Top 3 Risky Stock Investments

As an investor, risk can be a good thing. After all, you have to take risks to see big rewards. However, high risk investments aren’t always worth the chance, and there is definitely a way to take unnecessary or dangerous risks that will almost certainly end in a loss. The following are some of the riskiest stock investments available today that you’re better off avoiding completely.

Penny Stocks

According to the SEC, a penny stock is any stock that costs less than $5 per share. Basically, investors buy these cheap shares in the hope that their price will increase significantly in the near future, allowing them to “pump and dump” them for a huge profit.

Penny stocks can be risky investments because they are valued low enough to be traded “over-the-counter,” or in a forum other than a centralized exchange. Usually, it’s because the companies are too small to meet exchange listing requirements. That means penny stocks are also not subject to many of the rules larger securities are. There is a lot of misleading hype and even fraud surrounding these investments as a result.

For example, as Rachael Louise Ensign writes for WSJ Online, “an Internet promoter offering tips on a penny stock may actually be a shareholder looking to boost demand for the shares in order to drive up their price and sell them for a profit.”

Your Company’s Stock

Many companies offer discounted stock or company stock as an employer match to retirement plans as an added employment benefit. You might think this is a great investment opportunity, especially since as an employee, you have a pretty good handle on the current and future success of your company. However, getting a deal on an investment isn’t a good reason to invest in it.

Holding more than about 5 percent of your portfolio in company stock is just a bad idea. Think about it: You are already heavily invested in your company, even if you don’t own any stock at all. The simple fact that your financial well-being is dependent on the paycheck you receive is investment enough. Then add on the fact that a large portion of your retirement funds are also tied to your employer, and you are really venturing into eggs-in-one-basket territory.

Any One, Single Stock

Speaking of the eggs/basket analogy, quite possibly the riskiest investment you could ever make is only one. Diversification is the bread and butter of a sound investing strategy, even if you’re diversified among several higher-risk investments. Putting all of your money into a single stock is just too huge of a gamble, even if you’re 99 percent positive nothing could go wrong–the problem is there’s no 100 percent guarantee it won’t.

That goes for types of investments, too. Investing in stock only is setting yourself up for a loss. It’s essential you spread your money across various investments types like bonds, mutual funds and even a high-yield savings account or CD to protect some of your money.

In the end, the best high risk investments are those that have a lot of research behind them and offer a high return in compensation for the risk. Most importantly, though, you must understand there’s a good chance you won’t see a gain at all from your high risk investment, but lose money instead, and be comfortable with that fact.