Investing bears risks – we have been warned of this from the very first day we thought about investing. While risk is integral, experienced investors understand that some investments carry a much higher level of risk than others. Some can be mitigated with risk management techniques, like diversification, while others can not.
No discussion about investments returns is complete without talking about the risks involved. The general idea is, that risks correspond with returns; the more risk you take, the more you stand to gain or lose. If you’re an experienced investor seeking higher returns, you’re likely to have the brave heart to bet on high-risk investments and use them to double or triple your money.
But for beginners who are still testing the waters, you might want to do broaden your portfolio first before signing on the dotted lines of high-risk contracts. Here are 6 of the riskiest investments that are definitely not for those unarmed with vast knowledge, experience, and resources.
An option is a type of a derivative security. It refers to a contract that grants the holder the right to buy or sell an underlying asset (stock or commodity equity) at a specified price on a specified future date. Options give the right but not the obligation. Should the price of the security turn out to be undesirable during the future dates initially predicted, the investor won’t have to buy or sell the option security.
So why are options included in this category? Investing in options places time constraints on the sale or purchase of securities. With options, investors attempt to time the market. With prices of listed market options changing rapidly and unpredictably, options trading can either provide high rewards or a big loss in the short term. That’s why options trading is better left to the professionals.
2. Futures Contracts (or Futures)
Futures are legal contracts obligating the holder to purchase or sell an asset at a predetermined price (forward price) and at a predetermined future date. The asset can be a physical commodity (agricultural products, minerals, and currencies) or a financial instrument, Like options, futures can be viewed as gambling instruments as they can be used to speculate or hedge on the underlying asset’s price movement.
This is a high-risk venture for individual speculators. They compete against institutional investors who hold underlying positions on contracts that they buy. The lack of resources and time, as well as factors like leverage, trading price limits, the unpredictability of events, and extreme price volatility, can wipe out their profits if they’re not careful.
3. Limited Partnerships
Limited partners don’t receive dividends, though they have the direct access to the business’ flow of income and expenses. Although these partnerships are publicly traded and are relatively stable, you should still view small private partnerships with caution. Each partner is obliged to contribute resources like money, property, or labor in exchange for sharing in the profits and losses of the business. That said, everyone involved should be able to do their part for the benefit of all.
4. Alternative Investments
As its name implies, these investments are alternatives to traditional investment vehicles, such as cash, stocks, and bonds. These non-conventional investments include hedge funds, real estate, precious metals, artwork, collectibles, and royalty interests in oil and gas leases. They can provide good returns for experienced investors but they might do the opposite for the ones aren’t careful.
They can drop dramatically in value. They even become virtually obsolete in some cases, and their prices can be determined by capricious markets. The complexity, lack of transparency, volatility, and poor historical performance of these investments make them high-risk for novice and average investors.
5. Penny Stocks
Penny stocks are common shares of small public companies that trade at low prices per share. If you think about it, stocks that can be traded for less than a dollar per share sure sound like a good idea but they are not without the catch. While penny stocks can yield massive profits when you find the right company, a vast majority of them are criticized for providing with unpredictability, substantial volatility, and big losses.
Stock prices are listed on the “pink sheets”, an over-the-counter market that links traders electronically. Due to lack of information, minimum standards and regulation, and illiquidity, penny stocks can attract con men. They can easily be manipulated, and thus are notorious for bearing a large percentage of fraud in the industry.
6. Junk Bonds
A junk bond is a high-yield security, often issued by a company seeking to immediately increase capital. Some companies that fall below investment grade need to pay higher interest rates per year than their more stable cousins in order to attract investors.
The problem with junk bonds is they have a high-default risk due to the instability of the company. Although you receive a higher coupon from investing in a junk bond, you’re exposed to a greater risk of default in obligation, which translates into a suspension of income and a partial or total loss of principal.
Author Bio: Sophie Harris is one of the resident writers for FP Markets CFD Trading, a CFD and Forex Trading provider in Australia with over 12 years industry experience serving global clients. Writing informative content about business and finance is her cup of tea.