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Risky business; volatile investments and you
It’s fair to assume that the bigger the risk the greater the reward. Though you could end up with nothing at all, or could even owe money. That’s why it’s worth looking into the different high risk products and what exactly makes them so volatile.
The common high-risk investments
There are a whole range of investment products that earn the title of high risk. Here are the most common, and why they’re so risky…
Venture Capital Trusts (VCTs)
VCTs are companies that invest in new, small businesses that seem to be on the rise. These companies will not be being traded on the stock exchange, allowing for special tax advantages.
A fund manager will pick the companies they think will do well and invest in them. The risk is directly intertwined with the success of the chosen company. If it underperforms or fails, you may lose your money or receive less than your original investment. Needless to say, small businesses are far more likely to go bump!
As the name suggests, spread betting is less likely investing and more like betting. You bet on whether the price of a stock or commodity will go up or down in value. The more the price changes, the more an investor stands to win or lose.
A structured product is an investment where the return hinges on a set of rules, as opposed to whether the shares and assets make gains or losses.
Such products might be guaranteed capital plans, guaranteed equity bonds or protected investment funds. Some structured products offer capital growth or income or both. However the word ‘guaranteed’ might not mean exactly what you think. You are guaranteed to get returns offered only if the index or investment performs as required in the product’s terms and conditions.
Some structured products offer full capital protection, allowing you to at least get your money back, but many companies don’t – so you could lose your entire investment. The risk depends heavily on the rules applied to the product.
Land banking is a type of investment where a plot of land is purchased that hasn’t been granted planning permission. The risk comes from whether planning will be granted and therefore dramatically increase the value of the plot. As a rule of thumb, the FCA doesn’t authorise land banking schemes when they’re part of a collective investment.
Unregulated collective investment schemes (UCIS)
Most collective investment schemes are regulated by the FCA. but some may not be. Unregulated collective investment schemes (UCIS) often invest in assets that aren’t available to regulated investments. Types of investments may include film production, forest plantations and foreign property. They’re also not subject to investment and borrowing restrictions that regulated collective investments are.
There’s a whole range of factors that influence the riskiness of an investment. That’s why it’s important to remember that all investments do carry a degree of risk and even the safest of investments might yield little to no returns. For more information on whether an investment opportunity might be the best for you, contact a financial adviser.
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.