Which Stocks Should Traders Avoid?

Traders should avoid "story stocks," or those stocks whose value is based upon solely upon expected future potential, rather than a company‚s actual assets or earnings.

There’s an old sales maxim that "facts tell, stories sell," and nothing can seem more compelling than a company that through its patent or other proprietary technology is positioned to have an advantage over every other company in its industry. A perfect example of a story stock might be a biotech company that has a cure for an incurable disease, but whose price is predicated on a favorable outcome from field tests, or eventual FDA approval.

It often turns out that these speculative, “emerging companies” do not have the wherewithal to compete with much larger, more established and better run companies. Moreover, emerging companies are often under funded, and can take an abnormally long time to bring their product or service to market.

The question then becomes, why trade story stocks, when in the mean time, a trader can be profiting from companies with strong fundamentals that have an established track record for generating superior earnings and whose stocks are on the move right now?