In a previous article on the subject of investment, we dug into the prospect of how beginners can get started on actually planning and building up a portfolio. With this, we went into some broad conclusions over the kind of ratios you should take up of various kinds of assets depending on the kind of risk vs reward ratio you're after. An understanding of what exactly is a high risk investment will help you along your path to knowledge within the investment ecosystem.
An important factor in this is understanding what these kinds of investments are. Specifically, this article will be delving into the world of high risk investments, what they are, the kind of yields you can expect to earn from them, and some of the more pronounced examples we can see as of right now.
While the world of investments comes off like an expansive ocean of shares, bonds, ETFs, and more. The reality is that you can actually divide these into three camps - Low, Medium and High Risk.
High Risk, much as the name suggests, includes assets that carry a lot of risk. This can be due to the challenges of financial liquidity that these assets have, underlying volatility, or just prove risky from the fact that there's always the chance of these shares and assets folding.
So if there's a lot of risk involved with these assets, why on earth would you want to invest in them? It's simple: they carry higher risk and, as a result, a far higher margin for reward.
On average, depending on what high-risk investment/s you invest in, you can actually see an annual return on investment of anything from 10-35%.
It's because of this that those looking for high-payouts should seriously consider high risk assets. But with these rewards, investors need to accept the fact that there will be disproportionately higher risks to go with them.
One of the major reasons for why cryptocurrencies exploded onto the scene as an investment is because of the risk-reward ratio. If there is a need to substantiate the claim that cryptocurrencies are a high-risk asset - you need only take a look at how it performs on a daily basis.
At this moment in time, Bitcoin, along with other major assets like Ethereum, Litecoin, etc, have undergone a bearish reversal after several rally-dense months.
These are the same assets made popular by Jordan Belfort. Better known as the Wolf of Wall Street because of his hard-core approach towards the sale of Penny Stocks.
So what are they? Penny Stocks are basically shares that trade at a very low cost, and carry a comparably low market cap. One of the reasons that these shares tend to perform well are because they offer an avenue of investment for those trading outside of major stocks.
These are considered high risk because of the seriously big swings in value that can often happen because of major investors buying and selling these shares, consequently harming their overall market liquidity.
Speaking from personal experiences of interviewing Forex traders, it is understandably one of the more high-stress markets for traders, no matter how experienced they are.
There are a number of reasons for this - the first being that the world of forex is so remarkably volatile that it lends itself to short and margin trading.
The problem is that investors will need to act fast, largely because currency pairs undergo a lot of up and down movements over the course of a day, and whenever international developments happen; these can hit forex positions pretty easily too.
Effectively, Leveraged Exchange Traded Funds are basically a form of security that can be bought and sold. How it manages to do this is through the use of financial derivatives along with debts to provide a high-risk, yet high-reward investment.
What makes these Leveraged ETFs so different to their counterparts? A conventional ETF generally keeps track of their associated securities on an almost one-to-one basis. Meanwhile, ETFs that involve a certain volume of leverage means that they sustain a 2:1, 3:1, even 4:1 ratios.
What this means is that you can expect some pretty impressive returns depending on how much you allocate into these funds. Conversely, if these same ETFs fold, due to the nature of what they trade (securities and debts), it can leave you in a pretty bad way.