Most US investors surveyed could handle basic questions about stocks, bonds and inflation, but their knowledge weakened when leverage, interest-rate risk and other potential sources of loss entered the picture.
Only 18% of US investors with assets outside workplace retirement plans demonstrated advanced investment literacy, another 66% demonstrated basic knowledge but did not meet the standard for advanced literacy.
The analysis was made by the FINRA Investor Education Foundation and Stanford Initiative for Financial Decision-Making and based on the 2024 National Financial Capability Study Investor Survey.
Advanced Knowledge Centres on Investment Risk
The researchers selected 13 questions from an initial set of 17. Five covered basic concepts, including interest, inflation and the definitions of stocks and bonds. Eight tested more advanced areas such as diversification, margin trading, short selling, options, interest-rate risk and bankruptcy.
Respondents were divided into three groups. Some 16% had low investment literacy, 66% demonstrated basic-only literacy and 18% qualified as advanced.
Most respondents understood conventional instruments, but far fewer correctly identified how leverage can magnify losses, diversification affects volatility or rising interest rates influence bond prices.
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Basic Knowledge Does Not Guarantee Fraud Recognition
The limits of basic knowledge also appeared in responses to a hypothetical investment promising guaranteed, risk-free annual returns of 25% for five years.
Among investors with basic-only literacy, 54% said they would invest, compared with 49% of the low-literacy group and 35% of advanced investors.
The report does not state whether the five-percentage-point difference between the first two groups was statistically significant, so the figures should not be read as evidence that basic knowledge increases vulnerability.
Finance Magnates previously covered the fraud question as part of the broader 2024 survey. The new analysis uses the same respondents but divides them into three literacy groups rather than measuring change over time.
The results cover only US investors with assets outside retirement plans, not the wider population. The authors said investor education should place greater emphasis on leverage, diversification and other sources of investment risk, alongside fraud recognition.
