Part 5 of 5: the investment choices
Taking a large risk, even the chance of a possible total loss of an investment for a potentially huge gain defines speculation.
Investors can speculate on any company from the largest to a tiny startup. The odds and gains reach the most extreme among the junior and startup companies.
By discussing this topic I hope to make beginning investors aware of the extreme and very real risk of total loss. No beginner should consider or have anything to do with any speculative investing play.
The media give disproportionate amounts of attention to trading and speculating. That noise can mislead new investors. Today’s discussion of speculation explores this risky area.
Speculation falls at the most extreme end of all high risk strategies. This is as close as investing can get to gambling. In fact, in legitimate casinos, the gaming odds can be considerably better than among the more extreme speculative plays.
This Part 5 of the White Top View series on the big 5 money making investment choices follows our earlier discussions available at the links below:
The junior mineral explorers are the largest speculative stock group in Canada while in the US the Over The Counter (OTC) Market hold the dominate number of speculative plays. In the, Oh Canada and our one place to trade post, the Canadian markets including the TSX Venture Exchange were discussed. In the, Sorting through the other American markets post, we discussed the OTC Market.
Like in other human enterprises, there are both legitimate and shady undertakings in the investing world. A disproportional amount of both manipulation and outright fraud occurs among speculative stocks.
Still, there are also legitimate and real emerging companies, excellent discoveries and and huge investment winners! Enough big winning plays happen to keep investors coming back hoping to catch the next big one!
Should you be tempted, before you get anywhere near this high risk jungle, get help. Have an experienced, knowledgeable and honest guide. Better yet, in my opinion, your financial security will be best served by simply staying completely away.
Two common approaches to speculative trading plays are:
Trading on steroids
Rip Van Winkle trades
Covering these speculative trades are extensions of our trading discussion. We first discussed, Trading: an aggressive play and then momentum investing as methods of seeking bigger gains, faster. Now with speculating we look at the most aggressive and risky approach to trading.
Trading on steroids essentially means buying stock as it rockets up to ever higher prices on exploding volume. These are buying frenzies of raw greed. The ride can be exhilarating at the risk of a deal that may blow up or vaporise along with your money.
This approach waits for the wild run to start before investing. Not being in at the bottom means missing the biggest gains. However it also ensures not being stuck with a dead investment that never moves.
Like any trading, the most important skill remains getting out while there are still buyers willing to pay a higher price. Most especially junior exploration speculations frequently come to a rapid and losing end once the buying frenzy passes.
Rip Van Winkle trades involve buying many junior speculations and waiting for them to move. Speculators using this approach sit on investments in many dormant penny stocks. They hope for a good one or few among those they picked. At times those few can handsomely pay off making their wait and long odds worthwhile.
When such sleeping stocks do wake up the returns can run to multiple hundreds of percent! Those are the happy stories; most go nowhere fast and are simply dead money. Even the majority that do move quickly flame out but a few do go from pennies to dollars.
In extreme bull markets riding speculative stocks can produce phenomenal gains but always at very phenomenal risk. Prices move on news, rumor or simply lies. News or rumor of a discovery, major business, political or environmental event can trigger huge price movements.
Buying a position in the stock of an affected company before such news can turn pennies into dollars. Once the story breaks the action gets fast and furious.
This strategy can profitably work for those with knowledge that have done their homework and can pay close attention to the market. Have I mentioned: it is not ever a strategy recommended for beginners?
In Canadian junior resource penny stocks there are a myriad of other ways to play the speculation game. This can work for an experienced investor that makes the effort. However, it takes considerable time, effort and knowledge to learn. Beginners stay away. You need an escort here.
What investment strategy appeals most to you? Make a comment, ask a question, we can talk about it.
Next time we discuss an investor’s checklist to help prepare for year end.
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White Top Investor
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