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.

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