Find out what makes certain investments so risky and what you should consider before investing.
All investments involve some degree of risk, but some carry more risk than others.
High-risk investments include alternative investment strategies and products outside of common investment types to achieve a return. Some high-risk investments may be marketed as being able to achieve higher returns. But remember, investment returns are always uncertain and depend on factors beyond a company or individual’s control. Even common investment products with well-managed risk and strong businesses plans can fall short of expectations.
What Makes an Investment High-risk
A major factor with high-risk investments is that you are more likely to lose all of the money you invested.
The following types of market risk and company-specific risk can make an investment high-risk:
- Liquidity risk – There may be strict resale restrictions on the investment, or you may not be able to sell it at all. The investment may also not trade on a regulated stock exchange, which could affect its liquidity.
- Socio-political risk – Political decisions can affect investment markets.
- Interest rate risk – The interest rate reflected in the investment could change to a level that significantly affects the return or performance of the asset.
- Management risk – Inexperienced management team members, unethical behaviour, or bad decisions can affect a company’s performance.
- Credit Risk – A borrower, such as a bond issuer, doesn’t pay interest as scheduled or repay the principal at maturity.
How to Research High-risk Investments
Always consider any high-risk investment opportunity with caution. Incorporate these three steps into your research when considering any opportunity:
- Understand Your Risk Profile
You should have a solid understanding of your risk profile, which includes your risk tolerance, before making any investment. Everyone’s risk tolerance is different. Take our quiz to help determine how much risk you feel comfortable with.
Generally, high-risk investments are only tolerable for those with high-risk tolerance.
- Gather Information
Before making a decision, get as much information as possible. Ensure you understand how the investment works and the factors that could affect performance. Documents for common investment funds like mutual funds and exchange-traded funds (ETFs) are available for you to review. These documents, known as the Fund Facts and ETFs Facts, will tell you if the fund is low-, medium-, or high-risk.
If you are considering investing in a public company, learn how to effectively research public companies. If you’re considering a private company investment, it may be more difficult to get information. Our Private Placement Guide can help you better understand how the private placement market works.
- Seek Independent Advice
An independent professional, like a registered investment advisor, may be able to help you determine if the investment is suitable for you. Learn more about working with a registered investment advisor. As well, a lawyer or an accountant may be able to advise you on other aspects of the investment, like its tax implications.