Low price stocks have the advantage of costing less than high price stocks, but they have a tendency to be more volatile. Low price stocks that trade for less than $5 a share are commonly known as "penny stocks," which are issued by companies whose share prices can rise and fall at lightning speed. High price stocks issued by major corporations, such as IBM, are often called "blue chips." While low price stocks have a reputation for being high risk and high price stocks are considered safe, low price stocks can sometimes be very lucrative.
Low price stocks are not for the faint of heart. They can potentially double or even triple in a day. But in the same time period, you could find your whole investment cut in half or wiped out altogether. The ride is usually much smoother with high price stocks, but the potential for an overnight windfall is not nearly as great.
Sometimes a stock is priced low because it has been falling for some time, which makes it a far more risky investment. Companies that are experiencing major difficulties or heading toward bankruptcy will usually have a low price and they should be avoided. Financially sound companies will usually have a high stock price, but they are more likely to hold their value and steadily appreciate over time.
A stock priced at $1 a share has a greater chance of doubling than one priced at $100 a share. It also is a lot easier to afford the $1 stock. The high price of blue chip stocks can sometimes be a barrier to entry for small investors who want to be in the stock market. Penny stocks can literally be bought for pennies a share, which is a price just about anyone can afford, with the potential to double the investment.
While high price stocks are subject to close scrutiny by the Securities and Exchange Commission, companies with low price stocks do not always trade on major stock exchanges and are not required to file information with the Securities and Exchange Commission. Much of the information that investors would use to make a decision about the soundness of a low price stock may not come from credible sources.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.