Young Investors Prone to Risky Investments, Rely on Social Media for Tips: Survey

The latest report by the Financial Industry Regulatory Authority (FINRA) clears the fog on investor habits in the United States. Are retail investors more knowledgeable, do they engage in more risk, and from where do they get their investment information?

Report’s Background

Together with FINRA Investor Education Foundation and FGC Global, the report covers the survey findings from FINRA Foundation’s 2021 National Financial Capability Study (NFCS). Titled “Investors in the United States: The Changing Landscape”, the report builds upon the survey with updated insight on the role of social media in retail investing and motivations.

The report combined a state-by-state online survey covering 27,118 US adults, with the investor survey of 2,824 adults who have investments outside of retirement funds.

The report’s focus is not surprising, given the explosive growth of social media in retail. For instance, it took r/WallStreetBets Reddit forum nine years to reach the 1 million user milestone by the end of 2020. In the aftermath of the GameStop/AMC short squeeze, the financial forum grew to 13.3 million users in two years.

Report’s Highlights

• The younger the investor, the riskier investment behavior, measured by an uptick in option/margin trading, at 36%, under the 35 age bracket.
• Predictably, there has been a surge of new investors by 25% within the last two years, compared to a 21% increase in the last 8 years.
• The drastic increase in cryptocurrency investors at 33%, up from 18% in 2018. Over half of new investors under 35 within the last two years are crypto investors.
• New investors under 35 took part in “meme stock” trading, such as GameStop, AMC, and Blackberry, at nearly 40%, compared to just 4% for the over-55 age bracket.
• Online trading via websites is the most common gateway, at 62% (with less than $50k portfolio), followed by mobile apps at 44%, which younger investors more favor.

Although most investors rely on tools integrated within brokers’ platforms for trading, younger investors use social media for tips, at 60%. Comparatively, only 35% within 35-54 use social media, with only 8% for the over-55 age group.

Investing platforms are not clear enough on their fee structure. 17% of investors don’t know what fees they are paying, while 21% think they don’t pay any fees. Even among mutual fund investors, 38% erroneously think they don’t pay fees.

Reminder, all mutual funds have fees. Otherwise, there wouldn’t be an incentive to run them.

Lastly, motivation for most investors is long-term gains, at 96%, vs. making money quickly, at 72%. Younger investors are most likely to invest outside of financial gains, such as social/environmental responsibility within the ESG framework.

Younger Investors Get their Financial Tips Majorly from Social Media

Breaking down the actionable information for investing, the NFCS report found that 26% of investors largely rely on tools provided by brokers, or financial advisory firms. 47% of respondents use these tools in conjunction with other sources, such as business articles, online videos, newsletters, podcasts, and social media groups.

However, the most significant outlier is the percentage of users primarily relying on recommendations from financial professionals, at 38%. In contrast, tips from friends and family members are taken very seriously at 16%, while 45% of respondents take them somewhat into account.

Regarding financial source diversification, 67% of investors under 35 use at least six different sources, compared to those over 55 who are less likely to use multiple data flows.

Under 35 investors rely most on the world’s largest video-sharing platform, Youtube, at 56%. For that age group, the second best social media channel for investing is Reddit, at 41%, followed by an even split between Facebook, Twitter, and Instagram, at ~35%.

TikTok has also gained much traction among younger investors, at 28%, which is rarely used by other age groups, at 7% for 35-54, and just 1% for the over 55 age group.

Investment Risk Perception

As noted in the highlights, the 18-34 age group is the most likely to invest in cryptocurrencies at 62%, with 53% already having invested. This contrasts with the over-55 age group, at 9% and 7%, respectively.

Likewise, only 42% of younger investors perceive cryptocurrencies as extremely or very risky, with over half of older investors perceiving them as such. This trend continues on “meme stock” trading. Although 79% of respondents didn’t trade in GME/AMC/BB stocks in 2021, younger investors overwhelmingly participated in the social media event, at 39%.

New traders with less than two years of experience are most prone to exceedingly risky margin trading, at 19%. Expectedly, this too is led by the 18-34 age group, at 23%. This picture is only interrupted when asked about taking a substantial risk, as investors with more trading experience are slightly more likely to do so, at 20% vs. 19%.

Interestingly, when asked what they would do if the stock market were to drop or increase by 20%, most respondents said they would do nothing or don’t know. If stocks were to drop, 40% said they would buy stocks/funds, while 24% said they would sell stocks in the case of a 20% increase.

The preferred method for placing trades is still a classic website, at 62%, but younger investors (18-34) prefer to use mobile apps, at 78%. Equally, those with less than two years of trading experience use a mobile app, at 82%.

The report reveals a stark contrast in age-based investing practices, reflecting emerging technologies and social media tools. Given this bifurcation, younger investors are more prone to risk and have less knowledge. Case in point, the 18-34 age group, alongside new investors, had answered incorrectly to most finance quiz questions compared to other age groups.

This article originally appeared on The Tokenist

By Tim Fries