New Research Finds Most Investors Lack Advanced Investment Knowledge, Increasing Their Exposure to Investment Risk

Only 18% of Investors Surveyed Demonstrate Advanced Investment Literacy, With Knowledge Gaps Linked to Fraud Vulnerability and Weaker Financial Outcomes

WASHINGTON--(BUSINESS WIRE)--To kick-off World Investor Week (October 5-11), the FINRA Investor Education Foundation (FINRA Foundation) and Stanford Initiative for Financial Decision-Making (IFDM), released new research examining how the investment literacy of Americans, particularly risk-related knowledge, is tied to their decisions and financial outcomes.

The research, entitled “What Separates Sophisticated Investors? Risk Literacy and Investment Decision-Making,” draws on data from the FINRA Foundation's 2024 National Financial Capability Study (NFCS) and introduces a new measure of investment literacy that distinguishes basic from advanced knowledge. Using NFCS data from 2,861 investors who hold investments outside of retirement accounts, this research examines three groups (low, basic-only, and advanced investment literacy) based on their performance across 13 investment knowledge questions.

The findings reveal that only 18% of investors surveyed demonstrate advanced investment knowledge, including an understanding of how different types of investment risk, such as changing interest rates and the use of leverage, can affect investors. The findings also show that respondents with advanced investment literacy experience meaningfully better outcomes—including lower fraud vulnerability, greater retirement preparedness and a lower likelihood of engaging in costly credit card behaviors—compared to those with low investment literacy.

"This research underscores the importance of emphasizing risk-related concepts in investor education and elevating financial fraud recognition as a complementary subject,” said FINRA Foundation President Christine Kieffer. “The FINRA Foundation is dedicated to investing in this type of targeted, relevant investor education for all Americans, so that every investor is equipped to make sound decisions and protect themselves from fraud.”

"Most of the investors we studied know the basics, but very few have developed the risk-related knowledge that defines advanced investment literacy," said Andrea Sticha, Research Director at IFDM. "That gap is exactly why investment literacy deserves its own focus. Closing it means tailoring education to where an investor's knowledge actually stops, meeting them there with the right content and the right channel."

Key Findings:

• Advanced investment literacy is primarily about understanding risk: Six of the eight questions that define advanced investment literacy directly concern risk, including risk diversification, interest rate risk, the risk of buying on margin, short selling, option payoffs and priority of claims in bankruptcy. Advanced investment literacy is not necessarily about knowing more facts; it may be more about understanding risk from multiple angles.
• Advanced investment literacy is uncommon, even among active retail investors: Only 18% of investors surveyed demonstrate advanced investment literacy, while 66% demonstrate basic-only investment literacy and 16% display low investment literacy.
• Where investors get their information is tied to how much they know: Nearly three-quarters (74%) of those with low investment literacy rely on informal sources such as friends, family or colleagues, compared to 51% of respondents with advanced investment literacy. Nearly half (43%) of respondents with low investment literacy follow recommendations from social media personalities, versus just 13% of respondents with advanced investment literacy.
• Advanced knowledge—not merely basic—is tied to lower fraud susceptibility: Willingness to invest in a hypothetical, fraud-like opportunity—a guaranteed, risk-free 25% annual return every year for five years—peaked among respondents with basic-only investment literacy (54%), more than either those with low investment literacy (49%) or those with advanced investment literacy (35%). Investors with just enough knowledge to feel confident, but not enough to fully understand risk, might be the most susceptible group.
• Advanced investment literacy is linked to healthier finances: After accounting for demographic differences, investors with advanced investment literacy were nine percentage points more likely to have planned for retirement, eight percentage points more likely to have emergency savings and 15 percentage points less likely to carry costly credit card debt compared to investors with low investment literacy.

About the FINRA Investor Education Foundation

The FINRA Investor Education Foundation supports innovative research and educational projects that empower Americans with the knowledge, skills and tools to make sound financial decisions throughout their lives. For more information about FINRA Foundation research and education initiatives, visit www.finrafoundation.org.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. FINRA regulates one critical part of the securities industry—member brokerage firms doing business in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

About Stanford IFDM

The Stanford Initiative for Financial Decision-Making (IFDM) is a multidisciplinary collaboration among the Stanford Graduate School of Business, the Stanford Institute for Economic Policy Research (SIEPR), and the Stanford Department of Economics in the School of Humanities and Sciences. Led by faculty director Annamaria Lusardi, IFDM aims to enhance financial literacy and empower individuals to make informed financial decisions. The initiative focuses on four strategic pillars: education, technology, policy, and research — aiming to democratize access to financial education and support informed financial decision-making across communities. For more information, visit ifdm.stanford.edu.