If you want to invest in high risk stocks, you're going to have to do your homework. What may constitute a risky stock for one investor may not be for another. You could wind up losing your entire investment in a high-risk stock. On the other hand, you stand to make a lot of money if things go your way. Just think: Google, Apple and Microsoft were at one time considered risky investments.
Every investor is different when it comes to assessing risk. There's nothing wrong with putting your money into a high-risk stock as long as you're compensated for risk. You decide how much risk is too much risk for you. Your expected return should be more than enough to justify putting your money at risk. Expectations of double or triple your return on your investment is not unrealistic if you believe a the stock is worthy of investment. It would only make sense to set high expectations for a high-risk stock since you can invest in a safe utility stock or Fortune 500 company to get lower returns for far less risk.
Beta is a measurement of risk that tracks a stock's return to that of the overall market. A beta of 1 means that investors expect the stock to be as risky as the market giving them a similar rate of return. High-risk stocks have high betas, which means you stand a big chance of making a huge profit but also losing all of your money. Knowing that high-risk stocks have high betas, you can start screening companies using beta as a search criteria. You can use a financial website to create a watch list of high beta stocks. You want to stick with high beta stocks with above average earnings and revenue growth potential. This requires that you do a lot of research to understand the key metrics.
"Bottom fishing" is a term that investors use to describe looking at stocks that have fallen out of favor with Wall Street. Companies fall into this category for different reasons. Some were once high flying stocks and others are waiting for an event to take place such as winning a patent, a contract bid or receiving regulatory approval. A common example is a pharmaceutical company awaiting FDA approval for a new drug. Typically, theses companies have intrinsic value, which makes them attractive to value investors who use low price-to-earnings, price-to-book value and other financial metrics to determine if a stock is worthy of investment. Because these stocks are priced low, a positive event could generate above-average percentage gains.
Many investors pour through the pink sheets, which is an alternative trading system to a regular stock exchange or over-the-counter market. Companies listed through the pink sheets do not make the cut for a stock exchange's listing requirements and many trade for pennies per share, which is why they're referred to as penny stocks. There are many websites that tout the benefits of penny stocks because they are so cheap and an increase of a few pennies means a nice percentage gain. However, looking for the next penny stock that will reap huge rewards is like looking for a needle in haystack.
The companies listed on the pink sheets do not fall under the purview of the Securities and Exchange Commission, meaning they are not required to file periodic reports or audited financial statements. For this reason, the SEC considers these companies to be the riskiest for investors. In addition, there is no unbiased source or reliable information about these companies, making them very difficult to research. In addition, high-risk stocks are labeled as such for a reason. A financial adviser or stockbroker can assist in helping navigate the ins and outs of looking for high-risk stocks and help you build a stock portfolio that is diversified enough to place some of your capital in a high-risk stock.
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