First things first: Cheap stocks are not necessarily better stocks.
“False promises of quick and painless riches are easier to fall for when an investment can be made with so little money up front,” writes Dan Burrows, senior investing writer at Kiplinger.com, in his feature on penny stocks. “An investor might think, ‘How risky could it be?'”
The answer, Burrows says, is plenty. “Per the Securities and Exchange Commission: ‘Academic studies find that OTC [over-the-counter] stocks tend to be highly illiquid; are frequent targets of alleged market manipulation; generate negative and volatile investment returns on average; and rarely grow into a large company or transition to listing on a stock exchange.'”
That said, some investors simply don’t have the cash to buy some of the priciest stocks on Wall Street, such as auto parts chain AutoZone (AZO) or online travel company Booking Holdings (BKNG) that both trade for roughly $3,000 a share at present.
If you only have a few hundred dollars or you want to trade in round lots instead of a single share, then cheap stocks – or at least cheaper stocks – are one way to go.
Why should I buy cheap stocks?
With the latest bull market well underway, many stocks are now trading at much higher prices than they were a year or so ago. While this puts several popular names out of reach for the average retail investor, not all hope is lost. One choice investors have is to buy fractional shares of a stock whose price exceeds what you have available to invest.
Another option is to find high-quality cheap stocks. To be clear, this is referring to share price and not valuation metrics like book value or the current price compared with earnings trends.
Unlike the best value stocks that tend to boast strong balance sheets and a solid commitment to shareholders, cheap stocks often face weak fundamentals. They are also known to be risky and volatile, which understandably makes some folks hesitant to buy them.
Still, plenty of people love cheap stocks for their affordability factor and their ability to reap big gains in a short period of time (though, this also means investors can suffer big losses in a hurry).
If you are interested in cheap stocks, it’s vital to do your research beyond just looking at the latest print for prices. You need to take a hard look at risk metrics, recent performance and future outlook in order to invest responsibly.
Our methodology to find the best cheap stocks to buy
I have written extensively about capital markets, Wall Street and investing since 2008. Along the way, I’ve learned how to separate legitimate investing opportunities from those more likely to result in volatility or dubious performance. So when I compiled this list of best stocks to buy that are priced at or under $10, I focused solely on companies that trade on major exchanges vs over-the-counter “penny stocks.”
I also sought out well-established companies instead of small caps trading for only a few hundred million dollars, and each pick is valued at least $1 billion in market value. In addition to the stability this provides, the stocks also have a better chance of analyst coverage than the smallest stocks on Wall Street because of that size rather than fly-by-night corporations that are under the radar.
Lastly, from a valuation perspective, the companies have to be profitable and trade for a reasonable multiple on those profits. Specifically, they are under the average forward price-to-earnings ratio of the S&P 500 index, which is currently about 20.
With that in mind, here are five of the best cheap stocks to buy that are priced under $10 per share. But remember, cheap stocks move quickly, so if you decide to invest in them at all, do so in small amounts that you can afford to lose.
THE BEST CHEAP STOCKS TO BUY
