Speculative Stock

AAA

DEFINITION of 'Speculative Stock'

A stock with a high degree of risk. A speculative stock may offer the possibility of substantial returns to compensate for its higher risk profile. Speculative stocks are favored by speculators and investors because of their high-reward, high-risk characteristics. Such stocks usually have a very low share price, and often trade on smaller exchanges like the OTC Markets in the U.S. or the TSX-Venture Exchange in Canada. A necessary condition for investing in speculative stocks is a high tolerance for risk. This means an investor in a speculative stock should be prepared for the possibility of losing the full amount invested if the stock price goes down to zero.

INVESTOPEDIA EXPLAINS 'Speculative Stock'

The low share price of speculative stocks and the possibility – albeit remote – of windfall profits are two of their most appealing characteristics. A share price of a few cents means that speculators can load up on thousands of shares. If the company is successful and the shares eventually trade at a significantly higher price, the potential profit can be much more than that offered by most other investments.

Speculative stocks tend to be clustered in sectors such as mining, energy and biotechnology.  While there is significant risk involved in investing in early-stage companies in these sectors, the possibility that a small company may find a giant mineral deposit or oil field, or discover a cure for a disease, offers enough incentive for speculators to take a punt on it.

Although most speculative stocks tend to be early-stage companies, a blue-chip can occasionally become a speculative stock if it falls upon hard times and has rapidly deteriorating prospects for the future. Such a stock is known as a “fallen angel” and may offer an attractive risk-reward payoff if it can manage to turn its business around. 

Speculative stocks outperform in very strong bull markets, when investors have abundant risk tolerance. They underperform in bear markets, because investors’ risk aversion causes them to gravitate towards larger-cap stocks that are more stable.

Typical valuations metrics like the price/earnings and price/sales ratios cannot be used for most speculative stocks, since they are generally unprofitable and may have minimal sales. For such stocks, alternative techniques like discounted cash flow (DCF) valuation or peer valuation may need to be used.

Speculative stocks often account for a small portion of diversified portfolios held by experienced investors, since such stocks may improve the return prospects for the overall portfolio without adding too much risk. Experienced investors who dabble in speculative stocks typically look for companies that have experienced management, strong balance sheets, and excellent long-term business prospects.

VIDEO

RELATED TERMS
  1. OTC Pink

    The lowest tier of the three marketplaces for trading over-the-counter ...
  2. Single-Digit Midget

    A stock with a price that is below $10 per share. Although there ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has ...
  4. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  5. Fallen Angel

    1. A bond that was once investment grade but has since been reduced ...
  6. TSX Venture Exchange

    Originally called the Canadian Venture Exchange (CDNX), this ...
RELATED FAQS
  1. What is the difference between investing and speculating?

    The main difference between speculating and investing is the amount of of risk undertaken in the trade. Typically, high-risk ...
Related Articles
  1. Investing Basics

    How To Play The OTC Pink Stocks

    The OTC Pink offers a variety of investment candidates including many good companies waiting to be discovered. Recently, the OTC Pink has worked hard to improve the service by tiering companies ...
  2. Investing Basics

    OTCBB and OTC Markets Group

    The majority of larger companies that trade publicly choose to list their stocks on one of the major exchanges - the NYSE or Nasdaq. However, many companies are unable to meet the financial or ...
  3. Investing Basics

    Take Your Pennies To The TSX Venture

    The TSX Venture Exchange is a Canadian-based junior listings market that houses many micro-cap and small-cap firms.
  4. Investing Basics

    The Art Of Speculation

    Speculators believe that the market overreacts to a host of variables. These variables present an opportunity for capital growth.
  5. Investing Basics

    DCF Valuation: The Stock Market Sanity Check

    Calculate whether the market is paying too much for a particular stock.
  6. Active Trading

    Catching A Lift On The Penny Express

    The popularity of the penny stock market has grown, but are these stocks a safe bet?
  7. Investing Basics

    The Lowdown On Penny Stocks

    Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless.
  8. Investing

    Peer Comparison Uncovers Undervalued Stocks

    Learn how to put one of the top equity analysis tools to work for you.
  9. Investing

    Are These 2015's Most-Promising Small-Cap Stocks?

    At least one of these small-caps should spike in 2015.
  10. Mutual Funds & ETFs

    A Guide to Using Inverse ETFs for Diversification

    A look at how inverse ETFs can help investors diversify their portfolios.

You May Also Like

Hot Definitions
  1. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  2. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  3. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
Trading Center