Online trading: Potent cocktail of social media and thrill-seeking investors creates ‘crypto wild west’
This morning the FCA said young people are increasingly engaging with risky investments like foreign exchange and cryptocurrency, despite not having the capacity for loss if the investment goes wrong.
The warning lays bare a large group of thrill-seeking youngsters, solely interested in speculative short term gains.
The financial watchdog found that nearly two-thirds of young investors claimed that a significant investment loss would have a fundamental impact on their current or future lifestyle.
The findings and subsequent warning simply show how concerned the watchdog is that “the crypto wild west could have a serious impact on the financial stability of consumers who dabble in products they don’t fully understand,” commented Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown in the City.
Social media
The FCA stressed that a relatively new group of young self-investors are more reliant on contemporary media like YouTube and social media for tips and news, and often base their investment decisions on posts, blogs and videos they consume.
This highlights how “a new breed” of younger investors are getting involved in high-risk investments, that could seriously impact their financial stability, partly because they’re being persuaded into it by social media influencers, Streeter said.
“What is a particular warning light in this research is the finding that many investors who put money into high risk products appear to be thrill seekers, investing for a challenge, for competition and for the novelty factor rather than conventional reasons like saving for retirement,” she noted.
For example, 38 per cent of those surveyed did not list a single functional reason for putting money into their top three investments.
Danni Hewson, a financial analyst at AJ Bell, said today that the research suggests many are not relying on established sources of information that have some rigorous checks and balances.
“A worryingly large number seem to be blind to the pitfalls. Worse, almost half think there is no danger,” she noted.
“The high, when it comes, can override everything, clearing the way for unscrupulous scammers to pray on their vulnerabilities,” Hewson added.
Although Streeter called it “encouraging” that social media is prompting a more diverse range of investors to dip their toe in the stock market for the first time, she stressed it is important that “they don’t just follow herd instincts and look at assets as a long term strategy, rather than for speculative short term gains.”
Trading apps
With the online trading sector experiencing somewhat of a boom in recent years, high-risk investments are just a few clicks away on dozens of relatively new mobile apps.
“Trading apps have democratised the whole investment process but they need to be used thoughtfully,” Streeter warned.
“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.”
Most of the established investment platforms do not provide chat communities, which often fuel short term trading behaviour.
Financial resilience
Finally, the FCA research illustrated that the new generation of investors may have the lowest levels of financial resilience, making them more vulnerable to investment loss.
“To maintain financial resilience, it’s highly advisable to build up a pot of three to six months of essential expenses to fall back on before putting money into investments,” Streeter explained.
The FCA stressed some young investors simply chase after hottest stocks, thereby running the risk that they acquire them at an inflated price.
Streeter told wanna-be investors to “think about your investments like a planet of core investments and more riskier shares as satellites orbiting around it.”
“Or another way of looking at it is viewing individual stocks as side dishes to your well diversified main plate of investments.”