Low Priced Common Stocks Have An Arithmetic Advantage

Initial price Ending price Percentage profit
$1 $1.50 50%
$100 $150 50%

Mathematically, both scenarios result in a 50% profit percentage. However, it is always easier for a lower priced common stock to move from $1 to $1.50 than it is for a stock’s price to move from $100 to $150. Why? It is because it is priced at a lower initial price. This is the arithmetic advantage that low priced common stocks have over higher priced common stocks.

Of course, one must not buy stocks or options just because a stock’s price is low. One must be able to use fundamental analysis and technical analysis to justify that a stock’s price is headed higher.

For option traders with a longer time frame, they may want to purchase LEAPS on low priced common stocks if they understand that there is a catalyst that will help the stock’s price move dramatically higher. Also, it is important that an option trader makes sure that the security that he trades in is liquid. This applies especially to low price common stocks which may be illiquid. This will cause the spread between the bid and ask to be wider than other liquid securities. The implication is that orders will not be filled as easily. Before one trades options in low priced common stocks, do read : Liquidity & Wide Bid-Ask Spreads On Illiquid Optionable Stocks & How To Get A Better Buying & Selling Price Of An Option By Narrowing The Bid-Ask Spread