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GameStop frenzy prompts FCA risk warning to young investors

Saleha Riaz
·3-min read
A GameStop store in the Jackson Heights neighborhood of New York City, US. Photo: Nick Zieminski/Reuters
A GameStop store in the Jackson Heights neighborhood of New York City, US. Photo: Nick Zieminski/Reuters

The Financial Conduct Authority (FCA) has warned that investment apps are attracting a younger crowd of investors who may not realise the risks and may not be buying stocks for the right reason, in the wake of the GameStop (GME) shares frenzy.

"There is evidence that these higher risk products may not always be suitable for these consumers’ needs as nearly two-thirds (59%) claim that a significant investment loss would have a fundamental impact on their current or future lifestyle," the regulator said in a new report.

FCA's research found that for many investors, "emotions and feelings such as enjoying the thrill of investing, and social factors like the status that comes from a sense of ownership in the companies they invest in, were key reasons behind their decisions to invest."

This was particularly true, the FCA said, for those investing in high-risk products. For them, the challenge and novelty was more important than "conventional, more functional reasons" like wanting to make their money work harder or save for their retirement.

About 38% of those surveyed did not list a "single functional reason" for investing in their top three stocks.

Sheldon Mills, executive director, consumer and competition at the FCA said: "We are worried that some investors are being tempted – often through online adverts or high-pressure sales tactics - into buying higher-risk products that are very unlikely to be suitable for them.

"Investors need to be mindful of their overall risk appetite, diversifying their investments and only investing money they can afford to lose in high risk products.

"We also hope our research will provide valuable insights for other organisations that are involved in tackling harm in this market."

WATCH: What you need to know about GameStop's fall and rise

READ MORE: Amateur investors chase profits during the pandemic

The study also found that more than four in 10 do not view "losing some money" as one of the risks of investing, even though their whole capital is at risk.

"It’s really important not to chase after the hot stocks, instead of multiple investors are going after one particular investment, then they’re probably buying it at an inflated price," said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

"Investing will always present a certain level of risk however if you diversify your investments, you can spread and reduce that risk significantly and stand a chance of making much greater returns than if you had left your money in an account paying minimal interest," she added.

The FCA findings also show this newer audience has a more diverse set of characteristics than traditional investors. They tend to skew more towards being female, under 40 and from a black and minority ethnic (BAME) background.

This newer group are more reliant on social for tips and news, the report said.

The FCA had earlier warned that TikTok content creators have been offering "risky" amid the GameStop shares frenzy.

Shares in GameStop rose dramatically over the course of a few days in late January, driven in part by discussion on a now-famous Reddit thread called r/WallStreetBets.

Global regulators fired warning shots on the GameStop saga and online brokerage platforms Robinhood Markets and Interactive Brokers sparked an outrage after the platforms restricted its users from trading GameStop and other stocks.

Robinhood, one of the more popular investing apps, has also been fire since last year when a 22-year-old took his own life last June. He mistakenly thought he had lost nearly $750,000 (£545,148) in a bet on the app.

Meanwhile a report from earlier this month showed that the pandemic has created a new generation of investors in their late 20s and early 30s who are looking to do more with their money.

WATCH: How do influencers make money from TikTok?