Investors picking cheap stocks should investigate companies' underlying businesses, examine their financial statements and read the footnotes in their filings, advises TheStreet. Buyers should also be aware of scams, as cheap stock offers are often used to lure unsuspecting investors.
While companies that trade on the larger stock exchanges have to meet more stringent requirements, companies that have no real business operations sometimes sell cheap stock in their businesses on the lesser markets, notes TheStreet. Investors should choose companies that have not only real, but sustainable business models. Potential investors should also read financial reports from companies offering cheap stocks, to ensure that they file their reports on time, use legitimate auditors and have healthy financial statements.
Company filings include footnotes, and potential investors in cheap stocks should read these footnotes carefully to verify that companies are following generally accepted accounting principles, states TheStreet. One of the more common cheap stock scams that investors should be aware of is the "pump and dump," in which scam artists purchase large numbers of shares in a company to make it look like a good investment, regardless of the company's actual worth. Once new investors buy shares and inflate the price, the original investors sell off their shares to make a profit.