If you are a typical investor trying to make money in the stock market, sometimes it feels as if you have your work cut out for you. It can be very difficult to make consistent profits. Particularly with the price swings we’ve seen over the last few years, it can feel as if it’s constantly one step forward, two steps back.
One strategy that can be particularly successful is to find and invest in undervalued or cheap stocks. By cheap stocks, we don’t necessarily mean penny stocks (which can be something of a minefield). No, by “cheap” we mean undervalued, i.e. a stock that is currently priced less than what it should be priced at if everything were perfectly balanced.
When looking for undervalued stocks like this, you want to keep a look out for companies with strong balance sheets and plenty of cash. Try to find a company whose business seems solid and profitable, but where for whatever reason the market price is in the doldrums. Often these solid companies get knocked down by the market because they are a little out of fashion and don’t have the latest “hot product” or whatever. These are the times to invest because the stock will be relatively cheap.
Do watch out however for stocks that have taken a big drop recently. Often there is a good reason for such a drop, in which case it is unlikely to be a great investment. Remember how the stock market collapsed in 2009? Many people would have seen Lehman Brothers stock as being a good buy, whereas it actually was more of a “goodbye”!
So look at the fundamentals. How solid is the business? How does their balance sheet look? Ho much cash do they have? What is the market like for their products and services? You need to develop an eye for stocks that are temporarily down rather than being down and out.
Of course, this is not easy. If it was, then everyone would be doing it. But with practice you can develop a canny eye for a cheap stock. And this is a much safer strategy that will yield more consistently positive and profitable results than dipping in and out of penny shares. Good luck!