Estimated reading time: 2 min
This investment is considered high risk by the Financial Conduct Authority (FCA) due to the potential for losses.
What are the key risks?
Potential for total loss of investment
Investments in start-up businesses are often shares, and there is a high likelihood of losing 100% of the invested amount as many start-ups fail. The platform you’re investing through may not have conducted thorough checks on the businesses. It’s crucial to do your own research before investing.
Liquidity issues
Even if the business you invest in succeeds, it could take several years to recoup your investment. The most common ways to get your money back are if the business is acquired or if its shares are listed on an exchange. These events are infrequent. Start-ups rarely pay back through dividends. While there may be an opportunity to sell your investment early through a secondary market, there’s no guarantee of finding a buyer at your desired price.
Diversification is key
Investing all your money in a single business or type of investment is risky. Diversifying your investments reduces your dependence on any single one. It’s recommended not to invest more than 10% of your money in high-risk investments.
Potential dilution of your investment
If you invest in shares, the percentage of the business you own may decrease if the business issues more shares. This could potentially reduce the value of your investment, depending on the business’s growth. New shares could have additional rights that your shares don’t have, which could further reduce your chances of getting a return.
Limited protection in case of issues
The Financial Services Compensation Scheme (FSCS) does not cover poor investment performance. The Financial Ombudsman Service (FOS) also does not cover poor investment performance. For more information on how to protect yourself, visit the FCA’s website here.