High-risk investment products
If you want an investment that can give you a big payout, it usually comes with a big risk. This guide covers the main types of high-risk investment. They’re not illegal, or scams – you could win big. But if you invest, you have to accept that you might end up with nothing or even owing money.
The most common high-risk investments
Don’t go it alone. If you’re not sure about any of these investments, get expert help from a qualified financial adviser.
There are lots of investment products that are considered high risk. This guide just covers the ones you need to be most aware of.
A structured product is an investment where the return depends on a set of rules, rather than whether the shares or other assets in it gain or lose value.
They can be one of any number of investment types that work in different ways. Some examples are:
- guaranteed equity bonds
- guaranteed capital plans
- guaranteed stock market bonds
- protected investment funds
Some structured products give you an income, others offer capital growth (an increase in the overall value of your investment) and some offer both.
- The way returns are calculated can mean that it is very difficult to understand how the investment may perform.
- Some structured products guarantee that you’ll get back at least the amount you invest (full capital protection) but many don’t, so you could lose some or all of your money.
- Before you invest in a structured product, make sure you understand the risks. If you’re in any doubt, seek professional financial advice.
Venture Capital Trusts (VCTs)
- Venture Capital Trusts (VCTs) are companies that invest in small, new, growing companies that aren’t bought or sold on a recognised stock exchange. They have some special tax advantages.
- A professional fund manager picks the up-and-coming companies they think will do well.
- It’s risky – the companies the fund manager chooses might lose money or fail completely. You could get back less than you invest.
- Only invest in a VCT if you plan to leave your money in it long term (at least five years). Make sure you understand the risks and benefits – you might want professional advice.
If you’re interested in venture capital trusts follow the links below:
- Spread betting is more like placing a bet than making an investment. You bet on whether something – like the value of a share – will go up or down. The more it changes, the more you stand to win or lose.
- Originally, spread betting was all about the performance of the Stock Market. These days you can place spread bets on virtually anything you like, such as sports, reality TV and politics.
- To place a spread bet you usually have to have a minimum amount of money in a special account. But, if you place the wrong bet, you can lose substantially more than you may have in your account.
- Spread betting is riskier than other types of investment. Make sure you understand the risks and any terms and conditions before placing a spread bet.
To understand more about spread betting you follow the links below:
Contracts for Difference (CFDs)
- Contracts for difference (CFDs) are a lot like spread betting – you predict whether the value of a particular asset will go up or down. But with CFDs you buy an interest in the price movement, rather than placing a bet on it.
- The ‘contract’ is an agreement between you and a broker. You agree to exchange the difference between what an asset costs at the beginning of the contact, and what it costs at the end.
- As with spread betting, with CFDs, it’s possible to lose more than your initial investment. If you predict that the value of an asset will increase, and actually it decreases, you lose money.
- Make sure you understand the risks before you buy CFDs. You should only take a risk with money you can afford to lose.
Follow the links below to find out more:
- Land banking is an investment where you buy a plot of land that hasn’t been granted planning permission – in the hope that, planning will be granted and the plot will significantly increase in value.
- Quite often the land being sold is green belt, brownfield, of natural beauty or simply too small to build on – in which case it will never be valuable.
- Generally land banking schemes are not authorised by the Financial Conduct Authority (FCA). If unauthorised schemes are structured as collective investment schemes, many of them are in breach of FCA rules.
If you’re interested in property investment and land banking you can find out more about the pros and cons in our guide:
Unregulated collective investment schemes (UCIS)
- Most collective investment schemes (ones where contributions from lots of people are pooled into a fund) are regulated by the Financial Conduct Authority – but some are not. These are unregulated collective investments schemes.
- Unregulated collective investment schemes can be riskier than other pooled funds, because they often invest in assets that aren’t available to regulated investments. You could lose some or all of your money. The investments held may also not be diversified to the same extent as in a regulated scheme.
- They’re not subject to investment and borrowing restrictions that regulated collective investments are. Because of this they’re generally considered to be high-risk. You should always make sure you understand the risks before investing.
How to protect yourself
- Make sure you understand what you’re signing up to – especially the risks and charges. If it sounds too good to be true, it probably is.
- Don’t take the first product you see or one where a company contacts you unexpectedly. Always compare products to make sure you are getting the right one.
- Read the paperwork you get and make sure you understand it – don’t hesitate to ask questions if anything isn’t clear.
- Some investment products are provided by companies that are not regulated by the Financial Conduct Authority (FCA). If the company is not regulated then you will not be covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme.
Avoid toxic investments
Some investments are toxic – they’re likely to lose you money, they’re dangerous, and they’re often unregulated. Find out more below. We will update this guide on a regular basis.
Get professional advice
High-risk investments can be complex. Professional financial advisers can help you find the right investment product.