Cramer's 'Mad Money' Recap: Speculate the Right Way

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"The market is full of people who are speculating," Jim Cramer told viewers of his "Mad Money" TV show Thursday. We've got fools speculating, and they don't know what they are doing, he said.

Finisar(FNSR Quote) has been cut back by 25% because of speculation, Cramer said. You need to know what a company does and what it is levered to, otherwise you should not own its stock, he said.

"I love speculating, but you have to do it right," he said. "Speculating is not investing. When you confuse the two you get annihilated."

You should speculate only if you are comfortable with it, Cramer said. You have to separate it from investing. If you want to speculate right, this is the time to do it, he said.

Speculative stocks often don't have positive earnings yet, they move a lot when there is only little news about them, they are small, cheap stocks that are much riskier than regular stocks. In addition, there are usually one or two things that could make or break a speculative stock, so you must follow some ground rules, Cramer said.

First, never speculate with borrowed money, he said. These are risky investments, and there is a chance you could lose it all.

Second, only speculate with money you can afford to lose, Cramer said. As you get older, speculate less because then you have less time to make the money back if you end up losing it. He recommended 54 as the cut-off age for speculating.

Third, never put more than 20% of your portfolio in speculative stocks.

Speculative stocks usually trade in the $2 to $4 sweet spot, but you should ask yourself how they got there. Speculative stocks have checkered pasts. You have to make sure you do your homework before you speculate, Cramer said.

Fifth, don't speculate on debt-ridden companies. And finally, keep track of the financing that speculative stocks require.

"The bottom line: Know what you are doing so you don't speculate when you mean to invest," Cramer said. "And when you decide to speculate, do it the right way."