Risky Investments

Recurring headlines of market spikes in cryptocurrency and the stock market may have you reconsidering your financial investment options. But before you go rushing into a high risk investment, consider that no single investment, or type of investments, is right for everyone and cannot promise to provide a strong return year in and year out.

Risks of Cryptocurrency

With 12 years from its inception, cryptocurrency is still in the early stages of establishing itself within the market. Being so young and not widely accepted as a fully functioning currency, it is not uncommon to see its price rise and dip from one day to the next, making it a highly volatile investment. Take into consideration the amount you’ve invested, you may not see a great return until after a few years. This can become a problem when you find yourself in immediate need of extra funds. 

Cryptocurrencies can be traded but are not supported by physical assets as stocks are. The value of cryptocurrency does not technically exist, rather it comes from its reputation. In other words, it becomes incredibly risky if the market ever decides that it no longer holds value. Unlike stocks, there are no governmental agencies or regulations that assist crypto in holding its value.

Risks of Stocks

Stocks are defined as a partial ownership in a business or corporation that entitles you to a portion of their earnings. The risks in stocks vary depending on the current state of the economy and how well your investments are doing when you decide to sell. “Buy low, sell high” is a common phrase shared amongst stock investors. 

When setting your goals of estimated return, consider the amount of time you are looking to invest as well. Diversifying your portfolio of stocks and understanding the risks that come with it can lead you to success.

Universal stock risks to consider:

  • Commodity Price Risk
  • Headline Risk
  • Rating Risk
  • Obsolescence Risk
  • Detection Risk
  • Legislative Risk
  • Inflationary Risk and Interest Rate Risk
  • Model Risk

Problematic Investments
View the original article: Avoiding Inappropriate Investments.

Certain types of investment products may be legitimate, but not right for most investors, including you.

OTC Stocks: Shares in companies that aren't listed on a major stock market like the New York Stock Exchange or the NASDAQ Stock Market are called over-the-counter, or OTC, stocks. Some large international company stocks are traded OTC. But many OTC stocks are small and trade infrequently. Some issuing companies are not registered with the SEC, which is legal but this means there's limited information publicly available about them. Both factors make these stocks especially risky. Always do your research to make an informed purchase.

Penny Stocks: These are a specific type of OTC stock that sells for less than $5 a share. Some penny stocks may provide big returns over a long period of time, but many turn out to be worthless. Penny stocks are often falsely promoted to unsuspecting buyers who are led to believe they're getting a bargain.

Investments with high fees: Many investments charge annual fees to cover management expenses and sales charges to compensate sellers. Some also charge fees if you sell or withdraw within a restricted period. You probably can't avoid fees entirely, but you should stay away from investments whose fees are higher than average for the type of investment it is.

Pay particular attention to the expense ratios and sales charges of annuities and mutual funds you are considering. Some states have mutual fund fee calculators on their securities regulator websites. You can also find one on theFinancial Industry Regulatory Authority (FINRA) website.

Investments with limited liquidity: An illiquid investment can't be easily converted to cash. One example is a limited partnership, which pools people's money to invest in real estate or other ventures. Limited partnerships are not publicly traded, so if you need your money, you could have trouble finding someone to buy your portion of the partnership at the price you want. In fact, selling may not be allowed even if you could find a buyer.

Callable certificates of deposit (CDs): Unlike most conventional bank CDs, which mature within six months to five years, callable CDs may not mature for as long as 10 to 30 years. In that period, your money may be inaccessible unless you pay a steep penalty—an important fact that some dishonest salespeople conceal. Callable CDs may not be FDIC insured, so you should ask the salesperson for written verification.

Highly volatile investments: Investments like futures contracts and certain options contracts require constant monitoring to avoid potential losses. In fact, even if you do monitor them closely, you could still be vulnerable to large losses. If you're a new investor or can't constantly check on your accounts, these derivative investments may not be appropriate for you.

Article Resources:
Khojikian, Greg. “Council Post: The Biggest Risks of Investing in Bitcoin.”



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