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LONDON – The UK’s Financial Regulator warned on Tuesday that exciting young investors are taking huge financial risks, although most admit significant losses could profoundly affect their lives.
The UK’s Financial Conduct Authority issued its warning, based on research it commissioned, that “a new, younger and more diverse group of consumers are involved in higher-risk investments, possibly due in part to the availability of new investment apps.” “.
The financial watchdog identified assets like cryptocurrency, crowdfunding, foreign exchange, and contracts for difference as riskier assets. CFDs are a type of instrument used to bet on the future price of an asset without actually having to own the underlying asset.
The FCA said the newer “self-directed” investor – people who invest on their own behalf – has found they are more inclined to be women under 40 of black, Asian, and ethnic (BAME) backgrounds.
The report indicated that this new group would be more likely to look to online platforms like YouTube and social media, including Reddit, for knowledge, advice and tips.
Investors who take higher risk have been categorized into three broad profiles: “Try it out”, “Think it through” and “Player”. Those in the Participate group were more likely to use social media than traditional media to invest in tips.
The FCA’s warning and research comes after amateur investors on Reddit piled money into companies like GameStop in late January. The move resulted in losses for Wall Street hedge funds that had bet against the stocks.
At the time, the FCA issued a statement stating, “Buying stocks in volatile markets is risky and you can lose money quickly.”
Meanwhile, tweets from Tesla CEO Elon Musk and other celebrities who backed Dogecoin sparked a rally in the meme-based cryptocurrency.
The more established cryptocurrency Bitcoin has also skyrocketed this year, surpassing the $ 60,000 mark in early March.
“Enjoy the thrill of investing”
In this latest report, the FCA hired consultancy BritainThinks to conduct the investigation, which interviewed 517 “self-directed” British investors from August to January. Another 45 investors were interviewed in detail by telephone, of which 20 participated in online research in order to observe their “investment journey”. The report also took into account existing research on self-directed investors to inform the study.
The FCA found that emotional and social motivators such as “enjoying the thrill of investing” and “status that comes from a sense of ownership” led only four in ten respondents to invest in high-risk, high-return investments.
It was highlighted that “novelty and challenge, as well as satisfaction resulting from own decisions” were a particularly important motivation for these investors.
In comparison, investors who did not invest money in risky assets but opted for “more traditional longer-term types like stocks or ISAs” were more likely to be driven by “functional” motivators such as “make harder money work”. “”
The research also found that these higher risk investors did not always have a full understanding of the risk they were taking. Over half had a risk appetite of less than 8 on a scale from 0 to 10.
Only two in five of these riskier investors thought there was a real risk of losing some money. Yet 59% of all surveyed investors said that a significant loss of investment would have “profound effects on their current or future lifestyles”.
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