When it comes to investments, some are considered “high-risk” while other safer types of assets are called “low-risk.”
In the world of finances, the chance for an investment to perform at a loss of capital in relation to what was expected is referred to as a risk. Depending on their personal financial goals, consumers can choose whether they want to put their money towards low-risk investments, high-risk investments or a combination of both. However, before consumers invest any money they should learn more about the risks and potential for losses from different investment types.
Safe, or low-risk, investments carry a lower level of liability for the investors and are typical of investment types such as savings accounts and government bonds. Since these loans have a lower level of risk, they also tend to have lower potential for any significant financial gains. On the other hand, high-risk investments are usually more likely to produce higher financial yields. These high-risk investments are usually found in stocks, currencies, real estate or high-yield bonds and they usually have more substantial fluctuations in value.
Understanding the Risk-Return Tradeoff in Investing
Before putting your finances towards any investments, it is essential to understand the idea of risk-return tradeoff. Essentially, the risk-return tradeoff principle illustrates that the greater perceived risks in investments tend to have higher expected returns. Contrarily, investments that carry lower risks also tend to have smaller capital returns. All investors should consider these theory when they are looking for potential investment opportunities.
Investors are highly recommended to use this concept of risk-return when they are making decisions on investments and developing their portfolio. For some investors, taking more high-risk investments may be more appropriate for their financial situations, while others may prefer putting their money towards safer assets. There are numerous factors to consider when making investments, and understanding the risk-return tradeoff can help consumers make more educated decisions.
Should I consider investing in high-risk investments?
In the world of investments, taking strategic risks can prove to be incredibly valuable so high-risk investments are not always a bad thing. In most cases, assets and investments with a high risk also carry a high potential for substantial financial returns. However, investors must utilize a degree of expertise, research, dedication and management efforts to choose worthwhile high-risk investments. For investors who do not have the time or resources to oversee high-risk investments, there are numerous safer options available.
Overall, there is no investment option or amount of risk that is a good fit for every investor. Before any investments are made, investors are encouraged to consider their income, age and investment goals so that they may measure and assess their tolerance for risk. Investors with more financial stability may feel safer investing in high-risk assets, while younger investors may prefer a safer choice. Whatever the circumstances may be, a great deal of research and dedication is required to manage an investment portfolio.
Common High-Risk Investment Types
Investing in risky assets often carries a high potential for financial loss, but there is also the possibility to significantly grow an initial investment in a short period of time. Here are some examples of some of the most common high-risk investment types:
- Initial Public Offerings – When a company first offers stocks to sell stocks to the general public, they are called the initial public offerings (IPOs). Much of the risk of investing in IPOs comes from the fact that there is no prior data to demonstrate how the new company is likely to perform. However, this type of investment can yield high financial returns because prices are typically underpriced at this point.
- Stock Options – Stocks options allow for investors to purchase or sell stocks at a certain price at a future date. Since the price of stock options can rise and drop unpredictably, investors face a high risk of a losing or earning a significant amount of money.
- Venture Capital – When you use your money to fund small companies and startups during their inception, early and growth periods, it is called a venture capital investment. These types of investments are relatively high risk because startup companies tend to have more instability. However, these investments also have the potential to generate significant financial gains if the company is successful.
- Promissory Note – Promissory notes are investments where a private business promises the lender that any borrowed funds will be paid back with interest in a specified timeframe. These investments are incredibly high risk because startups offer no assurance that they will pay back the loans and promissory notes are sometimes used as a method of defrauding investors.
- Foreign Emerging Markets – When a country is experience a period of economic growth, investors can see it as an opportunity for a lucrative investment. However, investing in foreign emerging markets is very risky because the economic growth can stop at any time.
- High-Yield Bonds – Corporate bonds that have a low-credit rating are sometimes referred to as high-yield bonds or junk bonds. Unlike high-grade corporate or government bonds, there is a great potential for the investment to default with high-yield bonds. As a result, there is also a greater potential for price appreciation than other kinds of bonds.
- Penny Stocks – When a company offers shares of their company for less than a dollar each, they are called penny stocks. Investors can potentially find major financial gains if they invest in the right company, but penny stocks are known to be risky and volatile.
- Real Estate Investment Trusts (REITs) – When businesses invest in groups of commercial or residential income-producing properties, they are called real estate investment trusts. The risk of these investments can vary drastically based on changes in the economy and real estate market.
Alternative Investments – Alternative investments are usually investments into physical assets like gold, precious metals, collectibles and other rare memorabilia. There are also other alternative investments such as hedge funds or oil and gas leases. These investments can produce significant capital for an informed and strategic investor, but they can also prove to be worthless.