Distressed debt investing – why it is risky

Know the risks that come with distressed debt investing before you sink your teeth into it.

14:21 03 February 2013

Investing is a process wherein investors put in a portion of their resources into an investment vehicle over a specific period of time to earn interest. It is safe to say that every type of investment has risk. 

 

However, distressed debt investing is usually the most risky. Some companies or government entities sometimes enter a period of financial distress. When this happens, shareholders will most likely to try to sell their securities to other investors. This is what we call distressed debt investing. 

 

Distressed debt investing is really risky especially for novice investors. It takes a lot in order to make money from this. If you’re unsure on how to gauge if the company will bounce back, you may lose a lot of money from this.

 

So, why do people invest on distressed companies? Putting your money when the boat is sinking may not sound very appealing to you. However, a lot of people have made a lot of money through distressed debt investing.

 

When companies are in the brink of default, the price of their shares will go down dramatically. Investors who buy these shares can potentially make a lot of money if the company bounces back in the future.