Topic: Penny Stocks

Be wary of the ‘hot’ speculative stocks to buy as you could easily lose money

Find out why the top speculative stocks to buy can be very risky so you can make smarter investment decisions

Penny stocks are typically the quickest to fall when the bubble bursts in an industry. Some investors get hooked on the potential for high profits in a short time frame, but it’s important to remember that penny stocks are far more volatile than the stocks of well-established companies. It’s far easier to launch a stock promotion to make quick start-up cash, but it’s much harder to nurture that start-up into a successful, long-lasting business.

Often, when investors follow recommendations for speculative stocks to buy, and they lose money, they assume their mistake was bad timing. This is not the case. Investing in speculative stocks is very much like playing slots in a casino. You can get lucky investing in penny stocks if you find that one hidden gem, but the house odds are against you.

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Keep the risks in mind when a broker recommends speculative stocks to buy

Some investors looking to add to the aggressive portion of their portfolios turn to the higher-risk strategy of buying speculative penny stocks.

However, as mentioned, the odds are against you when you invest in speculative stocks and companies that have yet to make money. Some, if not most, of these companies will never make any money.

There are several potential risks when investors venture into penny stocks.

Buying low-quality penny stocks is one of those things that can appear to be successful before it goes badly wrong. Some investors get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.

Penny stocks tend to be engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software.

In penny stocks or games of chance, the odds are against you. The longer or more often you play, the likelier you are to lose.

Speculative stocks to buy have sometimes failed to catch the interest of venture capitalists

Successful venture capitalists tend to have a record of success in business and in investing. Thanks to their proven ability, they can move quickly when they spot a worthwhile opportunity. Since they raise money from institutions, corporations and wealthy individuals, they can operate as a private company. All this relieves them of a large amount of legal and regulatory issues that they’d have to go through to raise money from public investors.

Before you buy speculative stocks that claim to have a business plan with Uber-scale potential, ask yourself this: Why would the plan’s creator offer it to individuals, with all the accompanying regulatory burden? In most cases, it’s because they’ve already tried to interest the top venture capital funds, and nobody was buying.

Recognize that pharmaceutical penny stocks are also more speculative than many investors realize and you will make better buying decisions

Major pharmaceutical companies are a more speculative investment than most investors realize. They need a continuing flow of successful new products to maintain their earnings. They face increasing litigation and aggressive competition from generics as drugs come off patent. Unlike tech stocks, they have formidable regulatory burdens, and unlike other manufacturing stocks such as, say, auto companies, they do not benefit from customer loyalty.

Pharmaceutical or biotech penny stocks are even more speculative, and come with a greater variety of problems, than other penny stocks. Successful investors should be aware of the risks.

As mentioned, drug stocks are riskier than investors realize. The cost of developing a new drug is huge, and the payoff, if any, is uncertain. That’s even more so with pharmaceutical or biotech penny stocks, which typically have just one or two drugs under development—and in very early stages with eventual commercialization very unlikely.

Use our “sell-half” rule with speculative stocks to buy and profit more over time

Knowing when to sell a stock is one of the most important factors in successful investing—it’s almost as important as knowing when not to sell. That’s why we advise investors to follow a key rule when it comes to rising stocks.

Selling half of your hot stocks that surge helps you guard your profits. But apply this rule to more aggressive stocks only, and not to the well-established stocks that may surprise you by going a lot higher in the long run.

Whether your approach to investing is conservative or aggressive, the quality of your investments matters much more than your skill at selling.

However, you should be quicker to sell aggressive stocks than conservative ones. With stocks we rate as “Speculative” or “Start-up,” it pays to apply our sell-half rule. That’s when you sell half of a stock that doubles in price.

Use our three-part Successful Investor approach to keep speculative stocks to a small part of your overall portfolio

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

We see a lot of interest in activist investing, cannabis investing, and investing in cryptocurrencies, all of which can be seen as speculative. What industries do you feel the most confidence in when it comes to speculative investments?

What is your experience with buying speculative stocks? Have you made money by investing in them?

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