Most investors want to put their money in equities but may not be able to afford large stakes in valuable companies with higher-priced stocks. For them, low-priced stocks could be attractive as these will enable them to buy more shares instead of just a handful of higher-priced shares for the same amount. For example, an investor willing to spend $10,000 can either purchase at least 500 shares of a stock trading under $20 or only 100 shares of a stock trading at $100.
Additionally, low-priced stocks often have the potential for significant percentage gains. For example, if a stock is priced at $20 and increases by $1, that's a 5% gain. This is in contrast to stocks priced at $100 or above, which see 1% or lower gains if shares move up by $1.
Further, low-priced stocks have high levels of liquidity, giving these stocks an added advantage. This means that cash can be converted quickly and investors could easily get their money out of the securities. In fact, trading in higher average daily volumes keeps the bid/ask spread tight and does not lead to extra costs for investors.
However, low-priced stocks can be much more volatile than higher-priced stocks, thereby leading to significant losses if the stock price decreases. These are more susceptible to price manipulation, such as "pump and dump" schemes, which can lead to significant losses. Further, low-priced stocks, especially penny stocks, belong to smaller and less-established companies. These companies may not be required to file with the SEC, making it harder ...