How High Risk Investing Generates Higher Returns

Many people new to investing often wonder why it is the options with the highest risk that seem to also generate the largest returns. To answer this sort of inquiry, it is usually best to look at investing in the same way you might consider a wager of some sort. For instance, when someone puts down a large wager, they are setting the stage for a bigger payout. Additionally, the biggest payouts tend to come when the “stakes” are the highest, too.

This same sort of general mathematics applies with investing, as well. For example, when someone is willing to invest heavily in the area of investing known as “penny stocks,” they tend to get impressive returns if the company succeeds. The penny stocks are usually priced under one dollar each and are an extremely risky form of investing, but people are attracted to them because the company may be on the verge of making major profits.

Of course, when investing is done in a riskier way, the threat of total loss is always part of the equation as well. If you use the penny stocks as an example again, we can see that someone who buys thousands of dollars of the low-cost stocks as a form of high risk investing might see all of their capital disappear if the company fails to perform as hoped.

Is risky investing something to be avoided? If the budget allows for some risk to be assumed, it can actually be one of the most beneficial forms of investing available. It is necessary only to ensure that no harm to the portfolio will occur should the investment fail.