Which Stock Is The Riskiest?

Which Stock Is The Riskiest? All investments come with some kind of uncertainty and risk. In fact, identifying and analysing risk is a major component of a good investment strategy.

From an investor’s perspective, risk can be said to be the probability and magnitude of loss compared to the likelihood of return for a given investment. 

In the financial world there is even some technical jargon for certain kinds of risk. Alpha risk, for instance, is the term used to denote the amount of uncertainty faced by those trying to beat the market, or turn a profit on a particular investment. Beta risk, on the other hand, is the term given to the amount of systemic risk, or volatility, a stock represents in relation to the market as a whole.

Symmetrical vs Asymmetrical Risk

An important point to remember about risk is that often the most critical thing about it is whether or not the risk is asymmetrical.

What do we mean by this? Well, it means that, with some investments, either the upside outweighs the downside, or the downside outweighs the upside. This differs from, say, a high risk/high reward outcome – or, alternatively, a low risk/low reward kind – in which case the risk is symmetrical i.e. the expected loss matches the expected gain.

We’ll come back to this idea a few of times during the article.

What Does A High Risk Stock Mean?

There are two ways to think about risk when it comes to individual stocks: inherent risk, and circumstantial risk.

Inherent risk

First, some stocks are inherently more risky than others because of the broad category of stock to which they belong. For instance, penny stocks are considered far more risky than established blue-chip companies like Berkshire Hathaway (BRK.B) because the penny stock usually has a small market cap and are much more susceptible to volatility in its price action than a larger firm.

Penny stocks are also often younger companies with no proven track record of success, and the chance of them failing quickly is normally much higher.

Depending on the individual investor’s own perspective, penny stocks may be considered risk symmetrical assets as they are high risk, high reward gambles, and the potential pay-off when they do make a return is matched by the liabilities when they don’t. However, the high frequency of failure with penny stocks might make this view a little optimistic.

Second, a stock can be inherently high risk because of the connotations associated with the sector it operates in. A classic example of this would be the biotech industry, especially early stage pharmaceutical firms. Even more established names like Moderna (MRNA) took years of R&D investment before payoffs were realized.

Since the business of developing drugs and medical devices is predicated on gaining the approval of FDA officials at every point in the regulatory process, success in the industry is often described as being “binary”: either a drug passes scrutiny, and it generates huge revenues for its manufacturer; or it is stopped dead in its tracks with almost no chance of ever being revived at a later date.

This kind of risk is certainly asymmetrical since there are many unknown factors at the beginning of the journey, with budgetary considerations and clinical issues almost impossible to gauge or make predictions about.

Circumstantial Risk

Some stocks are designated high risk not because of some built-in or inherent uncertainty, but because of some local market headwind or other catalyst imparting added jeopardy to those investors trading it at a certain time.

Typical reasons for this could be a pending government decision that would have serious consequences for a company’s business plan, such as the granting of mining rights, or giving permission for an infrastructure project such as a gas pipeline or large city development.

Which Investments Are The Most High Risk?

Although it’s difficult to state definitively which kind of investment wins the prize for being the most risky, it’s a safe bet that any type of leveraged investment will expose the investor to more asymmetric risk in the long-run.

Some examples of leveraged investments are:

• Futures contracts – These derivative instruments are particularly risky for investors because they are usually highly leveraged, and inexperienced traders will be competing with professional representatives of major financial institutions with large underlying positions on the contracts being exchanged.
• Leveraged ETFs – As the name implies, these are exchange-traded funds that can multiply your exposure to an asset class or index by a factor of two or even three times. They are renowned for being highly volatile and have the capacity to lose you a lot of money in a very brief space of time.
• Options – An option is another derivative that allows an investor to make a leveraged bet against an asset without the obligation to buy or sell it (unlike in a futures contract). Options trading can confuse non-experts, and amateur investors without the requisite trading experience should normally avoid them.

What Stocks Are The Riskiest?

There are several specific stocks which, at the current time, could be classed as especially risky for a few important reasons. We’ll take a brief look at three of them below:

Palantir (PLTR)

Palantir is the brainchild of legendary venture capitalist Peter Thiel. The company leverages big-data and Artificial Intelligence in an effort to empower businesses and governmental agencies to solve challenges facing the military, energy and healthcare industries. 

The stock is a risky investment because, so far in its brief existence, the firm has courted much controversy over such hot-button political issues as civil rights and the role of the intelligence services in society.

Furthermore, the business model of the company is pretty novel, and it’s not yet clear if Palantir has the ability to live up to its own hype.

Nvidia Corp (NVDA)

Despite NVDA’s excellent stock performance over the last twelve months, the chip manufacturer is highly sensitive to economic cycles and supply chain contractions.

The recent and ongoing global semiconductor shortage is proof positive of this, and the uncertainty over how this will resolve itself, and what that means for Nvidia, should be a cause of concern for any investors with a stake in the stock.

Moderna (MRNA)

How Moderna fares over the next year will be a big test of the biotech firm’s staying power after the success it had during 2020. But the signs are already ominous: a battle over Intellectual Property rights looms, and the company’s lack of guidance for its 2022 revenue figures is an ominous portent.

And with the COVID-19 virus apparently in retreat, who can really predict what will happen to Moderna in the short-term?

Is Stock Trading Very Risky?

No investment vehicle is ever completely risk-free; even a savings account or government bond can suffer the ravages of inflation.

As such, the wise investor should never approach the stock market with fear and trepidation, but rather a willingness to understand the risks and rewards that any well-informed person can avail themselves of.

Knowing what level of risk you are comfortable with, and how some risk can be mitigated and others not – even hedging against the worst of all perceived outcomes – will put you in a much better position than just blindly hoping for the best and wishing for success.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.