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10 Risky Investments That Could Result in Serious Profit

W hile every investor dreams of doubling their money overnight, the trades that can produce that kind of profit typically carry significant risk. If you can tolerate the possibility of loss, you can potentially collect returns of 200% or higher on your initial investment. These are the 10 risky investments to consider if you’re ready to live in the fast lane:

  • Cryptoassets: These assets, including bitcoin and other forms of cryptocurrency, can increase in value quickly but are largely unregulated.
  • Emerging markets: This type of investment attempts to benefit from a growing national economy, such as the Chinese manufacturing boom of the 2010s.
  • Foreign exchange: Investing in foreign currency, or forex, offers the opportunity to profit from a highly liquid but risky asset.
  • Hedge funds: When you buy into a hedge fund, you purchase shares of a diversified portfolio with active management to optimize profit.
  • High-volatility stocks: With this asset, you try to profit from stocks that have a high beta, which indicates the level of price volatility.
  • Initial public offerings (IPOs): An IPO, or the first public stock issue from a formerly private company, provides the opportunity to get in on the ground floor of potentially astronomical growth.
  • Leveraged exchange-traded funds (ETFs): These assets are popular among day traders who accept the risk of flipping these stocks for profit within the same trading day.
  • Penny stocks: While these low-priced stocks usually aren’t worth the money, trading them in volume can occasionally produce a surprisingly high return.
  • Real estate investment trust (REIT): Shares in a real estate portfolio provide the opportunity to invest in real estate without the time commitment and upfront cost of buying property.
  • Venture capital: An investment in an expanding private startup in exchange for a share of its profits.

What Is a Risky Investment?

Generally, financial experts define a risky investment as one that carries the possibility of both major profit and major loss. Experienced investors can use techniques like technical analysis and fundamental analysis to minimize the risk level associated with a particular asset and increase the likelihood of a successful trade. Feel up to the challenge? Get started with one of these 10 traditionally high-risk, high-reward investments.

Cryptoassets

Image via Flickr by QuoteInspector.com

This category includes cryptocurrency as well as similar speculative assets such as initial coin offerings and blockchain. Bitcoin is the most widely recognized form of cryptocurrency, which operates outside the established monetary system.

Depending on the specific crypto asset, the associated risks may include high volatility levels, lack of a secondary market, limited security, and lack of liquidity. Potential returns for these assets are unpredictable and can skyrocket or plummet without notice.

Trading in crypto assets requires buying and selling shares from unregulated exchanges, which carries potentially unlimited loss. They lack consumer protections against market manipulations, insider trading, identity theft, and loss of funds. Many cryptocurrencies have a limited market history, which makes it difficult to establish an accurate value.

Emerging Markets

Investing in an expanding national economy can be very profitable when a specific sector, stock, or government bond takes off. However, the risk comes in when the rapid expansion ends prematurely and the asset performs below expectations. For example, this can occur if the country in question has an unstable political environment that shifts without warning, leading to economic consequences. Compounding this problem, American investors often encounter barriers to current, reliable information about emerging markets.

Foreign Exchange

Commonly called forex, foreign exchange is an investment in which you can trade currencies from all over the world. Forex sales and purchases take place on a decentralized market where you negotiate directly with other foreign currency investors. While many foreign currency trades result in significant profit, they also tend to carry high commissions and fees.

The main risk of forex trading comes from its zero-sum structure. With this type of trade, one party receives all the profit and the other shoulders all the loss. In addition, many forms of forex trade on unregulated markets that lack standard investor protections. Aggressive scams are also common in the foreign currency market, so be wary of a deal that sounds too good to be true.

Hedge Funds

This is an actively managed fund in which many investors purchase shares that represent portions of diverse assets and securities. While hedge funds often produce high returns compared to other types of investments, they also incorporate strategies to help decrease the associated risk.

Regardless of diversification and other efforts to mitigate risk, traders must be aware of the possible downsides of hedge funds. These include the inherent risk of short-selling strategies used by these funds, the common hedge fund practice of borrowing money to trade, the risk of the investments held in the hedge fund’s portfolio, the lack of regulatory oversight, and the limited public disclosure and transparency.

High-Volatility Stocks

Investors who want to take advantage of rapidly fluctuating prices often look for stocks with a high beta. This metric describes the impact of market volatility on a specific asset’s volatility.

U.S. News and World Report recommends seeking stocks with a beta of at least 1.5 for this strategy. Examples include:

  • Ameriprise Financial (AMP).
  • Boeing Co. (BA).
  • Citigroup (C).
  • Freeport McMoRan (FCX).
  • Nvidia Corp. (NVDA).
  • SVB Financial Group (SIVB).
  • United Rentals (URI).

If you’re an aggressive investor, consider adding shares of one or more of these firms and other high-beta stocks to your portfolio.

Initial Public Offerings

Commonly referred to as an IPO, an initial public offering is a growing company’s first issue of stock shares to the public market. Because these IPOs often attract a ton of interest and attention, they also have the volatility that fosters short-term returns for those who can brave the risk.

To best use this strategy, avoid high-profile IPOs like Facebook and Snapchat. Instead, look for an undervalued IPO, which can generate both long-term and short-term returns as the market naturally corrects the price. One great example is Twilio Inc., an online communications firm that increased in value by more than 100% in the six months following its IPO.

The main risk associated with an IPO comes from its newness to the market. Although companies must disclose financial information to the federal Securities and Exchange Commission, this due diligence does not guarantee the success of a public stock release.

Leveraged Exchange-Traded Funds (ETFs)

Because ETFs diverse from market performance, long-term returns on these investments can be extremely volatile. However, day traders who strive to purchase and sell an asset in the same business day can often double or even triple their returns by taking advantage of short-term movements.

Penny Stocks

Most investment news sources categorize penny stocks as any stock with a value of less than $1 per share. While this might seem like a deal, few penny stocks actually produce a substantial profit. The penny stock market also suffers from high rates of fraud, limited liquidity, and a lack of transparency. However, if you do serious research and have a high enough trade volume, you can potentially flip a penny stock for an impressive return.

Real Estate Investment Trust (REIT)

A REIT allows you to invest in shares of a residential or commercial real estate portfolio. In exchange for your investment, you receive a share of the profits along with regular dividends and advantageous federal tax treatment.

However, REITs are subject to risk caused by the volatility of the real estate market, economic changes, and fluctuating interest rates. The higher the dividend paid by a REIT, which can be up to 15%, the higher its general risk level.

Venture Capital

W ith this type of investment, you put your money in a private startup seeking expansion capital. While many such fledgling companies fail to deliver on their early promise because of poor marketing, inexperienced management, and other pitfalls, others become extremely valuable household names. When that occurs, early venture capital investors can potentially realize exponential gains.

To reduce your risk when investing in a startup company, look for a firm that has both an outstanding product and the management acumen to actually run a successful global business. Without due diligence, you could lose your initial investment, which will likely be substantial because of the high minimum amount required to buy into most private companies.

These investments aren’t for those of us with limited risk tolerance. However, they have the potential to produce returns that often far exceed those of less risky assets, as long as you don’t mind a bit of uncertainty or want to diversify the more reliable holdings in your portfolio.