High-risk and low-risk investments

The field of investments consists of instruments with different levels of risk. Conservative investors choose assets with a lower probability of losing funds, and traders give preference to high-risk instruments with higher returns. As a beginning investor, it’s important to learn about different types of instruments and build an investment portfolio competently. 

More about investment risk, types of high-risk and low-risk investments, their advantages and differences we tell you in this article.

Concept of risk in investments

Investment risk is a probability of getting less profit than expected, and also full or partial loss of the initial investment. It can be caused by any factors that influence global financial markets and investment assets: economic situation, political events, competition or unsuccessful developments.

For example, an investor has invested in assets and expects to receive an annual return of 10%. If there is a high probability of getting all 10% in a year, such an investment can be called low-risk. If there is a high probability of getting only 2% or losing the initial investment — high-risk.

There is no single metric by which to measure investment risk. But analysis of instruments and financial markets helps an investor predict the expected level of risk and prevent losses. There are many strategies to manage risk, one of which is diversification of investment portfolio. 

The essence of this strategy is to make a portfolio of several types of assets, combining high-risk and low-risk ones. It allows reducing the impact of market changes on capital and avoiding total loss of funds.

Low-Risk Investments

Investments with a low risk level are instruments with stable and low rate of return, as well as insignificant probability of losing funds. This type of investment is recommended for beginner investors because it does not require much experience in investing and regular analysis.

Examples of low-risk investments:

– bank deposits;

– government bonds;

– shares of large companies;

– real estate funds.

If an investor chooses only low-risk assets, he or she receives stable profits, but without a chance to increase income in the future. It is possible to invest in low-risk instruments by means of trust management. Thus, the assets will be managed by a trustee and the investor will receive a stable passive income.

Examples of high-risk investments:

– Forex trading;

– cryptocurrencies;

– investments in start-ups;

– technological innovations;

– shares of small companies.

High-risk investments attract first-time investors with short-term and high returns, but without knowledge and experience it is hard to get. This type of investing requires continuous involvement, in-depth analysis, and a readiness for financial losses, which is not suitable for everyone.

When creating an investment portfolio, it is important to keep in mind that instruments with high investment risk have high costs and commissions. This can affect an investor’s end income and lead to losses.

Summary

High-risk and low-risk investments

Creating an investment portfolio of instruments with different risk levels allows an investor to balance the profitability of his assets. Low-risk instruments in the portfolio bring the investor stable profit in the long run, which can partially cover potential losses from high-risk instruments.

Each type of investment is attractive in its own way, so their combination gives an investor the opportunity to make a profit, significantly reducing the risks of losing funds. It is important to understand that the field of investments requires constant study and analysis, individual approach to the choice of instruments and competent risk management.