There's no doubt that, Investing is one of the surest ways to secure your financial future. It is an effective way to make your money work for you and potentially build wealth. However, getting into the world of investments is like walking into a maze and you can’t afford to get lost.
Investing is not a game of chance, and you cannot leave your hard-earned money to trial and error. Otherwise, it may cost you your life savings and you don't want to take such a risk. Choosing the right investment is even more daunting, especially when there are too many such investment programs and platforms to explore.
We cannot also deny the fact that Investing is a very risky venture. However, the level of risk depends on each type of investment. For instance, there is low-risk investment such as cash or fixed deposits; medium-risk investments - such as mutual funds and real estate and high-risk propositions such as derivatives and futures.
In this post, we will discuss everything you need to know about high-risk investments; the different types and risk-levels associated with them.
Read on to find out.
What Is A High-Risk Investment?
High-risk investment, also known as a high-return investment is generally defined as any investment that has a large percentage chance of loss or underperformance. In other words, it is a type of investment that has a higher potential for loss than gain.
High-risk investment is less stable and reliable than any other type of investment. The degree or level of risk is very high and investors could lose all the money invested.
High-risk investment offers the potential for a much greater return on investment than more conservative options. But the chance of things going badly is higher.
Meanwhile, there are so many different types of high-risk investments, and it's crucial to understand what you're getting into before making a move. In light of your investment objectives, skill level, and risk tolerance, this will assist you in deciding which of them might be a good fit for you.
How Are High-Risk Investments Different From Other Types of Investments?
Is there any difference between high-risk investments and other types of investments?
The fact remains that high-risk investments typically offer a significantly higher return on investment when compared to other types of investments is one of the primary ways in which they differ. This is due to the fact that high-risk investments often also carry a larger risk of loss.
Another difference is that high-risk investments make it harder to get access to your money anytime you want to compare it to other types of investments. If something goes wrong and performance hasn’t met the set expectations, it may be more difficult to access your money when you need it.
High-risk investments also tend to have shorter timelines than most other common types of investments. This is because they are generally more risky and volatile.
Now that you know the difference between high-risk investments and other types (whether low-risk or medium-risk investments), let’s look into types of high-risk investments.
Types of High-Risk Investments
There are many different types of high-risk investments and these are the major five:
- Commodities Investment
- Equity Investments
- Cryptocurrency Investments
- Venture Capitals
- Hedge Funds
Commodities Investment is simply investing in raw materials or agricultural products that are traded in the open market. Examples of raw materials are gold, silver, oil and natural gas. And agricultural products like wheat, corn, soybeans, etc.
One of the biggest benefits of investing in commodities is the fact that they tend to protect investors against the effects of inflation. However, one unique risk of investing in commodities is that it is more volatile than other types of investments.
Equities are a type of investment whereby an investor buys shares directly from companies with the expectation of reselling to make gains when the prices are high or earning dividends.
The main benefit of equity investment is the possibility to increase the value of the capital amount invested. And a common problem investors face in equity investments, is that the stock market can be volatile, so returns are never guaranteed.
3. Cryptocurrency Investments
Cryptocurrency investment is another type of high-risk investment that is similar to an equity investment. This investment type can take many forms, ranging from buying cryptocurrency directly to investing in crypto companies or funds to becoming a crypto miner or validator.
A huge benefit of cryptocurrency investment is that it has the potential for high returns or rewards and with blockchain technology, your investment (cryptocurrency) is secured.
However, cryptocurrencies can be an extremely volatile investment. It is more vulnerable to price fluctuations which can in turn affect the value of coins - one of the bad sides of cryptocurrencies. Also, for newbie investors, understanding cryptocurrency can take time and effort.
4. Venture Capitals
Venture capital is a type of equity investment whereby investors provide finances for start-up companies and small businesses that have the potential for long-term growth.
The fact that an investor can decide on his own mitigates risk in venture capital investment. If you have good experience and make the right decisions, you can be very successful.
However, as an investor, one of the disadvantages of venture capital investment is that you may not earn your desired return. Also, investing in early-stage companies is riskier than investing in companies that are developed.
5. Hedge Funds
A hedge fund is a type of private investment that combines money from numerous high-net-worth individuals and large businesses in an effort to maximize returns and minimize risk. Hedge funds can be riskier because they have fewer regulations and greater fees.
Investing in different asset classes with long-short strategies by experts in hedge funds offers diversification benefits to investors. Meanwhile, one of the disadvantages of hedge funds is that you will pay higher fees than other types of investments.
Hedge funds are extremely risky and you can lose millions of dollars instantly. Also, the investment manager's performance fee can encourage them to take higher risks with their money.
High-risk investments can be great, but that doesn't mean they're for everybody. In a single word, high-risk investments are exciting because of the possibility of big returns. But, it is important to note that high-risk investments involve a high level of financial risk.
Because of this risk, many investors choose to avoid these investments and opt instead for low-risk options such as savings accounts and CDs. However, if you understand what you're getting yourself into, high-risk investments also have their place as a good alternative to normal savings accounts.
You just have to be sure that you're educated about what's going on and that you're playing with a full deck of cards before you dive in headfirst.