3.4.1.3. Speculation
Some investors may want to allocate a portion of their portfolio to speculation. These brave souls hope to make a profit from the rapid change in the value of an investment. With the potential for big or rapid gains must come the acceptance of lots and lots of risk. Still, speculation in the markets probably has better odds than Las Vegas. So if your customer has the desire and the ability to play with fire, investments that have the potential to turn a small investment into a much bigger one in a short amount of time include penny stocks, derivative-like options, commodity futures, and any asset that may be unloved or out of favor at the moment. Speculation, however, is something that should only be done by those who can afford to lose and know how risky the activity is. These kinds of investments often come with disclosure documents to make sure that an investor knows what they are investing in. Speculative investors may be interested in opening a margin account to take advantage of the magnifying power of leverage.
On the exam, expect situational questions that require you to understand the risks associated with an investment and an investment goal. You must also be able to use that understanding to determine whether an investment is appropriate to recommend to a customer given his investment goals.
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SUMMARY TABLE Investment Goals and Associated Risks |
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Goal |
Types of Investment Recommendations |
Biggest Risks |
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Preservation of capital |
• Insured bank CDs • U.S. Treasuries • Money market funds |
• Inflation risk |
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Current income |
• U.S. Treasuries • Agency bonds (MBSs and CMOs) • Preferr | |