DECEMBER 2021 |
57
THE RISKS OF
INVESTING And Understanding Your Options
aving a diverse investment portfolio is a great way to reduce volatility and avoid putting all your eggs into one basket. There have been many avenues for investors to earn great rewards, however, with great rewards comes greater risk. It is important to research the varying types of investments and corresponding risk levels to help guide you. Different people have different risk tolerances and understanding these will help you have a more informed discussion with a certified professional about the strategies available to you.
MUTUAL FUNDS One of the oldest ways for investors to grow their portfolio value, mutual funds have the support of other investors pooling money together into stocks. Mutual funds are seen as a safe option because of protection for investors if a firm goes bankrupt with the CIPF and IPC. They also hold different types of stock in one investment instead of needing to fund individual stocks. Despite being considered a low-risk option, that still doesn’t
mean that they don’t have any. They are putting money in the stock market, meaning they are dependent on the market’s whims. Currency risk can be an issue, so if the exchange rate of foreign currency goes up, the returns on an investment can equal a loss. Inflation is also a risk, where if the cost of living goes up, the amount of money made from a return can decrease. There is liquidity risk, where the bond issuer cannot sell an investment because it is declining in value, therefore having no buyers. Regardless of the risks that come with mutual funds, it can be a good way for a new investor to diversify their portfolio and understand the stock market before diving into individual stocks.
PENNY STOCKS Penny stocks have become one of the most popular modes of investment. They’re cheap, but high-risk, yet the returns from investing in a penny stock can also be extremely high. They exploded in popularity over the past year with
companies like Gamestop and AMC, where it was relatively easy for investors to buy stock and gain huge rewards from the fraction of the money they put into it. Because they can yield such high profits, they are extremely high risk. They are highly speculative and depend on the market which can be unpredictable. There’s also the risk of promoters making the penny stock seem bigger, or soon to be bigger, than it really is, which encourages investors to buy more stock or hold their position instead of selling. Any kind of low-quality penny stocks are guaranteed to generate major losses when the bubble bursts. They may be profitable for a short period of time, but low-quality penny stocks are the most volatile out of all penny stock types. While penny stocks may be trendy, they have a lot more risks than benefits, and investors should only invest in penny stocks if they have money they would be fine with losing.
finance & investment
by Isabelle Tennier
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