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How Cramer wins with higher risk stocks

On "Mad Money" Jim Cramer calls them "spec stocks." And he always says they're not for everyone.

That is, if you're an investor who has a low tolerance for risk, most speculative stocks are not for you.

"Not everyone can take the pain of speculating and if you can't, don't do it," Cramer said. Or, if you're intrigued but also cautious, only allocate a small amount of money to a spec stock; money you can afford to lose. "You are going to lose some bucks when you speculate, even if you do it wisely, because it is the nature of the beast," Cramer added.




The index chart on the electronic board at Bovespa stock exchange is shown in Sao Paulo, Brazil.
Nelson Almeida| AFP | Getty Images
The index chart on the electronic board at Bovespa stock exchange is shown in Sao Paulo, Brazil.

However, if you're willing to be vigilant, Cramer thinks many times the risk of spec stocks are worth the reward. That is, by doing thorough research or homework and then putting money to work strategically, investors can mitigate the risk and ultimately generate sizable returns.

And if you do put money into a spec stock, Cramer believes you can increase your chances of success if you do the following:

1. Take responsibility. Regularly revisit the reason for owning the stock and if the dynamics change for the worse, whether you have a profit or not, hit the sell button.

2. Take profits. As Cramer often says, before you establish a position you should at least have an idea where you want to sell. That doesn't mean you can't rethink the sell price, but when you have profits, take them.

3. Establish time horizons. Spec stocks are rarely long-term propositions. Largely, speculation involves monitoring a catalyst and after the catalyst manifests, for better or worse, the trade is done.

4. Understand specs go up and down. Unlike many other stocks that Jim Cramer talks about on "Mad Money" spec stocks can swing sharply in both directions, yet still remain investable. Before establishing a position, determine how much risk you're able to tolerate.

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"Also, specs should never be more than ten percent of your portfolio if you can keep it that way. If you are doing more than that, I think there will be too much pain if things go wrong," Cramer said.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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