Mad Money

Finding the Sweet Spot in Speculation

Stock speculation is nothing like gambling.

It’s not a roll of the dice.  Hope is never a factor.  No Hail Mary’s are involved.

Granted, these stocks tend to be volatile, small-cap companies that trade under $10 and whose success hinges on some catalyst like a court decision, clinical trial data or FDA approval, but that doesn’t mean they shouldn’t be thoroughly researched like any other equity in your portfolio.

Think of speculation as a calculated risk. It’s not like planning a family vacation by throwing a dart at a map. (Saskatchewan again, Dad? Next year Mom’s throwing the dart.) There has to be a reason you think the stock is a winner, and that’s where the catalysts come in. A company with no earnings can sometimes be pushed into the black by a key event.

Now, you're not likely to find Cramer recommending buying a company with no sales or revenue, but a stock with accelerated revenue growth that hasn’t yet become profitable might work, he said – as long as you believe in the stock.

It’s probably best to buy the sector rather than a single stock, Cramer said. You don’t want to get stuck with the one name that got left behind while the rest of the sector rallied. Buying a basket of companies also spreads out the risk. Of, say, five companies in a basket, two could flop, two might never move, and the last could pop. But that last company might do well enough to make you a nice net profit.

Remember that speculation is always a trade – it’s never a long-term investment. And you always want to have an exit strategy. There's no point in hanging on too long and losing your gains. In the event you’re not sure about when to pull out of a stock, Cramer recommends erring on the side of taking profits.

Bottom Line: You can’t be a good investor if you’re not an excited, interested investor, and one of the best ways to get excited is to speculate. But do it right, do it carefully. Be a prudent, conservative speculator and follow Cramer’s speculative rules.

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