All investments in the stock market involve risk, and some stock investments and investment strategies involve considerably more risk than others. Conventional wisdom says, the younger you are the more risk you can afford to take. You might even be tempted to buy into the old saying, "the higher the risk, the higher the reward." The problem with that old saying is, it usually leaves out the important word, "potential," before reward.
Single Stock Investments
Investing in a single stock as the only asset in your portfolio is a risky strategy. While it is possible that the company will have great success and the stock price will shoot through the roof, it is just as likely that the company will hit a major bump and the stock price will tank. One of the primary concepts for wise investing is diversification of assets. Your grandma might have said the same thing when she advised you to not put all of your eggs in one basket. Diversification spreads your risk over a variety of different stocks in a number of different economic sectors. If one stock declines in price, increases in the price of other stocks in your portfolio will help to offset the loss.
Emerging Technology Stocks
The stocks of companies that are heavily involved in emerging technology industries are high risk investments, according to the Mack Center for Technological Innovation at the Wharton School of the University of Pennsylvania. Emerging technology companies may include those involved with genetic engineering, nanotechnology, space travel and research, biomaterials and others. You can gain exposure to these companies and still limit your risk by investing in larger, well-established companies that have investments in emerging technologies firms. For example, a well-established entertainment company might have a stake in an emerging digital effects company.
High Beta Stocks
A stock's beta refers to its price volatility when compared to a stock index, such as the S&P 500 or the Dow Jones Industrial Average. The market price of a stock with a beta rating of 1 tends to move up or down at the same rate as the index. Each .1 plus or minus reflects a 10 percent difference in the stock's price movement when compared to the index. For example, a stock with a beta rating of 1.3 would tend to move 30 percent higher or lower than the corresponding index, and a stock with a beta rating of 0.9 would tend to move 10 percent less than the index. Stocks with higher beta ratings tended to produce lower overall returns than stocks with lower beta ratings, according to USA Today.
Trading on Margin
Trading on margin dramatically increases your risk, regardless of whether you are investing in a conservative or high risk stock. Margin is an investment strategy that involves borrowing money to pay for your stocks. Securities and Exchange Commission regulations allow investors to borrow up to 50 percent of the value of the stock. Margin gives you leverage, which means you control more stock with less money. If the price of the stock goes up, you can make twice as much money with the same investment. Conversely, if the stock goes down your loss is twice as great. You also have to pay back the amount you borrowed, with interest.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.