High-risk investing guide
Choosing high-risk investments can make up part of a balanced, diverse portfolio, all according to your personal risk tolerance.
Please remember, investment value can go up or down and you could get back less than you invest. The value of international investments may be affected by currency fluctuations which might reduce their value in sterling.
Investments promising the chance of high rewards usually mean big risks.
This means as well as the possibility of making lots of money, you could just as easily lose it.
In this guide, we’ll tell you about the different types of high-risk investments available and how you can include these in your portfolio.
What is a high-risk investment?
Every investment involves a level of risk, with some much riskier than others. High-risk investments can be attractive, offering a high potential return to reward your high-risk investing.
The increased level of risk doesn’t mean high-risk investments should be avoided – ‘risky’ doesn’t necessarily equal ‘bad’. But you need to be prepared that a possible outcome could be losing everything you put in.
As a responsible investor, it’s important you take the time to understand the risks of investing and decide whether you have the appetite to take on a low-risk snack or a high-risk meal.
By nature, high-risk investments are often more volatile. In some cases, investments might lack regulatory protection — such as crypto assets. You’ll also need to consider how comfortable you are potentially parting with your money permanently. High-risk investments have lower levels of liquidity, meaning once your money is in the investment, it’s often difficult to access if you change your mind.
The high stakes make riskier investments more suitable for experienced investors, while those just beginning their investing journey might prefer to start off with low-risk investment alternatives.
High-risk, high-reward
No investment is risk-free, so be aware that if you’re promised higher returns, this will likely come at a cost. However, some opportunities can seem too good to pass up. But how can you decide whether the potential return is worth losing your investment?
There’s no one-size-fits-all answer — what is risky for one person may not be as much of a leap of faith for others.
A good way to test your tolerance is by asking yourself whether losing the money would give you sleepless nights. If you can see yourself losing sleep over the money lost, then an investment is too risky.
Things to remember for high-risk investing
It’s easy to get drawn in with the promise of high returns. But first, slow down and remember these tips for high-risk investments:
- High-risk investing should only be done by experienced investors.
- While the potential returns are higher, the potential losses are higher too.
- Don’t put more than 10% of your net assets in high-risk investments.
- Be prepared to potentially lose all of what you invested.
- Only invest what you can afford to lose.
- Be wary of scams and trade on a trusted platform.
- Check that your investment will be covered by the Financial Services Compensation Scheme (FSCS).
- Get financial advice from an independent advisor if you’re unsure or need help investing.
As with any investment, go through our checklist of important questions to ask yourself before you invest or read our guide to managing investment risk.
Most common high-risk investments
| Type of investment | What it involves | What makes it high-risk? |
| Initial Public Offering (IPO) | An IPO is when a private company changes to a public company and offers shares to the public for the first time. | The issue price decided during the IPO process may be too optimistic. Investors who buy on the first day of trading take the risk that the IPO has been priced fairly and that there is sufficient demand to support the share price in early deals. |
| Venture Capital Trusts (VCTs) | VCTs specialise in funding smaller, new businesses to help growth in their early stages. | Not all new businesses will be a success and could be impacted by many uncontrollable factors. |
| Foreign Emerging Markets | Investments within developing nations with perceived growth opportunities as their markets develop. | Currency exchange rates between a chosen market can become stronger or weaker. Higher chance of geopolitical factors associated with less-developed nations affecting the market. |
| Real Estate Investment Trusts (REITs) | REITs operate similarly to an investment trust. It uses investor funds to own and operate properties to generate income. | Generally sensitive to economic changes, such as sharp share price falls in short periods. |
| High-Yield bonds | High-yield bonds are bonds that have ‘low-quality’ ratings but promise to pay out higher rates of interest due to the increased level of risk. | These types of bonds are more volatile and have a greater chance of defaulting. |
| Currency trading | Currency trading, sometimes called forex trading (as in foreign exchange), involves buying one type of currency while selling another currency at the same time. | The foreign exchange market can be volatile, with potential geopolitical influences affecting the value of various currencies. |
| Crypto assets | Crypto refers to assets that are purely digital and non-tangible. | Crypto investments are very volatile and are mostly unregulated in the UK, so your investments may not be protected. |
| Mini bonds | Mini bonds, or corporate bonds, are issued by companies to raise funds, with the promise of returns over a certain period. | Companies that issue mini bonds often do so because they haven’t been able to secure investors or obtain a loan from elsewhere. There is often no liquidity, meaning you can’t easily get your money back until the end of your investment period. |
| Spread betting | Spread betting involves placing bets on whether an asset’s price will rise or fall, rather than buying the asset. | Spread betting is similar to gambling, in that it is highly speculative and based on the outcome of markets. |
| Contracts for difference (CFDs) | CFDs are contracts made between a broker and an investor to pay the difference in value of an asset between its opening and closing, rather than buying the asset. | Investors rely on volatile assets staying stable to make returns on their bids. CFDs are not well-regulated and are not permitted in certain countries. |
| Land banking | Land banking refers to the practice of buying land to potentially develop at an undetermined later date, or dividing it up and selling it to other investors at a higher cost. | Some investors hold land for decades while waiting for the value to appreciate. This prevents land from being utilised, and there are no guarantees the value will increase. |
How to invest in high-risk investments
While there’s no way to remove risk entirely, you can manage investment risk by trading responsibly and with caution. You can also choose your level of direct involvement, ranging from hands-on management to passing over the management to a trusted provider.
Invest directly with a company
Starting at the highly involved end of the scale, you can work with companies to buy stocks and shares directly from them. Aside from private investments you can set up among personal contacts you might have, there are established ways to invest directly with companies.
Some companies offer Direct Stock Purchase Plans (DSPs) to potential investors, which allows you to buy shares and cut out the need for a broker.
Direct investments involve developing a role within the company. With this approach, you’ll need to be highly experienced and confident in your decision to become financially and personally invested in company decision-making and grow your investment.
Invest via a self-managed account
Moving onto a less direct but still engaged approach to investing — a self-managed account. There are several types of self-managed accounts:
- Trading Account - invest in a wide range of investment types globally.
- Stocks and Shares ISA - invest up to £20,000 yearly and pay no tax on money you earn.
- Self-Invested Personal Pension (SIPP) - invest pension contributions to grow your retirement fund.
A self-managed account requires you to be active in your investing to help maintain and grow your portfolio. You’ll be responsible for researching potential investments and buying and selling shares yourself, and can choose a level of risk you’re comfortable with.
This option is ideal for someone who has a keen interest in investing and enjoys watching the market or seeking out the latest opportunities.
Invest via a managed account
At the other end of the scale, you can relinquish most of the decision-making with a managed account, such as the ii Managed ISA.
Our Managed ISA allows you to reap the benefits of a high-risk investment portfolio, without investing much of your time. All you need to do is answer a few questions to help us understand your goals and find your perfect investment portfolio match — and let us do the rest.
Then relax knowing we’ll be working towards your goals, and you can check in anytime you want.
High-risk investing mistakes to avoid
Only you can find a balance between risk and reward that works for you. Here are five mistakes to avoid when making investments to help you understand the risks:
1. Believing everything you’re told
There is no reward without risk. If you’re offered a 100% guaranteed return on your investment, it’s probably too good to be true. You can avoid scams by doing research and being critical about potential investments.
2. Committing to the first investment you find
You wouldn’t buy the first house you viewed without checking out a few others. The same principles apply to investing. Take your time to assess your options before deciding on the best investment. And don’t be tricked by a ‘limited time only’ scenario!
3. Not checking for FCA regulation
While some high-risk investments are unregulated, you should still look for ones that have some protection. Check to see if the company offering the investment is regulated by the Financial Conduct Authority (FCA). If it’s not regulated, then it also won’t be covered by the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS).
Your investments with Interactive Investor are authorised and regulated by the FCA and protected by FSCS.
4. Not seeking financial advice
High-risk investments aren’t a decision that should be taken lightly — especially if you're a beginner. If you’re feeling unsure about your investment, seek financial advice from a qualified adviser. If you commit to an investment you’re not confident in then it’s unlikely to end well.
5. Only making high-risk investments
Mitigate risks by having a diverse portfolio. If all of your investments are high-risk by definition, then the stakes are much higher. Whereas if you have your money spread across investments with varying levels of risk, then it’s more likely that at least some of those will bring you returns.
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