High-risk investment products

There are some general points to remember when thinking about investing in a high-risk product:

• The higher the return promised, the higher the risk.
• You might not be covered under the Financial Services Compensation Scheme (FSCS), unless there has been misconduct by an authorised adviser or arranger (For example, if the product was mis-sold).
• If the investment is not covered by the FSCS, you might consider only investing what you can afford to lose;
• Don’t assume it’s a safe investment just because it can be held in an ISA. Seeking independent financial advice is important, so you understand fully what you’re investing in.
• If the prospect of losing money in an investment product is likely to give you sleepless nights, it’s almost certainly too risky for you.

This guide focuses on the high-risk products that you might need to be aware of.

Sometimes called high interest return bonds, these allow you to invest in a company and receive a fixed rate of interest over a set period of time. Your initial investment is returned to you at the end of the agreed term. The high returns typically on offer reflect the higher risks involved.

They are typically issued by small companies, start-ups, or companies that are finding it difficult to raise capital from institutional investors. This means they’re high risk investments, as there is a greater risk of delays to your interest payments and, if the company fails, you might lose your original investment.

As you’re locked into the investment for a set period of time, they’re not suitable for investors who might need access to the money.

A structured product is an investment where the return depends on a set of rules, rather than whether the shares or other assets in it gain or lose value. For example, a product might only pay out if the index or market that it’s linked to produces a certain level of performance over a certain period of time.

They can be one of any number of investment types that work in different ways.

Some examples are:

• guaranteed equity bonds
• guaranteed capital plans
• protected investment funds
• guaranteed stock market bonds

Some structured products give you an income, others offer capital growth (an increase in the overall value of your investment) and some offer both.

The way returns are calculated can mean that it is very difficult to understand how the investment might perform.

Some structured products guarantee that you’ll get back at least the amount you invest (full capital protection) but many don’t, so you might lose some or all of your money. Before you invest in a structured product, make sure you understand the risks. If you’re in any doubt, seek professional financial advice.

• Venture Capital Trusts (VCTs) are companies that invest in small, new, growing companies that aren’t bought or sold on a recognised stock exchange. They have some special tax advantages.
• A professional fund manager picks the up-and-coming companies they think will do well.
• It’s risky – the companies the fund manager chooses might lose money or fail completely. You could get back less than you invest.
• Only consider investing in a VCT if you plan to leave your money in it long term (at least five years). Make sure you understand the risks and benefits – you might want independent financial advice.

• Spread betting is more like placing a bet than making an investment. You bet on whether something – like the value of a share – will go up or down. The more it changes, the more you stand to win or lose.
• Originally, spread betting was all about the performance of the stock market. These days you can place spread bets on virtually anything you like, such as sports, reality TV and politics.
• To place a spread bet you usually have to have a minimum amount of money in a special account. But, if you place the wrong bet, you can lose substantially more than you might have in your account.
• Spread betting is riskier than other types of investment. It’s important to understand the risks and any terms and conditions before placing a spread bet.

• Contracts for difference (CFDs) are a lot like spread betting – you predict whether the value of a particular asset will go up or down. But with CFDs you buy an interest in the price movement, rather than placing a bet on it.
• The ‘contract’ is an agreement between you and a broker. You agree to exchange the difference between what an asset costs at the beginning of the contact, and what it costs at the end.
• As with spread betting, with CFDs, it’s possible to lose more than your initial investment. If you predict that the value of an asset will increase, and actually it decreases, you make a loss on the investment and could end up owing money.
• Make sure you understand the risks before you buy CFDs. It’s important you only take a risk with money you can afford to lose.

• Land banking is an investment where you buy a plot of land that hasn’t been granted planning permission – in the hope that planning will be granted and the plot will significantly increase in value.
• Quite often the land being sold is green belt, brownfield, of natural beauty or simply too small to build on – in which case it will never be valuable.
• Generally land banking schemes are not authorised by the Financial Conduct Authority (FCA). If unauthorised schemes are structured as collective investment schemes, many of them are in breach of FCA rules.

• Most collective investment schemes (ones where contributions from lots of people are pooled into a fund) are regulated by the FCA – but some are not. These are unregulated collective investments schemes.
• Unregulated collective investment schemes can be riskier than other pooled funds, because they often invest in assets that aren’t available to regulated investments. You could lose some or all of your money. The investments held might also not be diversified to the same extent as in a regulated scheme.
• They’re not subject to investment and borrowing restrictions that regulated collective investments are. Because of this they’re generally considered to be high-risk. You should always make sure you understand the risks before investing.

A cryptocurrency is a form of digital asset or money that can be exchanged in a similar way to normal currency. There’s no physical money attached to a cryptocurrency, so there are no coins or notes, only a digital record of the transaction.

Cryptocurrencies come in many forms, but the best known is Bitcoin.

• Buying and storing a cryptocurrency is quite technically demanding and it’s easy for things to go wrong.
• Cryptocurrency prices tend to be very unstable; if you’re investing with the hope of making money, it’s very easy to lose some or all your original investment.
• Cryptocurrency investors are increasingly targeted by fraudsters, while cryptocurrency exchanges have also been subject to cyberattacks.
• The complexity of some cryptocurrency products can make it hard for investors to understand the risks.
• There is no guarantee that crypto-assets can be converted back into cash. Being able to do this requires a level of demand and supply that can’t be guaranteed.
• The lack of regulation means that seeking compensation or making complaints is very difficult - investors are unlikely to have recourse to either the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS).

Exchange traded products (ETPs) are ones whose value goes up and down according to the value of an index (a group of companies used to measure the growth of a market) or another measure, like the price of oil or gold.

Some ETPs are well known and straightforward but some are much more complex and they don’t all offer you the same level of protection against things going wrong.

ETPs that are in the form of investment funds are called exchange traded funds (ETFs) and are regulated.

Many physically hold the shares or other investments that they aim to track and so are fairly straightforward and similar to other types of investment fund that you might consider.

However, some ETFs are complex and more risky, for example, tracking an index in artificial ways (called a synthetic investment strategy) or tracking an unusual asset, that might be hard to define and measure.

There are other types of ETP that are not set up as funds.

They might be bonds or have other more complicated structures. They are not regulated by the FCA, so you might have little or no protection.

They include exchange traded commodities (ETCs) and exchange traded notes (ETNs), and are not suitable for most people.

High-risk investments can be complex. Financial advisers can help you find the right investment products and avoid those that are unsuitable for you.