As the vast majority of investors will tell you, success is down to avoiding risk. But on certain occasions, an investor will have the urge to put their money behind a high-risk business.
Why? Because the returns can be extraordinary - it’s that simple. But what is a high-risk business and what do you need to know before gambling on a positive result?
I’m going to take you through everything you need to know to help you work out if a high-risk business is a viable investment to make.
What are high-risk businesses?
A high-risk business is a company that sells risky - or even dangerous - products. Certain products attract lots of interest from criminals and fraudsters, or can often be a risk in the sense they could cause problems for customers.
Gambling is a distinct high-risk business, as is anything to do with the sex industry, firearms, and cigarette products. But even direct marketing or health products are classed as high-risk. It’s the same for any new business - you have no previous record or credit history, so you are seen as high risk.
As an investor, the sensible option would be to walk away from these types of business models. But if you hear about a deal that sounds irresistible, there are some checks you can make to prevent disasters.
What checks should I make?
Due diligence is a vital aspect of any investment into high-risk companies. In an ideal world, any company you invest in should have open records, up-to-date tax returns, and a seriously impressive business plan.
You will want to see that the firm places standards high on their list of priorities, too. It means they should be upfront and honest with their claims, and comply with industry regulations. It is advisable to seek out firms that use protections for receiving payments, too, so you know they are avoiding the many fraudulent chargebacks that can occur with a high risk merchant account.
You will also have to do some soul searching. Take the arms industry as a perfect example. It will almost always be profitable, but can you live with the fact your investment is used for death and destruction?
Will it cause me problems?
Aside from the dangers of losing your money in a high-risk business, there is something else you need to think about: society. In the past, investing in shares with a tobacco company, say, was no great shakes - many would do it.
These days, however, the climate is a little different. In fact, if you are a company investing in tobacco, gambling, or the arms industry, there may be consequences. The societal norm has changed a lot, and many consumers will stop buying from companies who support industries they deem as irresponsible - or even ‘sinful.'
While it’s different for private investors, you should be aware that if others people find out about your portfolio, they may view you differently as a person.
Should I do it?
There is nothing to stop you from investing in high-risk businesses other than your moral code. If you do decide to go with it, ensure you run plenty of checks - and understand they are called ‘high-risk businesses’ for an excellent reason. Good luck!