THE RISKS OF INVESTING AND UNDERSTANDING YOUR OPTIONS

by Isabelle Tennier

Having 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.

BITCOIN

One of the hottest trends in the investment market, Bitcoin is a digital currency that can be used as both a payment and an investment but has no physical version like paper money. Transactions through Bitcoin are made anonymously, and don’t need to follow currency conversion because the Blockchain records every transaction and connects it to a data system. They can be purchased online for a fraction of a coin and used for different purchases. There is a rule that only 21 million Bitcoin can be produced, making it appealing for investors since this protects against inflation. While these benefits sound enticing, Bitcoin is more volatile than penny stocks and has extreme risks. Transactions are decentralized through the Blockchain, so there is no government protection from criminal activity. The digital wallets that investors use can easily be stolen, as they generally rely on one password to open the wallet. If a government did intervene, they could make Bitcoin illegal. It also has extreme ups and downs in terms of its value. Bitcoin, while emerging as a popular form of investment, comes with great risks and investors should be mindful before deciding if they want to delve into the market.

NFTS

A new form of investing, NFT stands for “Non-Fungible Token”. It uses Blockchain technology to produce unique identification codes and metadata for real life objects. Because of the uniqueness in their identity, they cannot be interchangeable. They function very similarly to trading cards. NFTs manifest in many different modes, the most common form of NFT investing is digital artwork, sports highlights, Tweets, and video game skins. They can translate into real-world objects like sports shoes and cars. However, they still carry risks like any form of investing. Like Bitcoin, they are decentralized so there is no protection from the government against criminals, and NFTs use the same digital wallet as Bitcoin. The asset could simply vanish or be deleted because they are stored online, which would make it worthless if it ceases to exist. They are also highly speculative, so they are only worth what people are willing to pay for. Also, investors don’t own anything. When they are sold, the original owner retains the copyright. They may be the newest form of investment, but that doesn’t mean it’s not important to take a step back and be careful of the risks that come with it.

Making investments is a good way for people to understand the economy and make some money while doing it. Having a variety of ways to invest can also help diversify a portfolio and help decrease risks when investing. Many new modes of investment have made this easier. While some of these investments like Bitcoin and penny stocks seem tempting because of the possibility for high returns, it is valuable to learn about the risks. Having knowledge of the risks that come with different types of investments can lead to smarter decisions, which can help avoid losses in the long run.

This article content is for informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. We highly recommend consulting a professional when you are ready to begin investing. The information shared here has been credibly sourced and is intended to expand your knowledge of the various types of investing for you to research further on your own or with the support of certified professional.

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