Survey: Investors Lack Knowledge
Survey Finds That Investors Lack Basic Knowledge on How Investing Works
By MARCY GORDON
AP Business Writer
WASHINGTON (AP) -- Most investors mistakenly believe the government will cover them against fraud by their broker and lack basic knowledge of how investing works, according to a survey by the industry insurance fund that protects investors if their brokerage firm goes bankrupt.
Investors' ignorance could create problems during the current market downturn, the head of the fund said Wednesday.
At least four of five investors surveyed failed the five-question quiz ``investor survival'' quiz developed by the Securities Investor Protection Corp. and the National Association of Investors Corp., an organization of some 35,500 investment clubs nationwide. Passing entailed getting three questions correct.
Michael Don, the president of SIPC, called the findings ``disturbing.''
``Many investors either have no knowledge or, even worse, the wrong information about a number of key issues that can haunt them during tough financial times,'' he said at a news conference.
Among those issues: what recourse investors have when they have lost money due to fraud, how to deal with problem brokers, and how limit orders and margin accounts work.
Fewer than one in five investors polled knew there is no insurance to cover stock-market losses or losses from investment fraud. Many mistakenly believe that the U.S. Securities and Exchange Commission or the Federal Deposit Insurance Corp. provides such insurance.
The survey comes as the latest political debate on private Social Security accounts gets under way. President Bush has proposed shoring up Social Security by letting younger workers voluntarily invest some of their payroll taxes in the stock market, and has appointed a commission to develop a plan and report this fall.
Some observers have expressed concern that the lack of financial knowledge among the public could lead to risky investments if such a plan is adopted.
The telephone survey of 933 adult investors also found:
--Nearly two in three respondents did not know what to do first when they suspect they are dealing with a problem broker. Only 36 percent knew they should explain their concerns in writing to their brokerage firm and keep a copy for themselves. Documented complaints are crucial to investors' efforts to recover money, the officials said.
--Fewer than one in four understand the use of limit orders to buy or sell, which are executed only at a price specified by the investor or better. Investors using limit orders benefit from price protection, but there is the possibility that the order won't be executed. They play a key role in the market by helping reveal the supply and demand for stocks and other securities.
--More than four in five do not understand how margin accounts work. Investors buy stocks on margin by borrowing part of the purchase price from their brokerage firm or day-trading firm and putting up the securities as collateral for the loan.
Already, as the market turned downward last year, investors' complaints to the SEC about their brokers set an all-time high. Complaints jumped about 9 percent overall, to 13,599 from 12,463 in 1999. Regulators believe that last year's spike in complaints was due in large part to increased difficulties with margin accounts in a declining market.
--There were no significant differences in the level of investment knowledge arising from investors' age, gender, income or occupation.
The telephone survey was conducted nationwide from May 31 to June 4, with a margin of error of plus or minus 3 percentage points.
Washington-based SIPC, with some $1.1 billion in reserves and access to credit lines, is an independent corporation that is funded by the securities industry. Roughly 7,500 brokerage firms each currently pay $150 a year regardless of their size.
SIPC's role is similar to that of the FDIC, which insures bank deposits, but SIPC doesn't have the same regulatory powers exercised by the FDIC. Since it was created by federal law 31 years ago, SIPC has paid $391 million to make possible the recovery of $3.8 billion by some 443,000 investors who lost money from brokerage firm failures.
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On the Net:
A new brochure on SIPC coverage, the investor quiz and a model claim form are available on the Web site at sipc.org
National Association of Investors Corp.: better-investing.org |
