“There is nothing new… There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again” – Jesse Livermore
The term “penny stock” is also identified to the name speculative stocks. Although not all speculative stocks are penny stocks, it generally refers to the shares issued by a small company that trades at a very low price. The definition of a speculative stock can include stocks of certain companies with no active trading market or it is an emerging stock. In general, penny stocks is estimated below 7 billion market cap, the smallest size of a publicly-listed company in the Philippines.
Speculative stocks may trade infrequently, which means that it may be difficult to sell these stocks once you own them.For these, and other reasons, these stocks are generally considered very risky investments. These companies typically have limited assets and operations. Here in the country, most of them are found in mining and oil, gaming and casinos, chemical and industrial sectors.
Why Speculative stocks?
What makes it very attractive to the people? Isn’t it that we should step back an avoid these kind of stocks at all cost? Why are they so popular? For traders, if you are not trading speculative stocks, you are missing an exciting drama. Now, lets take a look on the benefits of investing and trading in speculative stocks.
1. Big gains.
This is the most common reason why people want to start trading speculative stocks. One of the promising and enticing things is that it can make you a millionaire in a day or two. Although, there’s a risk that comes with it, a possible quick gains is likely to happen.
Yes, it is true.If you have sufficient experience and skills, or just get lucky, there are very large gains to be made,profit potential that are uncommon. People are looking for stocks that they can take profit at the shortest time.
When our stock market went all time high during the first quarter of 2018, some of the speculative stocks went unbelievably high for just 2-3 months. We saw Golden Haven,Inc. (HVN) went up 1,327% at the start of 2018 together with other Manny Villar stocks when he was on the headlines that he might be interested to bid for the third Telco in the country. It was followed by Now Corp. (NOW), one of the third Telco contenders which has gained 358.95% after confirming that they too will participate in the government bidding, and PXP Energy Corp. (PXP) also went up 80.77% after the news broke-out that the company will operate oil exploration in the disputed Philippine sea once there’s a confirmation on the said Philippine-China joint exploration. These stocks have been eyed-on by the crowd for many months now.
2. It is way much cheaper.
“Cheap stocks are cheap for a reason”- Willian J. O’neil
Since most of the speculative stocks are start-up companies, you can buy it for a very low price. Buying blue-chip stocks have gone very expensive and people thought buying stocks that has cheaper price might make sense. The big move found in speculative stocks are attractive and seem like an easy ticket to growing your portfolio. Although this has a point and these stocks are very affordable, I would always take it with a grain of salt.
Have you seen the movie ” The Wolf of Wall Street”? For the benefit of those who hasn’t watched it, it is a story of Jordan Belfort, the founder of Stratton Oakmont, an American start-up brokerage firm. They participated in a pump-and-dump scheme, a form of stock manipulation that involves driving-up the price through false and misleading positive financial statements so that it would push the price and cause public buying. Once the insiders dump their overvalued shares, the price falls and investors lose money.
Stratton Oakmont have tried to maintain the stock price by refusing to accept or process orders to sell the stock. Jordan Belfort and his associates later pleaded guilty to ten counts of securities fraud and money laundering, admitting that for seven years they operated a scheme in which they manipulated the stock of at least 34 companies.
This scheme is all too common. Small companies are mostly the subject of stock manipulation. While in the past they relied on telephone calls, the internet now offers a cheaper and easier way of reaching large numbers of potential investors through spam email, blogs, social media, facebook groups, and fake news. Having said that, be extra cautious and don’t be too gullible on other people’s advice in picking a speculative stock.
3. Promising future returns.
“If you are going to buy a bull, then buy a young one”- Dawn Bolton-Smith
Some of the blue-chip stocks have started as small cap stocks. The companies that have displayed consistent earnings with ongoing big projects and promising future plans can drive the stock price to go up, thus, multiplying the outstanding shares of the company. Speculative stocks are two-edged sword, it is risky but if you study it properly, it can bring you a fortune.
There’s no secret to finding a good speculative stock. You must do your research to find any potential company. The best way to monitor is through its price movement as you look for the opportunity on where the price is heading to. With proper analysis and risk management, you may pick your next winning stock.
Best example is Macroasia Corp (MAC), it is one of the best performing stocks last year that went up up more than 700% in one year. It displays very consistent quarterly and annual earnings and also has shown a good price trend. It’s current price is around 28.70 per share but way back in 2016, it was only traded around 1 peso per share.
4. Trader’s favorite.
“There is no good or bad stock, there’s only good or bad timing”- Anon
Stock market has shown herd mentality. It does not matter if the company doesn’t earned at all, as long as they remain as market favorites, people keep on buying them. For the most part, speculative stocks trade in a very low volume, except on special occasion when the stock is “hot”. An outstanding disclosure comes-out, stock price hits new highs, a backdoor news, or a major event might drive people on a frenzy buying.
Some people see this as an advantage; the price of these stocks can swing 10%, 20%, 50% or more in a day. If you’re on the winning side of it, you may enjoy it, but the losing side is no fun. These can be both good and bad depending on various factors.
Speculative stocks can fluctuate very quickly with large change in price. Partly due to low volume traded most of the time. The price moves found on these stocks can be extremely sharp, both to upside and downside. This means if you don’t know technical analysis and you have no experience in trading, you will probably get dumped with a losing stock.
People do make money by trading cheap stocks? People also lose money. That’s why I always advised my clients to study it carefully before buying these type of stocks. If you don’t have much time to monitor the price changes, then you better stick to position trading or long-term investing with stocks in the index. But given that you have the time and you’re ready to burn a candle to study, then go for it. It is something you can look forward to.
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