Why many young people are making risky investments (to the concern of some authorities)

A young man wasting money

The ease of investing is leading many young people to take many risks with their money, some warn.

The appearance of apps and platforms that allow anyone to make investments, whether in the stock market or in cryptocurrencies, has generated a boom in retail investors, especially young people who started investing 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 doubled in the past two years, with some 20 million new investors, many from humble beginnings and no stock market experience.

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 much needed. That’s what got me into investing,” he told Business Daily host Ed Butler.

Nachiket said that the Indian stock market suffered two sharp falls since he started investing, but that did not deter him. Quite the contrary.

“I think market crashes present an opportunity, because there are very good stocks at a very good price,” he said.

“You have to have resilience. 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%.

An Indian woman holds money in one hand and a piggy bank of coins on the note

In India, some 20 million people started investing their savings for the first time during the pandemic.

The risks

But experts and authorities fear that this growing interest in online investments and the financial speculation could cause a new crisis, like the so-called “dotcom 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 in the stock market or buying cryptocurrencies, lose all your money.

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In the UK, the Bank of England has issued explicit warnings about the rise in the number of risky investments.

Sarah Pritchard is executive director of markets for the UK’s Financial Conduct Authority (FCA), which is trying to alert these novice investors through platforms like Instagram and TikTok.

Pritchard told the BBC why he is alarmed by growing risk appetite of these new young investors.

“Our research shows that people between the ages of 18 and 40 have the double probability of investing in high-risk investments, but when you ask about their tolerance for risk, it’s 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 that any loss would be compensated, when it is not.”

The expert also pointed out that many inexperienced investors do not know that their assets can be reduced, instead of increased.

“Nearly half of the investors who invest without being financially advised they do not realize that they can lose money for the risk of your investment. That is what concerns us,” he said.

Pritchard noted that there have always been people looking to maximize their income through investments, but “what’s new is speed with the you can do it, with the increasing digitization of our lives”.

A woman looking at an investment app while drinking coffee

Thanks to technology, today you can invest in the stock market or cryptocurrencies from the comfort of your armchair.

According to FCA research, many young people start risky investing as a way to compete with friends or family, or motivated by what they see on social media and other means.

While these fledgling venture capitalists became active during the pandemic, Pritchard doesn’t think the phenomenon will end when the coronavirus is no longer a threat.

“We know that a million people (in the UK) bought or raised their high-risk investments in the first six months of the pandemic, but We believe 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 is common to be more risky when one is 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 looked at investment trends in more than 20 countries for investor Schroders Wealth Manahement.

Morgan told the BBC that many young people found that they had more money on hand 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 couldn’t go out as much because of covid, but also because their income had increased during the pandemic as as a result of state aid”.

Many of these new investors tended to ignore traditional strategies, betting on shares of technology and internet companies.

“This did not surprise us because these types of companies benefited from the pandemic,” said the expert.

cryptocurrencies

Many of the novice investors bet on cryptocurrencies.

But young people also showed a lot of interest in other innovative investments, such as electronic cars, biotechnology and cryptocurrencies.

Morgan agreed with the FCA report which noted that social networks play an important role in promoting this type of investment.

“I think a lot of people are being bombarded with information on social media to invest in this type of business,” he said.

As for the damage these high-risk investments can do, he believes that betting on riskier assets when you’re younger and have plenty of time before retiring is “normal and very acceptable.”

However, “the real question is how much of their assets are in these risk investments and whether they could withstand 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 bet, that is a problem“.

“But as a general rule, if you have more time to wait to make a profit, riskier assets make sense when you’re younger,” he acknowledged.

A young man looking at a financial graph on his computer

Taking risks when you’re young makes sense, as long as you don’t invest more than you can afford to lose and don’t expect immediate gains.

However, he clarified that, according to the study he carried out, many of the younger investors do not seem to have the patience required to see those long-term gains.

“We ask 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 rather than investing for the long term, which causes me some concern,” he said.

You can listen to the BBC’s Business Daily program on this topic (in English) here

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