Britain’s Financial Conduct Authority said young investors are taking on “big financial risks” by investing in cryptocurrencies and foreign exchange because of the accessibility of new investment apps.
A younger, more diverse group of consumers are buying high-risk investments, however the products may not be suitable, the financial regulator warned.
Almost two-thirds of those polled by the FCA study said significant investment loss would have “a fundamental impact on their current or future lifestyle”.
"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.
Tackling harm in the consumer investment market is a priority for the FCA, which has commissioned the BritainThinks study into self-directed investors’ behaviours, attitudes and financial resilience.
It follows the watchdog's "call for input" to the country's consumer investment industry last September, as it sought to overhaul the scandal-hit sector.
The UK’s investment market, which has more than 5,000 advice firms and more than 27,000 advisers, has been plagued with a series of financial scandals over the past few decades.
However, the latest study found that many investors are investing on their own with their actions driven by the emotions and feelings such as enjoying the thrill of investing, and social factors such as the status that comes from a sense of ownership in the companies they invest in.
Britain’s newer audience for high-risk investments has a more diverse set of characteristics than traditional investors, with more females, people under 40 and those from a Bame (Black, Asian and Minority Ethnic) background.
This newer group rely more on YouTube or social media for investment tips and news, the FCA said, a trend prompted by the accessibility offered by new investment apps.
Since the start of the pandemic a year ago, millions of Generation Z and millennials across the globe have turned to social media to learn money skills during the pandemic, with the social media site TikTok offering video tips on the basics of personal finance.
The FinTok hashtag, for example, has been driven by an explosion in bored novice traders signing up for commission-free trading platforms such as Robinhood and eToro during the pandemic lockdowns.
The FCA study found that investors are often very confident about their investment choice and knowledge, however, it also shows a lack of awareness or belief in the risks of investing.
More than four in 10 do not consider “losing some money” as a risk of investing, even though many investments place their whole capital at risk.
In some cases, the FCA found that investors can lose more than they initially invested for example with contract for difference investments.
“These investors also have a strong reliance on gut instinct and rules of thumb, with almost four in five agreeing 'I trust my instincts to tell me when it’s time to buy and to sell' and 78 per cent also agreeing 'there are certain investment types, sectors or companies I consider a ‘safe bet',” the FCA said.
The new, younger investors may have the lowest levels of financial resilience making them more vulnerable to investment loss, the financial body said.
The FCA urged young investors to evaluate whether an investment is safe by asking themselves key questions such as whether they understand the investment being offered to them and whether they are protected if things go wrong.