In whom do you place your faith for generating investing ideas? Increasingly, individuals seek out sources that can guide them towards investments that exceed their financial resources and expertise.
Recent research by investing platform Hargreaves Lansdown reveals that investors between the ages of 18 and 34 are progressively relying on social media platforms to make investment decisions. Specifically, 26% of these investors utilized Reddit to seek investment ideas, while 20% used TikTok.
In the absence of adequate counsel or direction on the level of risk to assume, investment may become more akin to gambling and result in individuals experiencing much poorer outcomes than appropriate.
Here, whether? determines whether assets will have a greater negative impact than positive impact on novice investors.
Prior to Investing
Do you have the financial means to forfeit your investments?
Although all forms of investing include risk, in the case of unregulated and other ‘adventurous’ ventures, the potential for financial loss is not just a matter of bad luck, but also has a significant likelihood of resulting in bankruptcy.
Do you need the ability to withdraw your funds from the investment without any challenges?
Investment in a sophisticated financial instrument, such as any of the aforementioned options, may result in a significantly prolonged timeframe for the withdrawal of your funds.
Do you possess sufficient knowledge about the specific investment kind to allocate your funds towards it?
Engaging in investments such as commodities or cryptocurrencies requires a certain degree of experience in the respective field to mitigate the associated risks. Therefore, it is advisable to assess your level of knowledge in order to comprehend the factors that impact your investment potential.
Are you allocating funds to an uncontrolled sector?
Cryptocurrency and tangible assets, such as wine or art, are not subject to regulation by the Financial Conduct Authority. As a result, you won’t be able to complain to the Ombudsman about any particular kind of subpar service that a company provides. FSCS protection of up to £85,000 is only available for assets regulated by the FCA, in the event of a platform failure. However, investments themselves are not offered any kind of protection.
4 Investments to Steer Clear of as a Beginner
While these investments can offer potential rewards, they are generally considered unsuitable for beginners due to their high risk and complexity. Cryptocurrencies are highly volatile and can fluctuate rapidly in value. Contracts for Difference (CFDs) involve leveraged trading, which can amplify both gains and losses.
Venture Capital Trusts (VCTs) invest in early-stage companies, which carry significant risk. Geopolitical events can have an impact on commodities and are subject to market fluctuations. Beginners may find it difficult to navigate these markets and understand the associated risks, making it advisable to start with more conservative investment options.
Cryptocurrency
While cryptocurrencies have seen significant growth in recent years, they are highly volatile and speculative investments. Beginners may find it difficult to navigate the complex market and understand the underlying technology. The risk of losing a significant portion of your investment is high due to market fluctuations and potential scams.
Cryptocurrencies, notably Bitcoin, are decentralized forms of money that operate independently from any designated nation or central bank.
Numerous individuals have made investments in cryptocurrency due to apprehension that they would otherwise forgo the next significant development that has the potential to generate wealth. The Financial Conduct Authority’s Financial Lives survey reveals that the percentage of UK people who have invested in any kind of cryptocurrency increased by almost three times from 2020 to 2022, reaching 5.8%.
Cryptocurrencies exhibit extraordinary volatility in their value. Bitcoin saw a £3,000 depreciation in value inside a single day this month, plummeting from £47,258 on 3 July to £44,716 on 4 July, therefore undermining its position as the most well-established cryptocurrency.
Apart from the inherent risk associated with legitimate cryptocurrency investments, the sector is abundant with fraudulent schemes. Many of these schemes often use counterfeit celebrity endorsements, such as Martin Lewis and Jeremy Clarkson, to advertise investments that provide unattainable returns.
Legitimate firms do not provide substantial returns, so any supplier proposing that investing in cryptocurrencies is a simple means to quickly amass wealth is probably a fraudulent scheme.
However, it is advisable not to invest in cryptocurrencies unless you possess a comprehensive understanding of the subject matter and have the financial means to potentially lose all of your invested capital.
Contracts for Difference (CFDs)
CFDs are leveraged financial instruments that allow you to speculate on the price movement of underlying assets without owning them. While they can offer high returns, they also carry high risks, including the potential for significant losses. Beginners may find it difficult to manage the leverage and understand the complexities of CFD trading.
During June 2024, the FCA accused seven reality TV personalities of engaging in unauthorised promotion of Contracts for Difference (CFDs) on social media. This action was taken in reaction to its persistent apprehension about the selling of CFDs to individuals who lacked the necessary exposure to the associated risks.
Investment in a CFD does not entail ownership of any underlying asset. Instead, you wager on whether it will appreciate or depreciate in value. Currency Futures (CFDs) are prohibited in Belgium, Hong Kong, and the United States, and have been subject to significant limitations in the United Kingdom since 2019.
An inherent limitation is that selecting to invest in a CFD will result in a cautionary notice stating that ‘70% of retail investor accounts incur financial losses while engaging in CFD trading with this particular provider’.
It is rare to locate a supplier with a percentage below 50%. Therefore, it is not only possible to lose what you have invested, but it is the most probable end result.
Venture Capital Trusts (VCTs)
VCTs invest in early-stage companies and offer tax benefits to investors. While they can provide high returns if successful, VCTs are considered high-risk investments. Beginners may find it difficult to assess the potential of early-stage companies and understand the risks associated with investing in them.
Allocating funds to publicly traded firms, which are those listed on a stock market, is the fundamental essence of investing. However, sometimes individuals choose to go another step and allocate their funds towards private enterprises.
Venture capital trusts (VCTs) are a specific kind of trust that allocates its investments towards private equity, therefore obtaining distinct tax advantages. An initial investment of up to £200,000 is eligible for a 30% income tax reduction, tax-free dividends, and no capital gains tax on profits.
However, the drawback is that you are more likely to get no tax returns to assert tax advantages on. FCA recommends that only’sophisticated investors’, investing more than £250,000 and earning annual incomes above £100,000, should utilize VCTs due to the much greater risk of incurring substantial losses.
Contrary to public corporations, private firms are not obligated to regularly disclose comprehensive financial accounts, thereby reducing the likelihood of detection of any issues with your investment and the ability to exit before it fails. Less-established firms have a considerably greater likelihood of company collapse.
Commodities
Commodities, such as gold, oil, and agricultural products, can be volatile investments. Geopolitical events, economic conditions, and factors like supply and demand all have an impact on their prices. Beginners may find it challenging to predict price movements and understand the risks involved in commodity trading.
A subset of investors want not just to invest in corporations, but also to own a direct stake in the raw minerals that fuel enterprises. Possible manifestations of this may include metallic elements like gold or copper, petroleum, or even agricultural commodities such as sugar.
Typically, investors acquire physical assets like this by way of exchange-traded commodities (ETCs).
Significant volatility is frequently a feature of commodities and other assets, mostly due to unpredictable factors. For example, a plentiful wheat crop has the potential to decrease prices, but an increase in severe weather phenomena or a war breakout might have the opposite effect.
What Next?
In conclusion, while these investments can offer potential rewards, they are generally considered unsuitable for beginners due to their high risk and complexity. It’s advisable for beginners to start with more conservative investments, such as index funds or ETFs, to build a solid foundation before venturing into riskier assets.
