The recent stock market rally has pushed the prices of many shares to higher levels. However, it’s still possible to purchase cheap shares from across the FTSE 350.
Buying companies at low prices could mean there’s more scope for capital gains in the long run. As such, now could be the right time to start investing £500, or any other amount, in a diverse range of companies ahead of potential stock market growth in the coming years.
Identifying cheap shares after the stock market rally
Clearly, different investors will have differing views on what constitutes a cheap share. However, it’s likely to be based on factors such as their future prospects, recent profitability, track record of growth and the value of their assets. For example, a company that has a low price-to-earnings (P/E) ratio versus its historic average, or compared to its sector peers, may be viewed by some investors as a cheap stock.
Some cheaper companies could be trading at low price levels because of difficult outlooks, or because they have weak financial positions. However, at the present time, some high-quality businesses appear to have low valuations because of weak investor sentiment.
As such, they may provide opportunities to experience capital growth over the long run. A lower share price would potentially offer greater scope for capital appreciation versus an expensive valuation.
A long-term stock market rally
As mentioned, the recent stock market rally has pushed the prices of many stocks, including some cheap shares, to higher levels. In the coming years, a further rise from the stock market’s current level is by no means guaranteed.
For example, risks such as coronavirus and the financial implications of disruption on various industries may cause an economic slowdown that lasts for a prolonged period of time.
However, history suggests that an economic and stock market recovery are likely to take place in the long run. As such, investing in cheap stocks on a regular basis could be a viable means of building a surprisingly large portfolio.
For example, investing £500 per month at an 8% return that matches the FTSE 100’s historic total return would be worth £480,000 in a 25-year time period.
Potential risks are ahead
As ever, investing in cheap shares is a risky pursuit. There’s a very real chance of loss in future, as the stock market experiences an uncertain period partially caused by coronavirus.
However, this threat may have been factored into the valuations of some stocks. Even after the recent stock market rally, there seem to be opportunities to buy high-quality businesses while they trade at low prices.
Buying them on a regular basis could produce attractive returns over the long run that improves an investor’s financial position in the coming years.
