Investing is a game that involves balancing the risk and reward of the thing you're investing it. However, there are some investments that are much riskier than others. And these are investments that you should really think carefully about before jumping in. Because, even though they're risky, when they do yield rewards, the rewards are typically large! So, here are the riskiest investments you can make.
1. Leveraged ETFs
The first risky investment is the class of ETFs and ETNs that are leveraged. These are incredibly risky investments because leveraged ETFs don't match market performance, and as a result, it can be incredibly difficult to predict long term returns. These investments are popular among day traders because they only follow the single day price movement of the index they are seeking to double or triple. As a result, over time, the price movement will just not match. Invest in leverage ETFs carefully because realize that they are designed to be short term investments
2. Penny Stocks
Penny stocks are typically classified as any stock that trades under $1. Many individuals see the low price as a possible deal, but in reality, penny stocks are cheap because they aren't worth it. These stocks have crashed in value because the fundamentals of the companies are in shambles. Most of these companies are start-ups or other ventures that have little capital and a small chance of success. Another problem with penny stocks are that they are a big source of investment fraud.
The biggest problems with these stocks are liquidity, transparency, and as a result, fraud. These stocks are common victims of pump and dump schemes, because so few shares trade, it is easy to jack up the price, profit, and watch other investors take a loss.
3. Emerging Markets
Emerging markets have been incredibly popular over the last few years, and the returns from investments in these markets have typically been great. However, investing in emerging markets (or developing countries) can be incredibly risky. First, the political climate and financial stability of many developing countries is not certain. These counties are developing – which means that they can change at any time. They don't have long track records of financial stability, and they may not even have stable laws or courts to regulate business.
Another big issue with emerging markets is the lack of information for American investors. Unlike reading the New York Times, it is nearly impossible for American investors to gain access to financial and political information from developing countries. As such, it is impossible to really know what is going on in emerging markets. Plus, even the regulatory agencies that are supposed to provide this information typically have incentives to not be accurate. All of this plagues investors.
Finally, investing in an IPO is incredibly risky. IPOs offer great opportunities for investors – get in on the ground floor of a company. Just imagine if you were invested in Amazon or Apple during their IPO. You would have seen a 1000%+ return on your investment. However, most IPOs don't go like that for investors. In fact, 80% of IPOs trade below their IPO price within their first five years. If you're considering investing in an IPO, really understand the fundamentals of the company and decide if this first wave of investing is right for you. If you like the company, a better bet may be to invest after the lock-up period of the IPO expires and the insiders that have been waiting to sell finalize their transactions. This eliminates much of the early price movements.