4 Reasons a Speculative Stock Can Fall Short

Many investors get involved with a speculative stock in order to take a chance in the marketplace. A speculative stock is one that is considered very risky compared to the returns that are expected from it. However, sometimes during a bull market, investors will invest in certain stocks just for the speculative nature of the investment. Here are a few reasons that a speculative stock might fall short of an investor's expectations of it.

1. Poor Financial Numbers

Most investors in speculative stocks do not put any time into researching the underlying company. This leads many investors to purchase stocks in a company that does not have great financial numbers. This could lead to a bad investment if the company does not move in the right direction. For example, if a company does not have consistent earnings, the price of the stock could go down over time.

2. Lose Market Momentum

Many speculative stocks are purchased during a bull market run. During this period, investors are purchasing as many stocks as they can because everything in the market is moving upward. For a certain amount of time, this strategy could potentially be beneficial. You might be able to realize a nice return on your investment. However, at some point, the market as a whole will slow down. When this happens, many speculative stocks that were relying on the momentum of the market will falter. If you happen to be invested in a speculative stock at this time, your investment could suffer significantly.

3. Failing to Meet the Whisper Number

The whisper number is a number that is circulated among Wall Street insiders about a particular investment. You might invest in a speculative stock because a financial advisor gave you the idea. The stock might start climbing and appear to beat Wall Street analysts' predictions. However, if a large number of institutional investors thought that the stock would do better than what it is doing, they might decide to sell their shares in the company. A large sell-off by institutional investors can cause the price of a stock to plummet rapidly. Unless you know in advance what the whisper number is, there is really no way to protect against this in your portfolio.

4. Obsolescence

Many investors get involved with a speculative stock because of a great product or idea that the company has. The investors believe that the company is on the right track and will potentially be huge in the marketplace. However, sometimes that idea does not pan out. Other times, a different company will successfully get the product to market first. When this happens, the company that does not make it to market with their idea could potentially become obsolete. When a company puts all of their resources into a particular project, they really need the project to pan out in order to succeed. When this does not happen, it can be devastating for the company and the investors. Therefore, before getting involved with a speculative stock, you may want to make sure that the company has a one-of-a-kind idea or product in the works.

blog comments powered by Disqus