bought shares of a falling knife. Still, if investors can find the right stock, stocks under $10 are one of the best ways to capture a significant gain without a large investment.
That brings up a second point. Stocks under $10 are more accessible for investors without a lot of money to put into the market. Robinhood and other trading apps are designed on this principle. If you only have a small amount of money to invest, you don’t have to put all your eggs in one basket.
In practical terms, an investor with $ 10,000 to invest could only buy about five shares of Amazon (NASDAQ: AMZN). But they could buy over 150 shares of Lovesac (NASDAQ: LOVE), a furniture retailer that is currently trading below $ 7 a share.
This also makes stocks under $ 10 a great option for diversification. Not only can you look at different sectors, but you can also dabble in international stocks.WHAT ARE THE RISKS OF STOCKS UNDER $10? One of the risks of buying a stock that is priced under $10 is the risk of share dilution.
Basically, outstanding shares are driven by supply and demand. A company that issues a solid earnings report, or comes out with a new product, etc. will see its shares drop due to more buyers than sellers.
The stock will be harder to by and sellers will be able to demand a higher price from investors. On the other hand when there are more sellers than buyers. There will most likely be a higher number of outstanding shares. Sellers would then have to accept lower prices for shares they bought to sell.
Risks Of Buying Stocks Under $10
Startup companies usually have an initial advantage in a new market. Because they have no competition. But, when additional companies enter the market a startup company may feel pressure to focus on its profit margins.
If the company is slow to adapt to the competition, its stock price may sink to extremely low levels. Yet another risk to buying stocks under $10 is that they may be in a cyclical industry. For example, a stock may spike during the holiday season. But, drop during the rest of the year. That’s another reason the stock may sink. In that case, a stock under $10 may still be a worthwhile investment if it pays a nice dividend.
On the other hand, there are a number of quality companies that have seen their share price reach uncomfortably low levels. Such as stocks in the hospitality industry that has been severely affected by Covid- 19.
Is It A Good Investment?
If you’ve got the time and patience to carry the stock through many economic cycles. These stocks are hopeful. It’s going to be slow before this increased demand shows up within the stock price. But, good investing opportunities do exist for stocks under $10. — if you’re looking in the right places.
Developing an inventory of the simplest stocks under $ 10 requires investors to try to do their homework. At a price of under $10, these companies don’t seem to be penny stocks. After all many companies have an outsized market cap. But simply because a stock is trading for an occasional price doesn’t make it a good value.
One of all the largest assets an investor can have is time. If you’ve done your due diligence. Buying stocks under $ 10 are often very profitable.