Compared with other investment options, such as bonds or traditional bank savings accounts, stocks expose investors to the most risk. They can be volatile, as rising stock prices can quickly and abruptly change course and lead to market losses. Nonetheless, investors continue to invest in high-risk stock investments because the potential profits these securities offer over time often surpass what is available in other asset classes. Stock risk can be judged based on a company's size, financial strength and region, and some stocks are riskier than others.
Stocks that trade in the over-the-counter bulletin board (OTCBB) market instead of on a major exchange, such as the Nasdaq, are risky. Typically, these companies do not meet the requirements to trade on a formal exchange. OTCBB stocks generally have a micro-market capitalization, which is a measure of the stock's value. Indeed, some OTCBB companies are worth less than $1 million, according to the U.S. Securities and Exchange Commission. Trading volume in bulletin board stocks is usually low, which means liquidity is similarly low, and investors might not always find a buyer or seller when needed.
Emerging-market stocks offer some of the most compelling investments in the stock market. Average annualized returns are 17 percent compared with 10 percent for the broader stock market, according to a 2012 "USA Today" article. Nonetheless, these stocks are also among the riskiest of overseas investments because these companies are based in countries that are less developed than major economies. Risks associated with emerging market stocks include higher-than-usual volatility, which can cause steep losses, and profits that usually trail those produced by stocks trading in more developed markets, according to a 2011 CNBC article.
In exchange for investing in high-risk stocks, investors usually have some reasonable expectation for above-average profits. Stocks considered small-cap growth -- or companies valued at under $1 billion, but whose earnings are expected to increase -- have not delivered on those investor expectations. While small-cap growth companies are risky in light of their size and ability to fall short of profit projections, they have delivered below-average returns over the five-decade period beginning in 1962, according Index Funds Advisors' data cited in a 2012 "USA Today" article.
Alternative-energy stocks are considered risky because their performance depends on several outside factors, all of which have the ability to impact profits. When the cost of more traditional energy, such as power produced by fossil fuels, is deemed affordable, alternative energy stocks, including solar and other renewable technologies, tend to fall out of favor with investors. Renewable energy stocks are also driven by factors such as federal policy and government incentives, as these technologies are often unproven and expensive, and not part of the mainstream.
Video of the Day
- John Foxx/Stockbyte/Getty Images