Are Low-Priced Stocks Better?

I’m often asked why the Buy List doesn’t have more lower-priced stocks. I’ve never understood this. It seems that investors would much rather buy a lot of shares in a low-quality, low-priced stock that a small amount of shares in a high-quality, high-priced stock.
My advice it to completely ignore the price range of a stock (though, don’t ignore its value). I’d much rather buy a small number of shares in a high-quality $80 stock, than many shares of poor $10 stock. With the advent of discount brokers, commission costs are pretty reasonable.
IBD has more to say:

Cheap stocks often end up at fire-sale prices for a reason. They may keep missing profit or sales views. They might be the target of a lawsuit or probe. Or they could hail from an ailing industry.
Another risk with penny stocks: lower trading volume. Mutual funds and other big investors are less likely to buy cheap stocks, since they can’t take big stakes without drastically moving the stock price.
Light volume also makes such stocks more prone to wild price swings, since only a few cents up or down can result in a big gain or loss.
Instead of seeking low-priced stocks, look for stocks priced at $10 a share or higher. They should sport strong earnings, sales, profit margins and return on equity.

I think people see a low-priced stock and think, “gosh, it’s so cheap–it just can’t go any lower.” Well, it can. I remember my finance professor said that “zero is a long way down.” A $100 stock can drop 99% and it’s still at $1. It can drop another 99% and it’s still at a penny. It can keep dropping 99% many more times and still not be at zero. Zero is a long, long, long way. That’s how low it can go.

Posted by on November 7th, 2005 at 11:59 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.