There are people who skip over stocks with share prices under $5 when they are searching for investment options because they believe that such stocks have little value. This is a huge mistake because stocks with share prices under $5 can make solid investments under certain circumstances. After all, the share price doesn’t actually say that much about a corporation when examined on its own without considering other factors of relevance.
What Does the Share Price Actually Say About a Stock?
To understand this, suppose that a corporation has 2,000 outstanding shares with a price of $100 per share. Now, suppose that the same corporation splits those 2,000 outstanding shares into 4,000 outstanding shares, which will now have a price of $50 per share. If someone judges the value of a corporation based on its share price and nothing but its share price, this means that they should see the corporation as having suffered a huge loss in value, which is ridiculous because nothing has actually changed save that it now has more outstanding shares. Based on this, it should be clear that the share price doesn’t mean much on its own, meaning that there are stocks with share prices under $5 that are worth buying as well as stocks with share prices under $5 that are not worth buying.
Instead, interested individuals might want to take a look at the changes to the stock’s share price over time as well as the causes of those changes. For example, if a corporation has seen its share price fall from $80 to under $5 because it has lost the license needed to continue running its operations because of serious legal issues, it seems safe to say that said corporation is not worth investing in because its future is looking very dubious indeed. In contrast, if a corporation has seen its share price fall from $6 to under $5 because of concerns about the near future of its industry while its fundamentals have remained strong, that could be a sign that it is worth investing it while its shares are cheaper than usual.
Of course, there are also cases when a stock that has had a share price under $5 for some time might be worth investing in. Sometimes, this could be because said stock belongs to a newer corporation that has succeeded in implementing a major step in its business plan, meaning that its value might start rising soon. Something that should appeal to those with a preference for the higher-risk, higher-reward approach. Other times, it is possible that the corporation has increased the number of its outstanding shares to lower its share price, which can be useful because lower share price makes it easier for interested individuals to buy and sell their outstanding shares. Something that should result in increased liquidity.
The share price is not a useful measurement for gauging the value of an investment on its own because no measurement is useful for gauging the value of an investment on its own. To use an analogy, investors can’t get an accurate idea of what a corporation is like based on a single measurement any more than they can get an accurate idea of what a person is like based on a single demographic factor such as either their age, their sex, their ethnic group, their level of income, or their level of education. Instead, if they want to understand a potential investment, they are going to look at it in thorough detail because a single measurement provides no more than a small pittance of insight into what is actually going on.
Based on this, investors shouldn’t dismiss stocks with share prices under $5 out of hand. However, this doesn’t mean that they should go about snapping up such stocks with careless abandon either. Generally speaking, interested individuals should know why a stock has the share price that it does before making a decision on whether to invest in them or not. Afterwards, if they find that they are alright with the expected risks and rewards of the potential investment, they should feel free to go ahead with it. However, unless they know what they are getting into, they should stay their hand for the time being until they know more.