Cramer's 'Mad Money' Recap: On Speculation

One caller to the show asked what opportunities might exist in foreign-exchange speculation.

"Have you ever seen a sheep before and after? Before and after they fleece it? That's what happens when you speculate in currencies," Cramer warned.

Speculative stocks grow very quickly, but they can die very quickly as well, meaning investors must keep an eye on what he called the life cycle of the company.

One example he offered was Taser (TASR Quote), where "you could have made a fortune speculating" if the trades had been timed correctly. The time to be in Taser was before the company started getting contracts for its products. After that, more investors started following the news, buying the stock and driving up the price, he explained.

In order to spot a stock worth taking a chance on, investors should speculate only on the companies with solid fundamentals, he said.

The essentials for a good speculative opportunity are a sound balance sheet, a good product and a small float. A small float is important because that means the stock is subject to potentially big moves if only one large institutional investor starts buying.

And as for knowing when to get out, the key is to watch the volume. When the volume is spiking, cash out, Cramer urged.

Crucially, he pointed out that bad speculators are prone to certain bad habits. Among them are selling too soon, holding a position that keeps going down, believing the hype, buying the worst company in a good sector and speculating on takeovers.

Want more Cramer? Check out Jim's rules and commandments for investing from his popular book by clicking here.