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Investment Myths - Myth 5: Always Buy Cheap

Updated on December 16, 2016

Myth 5: Always Buy Cheap

Many people like to buy stocks when the prices are cheap. However not every cheap purchase equates to a good bargain or is equivalent to good value for money. Many people assume that stocks which prices have fallen in price always mean a wise opportunity to buy. However, if analysed closely, the real word “cheap” can be defined in two ways. One; cheap can mean something that’s of “good value and worth more than the cost”. Alternatively, it can also mean “poor in quality, low in value, worthless and fruitless!”.

You should be alert when you are advised to buy a stock at cheap prices. There is always a reason why they are cheap. Do not invest if you have not done your research and analysis on a particular company, or if you do not have a valid reason or strategy behind why you are buying these cheap stocks. This does not mean that cheap stocks are always wrong to buy, but wise investors find out why a stock is cheap, and access the validity of the stock prices. You will need to ask questions such as “Why this stock is cheap?”, “Is this the good time to buy?”, “How long will this condition continue?”, “When would be a good time to sell?”. You must make sure that price declines are not caused by serious, fundamental and long-term unfavourable reasons.

We make money by buying the right security at the right time, not by buying a cheap security. Yes, the price is what you pay, but higher consideration should always be given to value. Do not be blinded by the price because it is not the only consideration. You can easily google top 10 cheapest stocks but there is no reason to invest if they do not at the same time generate profit. It is always good to have a critical eyesight as a low price might not be a good buy signal.

The chart below shows the example of Resolute Mining Ltd (RSG) stocks. When stock was dropping from $12 to $8, a buy signal was given by a broker. He claimed that it was a good value buy, as the price was cheap to buy. What happened after, was that it continued to decline to $2; proving that prices can continue to fall even though they are cheap! A cheap stock can still be cheaper.

We have covered a range of myths including topics on diversifying stocks, buying blue chips, buying cheap stocks and take profits etc. If you can’t tell by now, the foundation strategy of all strategies truly is being able to analyse! Analysis is the key to success in trading. Obviously, success never forms overnight and continuous effort is a prerequisite in growing and sharpening your own business and analytical skills. We encourage you to continue to develop and grow your existing skills, to expand your bank of strategies, increase in and accumulate knowledge, aptitude and insight, and never cease to strengthen your understanding of trading. Lastly, don’t ever forget - never lose your purpose and passion! Keep following us and stay educated!


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