More Prudence Needed as Retail Investors Have Increased Appetites for Quick Returns

24 September 2019

  • Retail investors, especially the younger ones, are seeking quick profits.
  • Stock investors largely rely on advice from friends and family and financial news when making investment decisions. Only half of the respondents refer to product information from primary sources.
  • Online stock trading platforms overtook offline channels as the preferred trading channel.
  • A Core Competencies Framework on Financial Literacy for Investors is in place to support and provide guidance for retail investor education around the globe.

Retail investors, especially the younger ones aged between 18 and 29, are keen to invest for quick profits and seek products with potentially higher yields, yet they do not put much effort into market or product research, according to the IFEC Retail Investor Study 2019 conducted by the Investor and Financial Education Council (IFEC).

In June 2019, the IFEC conducted face-to-face interviews with 1,013 retail investors aged between 18 and 69 who have invested in the financial markets in the past 12 months.

Retail investors need to familiarise themselves with different kinds of investment risks, especially in short-term trading and alternative investments

The survey found that in the past 12 months majority of retail investors have invested in stocks (83%), followed by forex (43%) and funds (23%). While majority of the surveyed investors aim for long-term capital growth (71%), nearly half of the respondents also look at short-term trading for quick profits (49%); with this investment mindset being particularly common among young investors aged between 18 and 29 years old (70%).

It is also found that young investors have a slightly higher appetite for cryptocurrency products. Among those aged 18 to 29 years old, 3% have invested in cryptocurrencies in the past 12 months, while 4% said they would be interested in doing so in the next 12 months. Of all surveyed respondents, very few (less than 1%) have invested in this product in the past 12 months, or plan to do so in the next 12 months.

Despite the risks associated with unregulated markets, technological complexities and lack of experience in cryptocurrency investments, one-third of the respondents rated cryptocurrencies at a medium risk level when asked if they perceived it to be of high, medium or low risk.

General Manager of the IFEC, Mr David Kneebone said, "We understand that some investors prefer short-term trading to take advantage of the volatile market, while others look at alternative investments such as cryptocurrencies to diversify their portfolios. Whatever the investment strategy, it is important to be fully aware of the associated risks of different products. For instance, investors should be wary of the risks of price volatility, hacking and fraud when investing in cryptocurrencies and using services of cryptocurrency exchanges."

"In an increasingly unpredictable and speculative market environment, it becomes even more important for investors to know how to exercise good investment discipline and make informed decisions," he added.

Stocks and funds: returns falling short of expectations

Stocks and funds remain the most popular securities investment vehicles for retail investors. In general investors have rather high expectations on return – an average of 18% annual return for stock investments. Meanwhile, by their own estimation, investors claimed they achieved an average return of 9% in the past year, which was merely half of their expectations. Overall one in six surveyed investors reported losses over the past year.

In terms of stock picks, while most stock investors continue to invest in the Hong Kong main board (95%) and blue chip/large cap stocks (70%), around 30% and 24% had invested in initial public offerings (IPOs) and the Mainland China market respectively. The strong momentum is in line with the significant growth of Stock Connect's northbound turnover reported in early 2019 as well as the boom in fundraising through IPOs on the back of the listing reforms introduced in 2018.

Online trading overtook offline trading as the preferred stock trading method, with two-thirds (65%) of the respondents citing online trading platforms as their most often-used channel.

Regarding the key source of information influencing retail investors' trading decisions, most tend to rely on secondary sources of information rather than conducting their own research. For stock investment, advice from friends and family members (82%), and financial news (78%) are the most commonly-cited sources of information. Less than half referred to companies' annual reports and financial statements (46%), and only about a quarter (28%) paid attention to corporate announcements and notices.

"Retail investors are very active in the Hong Kong financial markets, and it is crucial for them to be equipped with the financial skills and knowledge needed to conduct thorough research. They should understand the relevant financial documents before engaging in investment activities. Equally important is the ability to cope with the opportunities and challenges arising from the digital transformation of financial products and services," said Mr Kneebone. The full research report is available here.

Core Competencies Framework on Financial Literacy for Investors

The IFEC is committed to promoting and providing retail investor education in Hong Kong, and contributing to international efforts. To support the development and implementation of investor education initiatives across various jurisdictions, the IFEC, commissioned by the International Organization of Securities Commissions (IOSCO) in conjunction with the Organisation for Economic Co-operation and Development, has led a working group to develop a Core Competencies Framework on Financial Literacy for Investors.

Valuable input and feedback from 39 organisations across 34 jurisdictions have been collected to develop the framework's content pillars, which include basic investing principles and concepts, investment product attributes such as risks and fees, the buying/selling process of investment products, and ways to identify cyber security risks when using online trading platforms. Details of the framework are available here.

Upcoming: World Investor Week 2019

The IFEC will be supporting the IOSCO to launch its third annual World Investor Week (WIW) from 30 September to 6 October 2019. WIW is a global campaign to raise awareness on the importance of investor education and protection. Given today's digital environment, the WIW 2019 will include key messages regarding online investing, digital assets and Initial Coin Offerings, as well as re-emphasising the basics of investing. Please visit the dedicated page on IFEC website for more details.