As we always say, risk in always associated with every investment. However, the question arises when investors want a quantifiable number about the risk associated with every investment and whether they are willing to take it or not.
It is obvious that any investor who has just began his financial journey and probably in his mid-twenties will be able to afford a greater risk compared to those who are close to their retirement. The reason being that the young investor will be able to overcome his loss, because they have plenty of time for earning at their disposal. They can choose investing in instruments with high risk and high rewards.
On the other hand, any investor, who is on the verge of his retirement will choose to focus more in safeguarding his capital and investments because they hardly have any time left for overcoming any unforeseen loss. They will always choose investing in safe instruments even if it requires to compromise on the returns. Such assets usually include savings account, government bonds etc. which have very low returns but have reduced volatility and risk.
On the other hand, if your risk appetite is high and you want to take substantial risk in order to maximize your returns, you can choose from any of the high risk-reward instruments available. In this blog, we will discuss about high risk instruments and their types and help you in investing in them.
However, before proceeding it is highly recommended to have your risk profile evaluated, in order to know your risk bearing capacity. High risk investments can provide you great returns but on the other hand, they can wipe out a considerable portion of your capital in a few seconds.
Table of Content
Guide for Investing in High-Risk Instruments
- What are High-Risk Investments ?
- Types of High-Risk Investments
- Hedge Funds
- Penny Stocks
- Angel Investing
- Leveraged ETFs
So, without further ado, let us take a look at the risk profiling procedure and also understand about the importance of risk profiling for investors.
1. What are High-Risk Instruments?
To have an idea about High-Risk Investments, it is important to understand, what makes an investment “High-Risk”?
Instruments are evaluated based on various measures. Fundamental analysis is one of the key measures to identify the instruments. For instance, penny stocks can be considered riskier compared to blue chip stocks because the underlying business in case of penny stocks will not be that profitable or stable.
There are various mathematical measures like variance, Beta etc. which define the extent of risk in a mathematical value. The basic logic behind risk is higher the volatility of any investment that greater will be the risk. It results in higher ups and downs in your capital, which results in higher risk as well as rewards.
2. Types of High-Risk Instruments
Let us now take a look at some of the High-Risk Instrument and strategies and find out the perfect one for your needs.
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Hedge Funds: The ultimate goal of Hedge Funds is to extract the maximum possible returns for every investor by investing in different asset class. These classes can include junk bonds, real estate or even cryptocurrencies. There is no particular asset class defined for a hedge fund and that’s the reason it can be classified as a high-risk instrument.
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Penny Stocks: As the name suggests, these are stocks which trade at minimal pricing. These stocks are mostly offered by companies which have low market capitalization. Since the market cap is very small, there is a very h9igh volatility in the stock prices. Also, since the companies offering penny stocks are younger, there are high chances that these companies can’t be that stable of profitable. However, like other high-risk instruments, penny stocks can also yield high returns in shorty span of time.
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Angel Investing: Angel investing is very similar to Venture Capital, because both are a form of equity financing. Angel investing is a way, businesses use to fund their operations and the investors in exchange, get a stake in the ownership of the company. Angel investing is good for anyone who is willing to take the risk by funding a new startup. Crowdfunding can be considered as the modern form of angel investing where many different investors contribute money for a cause.
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Leveraged ETFs: ETFs are usually not that risk, but in case of leveraged ETFs, the picture is entirely different. Leverages instruments are the one which offers profit or losses in multiple of several times of what someone has invested. These ETFs can invest in any asset class, since they are leveraged, there will be a high risk associated with them. These ETFs use debt and derivative instruments to generate multiple times of what an index has performed.
Conclusion
While it is obvious, that these instruments have more risk associated with them, it does not mean that you should avoid investing in them. If your risk profile analysis permits you to invest in high-risk instruments, you can give these a try. But since the associated risk is very high, it is recommended to invest only based on research and knowledge. Alternatively, you can also take the guidance of a SEBI registered investment advisor who can guide you through your investments by providing research-based recommendations for investment.
