Cheap living is not just about saving; it is also about cheap but profitable investments. Cheap stocks are the rage these days. For less than $5 or even as low as a few pennies, you can now start investing in the stock market. How cool is that! But, do you know what you’re getting into? Is it worth investing just because it’s cheap?
First, it is important to understand that cheap in the stock market does not necessarily translate to low priced share stocks. Although a $1 stock may appear cheap in comparison to a $20 dollar stock, it may turn out, after considering the metric values of both stocks, that the $20 per share stock is the cheaper stock. The moral of the story is, low price is not equal to cheap when it comes to investments in stocks.
It will do you good to pay attention to the value of a stock rather than to its price. But, to determine its value, you need to learn the basic language of the stock market. You can’t just invest your money and expect it to earn dividends for you. You need to be an informed investor to understand not only how your money grows in stocks but most importantly, how to choose the right company with the right stock price per share to invest your money in.
There are many ways to evaluate and determine the value of stocks; price is just a small portion of determining whether or not cheap stocks are indeed cheap. One way to determine stock value is through the P/E ratio. P/E ratio is also known as Price-Earnings ratio where the current price per share of stock is compared to the earnings per share. Companies with a higher P/E ratio are usually higher priced stocks because they are expected to have higher earning growth. It may turn out that the more expensive option has the highest value which is then tantamount to cheap stocks with sound investment potential. The bottom line is: a cheap stock is an undervalued stock.
What actually determines the value of a stock is the same thing that determines the value of anything else: what people are willing to pay for it. Many stock prices are driven by speculation. As an example, investors may speculate (based on data they have) that a particular company will have major earnings increases in the next few years. These investors will start buying shares of that stock and drive the price up. The company may not even have any earnings at the present time, so its stock price is based on potential earnings.
This just goes to show that you can’t just solely rely on your lay person’s idea of cheap stocks to make a good investment. Educate yourself and learn as much as you can about stocks and the stock market. It is only when you are making educated decisions that you can fully evaluate the soundness of your investment.