Every investor naturally wants to earn a lot of money — that’s the very nature that drives investment in the first place. But in addition to looking at the potential reward, investors must also factor in the level of risk in their investments. Although investors have varying levels of risk tolerance, even the most aggressive investor can’t likely tolerate consistent 100% losses.
Thus, when it comes to owning risky investments, it’s important to differentiate between which ones have a path to success and those that are just complete speculations. Picking between these two types of risky investments can make the difference between building a high-returning portfolio and pouring money into one that costs you your life savings. Here are seven risky investments that just might be worth it in certain scenarios, along with the caveats you should understand before you buy them.
Initial Public Offerings
Initial public offerings occur when a private company “goes public,” or begins trading on an exchange. They happen all the time, but only a few make newsworthy splashes. But if you can manage to snag some shares of a highly touted IPO, you could literally double your money overnight. Shares of Beyond Meat, for example, priced at $25 and reached as high as $73 on their first day of trading before closing at $65.75, posting a one-day gain of 163%.
If you can research which stocks are likely to pop on their IPOs, you could score a big winner. Just note that after the initial hype, many hot IPOs die down. Although Beyond Meat went on to score much higher highs in the months following its IPO, the company has fallen on harder times and now trades at nearly 50% below its IPO price.
Options are leveraged derivatives that by definition only acquire value by being linked to other securities. They also have expiration dates, after which they often become worthless. This combination of factors alone makes options risky investments. But there’s a wide range of ways that you can use options, from the more conservative sale of covered calls to the wildly speculative selling of uncovered calls, and everything in between.
From an investor/speculator’s point of view, the most common use of an option is to buy a call, which benefits when a stock rises within a certain time period. For example, if you think Apple stock is going to rise, rather than buying the stock and perhaps enjoying a 20% gain, you can buy a call and generate a profit of 100% or more. Just remember that if you’re wrong about either the direction of the stock’s move or the time in which it occurs, you could lose your entire investment.
High-yield bonds have a higher potential for default than top-rated, investment-grade bonds. In exchange for this higher risk, these bonds have to compensate by paying more interest. Most advisors suggest that average investors interested in the high-yield bond market buy a mutual fund, as that cuts down on the risk of owning an individual bond. But if you can do the research into a company’s financials and determine that its cash flow is likely to support its bond payments, the risk may be worth it in exchange for the higher return. This is a tricky area, however, so you’ll likely want to enlist the assistance of a professional.
Stocks Down 50% From Their Highs
Right off the bat, it’s important to note that not all stocks that are down 50% from their highs are good buys. In fact, it’s probably true that most stocks that have fallen this sharply are not. But that’s why it’s important for you to do research as an investor. If you can find quality stocks that are just having short-term difficulties — or even better, that are simply dragged down due to market sentiment — then you have the chance to pick a good long-term winner. For example, Meta Platforms, formerly known as Facebook, was down 64.22% in 2022, but it rebounded by over 72% by late April 2023.
Long-term bonds can be relatively conservative if you’re willing to hold them the 20 or 30 years until they mature. But if you instead prefer to make a wager on the movement of interest rates, a long-term bond can be a risky, leveraged investment. If rates fall, the price of your bond will rise, sometimes by a great deal, at which point you can sell your bond early and book your profits. But just remember that the reverse is also true. Rising interest rates can decimate the values of long-term bonds over the short run, requiring you to potentially wait decades for the price to return to par value.
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