High-Risk Ventures: Exploring Dangerous Investment Opportunities

High-risk investments are those where the chances of underperformance or loss of some or all of the investment are higher than average. These investments often offer the potential for larger returns in exchange for accepting the associated level of risk. While the main three asset classes – stocks, bonds, and cash – are often considered safe, there are a number of high-risk bonds and smaller-cap stocks that may offer investors the potential for high returns.

Some examples of high-risk investments include:

- Initial public offerings (IPOs)

- Venture capital

- Real estate investment trusts (REITs)

- Penny stocks

- Cryptocurrencies

- Hedge funds

- Spread betting

- Leveraged ETFs

Initial Public Offerings (IPOs)

IPOs are a significant milestone for a company as they provide access to a large amount of capital to fund new growth, pay off debt, or allow early investors to liquidate their shares. However, IPOs also come with risks and disadvantages. The company becomes answerable to a much larger group of shareholders, and there is a greater time, effort, and attention requirement for reporting.

From an investor's perspective, IPOs may not always translate into favourable investments despite the media attention and high valuations. IPOs are considered more speculative than established stocks due to the lack of reliable financial information about the company. Additionally, a company issuing an IPO lacks a proven track record of operating publicly, and the competitive landscape of the market could negatively affect its performance.

Furthermore, there is a difference between the IPO offering price and the price an individual investor will pay for the stock once it starts trading on an exchange. The offering price is usually reserved for institutional investors, employees, and investors who meet specific eligibility requirements. As a result, individual investors may have to wait for the secondary market, where securities are traded after the IPO.

Overall, IPOs are high-risk investments that offer the potential for high returns. Investors should carefully consider the opportunities and challenges before investing in IPOs and assess the company's financial history, prospects, and competitive landscape.

Venture Capital

One key risk is the volatile nature of startups, which can be prone to failure due to market changes, competition, management issues, or technological shifts. Startups may operate in dynamic markets where consumer preferences and technologies can quickly render their products obsolete. This makes it crucial for investors to assess market trends and the startup's ability to adapt.

Another challenge is financial instability. Startups often struggle with cash flow and rely heavily on investor funding to sustain their operations. Investors need to carefully analyze the startup's financial projections, spending patterns, and fundraising strategies to gauge their long-term viability.

Regulatory and legal issues also pose risks to venture capital investments. Changes in laws or industry regulations can impact a startup's operations and market potential. Additionally, venture capital investments are inherently illiquid, meaning they cannot be easily sold or converted to cash.

Due diligence is crucial in venture capital investments. Investors need to thoroughly investigate the startup's business model, market potential, competition, financials, and team to identify red flags and assess the potential rewards against the risks.

To mitigate risks, investors can diversify their venture capital portfolio by investing in startups across different industries and stages. They can also consider investing in areas where they have expertise, allowing them to leverage their knowledge and insights to guide the company's growth.

Real Estate Investment Trusts (REITs)

REITs are required to meet certain standards set by the IRS, including:

• Returning a minimum of 90% of taxable income as shareholder dividends each year
• Investing at least 75% of total assets in real estate or cash
• Receiving at least 75% of gross income from real estate
• Having a minimum of 100 shareholders after the first year of existence
• Having no more than 50% of shares held by five or fewer individuals

By adhering to these rules, REITs don't pay tax at the corporate level, allowing them to finance real estate more cheaply and earn higher profits to disburse to investors.

REITs can be divided into three categories: equity, mortgage, and hybrid REITs. Equity REITs operate like a landlord, handling all the management tasks associated with owning a property. Mortgage REITs, on the other hand, don't own the underlying property but instead own debt securities backed by the property. Hybrid REITs combine both equity and mortgage REITs, owning and operating real estate properties while also holding commercial property mortgages.

REITs offer several advantages, including steady dividends, high returns, liquidity, and lower volatility compared to traditional stocks. However, they also come with certain disadvantages, such as heavy debt, low growth and capital appreciation, and a tax burden for investors.

When investing in REITs, it is recommended to start with publicly traded REITs, which are more transparent and have better governance standards. It is also important to do your research, think long-term, and examine the fees associated with the investment.

Foreign Currency

Benefits of Investing in Foreign Currencies

Diversification of Portfolio

Investing in foreign currencies can add diversification to an investor's portfolio. It can be an additional element to other investments such as stocks, bonds, and ETFs. However, foreign currency should typically only comprise a small portion of a portfolio's overall holdings.

Convenience and Accessible Markets

The forex markets are almost always accessible, with four major trading sessions in a 24-hour period: Sydney (Australia), New York (The Americas), London (Europe), and Tokyo (Asia).

Hedge Against Domestic Currency Inflation

Foreign currencies can retain their value while a domestic currency loses value due to inflation, thus providing investors with a potential hedge against inflation.

Ways to Invest in Foreign Currencies

Standard Forex Trading Account

Investors can work with a foreign exchange brokerage to trade their domestic currency for another. The goal is for the purchased foreign currency to increase in value relative to the domestic currency, resulting in a profit when traded back.

Currency CDs and Savings Accounts

Foreign Bond Funds

Investors can explore purchasing foreign bonds issued by foreign governments or companies. There are various types of foreign bond investment types available.

Currency ETFs

Currency exchange-traded funds (ETFs) are similar to foreign bond funds and offer many of the same advantages as traditional ETFs. They give investors exposure to the forex market and can be a good option for those seeking to broaden their investment horizons.

Risks Associated with Foreign Currency Investment

Market Volatility and Political Risks

Due to the active nature of forex markets, prices can change quickly, making it a volatile asset class. News cycles, including economic, political, or social developments, can cause sudden and significant price changes. Political instability or drama can impact the price of a currency, posing a risk to investors.

Interest Rate Risk

Foreign currencies may be subject to interest rate risk, which occurs when an investment loses value due to fluctuations in interest rates.

Currency Conversion and Transfer Costs

There may be additional costs associated with currency trading, including currency conversion and transfer fees, which investors should be aware of.

Approaching Foreign Currency Investment Safely

Education is key to approaching foreign currency investment safely. Investors should understand the mechanics of the forex market, including the use of "pips" (smallest unit of value in a currency quote) and leverage (using borrowed funds from a broker to make larger trades).

Additionally, investors should evaluate their personal risk tolerance and weigh it against the potential gains from foreign currency investing. It may not be suitable for everyone's investment strategy or risk appetite.

Penny Stocks

Despite the risks, penny stocks can be attractive to smaller investors because of their low price and the potential for high returns. They can also be used as part of a portfolio diversification strategy, where a small allocation of higher-risk penny stocks is used to balance out lower-risk investments.

Some examples of penny stocks with bullish technical patterns include:

• Blade Air Mobility, Inc. (BLDE)
• Cardiff Oncology, Inc. (CRDF)
• PLBY Group, Inc. (PLBY)
• Porch Group, Inc. (PRCH)

Frequently asked questions