According to a recent Finra Investor Education Foundation survey, young investors are learning as they go and may develop negative habits along the way.
Two thousand eight hundred twenty-four respondents who were 18 or older participated in the study for the report “Investors in the United States: The Changing Landscape” between July and December 2021.
What specifically are they doing that is so dangerous? Options trading, margin purchasing, meme stock speculation, dabbling in cryptocurrencies, and doing all of this primarily for amusement or short-term gain. They continue to use YouTube as their primary resource for learning about investment.
It makes sense that people between 18 and 34 only correctly answered four out of the 10 questions on the survey’s quiz on investing knowledge. As an illustration: False or true An investment’s historical performance is a reliable predictor of future outcomes.
Options Trading
Only one in five investors claimed to have traded options, which are only contracted to purchase and sell stocks rather than the underlying securities. Of the demographic of people aged 18 to 34, 36% had taken part, compared to only 8% of those aged 55 and over, which significantly skewed that number.
The most important statistic in this analysis is that 25% of people trading options had less than two years’ worth of investment expertise. Many survey respondents claimed they had only recently begun investing or had only recently stepped up their investing activities during the Covid-19 outbreak.
Trading options is not a wise first step. Furthermore, fees are typically more expensive than conventional trading, making it even more dangerous and speculative when volatility increases.
Trading On Margin
Combining options with margin trading, essentially the “buy now, pay later” variation of stock trading, can be deadly, especially for young novice investors.
In a volatile market, borrowing to purchase shares can leave you stuck paying a sizable wager if the price falls. However, younger investors were likelier to make margin purchases than their older counterparts.
And we’re not just talking a little bit here. The best-suited non-retirement accounts for margin trading have investable assets between $50,000 and $250,000.
Meme Stocks And Crypto
Talking about youthful investors being more interested in cryptocurrencies than their more experienced peers is practically a cliché at this point. So it should be no surprise that 53% of young investors reported having invested in cryptocurrencies, compared to 33% of investors aged 35 to 54 and 7% of investors aged 55 and beyond. Less than half of the younger cohort said that cryptocurrency was dangerous. (Ask them again the following year; the responses may vary.)
Similarly, meme stocks like GameStop GME, +1.07%, AMC, -5.18%, or BlackBerry BB, -0.94%, drew 39% of young investors but only 19% of investors aged 35 to 54 and 4% of investors aged 55 and above.
Additionally, compared to their older counterparts, younger individuals trade more frequently and pay more fees (while paying little attention to those expenses). Over time, fees may eat up a sizable return on your investments. We can only hope that this is a situation we can learn from in the future. If you jump right in and discover that you’re paying a ton in fees, you may rethink your investing strategy.
Investing In Education Channels
However, to alter the behavior of young investors, education must eventually be provided to them. Another warning sign is that most young investors get their portfolio guidance from YouTube. Additionally prominent on the list are Reddit, Facebook META, +2.82%, Twitter, and Instagram.
Where are they supposed to receive their knowledge from? Starting with the tools and investing research that their brokerages offer. However, the survey indicated that only 26% of respondents heavily depended on those. The same is true for business articles, direct counsel from professionals, and recommendations from dependable friends and relatives.
The report’s main finding was that people concerned about the next generation’s financial education should focus less on attracting them to conventional channels and more on reaching them where they are right now.
According to Mottola of the Finra foundation, “There’s certainly an educational opportunity here, but that’s something that, quite frankly, we’re still trying to comprehend.” Work still needs to be done, says the speaker.
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