A cheap stock does not mean, a bargain value stock. For a falling stock Zero may be a target. Beware, while you invest in them.
If the fundamentals go against a company, the prices starts to fall. The reason may be a continuous loss, unfavorable political conditions, change in the management or still worse fraud at the management level, all will bring down the prices.
Study the fundamentals of the stock before investing. you may avail the help of a fundamental stock analyzer. Many websites give this information free of cost.
If the fall of the stock price is due to technical reasons, then it works for your benefit. Study the charts, look for the buy setup and enter market.
For a trader, who has seen a higher price for the same stock, a lower price appears to be attractive. At every rally in a down trend s/he buys the shares. When it falls further, s/he buys again, to average the cost per share.
The prices continues to fall. The investor exhausts all their resources. Still the prices falls again. The loss of the shares bought in the first batch, has increased by the loss of the subsequent purchases.
When the shares are really available at a bargain, the investor is not only with out cash, but also under huge loss. By the time the prices stabilizes at a lower level and starts to rise it will take many months or even years.
Or the price may not go up at all. The company may even go bankrupt.
That will drain the investor of her psychological capital, which is much more costlier than financial capital.
Look at the charts below.
Both of them have taken 5 years to fall.
How much do you think they fall further?
How long do you think they will take to recover.
The falling stock may some times, (there are plenty of examples in all stock exchanges) totally vanish from the market. The investor's capital will also vanish in the thin air.
So, bottom line, beware of falling stock. Never average on losses. Just because a share is cheap, it may not be worthy to buy. Take extra precaution while investing in low value stock.
A cheap stock is not a value stock.
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