The Psychology Of Low-Cost Stocks

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Year in and year out, if you observe what people say online, you’ll see that the concept of low-costs stocks keep coming up. People are more convinced than ever that if they can purchase a “discounted” stock that they’re sure it will eventually “rocket up”, bestowing them with vast wealth in the process.

To the Moon…or to your Doom

Truth is, there’s no reason a low-cost stock will “shoot up”, especially to a degree that’s greater than normal stocks. In fact, most stocks are cheap only when their business model has been exposed as a failure. Consider that stock prices are a function of millions of savvy investors operating on valuing a company’s share prices at the same time. Sure, sometimes the whole crowd gets it wrong, but it doesn’t happen as often as you like.

I totally understand the mentality of why people want to buy the cheap stocks. It’s as simple as having a low amount of capital and wanting to get a high return. If you have $1,000 to invest in shares, it’s much more exciting to buy 2,000 shares of some garbage company than to purchase 1.5 shares of GOOG. But, since the name of the game is earning a return on your investment, you still have to ask yourself which company will bring the greater return on a percentage basis.

If you then connect the business models of XYZ corp (generally some company running a diamond or gold mine which hasn’t hit in 15 years) versus GOOG, which has become a global brand in less than 5 years, you’re forced to take a good hard look at what you’re actually putting your money in. And the fact is, your investment is still $1,000 in this case, no matter how many shares you purchase.

Sure, you might “hit it big” once in a blue moon with a cheap stock. Nobody would go to Las Vegas is everyone lost and every now and again you’ll here of a stock that took off like the proverbial rocket. But, more often than not, you’ll be holding the bag, wondering why you ever had to throw your money in the penny stock toilet.

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