A high-risk investment can be described as one of the best instruments with a higher chance of loss when compared to an investment with low risk. While these high-risk investment tools may yield greater earnings, they also carry a higher amount of uncertainty. This makes high-risk investments only suited for those individuals who can stomach big losses and can afford to lose a portion of their savings.
However, high-risk-return investments generate a significantly high rate of returns, which allows investors to set off losses they incurred through investment over the years. All these make it crucial for investors to pick their investment options carefully and if they decide to go ahead with high-risk options they need to select their options with care.
Read along to know more about high-risk investments and popular options.
Features of High-Risk Investments
Here are the key features of high-risk investment plan:
Volatility: High-risk investment options tend to be more volatile, which means their prices or values change dramatically over short periods of time. This volatility could result in sudden profits or losses.
High returns: One of the key appeals of high-risk investments is the possibility of earning high returns. These high-risk-return business options often have the potential to make large rewards when they perform well in the market.
Uncertainty: High-risk ventures are often coupled with higher uncertainty. This is because such assets may generate less predictable returns owing to factors like:
- Market fluctuations
- Regulatory modifications
- Advances in technology
- Market competition
Illiquidity: Some high-risk investments may be illiquid, making them difficult to convert into cash. Such investments often come with lengthy holding periods before investors can access their assets, restricting their capacity to adjust to rapidly changing conditions.
Higher investment limit: High-risk ventures could require a substantial amount of capital to get started. Typically, skilled or accredited investors can afford to expose their portfolios to high risks targeted by these investment options.
Popular High-Risk Investment Instruments
Here’s a list of high-risk investment plan that are popular in India:
- Stocks of new companies: Investing in equities of companies in their early phases of development is deemed highly risky, than investing in established companies. This is because new companies lack a proper and more extensive track record than established companies. Uncertainty regarding future performance provides investors with the opportunity to earn significant profits. Typically, such firms operate in industries with more volatility and may have tremendous potential for growth.
- Cryptocurrencies: Cryptocurrencies like Bitcoin and Ethereum, are counted among the highly volatile investments with rapid fluctuations. Investing in cryptocurrencies is filled with danger due to variables such as regulatory uncertainty, market sentiment, and tech issues. However, despite the risk, cryptocurrencies are among the lucrative investment options owing to their high return capacity.
- Venture capital investment: Venture capital is a type of private equity investment that is made into early-stage companies with robust growth potential. Investing in new firms via venture capital funds offers the best return on investment. However, it is still fraught with risks. This is because startups often come with a high failure rate, exposing investors to the risk of losing their capital. Also, the liquidity options in venture capital investments are limited to exit events like an initial public offering or an acquisition.
- Angel Investing: Individuals who donate funds to early-stage companies in return for stock are known as angel investors. Typically, angel investments are made in firms that are deemed small for venture capital funding.
As discussed, early-stage businesses are more likely to flop, making them vulnerable and risky investment bets. Usually, such investments come with a long horizon, as it takes a startup years to reach a point where it can actually exit. Despite the long time frame, there’s no guarantee that investors will profit from their angel investment.
- Initial Public Offerings: An initial public offering or IPO is the procedure via which a company initially makes its shares accessible to the general public. Participating in a company’s initial public offerings is deemed a profitable investment strategy. However, with high returns comes considerable risk, which makes trading in newly listed firms volatile. This is mostly because of the fact that the success of such companies is uncertain and their long-term viability is questionable. Hence, before investing in an IPO, it is important to have a proper understanding of the company’s fundamentals and prospects.
- Alternative Investment Funds (AIFs): It is essentially a private pooled investment instrument that puts capital into assets that are not commonly available to the general public. AIFs are also counted among the high-yielding investment instruments, but they accompany high-risk levels.
Some examples of AIF investments include hedge funds, private equity, and real estate investment trusts (REITs). Notably, these funds park money in assets that are less liquid than stocks and bonds, exposing them to less competition. However, these investment options can be illiquid and may accompany higher fees and high investment capital.
- Foreign Exchange Trading (Forex): Forex trading is the practice of buying and selling currencies in the global foreign exchange market in order to make a profit. Forex trading has the potential to generate huge returns but exposes investors’ portfolios to significant risks due to the following-
- Changes in currency
- Leveraged trading
- Geopolitical situations
Note that the value of the currency can fluctuate significantly and even a minute change in their exchange rate led to a major loss or gain for investors.
Currency values can vary drastically, and even a minor change in the exchange rate can result in a significant loss or gain. This makes it a highly risky investment option, especially for inexperienced traders.
Besides these, commodity futures also carry a high-risk level and exposes investors’ portfolio to market volatility. However, if an individual intends to park money into high-risk investment options, they must try to make efforts to cushion the associated blow and avoid huge losses. To begin with, they should research the performance and market standing of the company they are willing to invest in. Investors can also use an investment calculator to determine which of these options can help generate high returns.
Subsequently, they should be aware of their own risk-taking capacity and investment goals and build a risk management strategy to be prepared for the worst. Above all, investors must develop a balanced approach toward their investments and add tools like debt instruments and fixed deposit schemes that offer steady returns to achieve a balance risk-reward ratio.