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A Guide
to High-Yield, High-Risk Stocks
The classic image of the stock market is that of a place
where fortunes are made and lost throughout the course of the day, and where
those who take the biggest risks are rewarded by a hefty payout when all is
said and done. Of course, this is the movie version of the market… no matter
how thrilling the day-to-day dramas of investment trading become, they'll never
compete with the images of the stock market that have been created for the
silver screen.
There is a small grain of truth to those images from the movies, however… those individuals who choose to deal in
high-risk stocks can make a lot of money if they handle the risks correctly. If
they don't, however, then there's a good chance that they could lose their
entire investment.
Below you'll find more information on the world of high-risk (and high-yield)
investments, including ways to help insure yourself against major losses when
dealing with higher levels of investment risk.
Defining High-Risk Investments
The first thing that needs to be covered when talking about investing in
high-yield, high-risk stocks is exactly what is meant
by the terms “high-risk” and “high-yield.” The risk of the investment is
usually due to the very fickle nature of that particular stock… though it may
be growing in value rather quickly, it's obvious that the growth is going to
stop soon and a very rapid and severe descent is going to begin.
The yield of the investment, on the other hand, refers to the money that could
potentially be made by buying stocks early on in the increase in price, and
then selling just before the value starts to plummet. Fortunes have been both
made and lost (sometimes in the same day) with high-risk trading; the key is knowing exactly when to start buying or selling.
How to Trade High-Risk Stocks
When trading high-risk stocks,
it's almost essential that you have access to your brokerage account and that
you'll be able to buy or sell shares as soon as the price begins to fluctuate
in one direction or the other. This can be done online, via the telephone, or
in person if you don't use an online brokerage firm.
You can also usually set up hold orders which will start buying the stock when
the price reaches a certain level (up to the amount that you've specified) and
that will begin selling shares as soon as the price drops below a certain
point. Many online brokers allow these types of hold orders, and they can allow
you to go about your regular day without having to watch the market ticker the
entire time.
Guarding Against Loss
Of course, even with hold orders or a dedicated broker you can still end up
losing money when dealing with high-risk stocks… that's how they earned their
name. In order to minimize this potential for loss it's important to have a
well-diversified stock portfolio to fall back on.
If your high-risk investments begin
to fall in price too quickly and you end up losing money by the time the shares
have been sold, the relatively stable value of some of your core portfolio
stocks and indexes will help to even out your losses.
The fall of the higher-risk stocks
might even stimulate some other portions of the market, causing an increase in
other stocks in your portfolio. This will help take some of the sting out of
your loss, and may end up giving you a greater long-term gain than you might
have had from your short-term investment that went sour.
by: John Mussi
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Happy Investing & Trading… |