You really have to be careful when you are speculating on the stock market. If you are into trading speculative stocks, you have to be on the case on a full-time basis if you want to maximize your profits and reduce your losses.
If there is one reality to speculative investing, it’s that the market tends to buy on expectation and sell on news.
Take, for example, Finisar Corp. (NASDAQ/FNSR). The company is somewhat of a turnaround situation and it had all the makings of a successful speculative stock. The company’s operations were improving dramatically, and the stock was highly liquid–meaning that it was just perfect for a professional speculator.
In about six months, the stock went from $2 per share to $5.49 per share, all on speculation that the company’s operations would improve dramatically.
Recently, the company reported its financial results for its fourth quarter and year-end and the numbers were great. Quite clearly, the company came through on its promises. The company delivered solid revenue growth and a fourth quarter profit.
But, because the stock went up so much in anticipation of this good news, guess what it did when the company’s results hit the wires? The stock sold off big-time.
It was the perfect speculation–buy on expectation, sell on news. In a sense, the story was over just as soon as the company reported that its financial results met expectations. At the very least, the trade was over for most professional speculators.
Now, this group has moved on to other opportunities. So, make no mistake about it, speculating in high-risk stocks isn’t particularly easy, and without some effort you can lose your shirt.
Not surprisingly, if you want to get into the speculation business, you obviously should only do so with money you can afford to lose. You also need to stay on top of your stocks on a real-time basis and maintain strict stop/loss limits to protect your capital.
Finisar Corp. was the perfect speculation. If you wish, study the company’s stock chart and correlate the company’s news with the price action in the stock. By doing so, you will reinforce what a great speculative opportunity actually looks like.