Cramer's 'Mad Money' Recap: Stay in the Game

The Ground Rules

Because speculation can be "really risky," Cramer cautioned that investors should only start once they understand the basic ground rules of speculating.

First, never invest retirement money in speculation, he stressed. And second, don't ever have more than 20% of your non-retirement portfolio in speculative stocks.

Cramer urged very conservative investors to put a tiny bit of their money into a speculative stock. "Make it 1% or 2% of your portfolio if you're that conservative, because trust me, that 1% or 2% will make the whole process of investing a lot more interesting," he said.

What to Look For

Generally speaking, Cramer said, when he talks of speculation he is referring to small-cap stocks, meaning those with a market cap of anywhere from $250 million to $2 billion. For those new to the game, market capitalization represents the number of shares of a company multiplied by its stock price. It's one of the best ways of knowing what the market believes a company is worth, he explained.

Small-cap stocks are usually also less expensive per share, selling anywhere from $2 to $10, Cramer said. Sometimes there's a catalyst "lurking in the future that people are betting on" and often speculative stocks are unprofitable, he added.

Although Cramer said he would never recommend buying a stock with no revenue, or no sales, "a stock with accelerated revenue growth, that hasn't yet become profitable fits the speculative profile as long as you believe in the stock," he said.

There are two ways to go about speculating. Either people can pick out an individual stock with which to speculate or they can speculate on a sector trend by putting together a basket of stocks, Cramer said.

When speculating on a whole industry, people should not miss out by buying the one stock in the group that gets left behind, he said. To avoid this they should "cast a wide net" and spread the risk around by speculating in a "basket of stocks." Also, when speculating by sector, people should look for an industry that's been "knocked around" and "beaten up."

Moreover, speculation means always trading, he said. Cheap, small-cap stocks tend to go up and down by large amounts, so when speculating, it's a good idea to go in with an exit strategy, otherwise you risk losing all your gains, Cramer said.

"You can't be a good investor if you're not an excited, interested investor, and one of the best ways to get excited is to speculate, but do it right and do it carefully," he said. "Be a prudent, conservative speculator and follow my speculative rules."