FMA tells online investors to do their homework

The Financial Markets Authority has told hundreds of thousands of new Kiwi investors they need to “do their homework” and understand the risks of investing in financial markets.

Wednesday, October 7th 2020, 6:00AM 3 Comments

by BusinessDesk

The warning is part of World Investor Week and follows rapid growth in people investing through online platforms after the March slump when covid panic gripped markets around the world.

In New Zealand, local platforms report an estimated 120,000 Kiwis joined since the first covid-19 lockdown. This means an estimated total of more than 250,000 are using Sharesies, Hatch and InvestNow, with three-quarters of users aged 25-to-44.

The FMA said it has been engaging with each of the platform operators to understand how they are helping this new wave of investors understand the fundamentals of investing and navigate the landscape.

Poor financial literacy has been an issue for successive administrations. A major plank of the 2010 reforms was to make investing easier to understand so people could better judge the risk of an investment against the return on offer.

Some commentators have indicated online investing as a potential trouble area because platform users are often less informed about the functions and regulations of financial markets.

Easy come, easy go

Some point to Sky Network Television and Cannasouth as examples of stocks that retail investors bid higher ahead of a result for no clear reason, only to drop again when their earnings were in line with professional investors' expectations.

“While DIY investing can be great way to experiment and learn with a small amount, you need to do your homework before you buy or sell,” said Gillian Boyes, the FMA’s investor capability manager.

“Most importantly, ensure you get that information from reputable and independent sources, rather than following the herd on social media platforms, or listening to those with vested interests.”

Many users of NZX investor social media groups posted enthusiastically about the price of Sky TV surging on its result. Many posts were made in jest, but some were serious and may have contributed to retail investors buying the stock without understand its financial position.

The press release from the FMA doesn’t directly address these concerns, but hints at the problem of platform investors being easily influenced by market hype and not paying attention to fundamentals.

“A smart investor does proper research, takes into account fees, understands that risk exists in all investments, and recognises the benefit of diversified investment that fits their long-term goals,” Boyes said in the release.

The FMA has commissioned Mary Holm, a well-known financial commentator and former FMA board member, to create a beginners’ guide to investing that debunks eight common myths and misconceptions.

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Comments from our readers

On 7 October 2020 at 5:27 pm John Milner said:

I believe “giving a machine gun to a monkey” is appropriate. Of those of the public I know have dabbled, have been terribly disappointed to find their investment hasn’t magically doubled, but lost in value. Who would have thought!

On 9 October 2020 at 11:42 am smitty said:

@ john M, yes its not too far different from a DIY handyman saving some money from renovating their home. They make some errors along the way, but in the end they hopefully renovate the home to their liking.Naturally engaging an expert in renovation will result in a better outcome, but where's the fun in that? Also, I dablle myself, and recognise my limitations (as its not my day job) but the learning, insights and interest you gain from this is great for our industry. More power to them!

On 9 October 2020 at 2:38 pm JPHale said:

20 years in the industry, no slouch on this stuff but I specialise as a risk adviser for a reason. And outside throwing a dart on my KiwiSaver which isn't hard when you have some knowledge, I'm working with investment adviser for the rest without question.

I still don't understand how 90% of people still think financial services are not to be trusted but their own uneducated ill informed view that is guaranteed to lose money is better. And that's after seeing their grand parents, parents, and potentially their own with the last 12 months, losing money hand over fist and wondering why.

My stress doesn't come from regualtion and compliance, it comes from Stupid people playing Stupid games, winning Stupid prizes and expecting me to fix it for them!

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