Saturday, September 19, 2009

Buy Cheap Stock

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For people that lack enough investment funds to buy good quality stocks, they often look to buy cheap stock. If my mom bought individual stocks, she'd be that type of investor, I think. She's always going to sales looking for a bargain. Once I went to a sale with her and brought home a copy machine that I got for a dollar. My wife thought I was crazy, but at the time, I thought I got a bargain. It's only a dollar. Turns out that it would have taken a lot of money to fix it up and it wasn't such a great deal. Normally, I like to think that I look for quality and I'll spend more for a good product. It's the same for stocks, you usually get what you pay for.

Why Do People Buy Cheap Stocks?


I have a theory why people buy cheap stocks, like penny stocks. I think there are two factors at work. They are:
  • Small investors want to buy round lots of a 100 shares of stock because they think commissions are lower than if you buy in blocks of 100 shares.
  • The misconception that's it's easier for a stock to double in price from a $1.00 to $2.00 than it is for a stock to double from $25.00 to $50.00.
  • While they want to buy stocks that are cheap, they don't want to appear cheap by buying 10 shares of a quality stock instead of a 100 shares of penny stock.
If you are looking for cheap stock to buy, you are looking in the wrong place and here's why. The average investor like you and me has no impact on the market price of a stock. This is important because institutional investors like mutual fund managers do impact the market and in a major, major way. Which type of purchaser is more likely to affect the price of a stock more:
  • You buying a 100 shares of a stock.
  • A mutual fund manager buying millions of shares.
If you said the mutual fund manager, you'd be right. It is those guys, buying millions of shares, that really drive up the price of a stock. And you know what else is important to know about that, they don't buy cheap stocks or stocks less than $10 - $12 bucks or so. They are not buying penny stocks. 

This means if they are not buying stocks that are cheap, there' no one to drive up the price for you to follow along with.

The best cheap stock to buy online is not the one you got a hot tip across the fax machine about. It's not the stock market investing tip you got in an email promises riches because they've cured a disease or developed a fantastic new product. Don't you think that if there was a stock that was really worth it, that you and I'd be the last to know about it? Wouldn't THEY want to get rich off of it's increase in value? Why the sudden goodwill of letting you in?

The reason is simple. People with enough money to manipulate the smaller capitalization of penny stocks can influence the price of a penny stock. They buy and buy and drive the price up. Then they are faced with a dilema. We need someone to buy cheap stock, stock they inflated. They need buyers and that's why they start advertising via fax and email. They need suckers like us to bail them out and hand them the profit. Because you know, like I do, that the moment you buy that stock, it's going to start going down and before you know it, they are out quickly at the higher price. And now that's when you regret buying stock online cheap, because it's even cheaper than when you bought it and there's no one to bail you out. They have moved onto the next cheap stock to buy now hoping you'll make the same mistake twice. Now you know that you should only buy quality stocks regardless of how expensive they are and regardless if you buy the stocks in oddlots.

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