January 25, 2011 | In: Opinion

The Difference Between Risky and Dangerous Stocks

The words risky and dangerous are often used interchangeably in the trading world, but there is a substantial difference between the two:

Risky stocks are those stocks that you believe in, while most of the market doesn’t. Risky stocks are typically undervalued stocks that are in a downtrend. You know that the downtrend will be over one day, you just don’t know when. Risky stocks can offer you a very high return on your investment if you time your trades correctly.

Dangerous stocks, on the other hand, are stocks that you don’t believe in, stocks that are going up for no reason whatsoever. Dangerous stocks usually are issued by companies with no real fundamentals, companies that you (and the rest of the market) know they have no chance, at any point in the foreseeable future, of making the profits they are currently valued at. Dangerous stocks are bubbles (they are highly overvalued), and they can pop at any point in time. Trading dangerous stocks is nothing more than a gambling game.

Here are some risky/dangerous stocks I’m following at the moment, along with a small description on why I think they’re risky or dangerous:

- BAC (Bank of America Corporation): Risky. The stock is currently in a downtrend (after the reversal of the bullish trend last week) and may touch the already tested $11 level in a couple of weeks if the bearish sentiment continues. Although Bank of America is still losing money, I think 2011 is going to be brighter. I would wait though as I think there will be a better entry point for this stock. BAC is currently trading at $13.59.

- SIRI (Sirius XM Radio Inc.): Risky. What makes SIRI risky is the number of shares. It has 3.93 billion shares, and it’s still not making enough money to justify this number of shares. However, the current price of $1.58 is not bad, although I think the stock can go to as low as $1.50 (or even less) before rebounding. Anything below $1.40 is a strong buy, as SIRI at that price will be undervalued. I think the upper limit for SIRI, for this year, is $2.50. The stock shouldn’t go up more than that.

- YOKU (Youku.com Inc): Very dangerous. Think skydiving with no parachute dangerous. The stock has no value whatsoever to justify a $0.10 (that’s 10 cents) price, let alone the $31 it is currently trading at. Youku will never, ever make money for the investors, and the thing is all investors know this.

- DANG (E Commerce China Dangdang Inc): Dangerous. Although not as dangerous as YOKU, this stock is still dangerous. DANG is priced currently at around $30, while the real price of the stock should be no more than $6, as DANG can make money.

4 Responses to The Difference Between Risky and Dangerous Stocks

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Dangers of Buying and Holding at IPOs « Fadi El-Eter

June 1st, 2011 at 3:40 pm

[...] (E Commerce China Dangdang Inc): As dangerous stock, DANG was listed back in December of 2010, and it started trading for around $30. In the next few [...]

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Which Stock Has the Highest Dividend in 2011? « Fadi El-Eter

June 9th, 2011 at 10:10 pm

[...] 2 weeks ago, and that’s why investors are staying away from this stock, because it’s dangerous. Let’s do some math here: Imagine you bought 10,000 shares of this stock on January 20th at [...]

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Will BAC Trade Below $10 Today? « Fadi El-Eter

July 12th, 2011 at 9:00 am

[...] I watch most (but I’ve stopped trading since last year) is BAC. Although I have categorized this stock as risky before, I think it is one of the most interesting stocks out there. The pattern is now very clear, [...]

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What Is a Lockup Period? « Fadi El-Eter

November 28th, 2011 at 12:51 pm

[...] Now imagine that you are one of the co-founders of Dang, a company that is an Amazon clone in China. You knew Dang wasn’t worth $30 on the first day of trading, and you could have sold your shares then, but you had to wait for 6 months to do that. Note that Dang is now trading at $4.62, which his very close to the price I thought that the stock was worth when I wrote about it before. [...]

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