The best share market advisor in India will tell you that you should not only focus on the stock price when picking stocks. The important aspect when picking stocks for long-term investment is the value. However, most investors believe that low-priced stocks are better since the scope of growth is higher (and other reasons we will discuss later).
In today’s article, we will discuss whether low-priced stocks are better for long-term investments. If not, how should investors select stocks?
What are low-priced stocks and their characteristics?
There is no universal definition of low-priced stocks. However, most financial analysts state that stocks with a price below Rs 20 are low-priced stocks.
Most investors are attracted to low-priced stocks because it gives them the opportunity to buy more shares. If you plan to invest in low-priced stocks, do so only if you have expertise and experience in the market. You must get in touch with the best advisors in the stock market before you invest in low-priced stock. Let us understand some characteristics of low-priced stocks:
- Risks: Compared to high-priced stocks, low-priced stocks come with higher risks. One of the reasons for this is that they infrequently trade on exchanges. Also, even though they are listed for a long time, they perform poorly.
- Regulation: The security and Exchange Board of India (SEBI) is the regulatory body in India. It monitors all the activities related to all the stocks listed on the exchange. However, low-priced stocks are not regulated in the same way as some larger-cap stocks. Even if they are, fewer rules and compliance create a lack of credible information to make an investment decision.
- Volatility: Volatility reflects the price movement in the stock. Because low-priced stocks are cheaper, they are considered highly volatile. Investors fall into a trap with volatile stocks since they fall and rise in a short span. It makes them attractive, and investors get tempted to buy such stocks to make quick gains.
- Affordability: Low-priced stocks are generally affordable for new investors who have a small budget for investing in the market.
Is low-priced better at delivering results?
Now that you know the nature of low-priced stocks, we can discuss whether they are best for long-term investors. If you are confused even after our discussion, you must find the best advisor in the stock market for guidance.
Here is a crucial thing every investor needs to understand – the stock price is not an indicator to invest in a stock – it does not tell you its quality or real value.
Let us understand it with an example. Tata Steel’s share price was trading at around Rs 1000 some months back. Then the stock split was announced by the company in a ratio of 1:10. The share price would be one-tenth after the split – the share price went to Rs 100. Does it make the company more attractive or a priced because the price has come down? No, it does not.
As we mentioned above, low-priced stocks are volatile. They may double up, but the chances of them staying there are slim. Note – it does not mean that all low-priced stocks are bad. Some good companies are trading at low prices. However, it requires a lot of effort to find such a company.
Secondly, when we talk about long-term investing, you must invest in companies you are confident will continue to grow and survive all economic cycles – recession, geopolitical tension, etc. If the company is low-priced and does not have a good balance sheet, it is unlikely to survive and hence should not be in your long-term investment portfolio.
To sum up, low-priced stocks are mostly not good for the long term. There are a few hidden gems in this category, but you need the expertise to find them. You may look for the best stock advisory company in India to find such a gem.
Another essential point – when picking quality stocks, you don’t always have to look for a traditional advisory company. Jarvis Invest is an AI-driven tool that helps you select the best stocks for investment. Stocks are selected for you as per your risk profile and investment horizon.
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