What is a High Risk Stock?
A well-balanced stock portfolio will include a smattering of high-risk stocks, because those can provide substantial profit. High-risk stocks often make volatile moves, but those moves also can include dramatic drops in value. Investors must do a great deal of research or work with a well-trusted financial adviser if deciding to invest in the area of high-risk stocks.
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Identification
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Investing in the stock market always involves risk. Low-risk stocks typically are established companies which increase in value slowly and consistently over a long time. Sometimes, however, they can take a sudden turn downward, either because of a general market downturn, an industry decline, or issues with the company itself. Typically, however, the investor will regain his or her money over time.
Features
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High-risk stocks are very unpredictable. Some types of high-risk stocks are new companies where the stock price skyrockets in value as investors and traders speculate on potential success, only to plummet back down, all within a few months or a couple of years. Other stocks may be under-priced compared to their prior history, but are considered high-risk due to the company's financial or legal problems.
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Types
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Penny stocks, with shares typically under $1, usually are avoided by most investors. Even stocks under $3 are avoided for the most part by the conservative, but investing in a successful company with a very low share price can be extremely profitable. Microsoft stock, for example, was $2.50 a share in the 1990s, and within 10 years was over $50 a share. Amazon.com stock behaved even more dramatically. A person buying 100 shares of Amazon stock in 1997 for around $1 a share could have sold the pile two years later for around $10,000.
Significance
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Overpriced stocks--those which have shown too much price momentum--are considered high-risk. Some traders and investors work on the theory that a high-priced stock tends to go higher. This can be a good strategy when carefully considering corporate fundamentals and technical indicators on the chart, but the investor should plan to sell if the market gets dodgy. Especially when a bull market reverses to a bear market, overpriced stocks can crash in a big way. Amazon, for instance, peaked at around $110 in 1999, and by the end of 2000 was trading at around $15 a share.
Considerations
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Stocks which have crashed can be high-risk, or they can be excellent bargains. Corporate fundamentals and the general state of an industry can provide solid indicators whether to buy. Is it a good idea to buy Ford or General Motors in 2008 between $3 and $5 a share? Most analysts say no. History shows it's better to avoid buying stock in companies which may be on the verge of bankruptcy, or have enormous debt that will be a drag on cash flow for the extended future.
Potential
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Some stocks which have crashed can be terrific investments, however. A person buying Amazon at around $15 in 2001 or 2002 would be holding shares priced at around $50 at the end of 2008, and could have sold for a significant profit earlier in the year anywhere between $60 and $90.
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