What are Speculative Stocks?

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson we will define what speculative stocks are and explore how these companies offer an opportunity for unusually high returns on the initial investment along with higher risks.

Speculative Stocks

Bob has been investing in the stocks of some of the big name companies that he sees on the financial news each night. He's been generally happy with his returns of about 8%, but wants to make a few investments in assets with a higher return potential. He has come across the idea of investing in speculative stocks to help boost his returns. Let's take a look at what these kinds of stock are and help Bob evaluate the possible risks and returns of making this investment.

Definition

A speculative stock is a company that is characterized by extreme risk with the possibility of extreme returns in compensation for that risk. These stocks are typically traded on the over-the-counter (OTC) markets instead of the formal exchanges such as the New York Stock Exchange or NASDAQ Exchange. The price per share is very low, often below $1.00, which allows speculator investors the opportunity to load up on an enormous quantity of shares. The idea is that Bob could buy thousands of shares at a low price and make money from selling the shares once the stock price rises.

Risk and Returns

Speculative stocks are often seen in specialty industries such as mining, energy, or biotechnology. These industries have a high potential for dramatic successes or failures. For example, a newly emerging oil company may locate a highly profitable source of oil, but may also fail to build any successful wells. That company might spend millions of dollars in research and development and yet fail to deliver on its promises to consumers and investors.

In some cases, a stock that used to be a quality company may be undergoing a major downturn. Some investors may choose to invest in a company on the urge of failure in the hopes that it will turn around and create tremendous profits. This is an extreme example of every investor's goal to buy at a low price.

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