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.