Best Cheap Stocks Under $5: Risks, Benefits, and Promising Options

Many companies trading below $5 per share, also known as “penny stocks,” have faced significant challenges such as failed business models, management errors, or deteriorating balance sheets. By the end of 2023, there were 1,968 such stocks on major US stock exchanges. Finding worthwhile investments among them may seem like a daunting task, but even in these volatile times, there are promising opportunities. Here’s a list of the best cheap stocks to buy that could yield high returns in 2024, including stocks priced under five dollars with significant growth potential.

Differences Between Cheap Stocks and Regular Stocks

Cheap stocks, often referred to as “penny stocks,” possess several unique characteristics that need to be considered when trading them:

1. High Risk: Regular stocks on NASDAQ and NYSE meet strict requirements, including quarterly earnings reports to the SEC. Cheap stocks often don’t meet these standards and can drop to zero, affecting their earnings per share.
2. Trading Volume: Most cheap stocks trade for less than $1 million per day. Trading volume can spike during periods of momentum but usually falls, as institutional investors rarely show interest. Stocks trading for less than five dollars often demonstrate this pattern.
3. Liquidity: This is the biggest risk factor. Low volumes lead to wide spreads, indicating low liquidity. Exiting positions can be difficult, leading to price slippage.
4. Company Data: Detailed information is often unavailable. Typically, only press releases are accessible. Stocks are often owned by companies on the brink of bankruptcy or shell firms. Investors must conduct due diligence to find good stocks.
5. Promotion, Scams, and Fraud: Promotional campaigns can temporarily inflate prices. Insiders may use this to offload worthless shares, leading to price drops and reduced liquidity. This often happens with penny stocks.

By understanding these differences, investors can better navigate the complexities of trading cheap stocks and find the best growth-potential stocks to buy.

Why Trading Cheap Stocks Can Be Profitable

Despite their drawbacks, cheap stocks, often called “penny stocks,” offer several advantages:

High Profit Potential: There’s a chance to discover future giants like Amazon or Apple. Early investment in promising companies can lead to significant stock price and market capitalization growth. Penny stocks trading below $5 can yield high returns if chosen carefully. For a broader view of investment opportunities, explore different strategies and stock picks.

Early Entry Opportunity: These stocks often belong to startups or companies recovering from a crisis. While risky, they may be undervalued with high growth potential. Stocks priced under $5, such as those listed on US exchanges, can offer substantial rewards to those willing to take the risk.

Low Entry Threshold: Trading cheap stocks is accessible even to traders with small deposits. For example, with $500, you can buy only 5 shares at $100 each or 250 shares at $2 each. To earn $25, a $100 stock must rise by $5, while a $2 stock needs to rise by only 10 cents. The latter can achieve this in minutes, while the former might take days. Stocks trading for less than five dollars can offer plenty of opportunities for day trading and short-term profits.

By following a sound trading strategy and conducting comprehensive research, investors can find good stocks for their portfolio, potentially increasing the success of their investment management. For sustainable profit strategies, explore various stock trading strategies and how they can be effectively applied to cheap stocks.

Most Promising Stocks Under $5

Here are some of the best cheap stocks to buy for under $5 that could yield high returns in 2024:

Banco Santander SA (SAN) (USD 4.56)

Banco Santander is a major banking company based in Spain. The 2008 financial crisis hit Spanish banks hard due to the housing market collapse. The ongoing economic struggles in Europe during the 2010s didn’t improve the situation.

While Europe still faces significant structural issues, other Santander divisions, such as Santander Mexico, are performing better. Mexico’s economy is booming due to growing manufacturing, fueled by multinational companies like Tesla building new factories there. By the end of 2023, SAN shares were up 25.8%, but they remain attractively valued at 5.3 times forward earnings.

Ambev SA (ABEV) ($2.11)

Ambev is the South American subsidiary of the global brewing giant Anheuser-Busch InBev (BUD). Despite AB-InBev’s struggles in 2023, including high debt and marketing issues with Bud Light, Ambev remained unaffected. The company maintains a net cash position and avoided competitive missteps.

Ambev shares are attractively priced at 12.6 times forward earnings and offer a 5.8% dividend yield, making them a stable and affordable investment option. According to recent earnings reports, Ambev continues to show financial resilience.

Enel Chile SA (ENIC) ($2.80)

Enel Chile is a major Chilean electricity producer and distributor. In recent years, its shares have been hit by a “perfect storm” of drought, economic downturn, and unfavorable Chilean policies, causing prices to plummet. However, conditions are improving, and ENIC shares rose to $3.24 as of May 15. The stock has potential for further growth.

Chile’s leadership in green energy, driven by its hydropower sector and high solar potential, enhances Enel Chile’s appeal. The expected economic boom, fueled by the country’s copper and lithium reserves—critical for EV batteries—boosts its growth prospects.

B2gold Corporation (BTG) ($2.90)

Gold appears to be gaining momentum, with prices surpassing $2,480 per ounce as investors seek safe havens amid geopolitical tensions and an unfavorable macroeconomic backdrop.

This decline has led to a drop in B2gold’s share price. Despite this, B2gold offers diversification with mines in Mali, Namibia, and the Philippines. The stock trades at 9.9 times forward earnings and offers a 5.5% dividend yield, representing an attractive opportunity for investors.

Rocket Lab USA Inc. (RKLB) ($5.40)

Yes, it’s important to note the price of this stock. Although it’s above $5, Rocket Lab is a very promising stock, having gained 64% since May of this year. It’s likely to continue growing after a potential pullback, should one occur.

Rocket Lab is a private American aerospace manufacturer and provider of small satellite launch services. Industrial companies and defense agencies can hire Rocket Lab to develop and plan missions for delivering cargo to orbit or specific destinations.

While the industry is speculative and in the early stages of commercialization, Rocket Lab’s Electron rockets and Photon satellite platforms are in high demand. The company is expected to generate over $250 million in revenue this year, with projections for over $600 million by 2025, and analysts predict Rocket Lab will become profitable by then. This makes it one of the best stocks for your portfolio, despite its current price.

Nokia Corp. (NOK) ($3.84)

Nokia, a leading global telecommunications equipment manufacturer, is best known for its mobile network infrastructure, particularly for 5G deployment. The last few years have been tough for the sector, as 5G rollouts have been slower than anticipated. However, growing demand for mobile data transmission continues to support Nokia’s outlook, especially given security concerns over Chinese network equipment alternatives.

Recently, Nokia announced the acquisition of Infinera Corp. for $2.3 billion to expand its optical semiconductor capabilities. This strategic move is expected to be beneficial, with some analysts valuing Nokia shares higher than their current price. For insights on market prospects, including the impact of such acquisitions and overall market trends, explore detailed analysis and forecasts.

Key Rules for Trading Cheap Stocks

To profit from trading cheap stocks, also known as penny stocks, follow these simple rules:

1. Trade, Don’t Invest: Treat these stocks as short-term opportunities. Focus on trading signals, price behavior, and timely exits. Take profits at stop levels, considering the stock’s volatility.
2. Avoid the Hype: Be cautious with optimistic messages on social media and forums. They are rarely fully truthful and can lead to poor trading decisions.
3. Watch the Volume: Choose stocks with a daily trading volume of at least 500,000 shares or $1 million to ensure sufficient liquidity.
4. Exit Early: Exit trades early when liquidity is still good. This helps avoid getting stuck in a position with low trading activity.
5. Use Technical Analysis: Study trends, support, and resistance levels to make informed trading decisions. This is crucial for stocks priced under five dollars.
6. Risk Management: Determine acceptable risk before entering a trade and set stop orders. This is key to protecting your investment management strategy.

Many beginners start with cheap stocks. While some fail, others succeed by following these rules, gaining experience, and transitioning to more expensive, liquid stocks of popular companies. Careful trading of cheap stocks can bring profits and valuable market experience.

By sticking to a disciplined trading strategy and conducting due diligence, you can find the best cheap stocks to buy and consider for your portfolio. Using resources like MarketBeat and InvestorPlace can help you stay informed about promising cheap stocks and their growth potential.

Conclusion

Investing in stocks priced under $5, or penny stocks, can be very profitable but also carries significant risks. It’s crucial to conduct thorough research and apply effective risk management strategies. Diversification is key to mitigating potential losses and achieving sustainable profits. Resources like MarketBeat and InvestorPlace can help identify the best cheap stocks to buy right now. By staying informed and disciplined, investors can find growth stocks with promising potential to consider for their portfolio. With careful planning, these cheap stocks can significantly improve your investment strategy.