Question: I have always been conservative in my stock investments. I only trade blue-chip stocks but sometimes I feel like I have been missing a lot, especially when I see my friends making a killing from speculating third-liners. Should I gamble on tips and rumors? Please advise.—Celeste Christopher by e-mail
Answer: If you are the kind of investor who does not have time to monitor the stock market, investing in speculative stocks is not for you. Speculative stocks can be very risky because they don’t have the fundamentals to support a higher stock price expectation. Professional traders speculate on these stocks based on insider tips or recent company disclosures, believing that the stock will appreciate in value soon because of some significant changes that will happen to the company. What makes trading speculative stocks risky is that the stock can go up very fast as much as it can fall in just a few days.
Investing in speculative stocks without doing your homework is no different from gambling your money in the casino. Sometimes you can make money just by following tips from your broker, but most of the time you will lose. This is because you either bought a stock at a wrong price and did not cut your losses, or you kept it for too long without any idea where the company is heading to. There is nothing wrong with trading speculative stocks for as long as you play it carefully. You need to manage your risks by making an educated bet before you decide to buy.
Start by getting to know the company. Find out what the company’s business is all about and who are behind the management team. Review the company’s financials for the last three years to see how their earnings look like and if they have the financial capability to expand as they promised. Review its latest corporate disclosures to the stock exchange. You can get all these data by visiting the website of the Philippine Stock Exchange. Once you have all the information, identify the emerging story, that is, the speculations and rumors that will bring the stock up. Assess the situation carefully to see how possible the story is going to happen.
One of the most actively traded stocks last week was that of Manila Jockey Club (MJC). This stock went up to close at P3.82 last Friday, up by 77 percent on heavy volume from a low of P2.15 three days before. It makes one wonder why the market would be so excited to buy this stock even when its P/E ratio is already more than 100x. This is because the market is considering the possibility that the company will venture into a big gaming project, which justifies the current share price. If the project pushes through, the market expects the company to generate higher earnings and lower its P/E eventually.