Know Speculation From Investing

Editor's note: This column is an update of a portion of the "Mad Money" episode that aired June 8. Click here to read the full Mad Money Recap for that episode.

This is a Sam Peckinpah, Bring-Me-the-Head-of-Alfredo Garcia, if-not-Southern Peru CopperPCU market. We know we're in a bad place. What we don't know, at least not entirely, is why. Cramer's got a theory, and it's a theory that can make you money.

One of the big problems with this market is that it's full of people who are speculating and don't even know it. When speculation gets too intense, as it is now, you have good speculative companies like FinisarFNSR, a semiconductor company that goes into optical networks, getting cut back by 25% on a rise in earnings estimates, just because gross margins weren't so hot. Anybody out there who sold Finisar: Can you even explain to me what the company does? Do you think it has fins?

This is my point: I love speculation, but you've gotta do it right. I'm the only guy on the Street who thinks it's part of a healthy financial diet. It keeps you interested in the game, and it can, possibly, make you boatloads of cash. But speculation is not investing, and when you confuse the two, you get annihilated. So I'm gonna do a couple things to set you, and the market straight.

First, I want you to understand the difference between speculating and investing -- the difference between a risky speculative stock, and an investible security. You've gotta know this, because the risk level is totally different. I can't have you throwing all your retirement money in speculative stocks and thinking you're invested, because you'll probably lose all your money. There's a simple principle here: You need to be aware of what you're doing.

Only speculate if you're comfortable with it. Some like it hot, some just like Tony Curtis in a dress -- me, I love you, Spartacus.