Investor Warning: Retail investors at risk when trading in volatile markets
The Central Bank is warning retail investors that investing during periods of market volatility can mean increased risks for them and can lead to loss of their money.
Loss of investor money
A Central Bank analysis of the impact of the COVID-19 pandemic on retail investment activity found that:
- Activity (including the number of retail accounts and average number of daily trades) increased significantly during the period of increased market volatility
- All firms reported an increase in the percentage of retail clients losing money in the period.
Analysis conducted
Data was collected from a sample of MiFID investment firms in relation to retail client activity during the period December 2019 to April 2020. Firms included in the analysis account for 81% of the total retail clients in the sector as of 31 December 2019.
The analysis showed that, in comparison to the preceding period:
- The average number of retail accounts opened increased by 116%
- The average number of daily trades increased by 171%. This includes average daily transactions in Contracts for Difference (CFDs) which increased by 186%.
Warning about CFDs
The Central Bank is also particularly concerned by the significant increase in retail investor trading in CFDs. CFDs are highly complex, high-risk (leveraged, derivative instruments) investments, and research indicates that a majority of retail investors lose money when investing in CFDs even in normal market conditions.
The analysis found that the average daily transactions in CFDs increased by 186% during the review period and all firms analysed experienced increased retail client losses in these types of investments. The Central Bank has previously issued a notice restricting the sale of CFDs to investors.
What to consider before investing
All financial transactions carry a certain amount of risk. A volatile market and the potential risk of loss may create a level of uncertainty and concern, which may impact on investor decisions.
Investments are typically longer-term products. Investments in the short-term by retail investors looking to yield quick profits may perform poorly even in relatively stable, less volatile market conditions.
Before deciding to trade, investors should carefully consider their investment objectives, level of experience, and risk appetite.
Investors should also take the time to carefully review and consider all relevant material about the investment, how it works, and the associated risks. Investors should not invest money that they cannot afford to lose.
Firms’ obligations to clients
Under consumer protection law, when regulated firms provide clients with investment advice or make investment decisions on behalf of clients, they must:
- Act in the client’s best interests at all times, including ensuring sales staff are not incentivised into meeting targets that may result in an unsuitable sale
- Make sure that the product they recommend suits clients, including by conducting a thorough assessment of individual situations and needs
- Explain the potential disadvantages/risks as well as the potential benefits of the investment
- Consider the client’s risk tolerance levels
- Monitor and evaluate the products they sell and take into account changes to the client’s risk profile as a result of COVID-19. Products that previously may have been considered suitable for sale to clients may no longer be suitable in the current climate.
- Make sure that any communications to clients are clear, factual, informative and balanced.
The Central Bank continues to closely monitor firms’ compliance with all requirements and stands ready to take action to protect the interests of retail investors.
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