We would all like to find low cost stocks that yield a high return and make us tons of money, right? But it’s not that easy. Finding a low cost stock can be a great way to make some money, however there are many things to consider when determining if a stock is low cost and a deal, or just junk. Having patience with the stock market and doing some research can produce good results. It just takes time.
Price Does not Determine Value
While you may think you’ve found a great deal on a stock because it is selling for $2 a share, this really doesn’t mean you’ve found a bargain. A stock selling at a low price is selling at a low price for a reason, it may be struggling, or it may have maxed out it’s value.
Cost Is Relative
Deciding if a stock selling at $2 a share is a bargain means doing some homework. Compare the cost of this stock to the cost of other stocks in the same category or industry to determine if this is the typical price or in fact a deal.
To determine if you’ve really got a low cost stock, you need to take a look a the past performance of the stock. If it’s trading low right now, but has a good history, you may have found a deal. You can check out tools like Yahoo Finance to look at charts of the stocks history.
Price to Earnings
Compare the stock you have found with the price to earnings ratio (P/E). To do this, divide the stock price by the earning per share. Now you must compare this number to other stocks from other companies of the same size and industry. If the stock you want comes out better the other stocks, you may have found a low priced stock. If it comes out higher, it may appear to be low cost but isn’t worth much.
Growth of a stock is hard to predict. However if you look at the performance of the stock over the past year, you may be able to determine where the stock is headed. Remember though, other people will be doing the same thing and the owner of the stocks may have considered that and already adjusted the price accordingly. To figure out growth you can take the P/E ratio mentioned above and divide it by the company’s projected growth rate. If you get a number under 1.00 that is considered a low cost stock.
The most common mistake people make with the stock market is panicking and making rush decisions. If you take the time to do research on the stocks you are considering, and ride out any market fluctuations, you have the chance to do well and make some money. Low cost stocks can really pay out and are worth the time it takes to investigate them if you do it properly.
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