I don't understand the psychology of "cheap".
Well, actually, I do understand the psychology. I just don't understand why people are caught by the psychology, and think it's rational.
A stock that increases, say, 100%, increases 100%, whether it move from .50 to 1.00 or from 20.00 to 40.00. The .50 stock is NOT "cheaper" than the 20.00 stock, because an investment in either stock will provide exactly the SAME return.
If you only have $1000 to invest, you can only buy 50 shares of the $20 stock. You can buy 2000 shares of the .50 stock, and this is the basis for the fallicious psychology of "cheap" penny stocks.
But a 100% gain is still only doubles your money. And the floor is no closer with a "cheap" penny stock than it is with a $100 stock - the "downside" is still a total loss of your investment either way, and no more or less likely because of the price of the stock.
In fact, "cheap" stocks are often more expensive than "expensive" stocks. Although this has improved over the past few years, the spread is still significantly higher, and so you give away more to the market maker trading "cheap" stocks. |
