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LONDON — The U.K.’s financial regulator warned Tuesday that thrill-seeking young investors are taking on large financial risks, despite most admitting that significant losses could fundamentally impact their lives.
Britain’s Financial Conduct Authority published its warning, based on research it had commissioned, that showed a “new, younger, more diverse group of consumers getting involved in higher risk investments, potentially prompted in part by the accessibility offered by new investment apps.”
The financial watchdog identified assets such as cryptocurrency, crowdfunding, foreign exchange and contracts for difference as higher-risk investments. CFDs are a type of instrument used to bet on the future price of an investment, without actually having to own the underlying asset.
The FCA said the newer “self-directed” investor — people investing on their own behalf — that it had identified skewed more toward being women, under the age of 40, and from Black, Asian and Minority Ethnic (BAME) backgrounds.
The report flagged that this new group was more likely to look at online platforms like YouTube and social media, including Reddit, for investing knowledge, advice and tips.
It categorized those investors taking on higher risk into three broad profiles — those “having a go,” “thinking it through” and “the gambler.” Those in the “having a go” group were more likely to use social media rather than traditional media for investing tips.
The FCA’s warning and research comes after amateur investors on Reddit piled money into firms like GameStop in late January. The move led to losses for Wall Street hedge funds who had bet against the stocks.
At the time, the FCA issued a statement saying “buying shares in volatile markets is risky and you may quickly lose money.”
The more established cryptocurrency bitcoin has also rocketed this year, topping the $60,000 mark earlier in March.
In this latest report, the FCA commissioned consultancy BritainThinks to conduct the research, which surveyed 517 “self-directed” U.K. investors from August through January. Another 45 investors were interviewed in-depth over the telephone, 20 of which then took part in online research to observe their “investing 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, like “enjoying the thrill of investing” and the “status that comes from a sense of ownership,” were solely driving four out of 10 respondents to put money into high-risk, high-return investments.
It highlighted that “novelty and challenge, as well as satisfaction that comes from making their own decisions” tended to be a particularly important motivation for these investors.
By comparison, investors not putting money into high-risk investments, instead opting for “more traditional longer-term types such as stocks or ISAs,” were more likely to be driven by “functional” motivators such as “making their money work harder.”
The research also found these higher-risk investors did not always have a full understanding of the level of risk they were taking on. Over half scored their appetite for risk at below 8, on a scale of zero to 10.
Just two out of five of these higher-risk investors believed losing some money was a genuine danger. Yet 59% of all the investors polled said a significant investment loss would have a “fundamental impact on their current or future lifestyle.”