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What Are Speculative Stocks?

As an investor, you should have set goals for yourself to reach your desired financial targets. While most start out with a long-term growth strategy in mind, speculative stocks are a much different ball game.

Speculative stocks are typically invested in by investors looking to make calculated guesses on which way the asset will move. It is typically a high-risk investment that comes with the potential of significant gains or major losses.

How Does Speculation Work?

Speculation works by purchasing an asset with the hope that in time the price of it will increase. This then allows the investor to turn a quick profit and move on to the next. Speculation is typically done in a short-term investing style.

A stock that is in a new, obscure, or small company likely has the potential to experience failure. Many of these companies are considered speculative stock because of the risk associated with buying them.

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What Is Speculation?

Speculation is a tactic used by some investors to try and predict what the future market will do for various new and/or obscure companies. Speculation and investing are two different strategies.

When you speculate in a stock, you are buying it for a short-term gain based on your research, news, or other factors. The goal behind speculation is to sell the stock once it has reached a substantial price point, then move along to the next stock. Generally, most investors do not have interest in the companies they are buying into.

Alternatively, if you invest in a company you have likely done your research to make sure it is a sound investment with long-term growth potential. You weighed the possibility of a loss and found it was unlikely, and you are willing to stick through short-term volatility for the long-term gains.

Who Engages in Speculative Stocks?

Speculative stock investing appeals to short-term traders. Typically, they invest in low share price stocks that have greater volatility.

This volatility enables them to see a high return on their investment when it works out in their favor. These traders typically have high risk tolerance.

Speculators have one main concern, does the company stock have the ability to provide a substantial profit. They are not looking for a long-term, well-performing company. Instead, they’re more of a gamble, utilizing the stock market in hopes that they will see big returns off one of their speculative stocks.

What Effects Does Speculation Have?

The typical market has securities with share prices that rise and fall, similar to the major indices that rise and fall. But with speculation, investors utilize risky investments that are short lived and meant to predict the stock market’s behavior.

If enough speculative investors purchase shares of a specific stock, it shows demand in that company while reducing the shares that remain for sale. This creates a shift in supply and demand that can cause prices to rise.

Why Are They High Risk?

Speculative stocks are a high-risk investment. The risk of loss has higher odds than typical trading.

In fact, speculative losses have caused many traders to see complete disasters. But many speculative traders feel the risk is worth the reward.

As mentioned above, speculative investors find stocks that are from lesser-known, small, and/or new companies that they are hoping will go big. If they are wrong in their prediction, they risk losing their investment completely.

Speculative Stocks and Different Markets

Speculative trading is a type of trading strategy that is more aggressive than many other strategies. While it might seem that speculation is a strategy for only those willing to take risks, it does have benefits that help publicly traded companies.

Speculative investors are willing to go all-in on companies that have not been able to prove themselves yet. It provides the companies with funding to grow and expand, which they would not receive if these traders do not take a risk on them.

Forex Market

Forex is the foreign currency exchange market. It’s a more popular market among speculative investors because of the constant fluctuations between currencies and in the exchange rates.

Typically, investors utilize the Forex market to buy currency when it is weak, then sell it when it is strong. For example, there are more than a dozen currencies worldwide that the US dollar can be traded; from the British pound to the Japanese yen.

Speculation can have both a stabilizing and destabilizing impact on exchange rates. When an investor buys currency when it’s weak, then sells when it’s strong, it can provide a stabilizing effect.

However, there is some controversy around trading when investors sell currency when it is weak, hoping to get it weaker, before buying it again. This can destabilize the exchange rate.

Bond Market

There are multiple speculative strategies that you can utilize in the bond market. The famous investor Benjamin Graham used a convertible bond hedge strategy.

This is where you buy a corporate bond that has the option to convert it into stock. Then simultaneously short sell the stock. Another tactic that speculative traders use is bankruptcy bond tactics.

This is where an investor buys corporate bonds from large companies that are close to bankruptcy. It is a very high-risk strategy because there is a far greater chance that you can lose your entire investment. However, some have experienced nice capital gains.

Are All Stocks Speculative?

While some might feel all stocks are speculative, because of the unsurety of the way in which they will perform, speculative trading is much different than investing. Stocks that are considered speculative fit into the category of penny stocks, stocks from new or obscure companies, or smaller, lesser-known companies.

Can I Speculative Invest?

Those with high risk tolerance, can join other speculative traders and try to build wealth with this short-term strategy. However, it’s recommended that you reach out to your financial advisor to discuss if this strategy is best suited for your portfolio.