• Stocks that cost less than $5 are also called penny stocks
• There are several reasons why these stocks are so cheap
• Stocks under $5 have constant but limited volatility
• Buying stocks that are under $5 can be both advantageous and very risky

We have all heard the old saying that if it looks too good to be true, it probably is. Stocks are not that simple. The value that is placed on a company is determined by a multitude of factors and forces at work behind the scenes.

Most of it comes down to speculation and performance. How well the company performs and what investors expect will happen to it in the future. If investor sentiment is good and they predict that the company will do well, then more traders try to grab a piece of the pie; demand for the stock goes up, supply is limited, and the stock price starts to rise.

With more and more people entering the market, the demand for penny stocks is increasing. One big reason for this is their price. If you have just $100 in your trading account, then you are quite limited in what you can buy. Heck, with that amount of money you can’t even pick up half a share of Tesla Inc.

So if you have a limited budget or you are new to trading and just want to dip your toes in the water before plunging in, penny stocks offer a great solution. You shouldn’t expect to get rich from these cheap stocks and be ready to lose some money along the way, but once in a while, one of these stocks will go big and you can walk away with some sexy profits. Even if you don’t, the knowledge and experience gained from trading them should pay for itself.

Example of a $5 Stock That Made It Big

GameStop short squeeze. Enough said? Well just in case you were sleeping through the winter of 2020 I’ll explain.

GameStop (NYSE: GME) is a company that runs a chain of brick-and-mortar video game stores. You know, those places where you had to go into a physical shop and buy an actual CD, then drive back home, put the CD into a computer, and install your video game in order to play it. Suffice it to say, that with the digital age in full swing and the Covid-19 pandemic keeping people home, they weren’t doing too well.

There were a few rough traders speculating that GameStop’s share price might be a bit undervalued and they bought some stock, but what happened next was unimaginable.

For most of 2020, the stock price had been drifting around the $4 mark. Things started to pick up a bit and by the start of January, it was trading at around $17 a share. Then a Reddit group known for investing in high-risk stocks saw an opportunity. They made their move along with thousands of other investors and by January 27, 2021, had managed to push GameStop’s stock price to just above $347 a share.

Money was made, GameStop survived, and we all lived happily ever after. Well, maybe not you, otherwise you wouldn’t be here looking up penny stocks, right?

Before going on we need to make one thing very clear. Investment entails risk. Investing in penny stocks is doubly risky. The reason for these stocks being so cheap can have something to do with poor management, bad delivery, supply shortages, being undervalued by traders, and a myriad of other reasons. The companies on this list are just some of the most promising stocks that we have been able to sniff out. That does not mean that they will end up making any money. Some might go big, and some might go bust, but all of them have potential. All I am trying to say is that if you invest in any of these companies and end up losing your money, don’t come crying to us. You have been warned.

Edgio, Inc. (NASDAQ:EGIO)

Edgio, formerly known as Limelight Networks, Inc was founded all the way back in 2001. They are a company that specializes in creating a better online experience, by providing high-quality content delivery network services. That's quite a mouth full, so let’s put it in their own words, “faster websites, more responsive applications, the highest quality streaming, and more consistent game and software downloads, to any device”, that’s what they are all about.

Currently, on 26 August 2022, the company is trading at around $3 a share, up from around $2 per share in July of this year, and with a market cap of 658.04 million USD, this is no small-time fly-by-night company.

As we move ever forward into the digital age, companies like Edgio will just keep growing. With the demand for fast reliable internet-based applications and media on the rise, we have a sneaking suspicion that this might be a company to keep an eye on.

Ardelyx Inc. (NASDAQ:ARDX)

Over the last couple of years we have seen the meteoric rise of many pharmaceutical companies thanks to vaccine rollouts and the like. Now that things have calmed down we can finally take a new look at the healthcare sector to find investment opportunities that won’t just come and go like the flu season. One potential that stands out is Ardelyx.

Headquartee in Waltham, Massachusetts, Ardelyx is a biopharmaceutical company with a focus on your guts. That’s right, they use a specially designed discovery model that mimics environments inside the digestive system and kidneys in order to develop new drugs for treating disease. Their first product, IBSRELA (tenapanor), helps to cure irritable bowel syndrome with constipation (IBS‑C) in adults. If that doesn’t excite you then maybe the numbers will.

Ardelyx has a market cap of 216.49 million USD with a share price that currently stands at $1.40. 

Their stock price saw a massive dip in July of 2021, going from above $8 to just below $1.70 a share. Things remained on a somewhat downward trend as the price slowly crept further down to just below $0.60 in July of 2022. Since then market sentiment has picked up. Their New Drug Application for XPHOZAH (tenapanor), used in the treatment of hyperphosphatemia, is in process and they have several other interesting projects in the R&D stage.

We have a gut feeling that this company might be a good investment in the long run.

Companhia Energetica Minas Gerais (NYSE:CIG)

Sounds exotic, doesn’t it? Companhia Energetica Minas Gerais, CEMIG for short, is the largest power company in Brazil. Over the last year, we have seen the price of electricity soar on a global scale. This is bad news for consumers but creates some good potential investment opportunities for savvy traders. Headquartered in the capital of the Minas Gerais state, CEMIG currently produces around 12% of the entire country’s power supply and as Brazil is the seventh most populous country in the world, that is a lot of people using a lot of power.

CEMIG saw its lowest price in the last 5 years during May of 2020 when the stock was worth just under $1 per share. Since then the company’s charts have seen some beautiful growth, with higher heights and higher lows now continuing to appear over the last 2 years.

Today, at the end of August 2022, the stock price is up to just over $2, and although it does see some short-term ups and downs, the general price trend remains bullish.

GrafTech International Ltd (NYSE:EAF)

This is a bonus one because as of a few days ago, it can't be considered a genuine penny stock anymore, as the share price just crossed the $5 mark.

GrafTech is a company with a good track record that holds a lot of value. Founded in 1886 as the National Carbon Company, they were the pioneers of new battery technologies, and by 1914 had started some groundbreaking work with graphite electrodes, an important component in electric arc furnaces (EAF). They are still in the furnace game today and provide high-quality solutions for EAF operators in over 50 countries. They hold 135 patents, which is always a good sign of underlying value, and in 1956 even received an Academy Award for their creation of high-efficiency yellow flame carbon that was used in the film industry.

They have a market cap of 1.33 billion USD and a share price that has just peaked past the $5 mark due to the release of yet another quarterly earnings report showing performance that exceeded expectations. 

Cheap stocks might seem to be a good deal, but don’t buy something just because it is cheap. When you want to make a good investment it is of paramount importance that you first delve deep into the company to see if it will be worth your while.

It is always better to spend some time researching and planning your trades before opening a position that you might live to regret. Don’t worry too much about the hype when it comes to penny stocks. The good companies that fall into this category are usually ones that you buy and hold long-term. Penny stocks are not a get-rich-quick scheme. Many traders saw what happened to GameStop and now think that this is the norm. Well, it's not. Most companies take time to build out infrastructure, do R&D, and eventually if they deliver on what they promised, people get excited and start buying in.

So what are some of the advantages of buying shares in one of these companies?

• The price: this is a big draw for many new traders with small budgets.
• The potential: these companies might be on the brink of going big at any moment and if you are holding some of their stock you might be carried along and make a decent return.
• The feelings: well this might not be an advantage to everyone, but when you see potential in a company, invest in it, and then slowly see them grow, it feels amazing.

What about the disadvantages?

• The risk: while some of these companies might have great potential for becoming something big, many more will fail and vanish into the mists of stock market history. 
• The liquidity: not everyone is out bargain hunting from among the scores of cheap stocks. As a result, it might be hard to sell your shares when you are ready to take some profits or to give up and face your losses. 
• The lack of information: when Google makes an announcement it gets plastered across the internet, but when GrafTech International Ltd makes a groundbreaking discovery, you are likely to never hear a peep about it. This lack of good and accessible information can be a huge hurdle to those looking to find and invest in a great company with a low stock price.

The biggest takeaway from this is: DO YOUR RESEARCH!