If you can stomach the wild roller coaster ride of a riskier stock’s earnings, with its dramatic highs and lows in return for the possibly of outsized profits, then read on for a chance to boost your portfolio returns.
As you know, some stock market investments are much riskier than others. When you invest in a bank certificate of deposit, for example, it’s unlikely that you’ll lose any of your principal but returns are relatively low. When you buy shares of stock, such as IBM or Tesla Motors, you have the potential to lose and gain. Typically, riskier stocks offer the chance for higher returns — and greater losses.
Maybe the new start-up you invest in will turn out to be the next Amazon — who knows? For risk-takers willing to lose cash in exchange for a big potential payoff, check out these 10 investment types and strategies.
Buying a stock is to become a part owner in a company. When investing in stocks, you share in the corporate profits and losses. In this wide universe of stock investments, there are riskier and less risky investments.
For a bit of historical perspective, consider that from 1928 through 2014, the Standard & Poor’s 500 index, a proxy for the U.S. stock market, returned an average 9.60 percent per year. But beware. During this 86-year period, the average return masks years such as 1931, when the market lost a breathtaking 43.84 percent, and the more recent 2008, when the market lost a whopping 36.55 percent.
In today’s market, focus on stocks and funds that will benefit from higher interest rates. Choose companies with known histories of making money and generating revenue for shareholders.
2. Foreign Exchange Market
The foreign exchange market (Forex) is where international currencies are bought and sold in order to conduct foreign trade and business. If you’ve ever traveled in a foreign country, you understand how to exchange your native country’s money for foreign currency in order to buy meals, entertainment and souvenirs.
Forex can be profitable because it’s the largest financial asset trading market in the world, with $5.3 trillion traded per day last year. Moreover, Forex is liquid, and the market is open 24 hours per day, 5 ½ days per week.
Before entering the Forex market, it’s a good idea to open a practice account to learn this investing approach. Many companies offer Forex practice and trading accounts.
3. Peer-to-Peer Lending
Have you ever considered lending money to others in exchange for higher interest payments than you’d earn on your own bank deposits? If so, then the peer-to-peer marketplace might be for you.
There are websites as well as several companies that match borrowers with lenders. Prosper and Lending Club are the largest such firms. An investor could earn from 5 percent to 10 percent on their invested funds, depending on the risk level of the borrower and the default rate.
To invest, open an account, deposit your capital, and choose your own borrower or set up an automated system in which the broker company invests for you. To counteract today’s low interest rates, now might be a good time to test the waters of this peer-to-peer lending pool.
Related: 17 Smart Investments
4. Short Selling
Short selling is more of an investing strategy than a specific type of investment. Ordinarily, investors prefer their stock prices to rise. Investors might engage in a short-selling strategy, however, if they believe a specific stock or market index price will go down. With today’s lofty stock market valuations, this strategy holds promise.
Here’s how short selling works: If you believe stock XYZ’s price will decline in the future, you borrow shares of XYZ today — because you’re borrowing the shares from a seller, you’re “short” those number of shares — and then you sell them. After the stock drops in price, you buy the stock back at the lower price and profit from the difference between the sell and buy price, minus any commissions and interest. Of course, if the stock price rises instead of falls, you have the possibility of great losses.
Your investment broker or advisor can help you execute a short-selling strategy.
5. Penny Stock Trading
Penny stock trading is similar to stock market investing but with a twist. Penny stocks are low-priced stocks issued by very small companies. The Securities and Exchange Commission labels stocks priced under $5 as penny stocks. These stocks are less liquid than typical stocks. If you buy them, you might have a tough time selling them.
The allure of trading penny stocks is that they’re so inexpensive; a few dollars can buy many shares. Also, they are extremely volatile, with large price swings. If you find a winner, you could make as much as 1,000 percent profit on your investment in a matter of weeks, The Street.com’s Jonas Elmerraji has said.
Investors can jump on the penny stock-trading bandwagon through their investment brokers. These stocks are not listed on the major stock market exchanges and are instead quoted on the Over-The-Counter Bulletin Board operated by the Financial Industry Regulatory Authority for its subscribers. The OTCBB maintains listing requirements, though they’re less stringent than those of an exchange.
6. Master Limited Partnerships
Consider a master limited partnership as a combination of a limited partnership with the liquidity of common stock. For an entity to become an MLP, it must earn 90 percent of its income from natural resources, commodities or real estate, according to the Tax Reform Act of 1986.
Decent cash flow and tax advantages are benefits of investing in an MLP. Investors can also capitalize on their hunches regarding the direction of commodities, real estate and natural resources by purchasing an individual MLP or an MLP fund. If you think oil prices are poised to rise from their current low levels, you might investigate an oil-related MLP. Like most financial assets, the principal value fluctuates.
For risk-taking investors, MLP shares can be bought through investment brokers. There are also exchange-traded funds and mutual funds that invest in MLPs, diversifying the risk across several partnerships in lieu of investing in a single partnership.
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7. Hedge Funds
These glamorous investments take various sophisticated investing approaches in order to capture a higher return for a given risk level. Hedge fund strategies can include shorting stocks, using sophisticated options strategies and incorporating excessive leverage in their approaches.
Hedge funds are known for their high-risk, high-reward strategies. According to Zerohedge.com, the best performing hedge fund of 2015 was Quam China Focused Portfolio with an 18.63 percent return. Halkin Wittenberg European Small and Mid-Cap Fund was the biggest loser, bottoming out at -8.18 percent.
To invest in a hedge fund, you need to be an accredited investor with more than $1 million of investable, or liquid, assets. There are mutual funds that open the door to hedge fund investing for the rest of us. To access hedge fund investing, talk with your investment broker.
8. Buying on Margin
Buying on margin is another investing strategy with high stakes. In essence, the investor borrows money to invest. If the investment is profitable, then the returns are multiplied with the borrowed or leveraged money. If the return doesn’t pan out, then the losses are excessive.
For example, say you buy 100 shares of JUMP UP stock, which sells for $10 per share. Your total cost for this purchase is $1,000, excluding commissions. If the stock goes up to $12 per share, and you sell your shares for $1,200, you’ve made $200, or 20 percent on your original investment.
If you bought the 100 shares of JUMP UP on margin, you might borrow $500 and use $500 of your own money. When you sell, after the stock’s value rises to $12, your return increases to 40 percent. You earned the same $200 profit, but you only invested $500 of your money instead of $1,000. Conversely, if the stock price drops, then you’ll get a ‘margin call’ asking you to pony up more cash.
Today, an aggressive investor might short a diversified ETF with borrowed money to take advantage of low interest rates and lofty stock valuations. Your investment advisor can help with this strategy and explain the commissions and expenses.
9. Initial Public Offering
In an initial public offering, you invest in a company without a public track record as soon as their shares go public. Although there are highly publicized winners in this investing arena, there are many more losers.
Truecar (TRUE), an IPO darling, illustrates the roller coaster ride of IPO investing. On May 16, 2014, TRUE shares opened at $9.70. By Oct. 8, 2014, TRUE’s price surged to $23.06. On Aug. 7, 2015, TRUE’s price fell to $5.76.
If you’re interested in investing in an IPO, speak with a representative at your investment brokerage firm. Some IPOs are available to the public, and others aren’t.
10. Private Equity
Private equity investing is similar to owning shares in a publicly traded stock, although the private companies are not traded on public stock exchanges and thus are less liquid. According to Ryan Caldbeck of TheStreet.com in a story published last year, shares in private equity outperformed investing in the Dow Jones Industrial Average, S&P 500 and NASDAQ.
An easy way to get in on private equity investing is through a publicly traded private equity investment firm such as The Blackstone Group L.P. or the Carlyle L.P. Additionally, investors can buy private equity ETFs such as PowerShares Global Listed Private Equity ETF. With today’s start-up explosion, a private equity fund is a sensible way to participate in new business growth.
Investing in riskier asset classes is a fine approach for wealthier or aggressive investors to try their hand at beating the market. When investing in risky assets, limit the investment to money you can afford to lose.
Disclosure: I invest in peer-to-peer lending and have engaged in options trading and invested in master limited partnerships.