GameStop and gut instincts: new generation of UK investors cast blind eye to risks

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Popular investment trends such as cryptocurrencies and Reddit ‘meme stocks’ such a GameStop Corp (NYSE:GME) have attracted thousands of younger investors into using new investment apps without a good idea of the financial risks involved, according to research by the UK financial watchdog.

The Financial Conduct Authority is warning that higher-risk products, also including foreign exchange trading, CFDs, options, investment-based crowdfunding and peer-to-peer lending, “may not always be suitable for these consumers’ needs”.

This is because the research carried out by the FCA with more than 500 people currently engaged or considering self-directed investing indicated that nearly 59% of young investors surveyed claimed that a significant investment loss would have a fundamental impact on their current or future lifestyle.

READ: GameStop, AMC Entertainment and the democratisation of investing – meet the Reddit users turned traders

Over four in 10 new investors don’t view “losing some money” as one of the risks of investing, even though their whole capital is likely to be at risk, the research also found.

For many newer or less experienced self-directed investors, emotions and feelings such as enjoying the thrill of investing, and social factors like the status that comes from a sense of ownership in the companies they invest in, were key reasons behind their decisions to invest, with more than a third of those surveyed not listing a single functional reason in their top three motivations for investing.

Gut instinct, shortcuts and risky bets 

Despite a lack of experience, most new investors have a strong reliance on gut instinct and rules of thumb, with almost four in five (78%) trusting their instincts on when it’s time to buy and to sell, and the same proportion agreeing with the statement that “there are certain investment types, sectors or companies I consider a ‘safe bet’”.

The research found new investors tended to skew younger and be more gender-balanced, more BAME and more C1C2DE11 than the ‘traditional’ audience who have been investing for longer.

New investors are roughly divided into three types, the report suggested: those looking to ‘have a go’, who tend to be motivated by a combination of factors such as making money and emotional factors like the challenge and novelty investing, those who have some professional or academic background in maths, finance, economics or business and who believe this gives them an edge to see patterns and ‘think it through’, plus a group who see betting as being similar to gambling.

Those having a go, often look to “learn through doing and adopt shortcuts to decision making which can include going with ‘hyped’ options they have heard a lot about, or viewing mainstream, big name brands as a short-cut to what they believe are ‘safe’ investing”, such as investing in big tech companies.

Younger ‘thinking it through’ investors with some experience in related subjects feel they have high levels of knowledge and are very confident in their abilities, “although this can be misplaced in reality”, the report said. This group are often more motivated by social factors, such as feeling like ‘an investor’ and being able to prove their know-how when talking to others.

These more experienced investors use shortcuts built up from experience and background knowledge, such as seeing certain data patterns as indicating a ‘safe choice’.

The gamblers, who see investing as similar to betting, are particularly attracted to short-term high-risk, high-return options like forex, CFDs and options.

This group were found to be usually more emotionally motivated by the thrill and excitement and are looking to ‘beat the game’ and ‘win’.

Many of these new, younger investors have got involved in higher risk investments after being prompted in part by the accessibility offered by new investment apps, the report said.

Of newer investors, 51% used newer platforms, which were listed by the FCA as Trading 212, Coinbase, eToro, Moneybox, Moneyfarm, Wealthify, Upstart, FXPro, Plus500 (LON:PLUS), Binance, Peerform, Degiro, Kraken, Pepperstone and Lending Club, while only 39% of those who’d been investing for more than three years used these apps. 

Of those who had been trading for longer, 54% were using ‘heritage plaforms’, which included Hargreaves Lansdown (LON:HL.), Vanguard, Fidelity, Interactive Investor, AJ Bell (LON:AJB), IG (LON:IGG), Saxo Markets, Funding Circle, Prosper and Avatrade. 

‘We are worried these products may be unsuitable’

“Much of the consumer investments market meets consumers’ needs. 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,” said Sheldon Mills, executive director, Consumer and Competition at the FCA

He added: “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. Investors need to be mindful of their overall risk appetite, diversifying their investments and only investing money they can afford to lose in high risk products.”

It might feel like a game to many of these investors but the figures on screen are real, said Danni Hewson, financial analyst at AJ Bell: “Real money, real risk. And when it all goes wrong, which any seasoned investor knows it can, the end result can be shattering.”

She added: “The research suggests many are often relying on gut instinct or advice gleaned from social media rather than established sources of information with rigorous checks and balances. And the high, when it comes, can override everything, clearing the way for unscrupulous scammers to pray on their vulnerabilities.”

Not the whole story

Some of the research findings are extremely concerning but the sample size of the survey of just over 500 investors, skewed towards those investing in or considering investing in high risk, high return types of investments, may not provide a nuanced wider picture, said Moira O’Neill, head of personal finance at Interactive Investor.

“20 years or so on from the bursting of the dot com bubble, stock market opportunists have always been around – and too many speculative investors get their fingers burned time and again. The trouble is, if you talk to them alone, and fail to look at the bigger picture, you don’t learn very much. So, today’s FCA report feels almost like a wasted opportunity,” O’Neill said.

It is premature to draw any long-term trends, least of all draw sweeping conclusions about younger investors, but she noted that the past year has seen a revolution in savings habits, with Interactive Investor’s younger investors tending to have more investment trust exposure and less direct equity exposure than older generations.

“For every ‘GameStop’ in the top 10 most bought funds over the last year, you’ll find several solid blue chips running alongside it. There’s no question that many younger investors have participated in some risky investing behaviour over the last year, but it is not the whole story,” O’Neill said.

Although it is encouraging that social media is prompting a more diverse range of investors to dip their toe in the stock market for the first time, Susannah Streeter, senior investment analyst at Hargreaves Lansdown, said it is important that they don’t just follow herd instincts but instead look at assets as a long term strategy, rather than for speculative short term gains. 

“In many ways trading apps have democratised the whole investment process but they need to be used thoughtfully. If you are trading on the go, you need to ensure you give each trade as much consideration as you would if you were sitting in a quiet place at home, to try and ensure you are not swept up in any hype.

“There are clear financial dangers if traders indulge in highly speculative behaviour and put money into products as part of a gaming mentality rather than pursuing a well thought out investment strategy.”

A spokesperson for Freetrade, not one of the new platforms cited by the FCA but claiming over 600,000 UK users of its app and website, said the company “fully agrees” that highlighting how important it is for new investors to carefully assess the levels of risk that they are taking when investing.

“We want to take an active role in helping new and experienced customers learn more about financial markets,” the spokesperson added.

With the FCA report also drawing attention to the added risks associated with complex, leveraged products, like CFDs, which are often aggressively marketed at retail investors, Freetrade said its position has always been than the sale of these products to retail customers “should be banned outright in order to protect retail customers from potential harm”.

Showing the ongoing backing for such commission-free apps, Freetrade today announced that it has raised US$69mln in Series B funding.

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