The regulator warned that 59 per cent of investors are open to losses that may have a fundamental impact on their finances.
A greater use of investment apps has been identified as one of the reasons for this, with newer investors also more likely to be reliant on YouTube and social media for tips and news.
The FCA found that investors often had high confidence and claimed knowledge but in reality, exhibited a lack of awareness of the risks of investing.
For example, over four in 10 did not view “losing some money” as one of the risks of investing even though with most investments their whole capital is at risk.
At the same time, four in five (78 per cent) investors attributed investment decisions to ‘gut instinct’.
The FCA 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.
It found for those investing in high-risk products the challenge, competition and novelty were often more important than conventional, more functional reasons for investing like wanting to make their money work harder or save for their retirement.
It said 38 per cent of those surveyed did not list a single functional reason for investing in their top three.
The regulator is concerned that young investors could be targeted by unscrupulous firms.
The use of social media to market towards and communicate with young investors has already received attention by the FCA, which last year took a ‘social media adviser’ to court over claims they were unauthorised.
In January it issued a warning to advisers about heightened misconduct risks as a result of working from home, and reminded the industry that the use of unmonitored or encrypted communication apps to share sensitive work information presented "significant compliance risks".
Sheldon Mills, executive director of consumer and competition at the FCA, said: “Much of the consumer investments market meets consumers’ needs. But 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.
“We want to make sure that we encourage the ability to save and invest for lifetime events, particularly for younger generations, but it is imperative that consumers do so with savings and investment products that have a suitable level of risk for their needs.”
The FCA’s research also found younger investors to be a more diverse group than the traditional demographic.
This newer audience is more likely to be female, under 40 and from a BAME background.
Recently, the regulator has become more active in warning investors about the losses they face from high-risk investments, including cryptocurrencies.
In January 2021, the FCA explicitly warned investors that they could risk losing all their money when investing in digital assets including Bitcoin.
This came after the price of Bitcoin fell 28 per cent from its (then) record high of $42,000.
Cryptocurrencies have received particular attention from the watchdog which has claimed investors do not fully understand how they work. In October 2020, it acted on this to ban the sale of crypto-derivatives to retail investors.
The regulator estimated this ban alone could save investors from £53m losses a year.
James McManus, chief investment officer at Nutmeg, said: “The regulator is right to differentiate the practices of responsible investment firms helping people to achieve their financial goals with a long-term investing mindset, from those unscrupulous firms promoting high-risk investments to investors for whom they are unlikely to be suitable.
“In truth, what we’ve seen with the meme stocks’ saga and the extreme volatility in cryptoassets are timely examples of the perils of a short-term approach to investing driven by hype. These moments should act as a clear warning that market noise is often just that and if something sounds too good to be true, it probably is."
Jon Yarker is a freelance reporter for FTAdviser
