The appearance of apps and platforms that allow anyone to make investments, either in the stock market or in cryptocurrencies, has generated a boom in retail investors, especially young people who began to invest during the coronavirus pandemic.
A recent investigation by the BBC Business Daily radio show revealed that many of these investors under the age of 35 have one thing in common: Dear
The phenomenon occurs in many parts of the world. An example is India, where the number of retail investors has doubled in the past two years, with some 20 million new investors, many from humble origins and inexperienced in the stock market.
Nachiket Tikekar, is 23 years old and studies business administration. Since the pandemic began, he has invested all his savings and those of his parents – about $ 30,000 – in stocks.
“The covid crisis has made people realize that passive income is sorely needed. That’s what prompted me to invest,” he told Ed Butler, the Business Daily host.
Nachiket said that the Indian stock market suffered two sharp drops since he started investing, but that did not deter him. Quite the opposite.
“I think the market crashes present an opportunity, because there are very good stocks at a very good price,” he said.
“You have to be resilient. If you want to be successful as an investor, you have to stay calm while the market gets back on track ,” he said.
This strategy – he pointed out – allowed him to generate profits of between 30% and 40%.
The risks
But experts and authorities fear that this growing interest in online investments and financial speculation could provoke a new crisis, such as the so-called “dot-com bubble” when the Nasdaq stock index collapsed two decades ago.
Others warn that the most imminent danger is that many of these young and inexperienced investors, who risk their savings, either on the stock market or by buying cryptocurrencies, will lose all their money .
In the UK, the Bank of England has issued explicit warnings about the increase in the number of risky investments.
Sarah Pritchard is executive director of markets for the UK Financial Conduct Authority (FCA), which is trying to alert these rookie investors through platforms like Instagram and TikTok.
Pritchard told the BBC why she is alarmed by the growing appetite for risk of these young new investors.
“Our research shows that people between the ages of 18 and 40 are twice as likely to invest in high-risk investments, but when you inquire about their tolerance for risk, it is actually low,” he said.
“To give an example: 70% of the young people we surveyed believed that the purchase of crypto assets was protected, so any loss would be compensated, when it is not.”
The expert also noted that many inexperienced investors do not know that their assets can be reduced rather than increased.
“Almost half of investors who invest without being financially advised do not realize that they can lose money because of the risk of their investment. That is what worries us,” he said.
Pritchard noted that there have always been people looking to maximize their income through investing, but ” what’s new is the speed with which you can do it, with the increasing digitization of our lives.”
According to FCA research, many young people start making risky investments as a way to compete with friends or family, or motivated by what they see on social networks and other media.
While these rookie venture capitalists became active during the pandemic, Pritchard doesn’t believe the phenomenon will end when the coronavirus is no longer a threat.
“We know that a million people (in the UK) bought or increased their high-risk investments in the first six months of the pandemic, but we think this is here to stay, as the market changes.”
Is it that bad?
But is it so bad that young people are taking more risks with their savings?
After all, it’s common to be riskier when you’re young.
And financially, it might be better to take bigger risks when you have less to lose and more time to get it back.
Lesley-Ann Morgan led a global study that analyzed investment trends in more than 20 countries for investor Schroders Wealth Manahement.
Morgan told the BBC that many young people found they had more money available than usual during the pandemic.
“Many told us that they saved more than they anticipated and had invested more than they planned because, on the one hand, they were spending less money because they could not get out as much because of the covid, but also because their income had increased during the pandemic as consequence of state aid “.
Many of these new investors tended to ignore traditional strategies, betting on stocks in tech and internet companies.
“This did not surprise us because these types of companies benefited from the pandemic,” said the expert.
But young people also showed a lot of interest in other novel investments, such as electronic cars, biotechnology and cryptocurrencies.
Morgan agreed with the FCA report that noted that social media plays an important role in promoting this type of investment.
“I think many people are being bombarded with information on social media to invest in this type of business,” he said.
As for the damage that these high-risk investments can cause, he believes that betting on riskier assets when you are younger and have a long time before retiring is “normal and very acceptable”
However, “the real question, is how many of your assets are in these risk investments and if they could handle a 20%, 30% or 40% drop, as we have seen in the case of some cryptocurrencies this year.”
Another key point, he said, is where the money invested comes from.
“If it’s money you need to pay the rent, for example, and you’re using it for what is essentially a gamble, that’s a problem .”
“But generally speaking, if you have more time to wait until you make a profit, riskier assets make sense when you are younger,” he acknowledged.
However, he clarified that, according to the study he conducted, many of the younger investors do not seem to have the patience required to see those long-term gains.
“We asked investors how often they check their investments and many did it at least once a week.”
“That makes me think that people are trading on the stock market more than investing in the long term , which causes me some concern,” he said.
