Data shows that the number of stocks below 2 yuan has dropped by 90%, which is considered to be the market "eliminating" low-priced stocks. However, after a sharp rebound, the risks of low-priced stocks need to be paid special attention to, especially near the end of the year. When the annual report disclosure season comes next year, the risk of low-priced stocks such as performance explosion is much higher than other stocks.
The relationship between stock price and performance is that performance is the cause and stock price is the result. However, the factors that affect stock prices are not only performance, but also other factors, such as investor sentiment. As the market warms up and individual stocks are actively traded, low-priced stocks are more favored by retail investors because they are absolutely cheaper, making retail investors feel more like picking up a bargain.
Low-priced stocks have the problem of higher risks and lower growth potential, so investors should be cautious when considering buying stocks.
- Higher risk: Low-priced stocks often represent poor operating conditions or poor performance of the company. Stock prices reflect the company's market performance and future expectations. Low-priced stocks may be caused by reasons such as declining company performance, market pessimism or industry downturn. Buying such stocks may face greater market risks.
- Low growth potential: Low-priced stocks often lack obvious growth momentum. In the stock market, stocks of companies with strong growth and good performance tend to be priced higher. In contrast, low-priced stocks often lack significant growth prospects and earnings expectations. For investors seeking long-term returns, investing in stocks with greater growth potential is more in line with their needs.
- Liquidity risk: The trading volume of low-priced stocks may be relatively small, resulting in poor liquidity for buying and selling. When investors want to buy or sell, they may face large price shocks and transaction costs. In addition, liquidity risk may also affect investors' timely stop-loss and profit realization.
- Lack of professional information support: For most ordinary investors, the lack of professional investment knowledge and information support makes it difficult to accurately assess the true value and potential risks of low-priced stocks. Buying low-priced stocks requires an in-depth understanding of the relevant companies and industries, and ordinary investors may lack sufficient judgment and experience in this regard. Therefore, for investors who are not familiar with low-priced stocks, avoiding buying low-priced stocks is a relatively stable investment strategy.
Five Misconceptions about Low-Priced Stocks
Misconception 1: Thinking that "low-priced stocks" will never lose money
The most important and fundamental reason why small retail investors like to buy "low-priced stocks" is that they are "cheap"! Compared with buying high-priced stocks, the funds required to buy "low-priced stocks" will be much less, so the investment will reduce the risk of investment. This approach seems to reduce the investment amount on the surface, but in fact, the amount that retail investors can invest is certain. Holding a large number of "low-priced stocks" and a small number of "high-priced stocks" are essentially the same, but the effects are very different. Holding a large number of "low-priced stocks" often creates an illusion: it's not expensive anyway, so even if I lose money, I won't lose too much. Once retail investors have this "low-price fluke" mentality, their investment behavior will become very blind and hasty, which is very dangerous.
Misconception 2: Oversold effect, rebound space must be large
The "oversold effect" is the most common mistake made by many retail investors who do not have enough professional knowledge: once a stock with a strong upward momentum suddenly plummets without warning, under the influence of the "oversold effect", retail investors will choose to panic and sell to stop losses. Behind this phenomenon, some people have specially counted the stocks that suddenly plummeted. When they hit the bottom, they often have a strong rebound space, such as Baofeng Group (300431) some time ago. This rebound space is relative to the stocks that have fallen to the bottom, not necessarily low-priced stocks. But most people don't think so. They think that only "low-priced stocks" are stocks that have fallen to the bottom, and only low-priced stocks have room for a large rebound. Therefore, even if "low-priced stocks" keep falling, there will still be people who keep covering their positions: the more you buy, the more they fall, and the more you fall, the more you buy, the more vicious cycle comes from this.
Misconception 3: Lack of basic knowledge of stocks
Most retail investors have only a superficial understanding of investment knowledge. They learn while buying and accumulate investment experience through personal experience. There are very few highly professional retail investors. So, in the absence of basic knowledge of stocks, when stocks worth a few dollars and stocks worth dozens of dollars are placed in front of them and need to be chosen, most people will definitely choose "low-priced stocks" with strong visual impact and psychological expectations.
Misconception 4: Rights filling effect
Many stocks will be "devalued" to low-priced stocks after the "ex-rights" operation. At this time, the "rights filling" that investors are most happy to see will often appear. The biggest misunderstanding here is that "rights filling" is accompanied by "ex-rights" operations, and stocks after "ex-rights" may not necessarily have "rights filling" phenomena, and there may also be "rights discounts", that is, stock price declines! Many people have only seen the stock price rise after the ex-rights, but have not experienced "rights discounts", so they are blindly confident in the "low-priced stocks" after the "ex-rights", which is wrong.
Misconception 5: Low Price-to-Book Ratio
Many retail investors have certain misunderstandings about "low price-to-book ratio": they always take it for granted that a very low price-to-book ratio means that the stock is unlikely to fall, but this is not the case. Although the price-to-book ratio of "low-priced stocks" is often very low, it does not mean that the stock is definitely risk-free. The price-to-book ratio is only an objective evaluation of the asset quality of the company to which the stock belongs by the entire market. It cannot be used as the only criterion for blindly purchasing "low-priced stocks". If you must say, the price-to-book ratio can only be regarded as one of the reference factors at best.
The main reasons why low-priced stocks cannot be bought are as follows:
- The company's operating conditions may be poor. The stock price reflects the market's expectations and value assessment of the company. Low-priced stocks usually mean that the market is pessimistic about the company's future development prospects. There may be problems with the operating conditions of such companies, such as declining performance and bleak industry prospects. Investors may face greater risks when buying low-priced stocks.
- Liquidity may be poor. Low-priced stocks usually have small trading volumes and poor liquidity. This means that investors may find it difficult to sell quickly after buying, especially in market conditions that require quick response.
- Insufficient information transparency. Some companies represented by low-priced stocks may have problems with opaque information disclosure. This opacity increases investment risks because it is difficult for investors to accurately assess the company's true value and potential risks.
Detailed explanation:
For investors, the core purpose of buying stocks is to hope to gain capital appreciation through the company's good performance. However, low-priced stocks often represent the market's pessimistic expectations for the company. There may be problems with the operating conditions of such companies, such as declining performance, frequent changes in management, and unfavorable industry trends, all of which may affect the company's profitability. Therefore, buying low-priced stocks may face greater risks, and investors need to consider carefully.
In addition, low-priced stocks usually have poor liquidity. The small trading volume of such stocks means that it may be difficult to buy and sell quickly when needed. In an active market, stocks with poor liquidity may result in a large spread between bid and ask prices, increasing transaction costs.
Finally, the company information transparency behind some low-priced stocks is low, which may involve issues such as opaque financial reports and lack of public communication. This information opacity makes it difficult for investors to accurately assess the company's value and potential risks, increasing the uncertainty of investment decisions. Therefore, when buying stocks, investors should consider multiple factors and make prudent decisions.
