What are the risks of online investing?
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This beginner friendly guide explains the risks involved with online investing. We run through the main risks you may face and offer a few helpful tips so you can learn how to invest safely.
What is online investing?
It refers to the practice of buying and selling financial instruments via the internet. Traditionally, investing required you to contact a broker using a telephone, who would then place your order for you. Advances in technology have led to lots of online investment platforms emerging, where you can buy and sell at the click of a button.
These days it is possible to invest in a broad range of assets including stocks, bonds, commodities, currencies, ETFs, and cryptocurrency, among many others. Investment platforms can be used on a computer or via a mobile app meaning you’ll always have the latest information regarding how well your portfolio is performing.
What are the risks of online investing?
The main risks of online investing include losing your money or falling prey to unscrupulous scammers. There are other risks to be aware of and below you’ll find the main ones to take into consideration.
1. Lack of knowledge
Many investors lack the knowledge of a professional broker or financial advisor. It is easy to open an online platform and invest in a broad range of assets, but many require more experience and expertise to understand. Investing online without the proper skills or knowledge is risky and can result in financial loss.
2. Online platform scams
Most platforms comply with regulations and laws. Unfortunately there are some unscrupulous scammers who prey on unwise investors and create imposter sites designed to steal your money. These types of scams are becoming more sophisticated and are a risk to investors, especially beginners.
3. Black swan events
Black swans can wipe out even the most experienced online investors. Black swans are unpredictable events that can have severe consequences on a financial asset’s value. These types of occurrences are rare but their unpredictable nature means they pose a risk when investing online. It is possible to lose a lot of money during a black swan event.
4. Market manipulation and false information
Fake rumours are often started by investors who may be well followed on social media platforms. For example, if you invest in cryptocurrency online you will find individuals on sites like Twitter who provide false information to benefit themselves. Market manipulation is illegal but happens, especially with smaller companies in the stock market or crypto.
5. Improper use of leverage
Some online investing platforms offer leverage as a way for investors or traders to access more money to open bigger positions. While leverage can be useful when used carefully and correctly, using it recklessly can lead to a quick demise of your investment account. You can make a lot of money in this way, but there are many risks of trading with leverage as well.
6. Unregulated brokers
All investment platforms should be regulated in the region they operate in. Some jurisdictions provide stronger protection for investors than others. For example, the UK is known to have some of the best financial regulations in the world. If a broker goes underwater and its not regulated, then investors run the risk of never seeing their money again.
7. Failing to diversify
The phrase don’t put all your eggs in one basket applies to many areas but is especially relevant to online investing. Some investors take big risks, fail to diversify, and put all of their capital into one investment. It is recommended to spread your money across different investments so you can lower the amount of risk you’re exposed to.
How to stay safe when investing online
It is important to take measures to combat the risks you may face when investing online. Below are a few steps you can take to stay safe when investing online:
- Use a regulated platform. When you make an online investing account, make sure you go with a regulated broker. Brokers in the UK are regulated through the Financial Conduct Authority (FCA). You can use the FCA website to search for a broker’s registration number and confirm whether or not it is regulated.
- Don’t sign up from email links. Scammers may send emails or text messages telling you to sign up to invest and make big profits. If you want to register with an online broker, make sure you go to their website and don’t click unsolicited links.
- Research. Before making any online investment make sure you take the time to research the asset you’re planning to buy. Most brokerages have research material available and you can find lots of information online; but be careful to use reputable sources, like large news organisations or official company websites.
- Set a budget. When you are ready to invest it’s a good idea to set a budget before you get started. It is important to stick to your budget as it will help you manage your exposure to risk. You should never invest more than you can afford to lose.
- Diversify. Spreading your money across a range of investments is one of the safest ways to grow your capital. Investing in different asset classes and markets means you’ll be protected if a particular sector is underperforming.
- Be wary of internet messaging boards. Websites like Reddit and apps like Twitter can be great for getting information. But you should use caution with taking investment tips from users of these sites as you don’t know their motives, or whether they have the expertise to offer financial advice.
Where can I learn more?
You can learn more about investing with our easy to follow courses which you can find on the links below. You can also use the learn to invest section on our website where you will find lots of guides to help you.
Long-term Stock Investing
Short-term Stock Trading
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Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >