Buy low, sell high … that’s every trader’s dream, right?

The concept may be simple, but making it work can be pretty complex. Just because a stock is priced low doesn’t mean the price will skyrocket and earn you insane profits.

To improve your chances of potential profits, you first must learn how to find undervalued stocks and how to take advantage of them.

Here, I’ll break down the art of value investing in a way that is specifically geared toward low priced stock traders. In this post, I’ll explain what undervalued penny stocks are.

What Are Penny Stocks?

To really grasp what an undervalued penny stock is, you’ve got to break down both parts of the phrase and gain an understanding of both undervalued stocks and penny stocks.

Since they’re easier to define, let’s start with penny stocks.

The name is slightly misleading: while some penny stocks are sometimes traded for actual pennies, this isn’t always the case. Rather, penny stock is a term that can be assigned to any number of low priced stocks–typically those trading for five dollars or less per share.

Penny stocks are my bread and butter and key focus as a trader. I have found that trading penny stocks has been the most effective way to grow my account quickly.

OK, so you understand what penny stocks are. Now, what about undervalued stocks?

What Are Undervalued Stocks?

An undervalued stock, also referred to as a value stock, is a security that’s selling well below what it could or should be selling for. In the trading sphere, this is called its intrinsic value.

That phrase sounds mystical, and actually, it kind of is. Intrinsic value is the perceived value of a stock. Intrinsic value isn’t an exact science–really, it’s just an educated guess based on what facts are available.

It’s figured out by looking at factors like the business model and the market and considering things like earnings reports to figure out whether a stock is valued appropriately, overvalued, or undervalued.

There’s a very important distinction between a low priced stock and an undervalued stock, though.

Just because a stock is cheap doesn’t mean it’s undervalued. Undervalued stocks can be found at any price point and in any number of different sectors.

So when referring to an undervalued penny stock, you are not just referring to the cheapest of the cheap. You’re referring to a low priced stock that is trading for less than its intrinsic value.

To review: not all penny stocks are undervalued, and not all undervalued stocks are penny stocks

Value Investing is a Proven Strategy.

Does value investing work? Just ask Warren Buffet, who might be the most famous (and rich) value investor out there.

Building upon the principles and work of Benjamin Graham (aka “the father of value investing”), Buffet famously made a fortune using this style of trading.

Value investing has worked successfully for many traders over the years, and rewards traders who are willing to do the in depth research necessary to suss out the best undervalued stock trading opportunities.

Accessible to Traders with Small Accounts.

We can’t all be Warren Buffet, and we certainly can’t all trade with an account of his size. However, it is possible for traders with small accounts to utilize the tried and true techniques of master traders and apply them to trading undervalued penny stocks.

It Rewards Research.

Are you willing to research stocks before you buy? If so, you’ve got a leg up on the majority of traders out there. Seriously: there are a lot of traders who don’t even look at the fundamentals or charts for a given stock–they just hear some buzz about it, see that it’s low priced, and figure they can’t lose.

Wrong! You can lose big, even with low priced stocks. Lower priced stocks tend to be more volatile because the companies are less established and have a higher likelihood of failure. That’s why it’s so important to do your research.

Research is always important, but even more so when trading undervalued penny stocks.

Doing thorough research is what helps you identify the best contenders, and separates you from the rest of the jerks who are just chasing the most shiny stock they heard about on some promoter’s Twitter feed.

Potential Account Growth.

The idea behind buying undervalued penny stocks is that you’re in on the ground floor.

You’re buying a stock that for whatever reason is not trading at an appropriate price. So, you buy at a very low price, hoping that the stock will go up to the point you think it should be at and it may go up in price, which could help your account grow.

Avoid Overvalued Stocks.

Even with your best efforts, you might not always be able to identify undervalued stocks accurately.

However, a positive side effect of working through the process of trying to find undervalued stocks is that you’ll likely weed out overvalued stocks. These are stocks trading above their intrinsic or perceived value. Don’t let them distract you!

The Bottom Line

Trading undervalued penny stocks allows traders with small accounts to make use of the classic trading approach of buying low and selling high.

It’s not always easy to sniff out undervalued penny stocks. However, by following the tips and tricks of many successful traders before you, you can begin to develop an eye for undervalued stocks and learn how to make the most of them.

Of course, like any other style of trading, it’s ultra important to do in depth research before executing a trade. Just because a stock is undervalued doesn’t mean it will deliver profits!