4 Ways to Tell if a Stock is Low or High Risk

Risk management, risk management, risk management. You’ll hear that over and over and over again but you might be wondering what’s that mean? Okay, what it means is, depending on your risk profile, focus on the right stocks.

I’m gonna tell you how to tell what’s a high risk stock from a low risk stock. Doesn’t mean one’s better than the other, but you need to know and understand what your downside is.

High risk, low risk. What’s that mean?

How does it apply to me as a trader? Simplest thing to keep this article short is the idea is high risk stock, that’s a day trade, that’s something you’re looking to get in and out the same day, or maybe a short term swing trade.

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Maybe you hold it overnight, sell it the next day, maybe you hold it a couple days, those are the high risk stocks. They move big, but they let us grow our account quickly.

Low risk stocks are what you’re looking for if you’re a part-time trader, if you’re busy or, you know, maybe you’re just in a different phase of your life and you’re not looking to take these wild swings of seeing the stock up 20 percent, down 20 percent, you just like to see a little less volatility.

So that’s the biggest difference between a high risk stock and a low risk stock. Really it boils down to time frame. Short term versus long term.

Price Range

Number one, first thing, what’s the kind of best way to delineate a high risk stock from a low risk stock? It may sound painfully simple, a lot of it’s just price range.

Listen I love penny stocks, most of these articles we talk about low price stocks, they are those stocks that are less than 10 dollars, less than five dollars, less than a dollar even sometimes less than a penny. These stocks are very, very risky.

You know, the simple adage is a stock is a dollar a share for a reason, okay? Amazon isn’t a dollar a share. Microsoft isn’t a dollar a share. Google, Apple, these stocks aren’t a dollar a share for a reason.

You know, one dollar stocks are one dollar stocks for a reason. But Amazon isn’t gonna triple in a day, Google isn’t gonna quadruple in a day. The nice thing about low price, low float stocks is they have that potential, I mean we see it everyday.

Hundred percent, two hundred, three-four hundred percent movers,
so not always true, but typically, the lower price stock, the higher the risk but the bigger potential moves.

Higher price stock, less risk, but it’s gonna take you weeks, months, maybe even years to make a sizeable profit.

Float

Next thing I wanna talk about is float. Remember, float is the freely tradable shares, the supply as they say, and typically the lower the float, the less supply, the fewer tradable shares, the more likely the stock is to float rotate and spike big over the day.

Now that means it’s a puny, puny market cap stock as well, if you’ve got a two million float stock that’s trading at two dollars a share, that’s a four million float.

It’s not hard for a bunch of day traders to push that stock up and down quickly. Again, it’s a great thing for day trade, but if you’re looking for those longer term holds look for those higher float stocks.

Millions of shares, billions of shares possibly. That means they’re wildly held, so they’re held by hedge funds, they’re held by mutual funds, they’re held by retirement funds, you’re not gonna see those crazy wild swings.

So when you’re looking for that swing trade or that investment, best thing to do? Avoid less than ten million float.

If you’re looking for that big day trade that’s gonna move one, two, three, four hundred percent, always be running your scans for less than ten million float and that’s kinda the cut-off in day trade land. Ten million less, low float, ten million above, higher float.

Fundamentals

Next thing when it comes to high and low risk is the fundamentals. What are the fundamentals? Those are the balance sheet, the cash flow, the sales, basically anything the accountants care about, the CPAs care about, that’s what we call the fundamentals.

You know, and that’s where you’re looking for actual sales. Remember in low price stocks, in one dollar stocks, they may have no product, they may have zero sales. I’ve seen hundreds of dollars of sales, I mean, okay?

Companies issue their statements every quarter, if you’re a publicly trading company and you have a few hundred dollars in sales, what are your odds of success over time? Pretty low, okay?

Now if you’re looking at a Google or an Amazon, billions of dollars in sales, billions of dollars in profits, always new products, always new enhancements, growing, changing.

Now, the problem with those real companies is everyone knows this data. So you’re competing against hedge funds, mutual funds, private investors, wealthy individuals that have access to all of this fundamental data.

The nice thing about a low price stock with terrible fundamental is it’s all pie in the sky, everyone believes the next contract win, everyone believes the next product announcement, and that mania is what gives you the ability to profit in the short term.

So high risk, low risk?

It’s really just sales, balance sheet, cash on hand, debt. All of these simple things that you may be calculating in your own household.

Are They Real

Last big delineation between high risk and low risk is are they real, okay? You’d be surprised, or maybe you’re old and jaded like me and you’ve been around penny stocks a while.

A lot of these companies, I mean they literally have no product. If you called them up and said I have 100 dollars, I have 1,000,000 dollars I want to buy something from you, a significant majority of them, they’ll say no.

They literally have no product. It’s all a plan, it’s all a pipe dream. Real companies, with real sales, with real products, you know, you can call them up and you can buy their product, you can go to the store and buy their product.

So you might think, well why would I trade these imaginary companies with imaginary products and pie in the sky dreams? That’s why these stocks move.

When you’ve got a puny market cap and all the dreams in the world, that’s what the stock market is based on. It’s hope, it’s fear, it’s greed. So you can trade the higher price companies but have realistic expectations. They’re gonna trend slower, they’re gonna move slower, and it’s gonna take you longer to grow your account. Low risk though.

Odds are, you’re not gonna wake up in the morning and see a real company with real sales and real profits gap down 20 percent. But you’re also probably not gonna see it gap up 20 percent.

Low price stocks, with all the dreams in the world, they’re peddling dreams, they’re selling stock, they have the ability to move big.

So, what is your risk profile?

Do you like to swing trade, invest? Or do you like to trade the crazy jump movers of the day? So let me know below, high risk or low risk?

Beer buff. Incurable zombie guru. Amateur introvert. Avid writer. Typical bacon junkie. Trader.

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