Young investors are taking bigger risks for ‘thrills’ amid Reddit-Robinhood frenzy, crypto surge

Younger investors are taking on bigger financial risks, including in cryptocurrencies, the City’s regulator has warned.

“We want to make sure that we encourage the ability to save and invest for lifetime events, particularly for younger generations, but it is imperative that consumers do so with savings and investment products that have a suitable level of risk for their needs,” Sheldon Mills, executive director of consumer and competition at the Financial Conduct Authority, said in a statement.

The research by the watchdog, which is inclusive of a survey, comes after the GameStop saga earlier this year and a general surge in retail investing since the beginning of the pandemic. In January, the US retailer’s shares rose by more than 2,700% after a band of traders from the online forum Reddit led a campaign to boost its share price, squeezing hedge funds that had shorted the stock.

Following the turbulence, Robinhood – a zero-commission trading app that was used by many of those traders – has been under scrutiny over concerns it may diminish users’ sense of risk in the gamification of trading.

READ GameStop’s month of mayhem — Everything you need to know about Reddit, hedge funds and Robinhood

The FCA found that there is a “new, younger, more diverse group of consumers” getting involved in high-risk investments, which also includes foreign exchange trading. This trend, it said in its 23 March press release, could be due to the accessibility offered by new investment apps.

The survey, conducted with consultancy BritainThinks, includes the responses of 517 self-directed investors, defined as those who are making investment decisions on their own behalf. It was conducted from 18 August last year to 20 January 2021. Of those surveyed, nearly two thirds claim that a significant investment loss would have a fundamental impact on their current or future lifestyle.

For many of those polled, key reasons for investing included the feeling of the thrill of investing and the status that comes from a sense of ownership in the companies they invest in.

The FCA noted a “gambler” type of investor, who sees investing as a type of “betting”.

“The gambler [is] usually more emotionally motivated by the thrill and excitement and are looking to ‘beat the game’ and ‘win’ and is “usually more emotionally motivated by the thrill and excitement and are looking to ‘beat the game’ and ‘win’”, the FCA said in its report.

According to the report, 51% of those who had been investing for less than three years used new platforms, such as Trading 212 or eToro, as opposed to 39% among those who had been investing for longer.

“This is particularly true for those investing in high-risk products for whom the challenge, competition and novelty are more important than conventional, more functional reasons for investing like wanting to make their money work harder or save for their retirement,” the FCA’s report said.

READ GameStop, Nokia, AMC trading hype bolsters Hargreaves Lansdown

“Much of the consumer investments market meets consumers’ needs,” added Mills. “But we are worried that some investors are being tempted – often through online adverts or high-pressure sales tactics – into buying higher-risk products that are very unlikely to be suitable for them.”

The newer audience identified by the FCA “has a more diverse set of characteristics than traditional investors,” the regulator said. “They tend to skew towards being female, under 40 and from a Black, Asian and minority ethnic background.” The investors are often more reliant on social media for tips, the research found.

A new breed of younger investors are getting involved in high-risk investments, that could seriously impact their financial stability

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the warning shows just how concerned the FCA is “that the crypto wild west” could have a serious impact on the financial stability of consumers who dabble in products they don’t fully understand.

“The financial watchdog’s research highlights how a new breed of younger investors are getting involved in high-risk investments, that could seriously impact their financial stability, partly because they’re being persuaded into it by social media influencers,” said Streeter.

To contact the author of this story with feedback or news, email Bérengère Sim

Most Related Links :
editorpen Governmental News Finance News

Source link

Back to top button