High-risk investing isn't something to take lightly. The best investment funds include a strong platform of steady growth. However, high-risk investments, well considered and handled, can result in excellent returns. Risk is related to the volatility of the type of investment, meaning how much the price varies over time, which means you can win big or lose a lot.
Online stock trading platforms can help you determine the volatility of a stock, while brokers can advise you on good investments. Regardless of whether you invest on your own or with a company, here are some tips for protecting yourself:
- Only invest money you can afford to lose. While many people follow this rule when investing in the stock market, it's especially important with high-risk endeavors. In fact, be sure to count all the costs involved in an investment, such as lawyer fees if investing in venture companies.
- Do not count on this money for retirement. High-risk investing can give great returns, but those returns should be considered icing on the cake, not your meal ticket. Have other, more secure investments as the basis of your portfolio.
- Diversify. As with any investment portfolio, diversifying protects your assets. It's even more important in high-risk endeavors, where a single investment can fail miserably.
- Keep track. Some high-risk investments require a long-term commitment. Experts recommend sticking with a venture company five years to see if they will pay out, for example. Others, like forex, are faster moving.
With those tips in mind, check out these seven high-risk investments that can bring high rewards:
1. Initial Public Offerings (IPO): These are the first stocks a company issues when going public. They are risky for several reasons. First, the popularity of the company or excitement about its product might overvalue the stock from the onset. Second, a company may not have the management chops to do what it takes to propel the company to success. The best IPO investments are stocks that might be undervalued but have a company run by people with management experience as well as good ideas.
2. Peer-to-Peer Loans: In the past, lending money was something you only did with family or friends you trusted. Nowadays, however, peer-to-peer lending has become a new investment opportunity. There are many peer-to-peer lending services that allow investors to bankroll all or part of a person's loan with the anticipation of being repaid with interest. The lending group evaluates the risk of the person or company asking for a loan, then posts those it approves on a website for investors to select. You can join one of these lending groups, making an account and then choosing how much you wish to contribute to different loans. You can invest only a few thousand dollars, although some peer-to-peer lending companies have accounts that work like IRAs, with the corresponding tax breaks.
3. Options: Options are essentially bets that a stock's share price will rise or fall by a certain amount before a date you set. You pay a fee for the temporary right to buy or sell the stock at a specific price. If you are correct about the price movement, you get the money from the sale of the stock or can buy the stock at a price you want (with the hope that the value will rise, of course.) If not, the option expires and you lose your fee. Most investment experts do not recommend options trading for the beginning solo investor.
4. Penny Stock: This is stock that costs less than $5 and is generally bought and traded in huge amounts. It's a highly volatile market, meaning there's a chance for great profits. However, there's an equal chance for losses. It's a smart idea to have a stop-loss order in place when purchasing penny stocks to protect your assets. Stick with stocks vetted by the American Stock Exchange or NASDAQ, and expect a stock to take months or years to make gains.
5. Emerging Markets: These are companies in less-developed countries whose economies are growing. In essence, you are investing on the hopes that the country (and its businesses) continues to thrive. This proved very successful for investors of Chinese industries in the past. Now, emerging markets include several South American nations, Poland, Egypt and Asian countries. The risk lies in the uncertainty of their geopolitical and economic stability. Argentina, for example, was once an emerging market, but political and economic changes of the 2000s shriveled trading and reduced its standing in the market. Investment professionals say the best way to take part in emerging markets is through a professionally managed fund such as an emerging market exchange-traded fund. Alternately, you can purchase stocks of the largest companies in emerging markets through a brokerage or via an American Depositary Receipt. An ADR represents the shares but is issued by a U.S. bank.
6. Forex: The foreign exchange market deals solely in currencies instead of companies. You trade on the exchange rates of currency pairs, so the markets are large and susceptible to major fluctuations based on global events (like Brexit). Most forex traders monitor pairs for certain activities and execute trades based on strategies they develop. Forex trading requires you to trade on margin, so while gains will be magnified by the leverage provided by your broker, so will potential losses. To learn more about Forex trading, read our reviews of Forex brokers.
7. Futures: When you invest in futures, you are agreeing to buy something that a seller has not yet produced, usually with the intention of buying it more cheaply than you can eventually sell it once it is available. For example, you may purchase 5,000 bushels of oranges at $4 to be delivered in six months. If in the meantime, the price per bushel rises to $6, you should be able to sell them and come out ahead. However, if the price falls, then you lose money.
They say with great risks come great rewards, but be sure when you invest in these high-risk endeavors, you are smart about it. Good luck and good fortune!