High-risk stocks are equity investments where an investor can experience significant losses, if not all their money.
Generally, high-risk stocks tend to be from cyclical, volatile industries or be newer, untested companies. In contrast, while all stocks carry risk, lower-risk companies tend to be more established businesses that have steady earnings and often distribute a shareholder dividend.
Investing almost always involves risk. The question for most new investors will be how much risk they are willing to take on. If you’re looking to take on substantial risk, then you may want to look at high-risk stocks. Of course, it’s important to remember that the more risk you take on, the more you stand to potentially lose money.
Why Invest in High-Risk Stocks
Why would anyone want to invest in high-risk stocks and other securities with similar risk profiles?
First, very few people put 100% of their portfolio into investments like these (unless they really like to gamble and don’t mind potentially going broke). Instead, risk tends to be considered as part of a broader asset allocation strategy.
Ideally, investors take on just enough risk to potentially increase their returns without ruining their long-term prospects should they lose up to a significant percentage of their allocation to high-risk assets. The balance between safe and risky assets tends to be determined by individual investor goals.
Conventional wisdom often says that younger investors in their 20s or 30s tend to be able to afford greater risks, since they will, in theory, have the rest of their working lives to earn back any potential losses. Meanwhile, investors who are closer to retirement typically choose to focus on safer investments that are likely to produce more reliable, albeit smaller, gains.
A Warning About High-Risk Investments
There are different ways to attempt to measure risk. Some of them are objective measurements of aspects of a specific investment while others are more generic insights. Penny stocks and IPOs tend to be riskier than shares of big companies, for example, because their underlying businesses generally aren’t as stable or profitable.
Statistically-based measurements of risk, such as variance, seek to assign some kind of mathematical value to the risk involved in a particular investment. Calculating portfolio beta is another way to monitor who sensitive your stock holdings are to broader swings in the market.
An important thing to note is that riskier types of investments are generally considered to be ones that have greater volatility and greater chances to see negative returns. When it comes to high-risk stocks and other investments involving significant risk, wise investors often follow the adage “never invest more than you can afford to lose.”
High-risk investors must be prepared for the possibility of losing a significant amount or the entirety of their funds.
Types of High-Risk Stocks and Investments
Highly Volatile Stocks
Along with cryptocurrencies, penny stocks might be among the most easily accessible risk assets listed here. Anyone can trade them—the only thing required is a brokerage account.
Here are some examples of some stocks that tend to be more volatile:
• Penny Stocks: Broadly defined as stocks that trade at a market value of less than five dollars per share, penny stocks can be found across all industries. Penny stocks might represent shares of companies in utilities, energy, gold mining, technology, or anything else.
• IPO stocks: Initial public offerings, when a private company goes public and lists shares on the stock market, can also be volatile. These newer companies generally tend to be less tested by the market, making them more prone to price swings or ups and downs in business trends.
• Commodity Stocks: Companies that produce raw materials like oil, grains, and metals have in recent years been highly volatile. That’s partly because these industries are very cyclical, closely tied to economic growth. So any sign of slowing growth or even perceived signs of slowing growth can cause investors to sell this group.
Bitcoin, the first cryptocurrency, gave birth to an entirely new asset class when it was created in 2009 by a pseudonymous programmer named Satoshi Nakamoto. The entire digital currency market has since ballooned in the past decade, totalling about $1.5 trillion in early June 2021 and with more than 7,500 different coins and tokens in existence.
Trading cryptocurrencies like Ethereum, Cardano and Dogecoin has exploded in popularity among retail investors and even lured professional traders to try their hand in the market. However, the cryptocurrency market is still very volatile and highly speculative, with digital assets remaining mostly unregulated.
Take Bitcoin, which has the largest market cap and longest track record. In 2017, the coin skyrocketed from around $1,000 at the start of the year to $20,000 by the end. Bitcoin eventually tumbled for pretty much of 2018. In 2020, Bitcoin surged again, and in 2021, scaled new heights, surpassing $60,000. But worries of increased regulatory oversight have since caused the coin to lose about half its value through June.
Ethereum climbed from about $135 at the beginning of 2020 to as high as $4,000 in 2021. Like Bitcoin, Ether has also since fallen. Cardano and Dogecoin are virtual currencies that have taken the crypto world by storm in the current wave. Cardano has seen its value jump 1,600% in the past year, while Dogecoin’s price has increased 12,000%!
Like other high-risk, high-reward stocks, penny stocks can yield high returns in a short amount of time. This is partly due to the fact that a small company might see rapid growth, and partly due to the fact that many investors speculate in penny stocks.
Spread betting refers to making a bet on the direction of the price of an asset without actually holding it. Investors can make bets on things like currencies, bonds, commodities, or stocks. In spread betting, you make money if the asset moves in the way you predicted, and you lose if it moves the opposite way.
Spread betting is often offered as a leveraged product, meaning investors can trade on margin. If the margin requirement were 10%, for example, a bet of $10,000 could be made with as little as $1,000. This amplifies both losses and gains. When trading on margin, investors are vulnerable to margin calls and can lose more than they initially invest.
The thing that makes a leveraged ETF risky is the word “leveraged.” A leveraged investment vehicle is one that offers returns or losses several multiples higher than what someone has to invest, as we just described in the section on spread betting.
Using debt or derivatives, leveraged ETFs attempt to generate, on average, two or three times the daily performance of a given index.
There are leveraged ETFs that rise in price along with the assets they track (bull ETFs) and those that rise in price when the assets they track go down in price (bear ETFs, also known as inverse ETFs).
Think of hedge funds like high-risk funds. A pool of investor money gets invested in different assets. The goal of a typical hedge fund is to get high rates of return for investors by any means possible. That means taking on lots of risk.
There is no established definition of what a hedge fund can invest in. There are hedge funds specializing in all kinds of asset classes, including things like:
• Junk bonds
• Real estate
• Stocks related to a specific industry
In general, hedge funds are only available to “accredited investors.” That means investors have to fit specific criteria, such as making more than $200,000 per year if the investor is an individual. Certain financial entities like trusts and corporations can also be accredited investors .
Part of what makes hedge funds risky is that they are not subjected to the same government regulations that are designed to offer protection to everyday investors. The reasoning behind this is that only sophisticated investors should be involved in the first place.
Venture capital refers to a form of investing that targets a new company and seeks to help it grow.
The requirements for companies to have access to the public equity markets, meaning they raise money by selling their shares on an exchange where any average investor can purchase them, are quite high. The vast majority of corporations aren’t eligible for this kind of funding, so some of them turn to venture capitalists.
Venture capital funds often receive much of their funding from large institutions like pension funds, university endowments, insurance companies, and financial firms.
The term “venture capital” has become closely associated with the tech industry, as many entrepreneurs in technology that believe they have promising ideas turn to venture capitalists to fund their startups. Traditional business loans often require real assets as collateral, and with many modern companies being information-based, that kind of loan isn’t always an option.
Most new businesses fail, making venture capital investing full of risk. But the possibility of getting an early investment in the next big tech company means the potential reward can also be high.
Angel investing is similar to venture capital in that both refer to a form of equity financing—a way for businesses to fund their operations in exchange for a stake of ownership in the company.
The term “angel investor” is a more generic term that applies to anyone willing to take a gamble on a new startup. Angel investors are most often high net worth individuals looking for big returns on their investment. If you’ve ever seen the show Shark Tank, then you’ve witnessed a form of angel investing.
Crowdfunding is a newer form of angel investing whereby many people contribute small amounts of money to a cause. Go Fund Me campaigns are an example of crowdfunding.
Unregulated Collective Investment Schemes
If there ever were a great example of a high-risk investment, unregulated collective investment schemes (UCIS) would be it.
A UCIS functions similarly to a mutual fund in that a pool of investor money gets collected and invested in different assets. However, as the name suggests, there are no regulations in place to safeguard consumers. Investors have to place all of their trust in the people managing the scheme.
While high-risk stocks are risky, that might not necessarily mean everyone needs to avoid them all the time. As noted before, financial advisors generally recommend younger investors to allocate at least a small percentage to higher-risk stocks. Investing in more volatile companies may help individuals benefit from the potential growth of these businesses.
With SoFi Invest®, financial planners are available to talk to members—at no additional charge—about their financial goals and risk tolerance. For investors interested in delving into some higher risk investments, like cryptocurrencies and IPO stocks, the SoFi Active Investing platform is a great option. Users can trade stocks, ETFs and fractional shares without incurring any SoFi commissions. For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.
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