Understanding the Risks of Speculative Stocks

The primary risk with a speculative stock is that the company will be unable to continue as a going concern and you will lose the entirety of your investment. A speculative stock is one that is issued by a company with both high return potential and high risk. Small-cap or micro-cap companies often fall into this category, whereas mid- and large-cap companies have usually achieved sufficient stability to have been able to grow. A company issuing a speculative stock will likely have a limited operating history but the ability to realize a significant gain if it is successful. A small oil exploration company, for example, may be a speculative stock. If the company discovers the oil that it expends to, the potential return to an investor is quite significant.

You can achieve these returns in part because the higher level of risk means that the windfall event is assigned a probability that drives price. If the event occurs, the probability goes to one hundred percent, and the investment will likely experience explosive growth. If the windfall event does not occur, the company may no longer have the ability to operate and may close its doors. This type of speculative investment can deliver huge returns but carries significant risk.