Within every balanced portfolio, most people usually have a certain amount of high risk common stock as these investments can result in large gains. However, they can also be dangerous. An example of high risk common stocks would be a start-up business. While the potential is great, so is the risk.
Low Risk vs. High Risk Common Stocks
Low risk common stocks are generally a wise investment option for nearly every portfolio. These companies most likely have weathered the storm of market volatility for years and established themselves as important figures in whatever industry in which they operate. The only time these common stocks take a dive is during a general market downturn, a decline in the industry overall or if the company itself is experiencing management issues.
The primary example of high risk commons stocks investing as an important addition to a portfolio is the fact that a small investment can lead to large gains. Every investor has heard the maxim “buy low and sell high." High risk common stocks enable people to do this. Generally, a company with the highest risk is either a business that has only recently gone public or is changing direction within its industry.
Negatives of High Risk Investments
The main problem with the example of high risk common stocks as an investment is the fact that they are wholly unpredictable. While some companies go public and the stock skyrockets, making investors a large profit, the same amount of companies suffer dire consequences. Picking and choosing the right high risk common stock can be a challenge and many advisers make a great living targeting wise choices for their clients. Without high risk common stocks and the profit margin possible, many of these individuals and companies would be out of business.
Examples of High Risk Common Stocks
A number of different investments can be considered an example of high risk common stocks. When a company is under priced according to prior market activity, it is a high risk common stock. Likewise with companies experiencing legal difficulties. These could go either way depending on the outcome of a case. Penny stocks, any common stock with a value under a few dollars, are also considered to be a high risk investment. However, as history has shown, many of these low value stocks ultimately create large dividends for their owners. For example, during the 1990s, Microsoft traded at roughly $2.50. By the early 2000s, the common stock was valued at or near $50 per share. In this case, the high risk paid off for investors.
Importance of Balance in a Portfolio
Balancing one's stock portfolio is very important to maintain a strong financial position in the market. It's important to invest certain amounts of money into both low risk and high risk common stocks, as both will theoretically result in profits over the long term. Traditionally, younger investors will want to balance a portfolio with a larger example of high risk common stocks versus low risk common stocks. In this way, market volatility will level itself out over time. Inversely, older investors typically invest in more low risk common stocks than high risk ones as the time frame to retirement means each fluctuation can have a detrimental effect on one's portfolio and financial future. While this theory is sound, it is best to consult a financial adviser or investment professional to determine the right course of action for individual circumstances.
Securities and Exchange Commission: http://www.sec.gov/investor/alerts/bankruptcygmalert.htm
Capital Flow Analysis: http://www.capital-flow-analysis.com/investment-essays/value_dividends2.html