Nearly every investment involves some degree of risk—that’s simply the nature of putting money to work for you. But there’s a meaningful difference between the everyday risk that comes with a diversified portfolio and the kind of exposure that can wipe out a significant portion of your savings in a short period of time.

Some investment categories are known for their potential to generate outsized returns, but they carry equally outsized downside risk. If you’re not fully prepared for what that can look like in practice, it’s worth understanding what you’re getting into before committing any capital.

Penny stocks

These shares in small companies typically trade for less than five dollars—often far less. The low price per share can make them feel like an accessible entry point, but that low price usually reflects real uncertainty about the company’s prospects. These stocks often trade on loosely regulated exchanges, have limited publicly available financial information, and can be targets of “pump and dump” schemes in which prices are artificially inflated before insiders sell off their shares. Liquidity may also be thin, meaning that it can be difficult to sell your shares when you want to. The combination of low transparency, regulatory gaps, and susceptibility to manipulation makes penny stocks a high-risk category for many investors.

Leveraged and inverse ETFs

Leveraged exchange-traded funds are designed to deliver multiples of the daily return of an underlying index—two or three times the movement, up or down. Inverse ETFs aim to move in the opposite direction of their benchmark. Both are built for short-term tactical use, not long-term holding, and they behave in ways that catch many investors off guard. Due to a mathematical effect called volatility decay, a leveraged ETF held over weeks or months can lose significant value, even in a market that ends up roughly flat. These products require active monitoring and a strong understanding of how they work. Holding them the way you’d hold a conventional index fund is a common and potentially costly mistake.

Options trading

Such contracts give you the right—but not the obligation—to buy or sell an asset at a specified price within a set time frame. Used conservatively, options can serve legitimate risk-management purposes. But in the hands of investors who don’t fully understand the mechanics, they can generate losses that exceed the original investment. Selling certain options can even expose you to theoretically unlimited downsides. Options also have expiration dates, which means time works against you in a way it doesn’t with stock ownership. This is a category that may reward deep knowledge and punish guesswork.

High-yield bonds from distressed issuers

Sometimes called junk bonds, high-yield bonds are issued by companies with below-investment-grade credit ratings. The higher interest rates they offer are compensation for the higher likelihood that the issuer may struggle to meet its obligations. In stable economic conditions, some investors incorporate high-yield bonds as part of a diversified fixed-income strategy. But individual high-yield bonds from financially distressed companies carry a meaningful risk of default, which can result in partial or total loss of principal. Without the expertise to assess issuer-specific credit risk, this category is difficult to navigate safely on your own.

None of these routes is inherently off-limits for every investor—context, risk tolerance, and overall financial situation all matter. But each one carries downsides that aren’t always apparent at a glance. If any of them are on your radar, speak with a financial advisor to determine whether the potential upside is worth the risk.