The Perils Of Bargain Hunting

As I have been discussing in a series of articles (which you can find here, here and here), we now have a substantial body of evidence demonstrating that individual investors possess a preference for low-priced equities. This is anomalous behavior, because the level of a company’s stock price is arbitrary—firms can manipulate it by adjusting the number of shares they have outstanding.

The research from a trio of studies on the U.S. stock market has found that this irrational preference is explained by individual investors who are searching for a cheap bet, as with lottery tickets. Therefore, such investors find lower-priced stocks attractive. The research also confirms the view that individual investors may see low-priced stocks as being closer to zero and farther from infinity. Thus, they are perceived to have more upside potential and less to lose.

Read the rest of the article on ETF.com.

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