When considering stocks to buy, sometimes cheaper (and smaller) is better.
Most retail investors are better off taking a pass on those splashy household names and looking for stocks to buy that go for more modest prices - stocks that trade for less than five bucks a share.
Stocks trading for $5 or less often are considered riskier, but offer more upside than their bigger, pricier brethren.
That's because stocks of small companies are less liquid and more volatile relative to the rest of the market. Typically, their prices tend to be move in bigger chunks, making for bigger gains (or losses).
Simply put, these stocks can provide more bang for your buck.
Here's what you need to know...
Stocks to Buy That Can Beat the Big Boys
Individual investors who can spot promising small stocks to buy actually have some advantages over institutional investors.
First of all, big investors, like mutual and pension funds, manage billions in assets.
In order to buy a position large enough to make a difference, mutual funds often invest hundreds of millions of dollars in one company. But the lower trading volume of smaller stocks can make it difficult to buy or sell them without having a huge influence on the price.
Second, because the big fish attract the big bucks, small fry are often ignored by Wall Street analysts.
Most analysts can't afford to spend their day prying into stocks to buy with small market caps.
That's because big investors aren't waiting in the wings for a report on a small technology company that few people follow. Instead, they want the latest intelligence on highly-liquid blue chips.
But when the companies are ready to graduate to the next level, the big boys will pile in and buy thousands of shares -- pushing up prices and rewarding existing shareholders.
Small Stocks to Buy Offer High Growth
Another key reason to look at small companies is that they have the ability to grow quickly - a feat that's very difficult, if not impossible, for large companies.
A company with a market cap of $10 billion can't double nearly as quickly or easily as a company with a market cap of $500 million.
But that's the beauty of small companies -- they give the individual investor a chance to get in on the ground floor.
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Giants of today like Microsoft Corp. (Nasdaq: MSFT), WalMart Stores Inc. (NYSE: WMT) and Costco Wholesale Corp. (NYSE: COST) all started as small businesses --helping early investors turn small investments into massive fortunes.
Spread the Risk
That doesn't mean it's time to dump all of your blue-chips and load up on stocks under $5. Remember, these tiny companies carry lots of risk.
So be sure to buy several companies to diversify your risk and to keep your positions small.
Also, don't overpay. Use limit orders (trailing stops) to protect your capital, just in case one of your stocks hits a rough patch.
With that said, here are three stocks to buy priced under $5 that look like bargains right now:
Nokia Corp. (ADR NYSE:NOK) -- Once king-of-the-mountain in the cell phone business, NOK's sales fell of a cliff after the introduction of Apple's iPhone and Google's Android mobile operating system.
But the phone maker is showing signs of life with the recent launch of the Lumia 920T, Nokia's new Windows-based smartphone.
NOK trades for only 1.3 times book value and has $3.64 in cash per share -- almost equal to the cost of shares. Earnings per share (EPS) surged by 70% in the first quarter.
Sirius XM Radio Inc. (Nasdaq: SIRI) -- The provider of pay-to-listen radio has survived years of Wall Street negativity and appears to be on a solid path to growth.
Trading at around $3.33, its stock is up 10-fold since 2009 and is still in the early phases of building its market.
A surge in new car sales, where SIRI has 67% penetration, should bolster organic growth.
Meanwhile, its stable of exclusive content -- including Howard Stern and Oprah Winfrey -- should sustain its low defection rate.
Analysts project sales should rise by 30% annually over the next five years, and a P/E ratio of 6 suggests SIRI is currently undervalued.
What's more, the company is healthy enough to generate sufficient cash to support a new $2 billion stock repurchase program.
Vitesse Semiconductor Corp. (Nasdaq: VTSS) --VTSS is a leading provider of semiconductors focused on cloud networking and Ethernet solutions -- a premier supplier of data center infrastructure for mobileand wireless systems.
VTSS is truly a microcap, with a market cap of just $79.6 million.
But VTSS has caught the eye of both institutional investors and insiders, whose purchases should give the stock a boost.
Institutions soaked up 3.45 million shares, or about 19.5% of the company's shares over the last six months, while insiders bought 3.36 million shares, and now own roughly 36% of its shares. Vitesse had a recent closing price of $2.33.
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