By Julie Jason, originally posted on Forbes.com
One of the trends that has emerged during the COVID-19 pandemic is the growth in the number of new, young investors, spurred on by easy-to-use investment apps and developments such as stock slices – the ability to buy a piece of a high-priced stock as opposed to a whole share.
They have entered the investment market – but are they really ready?
While apps can draw young people into the market, investing is not a game. But it is a contest of sorts, one in which you use your knowledge and insight to hopefully make your money grow. In order to achieve the highest rate of success, you need to understand financial markets and investing as best you can.
Being unprepared or lacking key skills can result in a financial fiasco, which is a hard way to learn important lessons, especially at a young age. With that in mind, consider where a young investor might learn not only how to invest, but also how to avoid being conned.
What better source than entertaining games and quizzes created by regulators, such as FINRA, the Financial Industry Regulatory Authority. FINRA regulates the brokerage industry.
Each and every resource I’ll discuss with you here can attract the interest of young people. There is no textbook to read. There are no homework assignments. No grades. Instead, there are easy, interactive resources that engage rather than bore ... just some good fun with investment facts.
Investor Knowledge Quiz
I recommend starting with an interactive application that helps the young investor get a quick knowledge self-assessment. Called the Investor Knowledge Quiz, you can learn about what you know about investing – and, more importantly, what you might not know. FINRA “believes all investors should have access to basic educational information about investing.” The quiz includes explanations for the correct answers.
Here is a sample question:
You invest $500 to buy $1,000 worth of stock on margin. The value of the stock drops by 50%. You sell it. Approximately how much of your original $500 investment are you left with in the end?
4. Don’t know/Not sure
Answer: When you buy stock on margin, you risk losing your entire investment — or much more. In this example an investor used $500 to buy $1,000 worth of stock, borrowing the additional $500 from a brokerage firm to make the purchase. When the stock was sold after dropping 50% in value, its remaining worth was only $500 — the same amount the investor still owed to the brokerage firm for the margin loan. To learn more about the risks of margin trading, read our Investor Alert Investing with Borrowed Funds: No "Margin" for Error.”
Learn To Invest
After taking the quiz, do me a favor: Just take a minute to go to the Learn to Invest section on Finra.org, which includes a Young Adults and Investing section. Look around. Among the resources are a number of very short, targeted and interactive courses that you can try out in no time at all using the quick courses link. Even people with short attention spans will benefit greatly. For example, “Worth Holding On To?” helps you quickly understand and evaluate an investment’s rate of return by guiding you through how it is calculated, which will help you compare the performance of one investment to another.
Next go to FINRA’s Risk Meter. There, in 12 questions, you’ll see if you “share characteristics and behavior traits that have been shown to make some investors vulnerable to investment fraud.” Everyone should take three to five minutes to test themselves. After taking the quick quiz, you’ll get a report that will grade you based on whether your personality and habits make you susceptible to fraud. The report that the Risk Meter generates will inform you about yourself in a way that will be telling and helpful.
If you are considering making an investment, before you do, take this four-question (yes, only four) quiz called FINRA’s Scam Meter. To use the scam meter, you need to have a particular investment in mind. Suggest this for the young people in your family, and test yourself as well. You can print out the results, which will give you an explanation of each of your answers.
Con ’Em If You Can
A fun strategy game called “Con ’Em If You Can” was developed by the FINRA Investor Education Foundation and Commonwealth, a national nonprofit that seeks to strengthen opportunities and security for financially vulnerable people. The game is designed to help players learn to spot and avoid investment fraud. You can find it here.
The Knowledge Gap
When it comes to investing, young investors without experience have a knowledge gap. There is good reason. Learning how to invest, even how to know what you don’t know, takes years of experience.
To evaluate investors’ knowledge, a recent FINRA Education Foundation study looked into the world of investors and found there is much for those new to the field to learn — enough that it has helped fuel a new effort by the FINRA Foundation to address the knowledge gap that appears to exist, and help up-and-coming investors avoid egregious mistakes.
A Study Of New Investors
The FINRA Foundation conducted a study earlier this year with the research organization NORC at the University of Chicago titled “Investing 2020: New Accounts and the People Who Opened Them.” The study classified new investors as being those who “opened one or more non-retirement investment account(s) during 2020, and did not own a taxable investment account at any time before 2020.”
Among the findings were:
- More than 60% of new investors were under the age of 45, with 22% of new investors in the 18-29 age group.
- When asked to self-assess their investment knowledge, 50% of new investors considered themselves average, while 38% said their knowledge was low or very low.
- New investors on average answered correctly only 1.4 out of 5 questions testing investor knowledge.
New FINRA Initiative
Those survey results, along with a 2019 FINRA Foundation survey that showed investor knowledge in the U.S. as being low among all investors, give statistical backing to FINRA’s new multiyear, multifaceted $30 million initiative. Robert Cook, the president and CEO of FINRA as well as the chair of the FINRA Foundation, said in a statement, “It is critical that newer investors understand both the benefits and the risks of participating in the financial markets.”
The first phase of the project, which is going on now through Aug. 30, 2021, involves the public. FINRA is seeking comments on 10 questions that involve educational efforts. If you have an interest in commenting, look at the questions here, where you will also find instructions on how to submit your comments. You can read comments that have already been submitted as well.
In the second phase, there will be a comprehensive program “aimed at educating this rapidly-growing segment of novice retail investors who are leveraging advancements in technology to enter U.S. securities markets.”
Congratulations to FINRA for taking on this important project. All investors will benefit.
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