Calculating Risk: The Riskiest Types of InvestmentsFriday, March 13, 2020
Seasoned stock traders talk about their risk/reward ratio, managing their risk to remain profitable. Large risks have the potential for large rewards, while the reverse is true for small, safer risks. Low risk investments include things like money market funds and treasury securities, savings accounts, rewards checking accounts, and CDs. Today, though, let’s talk about some of the riskiest types of investments.
What are the riskiest types of investments?
- Leveraged ETFs (Exchange Traded Funds) – These incredibly volatile investments are popular among day traders, and are extremely short term. Long-term results are difficult to predict and rarely profitable.
- Options and Futures – Market Options and Futures Contracts are both high-risk investment opportunities. For investors willing to gamble, there can be enormous upsides, but there can also be devastating losses. Because of this, calculating your risk/reward ratio can be very difficult.
- Penny Stocks – Penny stocks are generally viewed as all stocks that trade under $5 per share. These low prices may seem like a bargain, but there’s a reason why the stock is trading so cheaply. Penny stocks are also ripe with fraud.
- Junk Bonds – Companies that have been poorly valued may pay higher rates of interest in the hopes of attracting investors. Like a house of cards, however, these companies sometimes collapse due to their instability, leaving investors empty handed.
- Emerging Markets – Some companies come roaring out of developing countries with great fanfare, and can look very attractive to investors. The inherent danger lies in issues that may be completely out of the company’s control, and has more to do with where the company is located. Developing countries are often susceptible to political volatility and unrest, and financial insecurity. Plus, because of their location, there are often issues of transparency when seeking background information.
- Hedge Funds – A hedge fund is an investment fund that sometimes uses risky strategies like derivatives trading, leveraging and short selling, as opposed to more traditional strategies. Because hedge funds are largely unregulated, and not subject to restrictions on assets, they can be very risky. You are relying on the knowledge of the fund manager and his skill in choosing funds to invest in.
- IPO (Initial Public Offering) – Here’s the bottom line—four out of five IPOs are trading below their initial price within the first five years.
All investments carry some element of risk. This post has only scratched the surface in listing some of the riskiest. The attorneys at ChapmanAlbin understand the perils involved, and are here to help you. If you have a question about an investment or believe you’ve fallen victim to investment fraud, call us for a free consultation.