How to Choose Cheap ASX stocks for Higher returns

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By Elly Smith

A full detailed guide on how to choose Cheap ASX stocks for Higher returns with evaluation,how to buy,how to find and everything you need to know.

The Australian Securities Exchange (ASX) is home to a wide variety of stocks, from large blue-chip companies to small, up-and-coming businesses. While there is no guarantee of success, there are a number of factors that can help you pick cheap stocks that have the potential to deliver higher returns.

In the fast-paced world of stock trading, finding the right investments can feel like searching for a needle in a haystack.

However, with careful analysis and a discerning eye, you can uncover some real gems on the Australian Stock Exchange (ASX).

In this article, I will discuss some of the key things to look for when picking ASX cheap stocks. I will also provide some tips on how to evaluate these factors and make informed investment decisions.

What are cheap stocks?

Cheap stocks are those that are trading at a price that is below their intrinsic value. Intrinsic value is the theoretical value of a stock, based on its underlying assets, earnings potential, and other factors.

There are a number of reasons why a stock might be trading below its intrinsic value. Perhaps the company is facing some temporary challenges, or the market is simply undervaluing its prospects. Whatever the reason, cheap stocks can offer investors the potential to buy low and sell high.

There is no one definition of what constitutes a cheap stock. However, a good rule of thumb is to look for stocks that are trading at a discount to their book value or earnings per share.

How to find cheap stocks on the ASX

There are a number of ways to find cheap stocks on the ASX. One way is to use a stock screener. A stock screener is a tool that allows you to filter stocks based on a variety of criteria, such as price, market capitalization, and financial performance.

Another way to find cheap stocks is to do your own research. This involves looking at the company’s financial statements, reading analyst reports, and following news about the company.

How to pick cheap stocks for higher returns

There are a number of factors to consider when picking cheap stocks for higher returns. Here are a few of the most important:

When picking cheap stocks, there are a number of factors to consider. These include :

Company’s financial performance: Look for companies that are profitable and have a strong track record of earnings growth.

Competitive position: Look for companies that have a dominant market share or a unique competitive advantage.

Management team: Look for companies with experienced and capable management teams.

Fundamentals: The first step is to assess the company’s fundamentals. This includes looking at factors such as its financial performance, competitive position, and growth prospects.

Valuation: Once you have a good understanding of the company’s fundamentals, you can start to evaluate its valuation. This involves comparing the stock price to its intrinsic value.

Risk: It is important to consider the risk associated with the investment. Cheap stocks can be more volatile than more expensive stocks, so you need to be prepared for the possibility of losing money.

Your investment goals: Finally, you need to consider your investment goals. If you are looking for long-term growth, you may be willing to take on more risk. However, if you are closer to retirement, you may want to focus on safer investments.

How to evaluate the risk of cheap stocks

Cheap stocks can be more volatile than more expensive stocks. This is because they are often smaller companies with less liquidity. As a result, they can be more susceptible to changes in market sentiment.

To evaluate the risk of cheap stocks, you should consider the following factors :

Company’s size: Smaller companies are typically more volatile than larger companies.

liquidity: Stocks with low liquidity can be more difficult to sell, which can increase the risk of losses.

Financial performance: Companies with weak financial performance are more likely to default on their debt, which can lead to losses for investors.

Management team: Companies with inexperienced or incompetent management teams are more likely to make poor decisions, which can hurt the company’s stock price.

Do your research : Before you invest in any stock, it is important to do your research and understand the company. This includes reading the company’s financial statements, researching its industry, and following its news and analyst coverage.

Use a variety of valuation methods : There are a number of different valuation methods that you can use to assess a stock’s value. It is important to use a variety of methods to get a more complete picture of the stock’s value.

Be patient : Cheap stocks can take time to appreciate in value. Don’t expect to get rich quick.

How to buy cheap stocks

Once you have found cheap stocks that you are interested in, you need to decide how to buy them. You can buy stocks through a stockbroker or through an online trading platform.

When buying cheap stocks, it is important to remember that they can be more volatile than more expensive stocks. As a result, you should only invest money that you can afford to lose.

8 steps to analyse and choose cheap ASX stocks

1. Understand the Basics

Before diving into the world of ASX stocks, it’s crucial to have a strong foundation. Understand key concepts like market capitalization, P/E ratios (Price-to-Earnings), and dividend yields. These will serve as the building blocks for your stock selection process.

2. Define Your Investment Goals

Start by setting clear and realistic investment goals. Are you looking for short-term gains, or are you in it for the long haul? Your objectives will influence the types of stocks you should consider.

3. Screening for Potential Candidates

Now, let’s roll up our sleeves and get to work. Begin by using stock screening tools available on various financial websites. Look for stocks with:

a. Low Price-to-Earnings (P/E) Ratio: A low P/E ratio suggests that a stock might be undervalued compared to its earnings. However, always consider the industry average.

b. Strong Dividend Yields: If you’re seeking income, prioritize stocks with attractive dividend yields. These can provide a steady stream of cash flow.

c. Healthy Balance Sheets: Review a company’s financial statements to ensure it has manageable debt and strong cash flow.

d. Growth Prospects: Investigate a company’s growth potential by examining its historical and projected earnings.

4. Dig Deeper with Fundamental Analysis

Once you’ve identified potential candidates, it’s time for a deeper dive. Conduct fundamental analysis by:

a. Reading Annual Reports: These documents offer insights into a company’s financial health, management’s commentary, and future plans.

b. Analyzing Industry Trends: Consider the broader economic environment and industry-specific factors that could impact your chosen stocks.

c. Evaluating Competitive Advantage: Does the company have a unique product, technology, or market position that sets it apart from competitors?

5. Technical Analysis for Entry Points

Technical analysis involves studying stock price charts and patterns to identify optimal entry points. Pay attention to support and resistance levels, moving averages, and volume trends. This can help you time your entry into a stock more effectively.

6. Risk Management

Investing always carries risks. To mitigate them, consider:

a. Diversification: Don’t put all your eggs in one basket. Diversify your portfolio across different sectors and asset classes.

b. Stop-Loss Orders: Implement these to limit potential losses if a stock doesn’t perform as expected.

c. Position Sizing: Determine how much of your portfolio you’re willing to allocate to each stock.

7. Stay Informed

The stock market is dynamic, and conditions can change rapidly. Stay informed by following financial news, monitoring your portfolio, and regularly reviewing your investment strategy.

8. Patience and Discipline

Finally, remember that successful investing requires patience and discipline. Don’t let short-term market fluctuations dictate your decisions. Stick to your investment plan and remain focused on your long-term goals.

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Additional tips

Look for stocks that are trading below their book value : Book value is the value of a company’s assets minus its liabilities. Stocks that are trading below book value are often considered to be undervalued.

Look for stocks with strong earnings growth : Companies with strong earnings growth are more likely to see their stock prices appreciate over time.

Look for stocks with a low P/E ratio : The P/E ratio is a measure of how expensive a stock is relative to its earnings. Stocks with a low P/E ratio are often considered to be undervalued.

Look for stocks with a strong management team : A good management team is essential for a company’s success. When choosing stocks, look for companies that have a strong management team with a proven track record.


Picking cheap stocks for higher returns can be a profitable investment strategy. However, it is important to do your research and understand the risks involved before you invest. By following the tips in this article, you can increase your chances of success in picking cheap stocks.

Remember, investing is a journey, not a sprint, so stay committed and adapt your strategy as needed along the way. Happy investing!

Investing in cheap stocks can be a great way to grow your wealth over time. However, it is important to remember that there is no guarantee of success. Always do your research and understand the risks involved before you invest.

I hope this article was helpful. If you have any questions, please feel free to ask me.

Until then,

See you on the other side.Thank you.

FAQs (Frequently Asked Questions)

Can I solely rely on low P/E ratios to identify undervalued ASX stocks ?

While a low Price-to-Earnings (P/E) ratio can indicate potential value, it’s essential to consider other factors as well. Industry dynamics, company growth prospects, and financial health should also influence your decision. A low P/E ratio alone may not guarantee a good investment.

How do I decide the right time to sell my ASX cheap stocks for maximum profit ?

The ideal exit point depends on your investment goals. Some investors prefer holding stocks for the long term, while others aim for shorter gains. Review your portfolio periodically and sell if your original investment thesis no longer holds or if you achieve your target returns.

What role does market sentiment play in picking ASX cheap stocks ?

Market sentiment can significantly impact stock prices in the short term. However, it’s crucial to base your decisions on fundamental analysis and not solely on market sentiment. A company’s financial health and growth prospects should be the primary drivers of your investment choices.

Is it possible to find cheap ASX stocks in high-growth industries ?

Yes, it’s possible. High-growth industries often have companies with varying levels of valuation. Look for those companies within the sector that might be temporarily undervalued due to market sentiment or specific circumstances. Conduct thorough research to identify such opportunities.

How can I handle the emotional aspects of stock trading, like fear and greed ?

Managing emotions is a significant part of successful investing. Create a well-thought-out investment plan with clear entry and exit strategies. Stick to your plan, and don’t let fear or greed drive your decisions. Additionally, consider seeking advice from a financial advisor or mentor to help you stay disciplined.

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