Speculative stocks are a type of stocks issued by companies with fundamentals that do not show apparent strength or sustainability. These companies are subjected to speculation because their stocks seem to have high risk at the moment but can also appear to have great potential for generating substantial returns due to their unrealized potential. This article lists the characteristics of speculative stocks.
Key Characteristics of Speculative Stocks: How To Spot Them
Investing in speculative stocks has advantages centered on their potential for high returns but they also have disadvantages that include high risk or potential for incurring substantial losses. Spotting them requires taking a look at the following characteristics:
• Volatility and Unpredictability: These stocks are volatile. This means that their prices tend to move drastically in upward and downward trends in a short period. This makes them difficult to predict but still appealing to some investors and traders looking for higher returns in a shorter duration.
• Stagnant Value or Price: Some of these stocks are not volatile. Their value or stock prices tend to be stagnant for an extended period lasting for at least three years. This is true for startup companies or those which still in their emergent phase of development. Stagnancy also makes them difficult to predict.
• Startup or Small Companies: These stocks are often issued by startups and small companies with no record of positive financial performance and favorable business growth. This also means that these stocks also have high levels of uncertainty due to the uncertain future or prospects of their issuing companies.
• Unprofitable and High Debt: Companies that issue these stocks are also unprofitable due to the fact that they are either in their earlier stage of growth or that their business or the products they offer have unrealized potential. Some of these companies tend to have high levels of debt incurred as part of their capital-raising activities.
• Lack of Market Information: One of the challenges in investing in these stocks is the absence of suitable amounts of market information that can help in making informed investment decisions. Startup companies have no records to back their capabilities while small-sized companies tend to have limited records.
• Small-Cap and Growth Stocks: Some speculative stocks also share some characteristics with small-cap stocks and growth stocks. Remember that most companies that offer them are either startups or small-sized organizations with small market capitalization. Those with a high potential for generating profits can be considered growth stocks.
• Available in Different Markets: Most of these stocks are traded in over-the-counter or small stock markets. Some are traded in established or larger stock exchanges or specific markets for emerging companies. The fact remains that investors and traders can find and pick them in different channels or exchange platforms.
• High Risk and High Return Potential: Speculative stocks are also examples of investments that demonstrate the risk-return tradeoff. Their potential for providing substantial returns over a short period also comes with the possibility that they would incur significant amounts of losses as determined by their value or prices.
Nevertheless, based on the characteristic above, it is easy to spot and pick speculative stocks. Take note that not all speculative stocks will exhibit all of the aforementioned characteristics. Each investment should be weighed on a case-by-case basis.