Guidelines for Price Levels
Low-priced stocks, those trading for less than $10, are particularly attractive to individual investors because it's easier to establish a large position in these stocks with less capital. But before you invest in any of the stocks that fall into any of the four categories I've outlined, please consider the amount of risk you can tolerate, and be aware that all of the stocks in these groups should be considered speculative.
Be aware that my model indicates that it's most prudent to add to positions at a value level and to book profits on strength to a risky level. For example, a trader who buys at a value level should consider selling at the nearest pivot.
Options on Survival
: This group includes stocks trading in the $1-to-$3 range. Stocks in this category are option plays on the company's survival. Buy them only if you can afford to lose 100% of the investment, because stocks become worthless at bankruptcy, which is a high risk for companies with stocks in this price range.
Margin Threshold Stocks
: Stocks in this group trade for less than $5 but more than $3. Many brokerage firms will not allow their clients to buy stocks trading for less than $5 on margin. Keep in mind that these stocks trade below $5 for a reason; like their Options on Survival kin, their companies are at risk for bankruptcy. However, unlike members of that lower-priced group, stocks that trade between $3 and $5 have a better chance of survival.
Five & Dimers
: This class of stocks, those that trade between $5 and $10, tends to stay in that range. Many mutual fund managers, by their fund guidelines, can't own stocks trading below that upper level. If there is a reason for a stock to fall below $10, expect to see selling pressure from the mutual fund managers. Once the selling subsides, and if the stock stays above $5, some speculation is merited in stocks that still have positive profiles. I believe a good strategy for members of this group is to buy tech stocks trading for less than $10, but to keep a sell-stop in case the stock breaks below $5. Stocks from the Five & Dime should be considered speculative. But they can be rewarding if you find the ones that can get back above $10 before they break below $5. A positive chart profile is a good indicator for stocks trading in this range.
Stocks Below $1
: Often called penny stocks, stocks that have drifted down from higher levels to become members of this group become subject to delisting. I will not comment on these, or on stocks trading on the bulletin boards or Pink Sheets because they are so volatile, illiquid or hard to research, if not all three.