CTASaham's Favorites! Should I invest in speculative stocks?
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.
