What is a Financial Pyramid?

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Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Financial Pyramid”
Many investors structure their portfolios in the form of a financial pyramid. The base of the pyramid is made up of nonvolatile, liquid assets. The next level includes securities that provide both income and long-term capital growth.
At the third level, a smaller portion of the portfolio is allocated to more volatile investments with higher potential returns and greater risk. At the top level, the smallest percentage of the overall portfolio is invested in ventures that have the highest potential return but also pose the greatest investment risk.

This strategic approach gives you the potential to realize significant returns if some of your speculative investments succeed without risking more than you can afford to lose. It’s entirely different from a pyramid scheme, a scam that uses new investor money to pay large returns to earlier investors.
Investment structure designed to break up investments into three main levels – low, middle and high, which correlate with a risk level. Smart and cautious investors will usually put a bulk of investment at the lowest level of the pyramid to ensure profitability and stability. The remaining investments are placed at the middle and high levels depending on the investor’s confidence in the investment, and the amount of risk they are willing to take on. A strong base or lower level of the pyramid is essential for investors to fall back on if other middle and high level investments fail.

By Barry Norman, Investors Trading Academy


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