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Speculative stock is any type of stock option where the degree of risk associated with the shares is considered out of balance with the rate of return that can reasonably be associated with the investment. Often, stocks that are identified as speculative are anticipated to decline in value, based on projected market conditions and other factors that may relate to the issuer of the stock. At the same time, speculative stock is believed to have very little chance of increasing in value, unless conditions in the marketplace undergo sudden and unanticipated shifts.
One of the most common examples of speculative stock is that of penny stock options. Penny stock, also known as penny shares in the United Kingdom and parts of Europe, normally trade for very low amounts per share. They are also often traded over the counter, and may carry a bid/offer spread that is in excess of ten percent. One of the characteristics that make penny stock a speculative investment is the relative lack of information on the nature and status of the companies that issue the shares. This lack of available data makes it much easier to manipulate the stock and thus increases the degree of risk associated with investing in this type of stock option.
In general, investors who choose to engage in the purchase of speculative stock tend to be risk-takers. They often base the decision to buy on possible future events that have very little chance of coming to pass. This strategy is sometimes known as taking a flier. When the venture is considered highly speculative, the trade may be described as taking a flier without a net.
With speculative stock, the idea is that if the shares do not perform as anticipated, the investor loses money, or takes a bath, as this type of situation is sometimes called. Fortunately, the relatively low purchase price per share does help to limit the degree of loss incurred, at least in comparison to other types of stock options. When the long-shot gamble does pay off, and the value of the speculative stock appreciates, the investor does earn some sort of return on each of the acquired shares. The hope of each investor is that the speculative stock will not only surprise everyone and post some sort of return, but that circumstances will cause the price of the shares to increase considerably, allowing the investor to realize a significant return from the investment.
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