Everyone is on the lookout for cheap UK stocks to buy. Usually, when we use the word cheap with regards to investing we mean undervalued. This may be from a technical point of view, based on the historical share price. Or it could be from a fundamental point of view, based on the balance sheet or income statement for the last trading period.
Either way, the premise is that buying cheap UK stocks and putting them in a Stocks and Shares ISA can help to make a profit. In the long run, these stocks should return to a fair value. The share price should rise, giving investors a profit when they sell the shares. As there is no capital gains tax on stocks held within an ISA, the investor can get the full benefit of the profit when they sell the stock.
Ways to invest in cheap UK stocks
First, I’d split my investment up between different sectors. UK stocks may be cheap for a reason, and so I don’t want to put all my eggs in one basket. For example, various stocks related to aviation could be viewed as cheap. These include Rolls-Royce Group, easyJet, International Consolidated Airlines Group and others. But what if the stocks don’t recover? With this in mind, I’d mix up different sectors to avoid being overly concentrated in one sector.
In a similar manner, I’d look to invest in stocks that are well prepared to ride out Covid-19 into next year. It’s unlikely the virus is going to disappear anytime soon, and so I’d buy stocks that look cheap but aren’t overly exposed to the virus. For example, boohoo group stock looks cheap at current levels. Yet the firm is coping well with the pandemic so far. This would be a safer buy in my opinion than some other firms.
Investing at the right time
Third, I’d make sure not to go all in right now. There’s plenty of risk events through to the end of the year. These include the US election, Brexit deadline, and holiday trading period. I’m sure this will throw up cheap UK stocks as a result of some of the actions. So keeping some powder dry should help me take advantage of these events in the immediate aftermath.
Even for the cheap UK stocks I do decide to invest in right now, I’d be cautious about buying in one go. Various studies have shown that by averaging your purchase price on a stock by buying over three or four occasions can be a much better investing strategy. This goes back to my earlier point that some stocks may be cheap for a reason. The share price may continue to fall for the next few months. So buying now, and then again in one month can result in a better (lower) average price.
Think long term
The stock market crash (along with the cheap UK stocks) won’t last forever. History has shown that the stock market does rebound from slumps in the long term. So although it sounds obvious, I don’t want miss the boat by simply not investing at all!
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.