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Why should the risky stocks be sold at premium?

Answer:

Actually the riskier the stock the larger the discount rather than a premium. The riskier a stock is the more likely it is that you could loose everything you have invested. It all comes down to the risk reward analysis. Investors must determine if the potential loss of a substantial amount of their investment is worth the reward if things work out in their favor. This determination will be based on each individuals risk tolerance. The riskier the stock becomes the less people will be willing to invest and it begins to effect the stock price resulting in that particular security trading at a discount to the market.

Stocks with large potential can sell at a premium in the hopes that the potential will be realized. But, this is entirely different than a premium given based on the amount of risk. As percieved risk becomes greater stock prices decline.

First answer by Ksmail. Last edit by Ksmail. Contributor trust: 3971 [recommend contributor recommended]. Question popularity: 1 [recommend question].