White-knuckle ride to riches

Putting money into volatile investments is a little like a roller-coaster ride: unpredictable, sometimes frightening and often great fun.

So what do those adrenaline junkies who are willing to put their heads above the parapet invest in? We find out:

Investments for the adventurous range from venture capital - where your money is invested in fledgling companies that may become the next sharemarket darling or go to the wall before anyone's heard of them - to futures and foreign exchange trading on margin, where if you get it wrong, you can lose everything and still owe money.

In a rampant bull market, high-risk investments can be seductive. Even so, sensible investors go into these investments with their eyes open and invest only a portion of their portfolio, which they can afford to lose should their investments go to the wall.

Speculators who plunge all of their money into one high-risk style of investing risk being burned badly.

"People must educate themselves adequately before they go in," says Robert Oddy, managing director of International Financial Planners. "It is hopeless thinking they can make money without doing the ground work." And that means more than reading one book or attending an expensive seminar or two.

There's a fine line between taking risks and being foolhardy. Never be tempted to invest in get-rich-quick schemes. If it sounds too good to be true it is.

Many of the riskier investments such as foreign-exchange trading and hedge funds aren't regulated, which means that investors aren't guaranteed minimum standards of protection.

You also need to be aware that if you start trading investments regularly, the Inland Revenue Department is going to want to take its cut in the form of capital gains tax.

DERIVATIVES

The collective name for futures and options trading. Futures are an agreement to buy or sell a quantity of an asset, such as a share or a commodity, at an agreed price on a specific date. Options give investors a right or an obligation to buy or sell a fixed amount of an asset at a fixed price on a predetermined date.

Contracts for Difference are another related investment available to New Zealanders. One advantage of derivatives is that they give investors access to international markets allowing them to trade on anything from the German DAX index to barrels of oil.

OMFinancial's head of futures, Kevin O'Sullivan, says clients vary from mum and dad investors dipping their toes in the market to high net worth individuals. www.omf.co.nz

SMALLER MARKETS

The NZAX and Unlisted markets exist to trade small or growing companies that aren't large enough for a listing on the NZX.

These shares tend to be less easy to sell and more volatile than larger companies. However, from an investor's point of view, these companies have the chance of becoming the next big thing - growing from a small company to an international success. www.nzax.com and www.unlisted.co.nz

FOREIGN EXCHANGE TRADING

Forex trading involves buying and selling different currencies. Investors in this market usually use margin trading where they put up a small percentage of the actual money they're trading. Each position is revalued daily to determine unrealised gains or losses. Forex trading is not regulated in New Zealand. www.omf.co.nz

VENTURE CAPITAL

Venture capital funds invest in small expanding companies, which because of their newness are riskier than large established companies. Venture capital funds such as Macquarie's Global Infrastructure Trust often return double-digit gains each year on average over the period of their life, says Oddy. But the investor needs to be in for the long run, which can be 12 or 14 years, to really benefit. www.nzvca.co.nz

NEW ISSUES

These are also known as flotations and can even be listed companies trying to raise more funds. There is no guarantee that the price paid will not fall after the float. Selling shares immediately they are listed with a view to making a quick profit is common. Brett Wilkinson, private client adviser at Direct Broking, points out that the risk involved depends on the issue. "History on the New Zealand market is mixed: Feltex was a disaster and Pumpkin Patch a winner," Wilkinson says.


OFF PLAN INVESTING

Investment property is the darling of the millionaire-by-Christmas brigade. And at the risky end of property investment is buying "off plan". That is buying a property from the plans before it is built. Typically, the investor is hoping that in a rising property market, by the time they have to pay the bulk of the money for the property it will have risen in value and they can flick it on at a profit. However, invariably the glowing cashflow figures presented by the marketing people are out of date and you will end up topping up the rent with your own money in order to pay the mortgage and other bills. Often the agreements to buy off-plan property include clauses where the developer can either increase the price or cancel the agreement. www.propertytalk.com

HEDGE FUNDS

Hedge funds often make speculative investments in many markets but hedge their bets by using derivatives. They can potentially profit in a rising or falling market. They are often viewed as risky because they are not regulated but nevertheless are popular with very wealthy people. In New Zealand, says Oddy, Man and Macquarie have hedge fund trusts. The ride can be volatile, but if you're using hedge funds correctly you should be hedging against the movements of other investments in your portfolio. www.hedgeco.net

WARRANTS

ABN Amro Craigs launched 15 Rolling Instalment Warrants on the NZX this year and UBS followed suit with two more. A warrant gives you the right to buy a number of shares in a company at a fixed price at a future date. Effectively, you pay half of the value of the underlying share now and agree to pay the other half at a fixed date. Instalment warrants, therefore, provide investors with the benefits of share ownership, with only partial capital outlay.

By buying the warrant you are gambling that the share price will rise above the price you have to pay to buy it. If the share price falls steeply, the warrants could lose all of their value. You receive the full dividend for the shares - effectively doubling the dividend you receive on your investment. There is a good explanation of them on the ASX's website: www.asx.com.au/investor/warrants/index.htm

FINANCIAL SPREAD BETTING

Small numbers of Kiwis get involved with financial spread betting through mainly British-based bookmakers, says Oddy. The bookmakers predict the level of a share or market at a future date. Investors can bet on whether they believe the market will be higher or lower than that level. For every point by which an investor is right, he or she wins a multiple of the stake. Conversely, for every point wrong, a multiple of the stake is lost. Investors can try their hand at a virtual spread betting platform at www.bullbearings.co.uk

PENNY SHARES

Also known as penny dreadfuls and spec stocks, these are companies whose shares trade for just a few cents. They are popular because investors can buy a lot of shares for a small sum. Because the prices are low, it is believed to be easier for their value to double or treble. But many are cheap because they have fallen on hard times. They may struggle to recover but, if they do, the returns can be spectacular.