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How do I Choose the Best Cheap Shares?

Jim B.
Jim B.

Buying cheap shares of stock can be an effective way for investors to achieve tremendous returns while encountering relatively little financial risk. The key to effectively investing in cheap securities is to find companies whose actual value is not accurately represented by its low market price. Doing this can involve analyzing statistical ratios that show a stock's intrinsic worth independent of market prices. Another way to find cheap shares is through savvy analysis of current events that can affect share prices in the future.

It is the dream of many investors to stumble upon a low-priced stock that reaps huge rewards when the underlying company becomes a major force on the market. Obviously, such an occurrence is a rarity, or else the stocks that are regarded as penny stocks for their low prices would be priced much higher by investors. There are ways that investors can find cheap shares with lucrative potential without resorting to blind luck.

Businessman with a briefcase
Businessman with a briefcase

The key concept that investors should focus on when trying to choose cheap shares is the intrinsic value of stocks. A stock's intrinsic value is what it is worth regardless of what its market price currently is. After all, if market prices were unerringly accurate, stocks would never go up and down, and prices would remain frozen forever. Finding accurate ways to determine the intrinsic value of stocks can allow an investor to pick out low-priced stocks that earn big rewards.

Statistical ratios are one way that an investor can determine intrinsic value and buy cheap shares that allow him an ownership interest in companies with great potential. Earnings ratios are the most popular of these, as they measure how much the market is willing to pay for one dollar of earnings by a company. A low ratio could be the sign of an underrated company. Other ratios can measure cash flow, assets, and even future projections, so investors should test each of these out to see which prove to be accurate indicators of stock potential.

One drawback with using these statistics to find cheap shares is that penny stocks often are attached to companies just starting out that have little or no track record. As a result, ratios for these companies can be unreliable. As this is the case, investors should consider studying up on events that may affect the company. For example, a company may hire new leadership, or it may be on the verge of developing a new product. Finding out these important pieces of information can put an investor on the track of a cheap stock with a bright future.

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      Businessman with a briefcase