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Stock Strategist

Not Being Paid for the Risk in These Stocks

These names have surged ahead of the market�and their own fundamentals.

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Investing in stocks is an intrinsically risky enterprise, but that's not necessarily a bad thing. In shouldering those risks, investors can expect to be paid a premium and generate higher long-term returns then they'd get by buying corporate bonds or government debt.

When investing, it is crucial to make sure you understand the level of risk you are taking on and then making sure you're being adequately compensated. (We recently took a look at the process that our equity analysts use to determine a stock's risk level.) But once you've determined the level of risk, how do you figure out what you're being paid to accept it? That's where valuation comes in. The riskier the stock, the cheaper you need the valuation to be. Just buying riskier stocks and assuming you are going to be paid more for holding them is a recipe for disaster.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.