Speculating On Stocks

We all hear of those stocks where folks invested a small amount and came away with massive gains. You always hope to be that person, but you never seem to get lucky. Well chances are, most people never do. Those opportunities are few and far between. Just have to be in the right place at the right time.

Nothing wrong with a little speculation every now and again. If you’re going to do so with highly volatile stocks, you shouldn’t do so with much of your portfolio. I’d say no more than 5%-10% of the portfolio should ever go into something like that. Plus you need to do a good bit of research as well.

A lot of speculation these days tends to be in the biotech market. Lots of companies trying to get a drug on the market in various stages of drug trials, hoping to get the FDA to approve it. If the company is lucky enough to get approval, you could be in for a big payday.

Another method to gains is a small company that has a drug that makes it attractive to a bigger pharmaceutical company. Their drug pipeline is lacking, so they buy up a smaller company to gain access to the particular drug. Sometimes, just on rumors of big suitors, these companies stock can soar.

Take for example, Ariad Pharmaceuticals ($ARIA). Last year they had a drug on the market and they were up to $23. Then the FDA makes them pull it after some adverse reactions till they make some changes. The stock drops all the way down to $6. Then it goes even lower. They eventually make some changes and they are able to market again but to a smaller set of patients to prevent adverse side effects. The stock starts to go up again.

All of a sudden, there are rumors of several pharma companies interested in them for the leukemia drug, including GlaxoSmithKline($GSK) and Eli Lilly($LLY). They went from $6.75 a couple of days ago and are now up to close to $9 as of this morning. Some of the rumors suggest a price offering of $20 may be possible. Needless to say, anyone that bought into it are already happy and could have the potential to be even happier if the rumors turn out to be true. But this is usually the exception to the rule. There are plenty of others that have a quick rise and then a hard fall as their drug fails to get approval, or a buyer never comes.

So you have to be diligent and be prepared to get out quickly. Speculation isn’t for the faint of heart.

#1 – Always do your research on the company and see what they say as well as financial publications thoughts on the company.

#2 – Identify a catalyst for the stock to go up and how likely you think that is.

#3 – Set an entry and exit point for yourself once you find one that looks promising and stick to it.

#4 – If the stock rises, look to skim some of the profits off as these can tend to rise and fall quickly. You can keep your base amount invested, but pocket gains as they come.

#5 – If you hit your target, sell out of your position unless you find another catalyst likely to keep it going. You really need to justify staying in though.

Good hunting and good luck!