Ep 133: Speculative (Penny Stocks) vs Stable Stocks & What to Trade? - Tradersfly (2024)

Ultimately there’s a vast range or if you look at kind of a spectrum, let’s use over here as a stable company and over here is more of a speculative company, there’s a huge range that you could go in between.

Any company that you choose on the stock market could fall somewhere in between this range, and all we’re doing is categorizing the extreme, somewhere over here.

Often a speculative company has been around a lot less, so it’s usually a much younger company than something like, let’s say a Microsoft.

A company who’s around only a few years, like let’s say a Groupon or a GoPro, comparing that to the time frame of let’s say Microsoft, that’s been around for quite a long time. So, the period plays a role because there’s more consistency.

Also, the volume can also play a significant factor. Usually, this is a lot less volume, let’s say the lower 10% of traded volume compared to other companies, whereas often more stable companies will trade in the top 10% of volume, or higher volume than usual.

It’s not always the case, but often times that can give you an indication of what’s more of a stable company versus a speculative company.

That’s not always the case, sometimes the revenue continues to decrease time and time again, but at least you get to see that consistency, whether that consistency is to the upside or the downside.

When it comes to speculative companies, sometimes things or behavior can be a little bit to the downside, then a little bit to the upside, it’s less predictable of what’s going to happen, so you can’t predict that behavior as much, it’s more erratic.

And finally the price per share, usually they are higher priced companies, and these are lower priced companies. This could be like penny stocks or stocks that are trading for five dollars a share, whereas here a stable company, it could be something in the $30 to $50 range, but it could also be something like in the $150 range, like an Apple or something like that, like a Netflix.

That’s why they’re also harder to manipulate, because it requires more cash, whereas if a stock is $1 or $2, it’s a lot easier to manage those kinds of companies.

Of course many people choose speculative companies for one main or big reason, and that is because the percentages or the potential of growth, since we have a lower price per share, you can use leverage to go ahead, buy your share amount and then when the stock does explode, you go ahead and make more.

This, of course, is that get-rich-quick mentality. This is what many people who trade speculative companies really bet on, is because it’s a lower stock price, they use the leverage, buying more shares, because, in the end, the way they look at it is they only really need one or two companies for them to explode and that’s where they make their money.

For some people, depending on their personality, speculative companies are great with an A-type personality, more aggressive, people who like more risk or people who are more retired, like stability, then probably going with a stable company is better, because you’ll get that consistency.

I’d like to also share with you a couple of charts and graphs to illustrate some of the things we just talked about, and it comes down to your result as far as your profitability.

We’ll just jot a little point right here on the lower left area, and this would be something like a bank CD, so you’re starting with low risk, but you also get low profit, because you’re consistent on this, because with a bank they’re going to pay out your CD or Certificate Of Deposit time and time again; less risk but less profitability.

As you continue to move towards the higher end risk of the curve, of course, your risk increases but your profit potential also starts to increase. As we advance and move more into, let’s say ETFs, you continue to grow, then we stay and, we get into stocks or more stable companies, continues to increase.

And as you continue to drive up that risk, you might get into the speculative companies, where you have a higher profit potential but the risk is also greater. In either case, as you increase the risk, your profit potential also continues to rise.

On this other side, we have the profits versus the chance or the percentage of probability of success. When you have a low chance of success, which means you’d be kind of in the high-risk area, you have that higher profit potential, and it would be somewhere over here; let’s just put a dot in the upper-end top left area of this chart.

This is kind of how things start, and as your chance of success gets increased, as you
get into that middle or higher chance of success, your profitability or your potential profits begin to die out, and they slowly start to diminish here.

Eventually there kind of becomes this stability point, so you might have kind of a stable area, where your chance of success kind of gets into that 50/50, but you still have that profit potential that you make, which could be like a nice little sweet spot which, let’s just say this is the stable companies or the stable stocks.

And then eventually, this also trickles down, because you’re getting into a very high chance of success; as you get into a very high probability of success, you get that diminished amount of profits or a meager amount, and this could be kind of like your bank CDs.

You have a couple of different choices of course; if you’re looking for the higher profit potential, the speculative companies are the way to go, but they do have a higher risk.

If you’re looking at stable companies, yet that consistency and you still have a large number of stable companies you can choose from, but that’s where the majority of money is made when it comes to the stock market, so you want to focus kind of on that stable area because you have that higher chance of success.

It’s important to find your balance, where you want to stick to, and it comes down to your personality and your risk tolerance and risk levels. If you have an A-type personality, you might want to trade the higher risk stocks, if you have kind of more of a calm B-type personality, then you want to trade more the stable companies or invest more in stability.

I hope this gives you a nice little breakdown and comparison and things to think about when it comes to trading stable companies versus more speculative companies or companies that are more well known or more significant cap stocks, usually the companies that are more stable are a little bit higher priced versus kind of the penny stocks.