FINRA Study Warns of Declining Investor Participation and Rising Fraud Risks Among Younger Investors
From the desk of Jim Eccleston at Eccleston Law
A new study from FINRA’s Investor Education Foundation highlights troubling shifts in retail investing, including shrinking participation, heavier reliance on social media for advice, and growing vulnerability to fraud. According to Financial Advisor News, FINRA released the findings from its 2024 National Financial Capability Study.
The study surveyed 2,861 U.S. adults who hold non-retirement investment accounts and found that the surge of first-time investors that emerged during the pandemic has not only slowed but reversed. Just 8 percent of respondents said they began investing within the past two years, down sharply from 21 percent in 2021. FINRA researchers reported that many pandemic-era investors have since exited the market, particularly younger participants.
FINRA senior researcher Olivia Valdés noted that the median age of first-time “Covid-era” investors increased from 31 to 38, a shift that suggests younger investors have disproportionately left the markets. Participation declined most significantly among adults under 35, men, and non-white investors, effectively erasing gains seen between 2015 and 2021.
Only 8 percent of all respondents said they are willing to take substantial risk for substantial returns, down from 12 percent three years earlier. Among investors under 35, that figure fell from 24 percent to 15 percent. Despite this stated caution, younger investors reported higher engagement in options trading, margin use, and cryptocurrency investing, as reported by Financial Advisor News.
Valdés attributed this disconnect to knowledge gaps rather than inconsistent attitudes. The study showed that three-quarters of margin traders could not correctly answer a basic question about how margin works.
The research also revealed a major shift in how investors seek information, according to Financial Advisor News. Nearly 29 percent of all investors rely on social media for investment guidance, a figure that climbs to 61 percent among younger investors, with YouTube emerging as the leading source.
Financial Advisor News adds that fraud concerns continue to rise across all age groups. Thirty-seven percent of respondents said they worry about losing money to fraud, up from 31 percent in 2021. Alarmingly, when presented with a hypothetical investment promising a guaranteed, risk-free 25 percent annual return, half of the respondents said they would invest.
The study confirmed persistent gaps in financial literacy. On FINRA’s investing quiz, respondents averaged 5.3 correct answers out of 11. While many understood basic concepts like stocks and inflation, only 23 percent correctly defined short selling, and just 20 percent understood margin investing. Financial Advisor News reports that younger and less experienced investors scored the lowest overall.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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