By definition, if you want to buy cheap stocks, then penny stocks trade in the ‘cheap’ category. But what amazes me is that many people overlook the real meaning of ‘cheap’ when they look at penny stocks, and completely overlook the real gold mind: cheap penny stocks.
What are cheap penny stocks? Before we look at that, let’s first define cheap stocks. Cheap, with regards to stocks, does not directly correlate to the market price of the shares. In reality, if you want buy cheap stocks, they you are looking for stocks that are priced low relative to their intrinsic value.
For example, if you want to buy a TV and when you shop you find two. TV A is priced at $500 with a 10% discount for an overall price of $450. TV B is priced at $2000 with a 50% discount for an overall price of $1000.
If we look at the concept of cheap we can easily say that the overall cost is less for TV A and therefore cheaper. However, if we look at the value of TV B we see that we are gaining $1000 in value for putting the same amount on the table. Therefore, TV B is significantly cheaper.
When trying to buy cheap penny stocks, we must look at the stocks for what they are, stocks. A cheap stock is a cheap stock regardless of the overall cost. With stocks we want value, not price. Think TV B. The reasoning is simple. You may not be able to resell your $2000 TV, but you can easily resell a share of stock. So buying value that is under priced gives you significant profits upon sale.
So if you want to buy cheap stocks, you buy an under priced share. Penny stocks trade in this exact same manner. You buy cheap penny stocks when you buy penny stocks that are drastically below market value.
Think about this. You can buy GOOG when it trades at $400, at a low price of $200. You double your money because you buying below what the stock is valued at. How about a penny stock that is trading at $.50 but worth $1. Again, you double your investment. The principle holds.
If you want to eventually buy cheap penny stocks for trade, then you must learn how to buy cheap penny stocks.