Many retail investors are taking decisions influenced by competition with friends or family and do not realize that high-risk investments such as cryptocurrency are not regulated, according to research from the UK’s Financial Conduct Authority (FCA).
Retail investment has boomed over the last 18 months, with millions of new brokerage accounts opened and investment ideas becoming a popular topic of conversation on social media networks like Instagram and Reddit. But regulators are worried that new investors may not understand the risks they are facing.
The FCA research, which polled the views of 1,000 people aged between 18 and 40 who invest in ‘high risk’ products, finds that 76 percent say they are driven by competition with people they know such as family and acquaintances.
Underlining the influence social media has on investment decisions, 58 percent say they are influenced by hype on social platforms or in the news.
The survey also finds that investors are taking a short-term approach to investing, despite acknowledging that stabler gains are preferable. Of the respondents, only 21 percent say they plan to hold their most recent investment for more than 12 months. At the same time, 60 percent say they would prefer investments with less volatility.
Perhaps most worrying for regulators is that many of the surveyed investors do not realize the investments they are participating in do not come with protection. The majority of respondents who invest in forex (57 percent) and cryptocurrency (69 percent) incorrectly think these products are regulated by the FCA.
‘We are seeing more people chasing high returns,’ says Sarah Pritchard, executive director of markets at the FCA, in a statement. ‘But high returns can mean higher risks. We want to give consumers greater confidence to invest and help them to do so safely, understanding the level of risk involved.’
The FCA has launched a new strategy, called InvestSmart, to try to explain the risks associated with products like forex and cryptocurrency. The regulator says it will use social media and other online forums to attempt to influence retail investors in the places where they are already receiving information.