Anybody who has read any article of mine knows that there are a few rules that I hope people remember. One of those is that just because its cheap doesn’t mean you’re getting a bargain. If you follow that rule, why would you want to try your luck at cheap stock trading?
First, let’s look at my rule. Think of something that you have found in a store that had the word, “clearance” written all over it. You’re drawn to it like bees on honey but when you get there you notice why it’s in the clearance rack: It’s junk, it’s next to worthless. Why would you want that? Remember to apply that same rule when picking stocks.
But in this case we’re going to talk about cheap stock trading. There are times when cheap stocks are truly a bargain. Another rule that I keep on the front page of my investing rules is that the value of a stock doesn’t necessarily reflect the value of a company. There are a lot of good companies with bad stock. (bad, meaning undervalued in this case) There are also bad companies with overvalued stock. This may seem odd but I think both of these scenarios represent “cheap” so they may be prime targets for some cheap stock trading.
First, a good company with undervalued stock. This is what we consider to be on sale. If you find one, buy it up. The Elementary-Finance Ho Hassle Portfolio is a prime example of this. For this portfolio, I found three companies that I felt were good companies with undervalued stock. I bought these starting on June 23rd. Since that date, the portfolio has tripled the market gain. (Take a look at it by clicking here)
Now, let’s look at cheap stock trading from the other side. Change your thinking to regard cheap as trash. In my world, and I’m sure yours, sometimes you hear somebody say, “that person is trash.” I can’t think of many times where I have heard those same people say “If that person doesn’t turn their life around, there life will blow up.” I’m sure you have heard something similar.
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While a crude and judgmental example, it applies. Sometimes stocks run up in value not because the company is good but because the market is buying it for some other reason. Stocks that are artificially inflated tend to come crashing down at some point. If you find that stock, you can employ an advanced trading technique to profit off of that stock.
Take a look at short selling. Often simply referred to as “shorting,” you are simply betting that the stock will drop in value. You profit when the stocks goes down. There are many uses for shorting a stock. One of the biggest reasons is hedging. Hedging is protecting your portfolio some how. In another article we will talk about shorting and hedging.
So now that we know the two definitions of cheap stocks, we can find a couple of good reasons for cheap stock trading. As always, be careful. Greed is often the downfall of a portfolio. The best way to make money in the stock market is to remain patient.
Make sure to check out the book above. It’s a great resource for the investor looking to make better stock picks. It definitly was for me. Click here to go to the elementary finance bookstore or click on the book above to order your copy.