When it comes to investing your money, there are both low-risk and high-risk options. This article focuses on certain high-risk investments and reasons why you might want to be wary of them. But first, it is necessary to know what high-risk investments are. A high-risk investment is an investment that has the potential to help you get a higher than average relative return on the money that you have invested. But these products or types of investments that we will discuss may also come with a high dose of risk. Notice that the key word here is potential. This means that if you, as an expat investor, choose to use these methods to invest your money, you may also be taking a high risk as well. Why are they considered to be high-risk? A high-risk investment can be analyzed in two ways: the first of these ways is that there is a larger percentage or chance of a loss of capital. The second way is that there is a very high chance of loss when you are immersed in a high-risk investment strategy. Bu what are some of these high-risk investments? Read below to find out!
- Leveraged Investments
This type of investment involves using borrowed funds in an attempt to increase the potential return on any investment. There are various leveraged products that exist on the market, such as exchange traded funds with double or triple the leverage. The risk involved with this type of investment is that let’s say that you decide to invest up to three times the value of the index. If the market goes down, then the risk would be that you will lose all of the money that you invested using leverage. Leveraged investments are done in such a way that it seeks higher investment profits by using borrowed money. The most common example of leverage is the one called financial leverage, which is using borrowed money to purchase asset(s) because you expect that the asset has potential to generate future income or rise in value. Hence, the greater the amount of your debt is, the greater the value of the investment will be. As the leverage rises, so does the risk of failing, because it becomes more difficult to pay off the debt that you have accumulated. There are two other types of leverage and they are construction leverage and instrument leverage. Construction leverage is when you combine securities in a portfolio in a certain way. For instance, the investor can choose to “hedge” certain assets. An example of instrument leverage is when you invest in gold that has the potential to magnify an increase in the price of futures three-fold.
2. Trading Using Options
Another high-risk investment is called Options or Trading Using Options. This investment strategy allows an investor to make money off of stocks or other securities even if there is no rise in the markets. In this type of investment, there is an options contract that is involved. When an investor buys an options contract, they are essentially buying the right to purchase or sell an asset at a set price before a certain date. For instance, if an investor agrees to buy 200 shares of Microsoft stock priced at $250 a share and that stock ends up trading for less than that, the investor makes money. Why is this a high-risk investment though? There is an option called a naked option where an investor can choose to bet against a certain stock. If the investor believes that this stock will not go above the said $250 per share, he or she enters into a contract that is set to expire in June of 2020, for instance. When June 2020 comes around and Microsoft’s stock ends up trading at $350 per share, the investor then loses the difference or $100 per share, resulting in a significant loss.
3. High-Yield Bonds
This type of investment strategy is common for older investors and retirees who are looking to invest in the fixed income market through the use of corporate, municipal bonds, and US Treasuries. It is possible to get a higher rate of return from bonds if you are willing to take the risk to purchase riskier debt. I wouldn’t encourage anybody to get into a ton of debt but what was described earlier is known as the risk premium. One of the most common bonds that is a high-risk investment is what is known as a “junk” bond. Junk bonds are junk in the sense that they have a higher risk of default compared to bonds that are issued by large companies or governments. Junk bonds are issued by companies that are not doing well financially. These kinds of companies have a higher risk of defaulting, not being able to pay their interest payments or repaying the principal that they owe to investors.
4. Currencies & Cryptocurrencies
When it comes to currencies, these can change quickly. The rate of success using this investing strategy depends on how you can predict these changes and act on these movements, which will then determine how successful you become on the foreign exchange market or Forex, for short. Currency swings, especially outside the US, can allow an investor to get high potential returns if they forecast the changes correctly. However, a wrong bet on a currency can result in the loss of all the money you have invested. In addition to this, currencies are often traded using leverage, so in a situation where you made a mistake, betting on a currency can make your losses even bigger. A cryptocurrency is a digital or virtual currency that becomes successfully secured by cryptography, and while it definitely deserves its own article, one can easily look up the history of Bitcoin, Ethereum, and other cryptocurrencies to see that huge fluctuations in price are not uncommon. These are certainly not for the faint of heart.
5. Foreign Exchange Traded Funds (ETF’s)
At its most simple level, exchange traded funds or ETFs for short are investment securities that are similar to mutual funds but they trade like stocks. They can be traded by an exchange basis and ETFs are commonly referred to as a “basket of assets”, where the investor does not need to purchase these assets by themselves. I bet you are wondering how an ETF works. Typically, the person or company that is providing these funds owns the initial assets and they design or formulate a fund to keep track of how these investments are doing. They then sell the shares in those funds to investors. While ETFs based in the US have a long history and have generally been a solid investment, it may not necessarily be the case for foreign ETFs, given that we tend to see more volatility in less-developed foreign markets.