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"Tonight I'm going to give you some of the best educational supplements," Jim Cramer told "Mad Money" viewers Friday in a show compiled of previously broadcast clips that Cramer felt would help educate people.

He said the segments would deal with leaderless markets, volatility and the difference between speculating and investing, all of which would be geared to making money.

"First I'll tell you how to deal with a leaderless market," he said.

The markets need generals, he explained, adding that the leaders of the last market run-up are all played out. "The generals are dead," Cramer said, and listed Cisco ( CSCO), Dell ( DELL), Microsoft ( MSFT), Intel ( INTL), Broadcom ( BRCM), Marvell Technology ( MRVL) and Google ( GOOG) as examples of previously hot stocks that are now lukewarm.

He also added General Motors ( GM) and Wal-Mart ( WMT) as two stocks that may have "lulled us into a false sense of security," but that didn't, in the end, have the right stuff to rescue the market from its latest slide.

"We're leaderless, headless and things will get volatile," he said. "It's because we've got no generals. They shot them all."

To beat the rudderless market, Cramer suggested that investors stand to benefit by buying stocks of commodity companies, as well as recession stocks. "But, he said "they can't go up at the same time. It's like a seesaw."

He recommended Clorox ( CLX) as a good investment in the current environment.

"We need a new general. A new secular growth story that we can depend on," he said. "In this situation where the general is dead, you need some recession stocks and some commodity stocks."

"Remember where ignorance reigns, cash be king," he said.

Volatility: A Love Story

In the next segment, he turned to volatility.

Volatility can be scary, it can make you feel like you understand nothing about the market, and it can make you feel like the market is positively bipolar, Cramer said.

"But it is time to stop worrying and learn to love the volatility and make money off of it," Cramer said.

In his two-step plan to profit off of volatility, Cramer said first you must understand the market, and then learn to trade off of it.

"The number one reason getting in your way of making money is lack of understanding volatility, he said. "You get volatility when the market cannot process supply and demand correctly."

When there is no volatility, buyers and sellers are in equilibrium. But this is not the state we are currently in, Cramer said. "Our equilibrium has been destroyed," he said.

The first source of volatility, Cramer explained, is that brokers don't position any more. Positioning is when hedge funds don't dump stock, but instead sell stocks slowly.

"This prevented volatility," Cramer said. But brokers have stopped positioning because it has become less profitable. "Commission is too low, and interest rates are too high," Cramer said.

The second reason the market goes up and down really fast is because of new exchange-traded funds (ETFs). They move much faster than individual stocks, so when you buy or sell ETFs, the stocks in them either get crushed or lifted with a crane, Cramer said.

The third cause of volatility is hedge funds, which buy and sell stocks quickly, Cramer said.

"Hedge funds are pushing stocks up and down," he told his viewers. "You are at the mercy of mutual funds, pension funds and hedge fund accounts."

It's only the big institutional funds that have that power, he explained. And then turned to how even individual investors, which are partly at the mercy of price swings caused by hedge funds, could still make money.

"If there's one thing I'm good at, it's trading," said Cramer.

First, pick a stock that you really like, he said.

To show his viewers how to play the volatility game, Cramer picked Occidental Petroleum ( OXY).

"OXY is the least hedged of all the oils," Cramer said. "It's in the prime position for volatility."

When you're looking for a company that has volatility, Cramer warned, it should not be a bad company.

After you pick a company, take an opinion, he said.

"Opinions matter to make money," Cramer said. "Act on your opinion based on your convictions."

Taking his example of OXY, Cramer said if you have 300 shares of it, drop 50 shares every time it jumps 3%, and when it goes down, buy it back.

"Treat trading like a dance," he said. "When the stock goes up, sell a little and when it goes down, buy a little."

Buy and sell your stock in increments because small trades equal big payoffs, he said.

The bottom line is you can make money off of a volatile company if your trading strategy includes core positioning, Cramer said. "Take my rules and apply them to yourself."

Cramer gave Pepsi ( PEP) and Sears ( SHLD), which he owns for his Action Alerts PLUS charitable trust, as two examples of companies with core positions.

Speculation Recommendation

Cramer now turned to speculation and what it means for would be investors.

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

Finisar ( FNSR) has been cut back by 25% because of speculation, Cramer said. You need to know precisely 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.

"The risk level is totally different," he said.

Speculative stocks often don't have positive earnings yet, they move a lot when there is only a 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 cutoff 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."

I want to do more than teach you how to speculate like a pro, Cramer said. I have put together 10 stocks with my team to create a "Mad Money" speculative-stock index, he said.

The stocks in this index are:
  • Rentech (RTK)
  • Crystallex International (KRY)
  • Ivanhoe Energy (IVAN)
  • Transmeridian Exploration (TMY)
  • Northgate Minerals (NXG)
  • EuroZinc Mining (EZM)
  • Conexant Systems (CNXT)
  • Finisar
  • Ciena (CIEN)

Rentech is not making money, and there is no guarantee its technology will ever be used; Crystallex is play on a gold mine that might never happen; Ivanhoe's prospects could be fictional for all we know, Cramer said.

Transmeridian is based on one project that could be confiscated tomorrow; Northgate Minerals relies mostly on gold and copper, and its main mine could have a short lifespan; EuroZinc Mining has one main copper mine in Portugal. If there's any disruption there, that project will go down the tubes, Cramer said.

JDSU has an optical market that is volatile, and it has very little insider ownership; Conexant's balance sheet should lose 7 cents per share in 2007, and it needs to refinance, he said.

Finisar has serious competition, and even after reporting a good quarter, the stock got pounded in the market today, Cramer said. And Ciena's future operating margins are questionable, he said.

"Speculative stocks are a sector of their own," Cramer said. "They are radically underperforming. Since May 11, my speculative index is down more than 15.49%."

"When the speculative index is cheap, that is when we want to start to get in," Cramer said.

You should speculate, he said. It's where the big money comes from, but you have to do it carefully and methodically because it is a risky business. You should have a few speculative stocks, he added. You need to be diversified when speculating also. It should only take up a fifth of your portfolio, he said.

"You should do an hour of homework per stock per week," he said and warned that those not keeping up with the research would likely lose.

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

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At the time of publication, Cramer was long Sears.

Jim Cramer is a director and co-founder of He contributes daily market commentary for's sites and serves as an adviser to the company's CEO. Outside contributing columnists for and, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Listen to Cramer's RealMoney Radio show on your computer; just click here. Watch Cramer on "Mad Money" at 6 p.m. ET weeknights on CNBC. Click here to order Cramer's latest book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here. has a revenue-sharing relationship with Traders' Library under which it receives a portion of the revenue from Traders' Library purchases by customers directed there from

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