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Join Which? Money4 investments to avoid if you're a beginner
Alternative riskier investments are growing in popularity, but could leave you worse off
Who do you trust to give you investment ideas? Increasingly, people turn to sources that could point them in the direction of investments beyond their means and knowledge.
Investment platform Hargreaves Lansdown has recently found investors aged 18-34 increasingly use social media to decide where to invest their money – 26% of used Reddit for investment ideas and 20% used TikTok.
Without proper advice or guidance on how much risk to take on, investing can start to look a lot more like gambling and leave people much worse off than they ought to be.
Here, Which? finds out which investments are going to cause more harm than good to amateur investors.
1. Cryptocurrency
Cryptocurrencies, the most famous of which is Bitcoin, are a form of currency that aren't controlled by any country or central bank.
Many people have invested in crypto out of fear that they will otherwise miss out on the next big thing that could have made them rich. The proportion of UK adults invested in some form of cryptocurrency nearly tripled between 2020 and 2022 to 5.8%, according to the Financial Conduct Authority’s Financial Lives survey.
The value of cryptocurrencies is extremely volatile. For example, Bitcoin lost £3,000 of value in one day this month, dropping from £47,258 on 3 July to £44,716 on 4 July, despite being the most established cryptocurrency.
Beyond the high risk of genuine cryptocurrency investments, the area is rife with scams. These often use fake celebrity endorsements – recent examples include Martin Lewis and Jeremy Clarkson – to promote investments with unrealistic returns.
Legitimate companies won’t guarantee huge returns, so any provider suggesting any cryptocurrency investment is an easy way to get rich quick is likely a scam.
But, even if it’s not a scam, you shouldn’t invest in cryptocurrency unless you really understand it and can afford to lose everything you invested.
- Find out more: cryptocurrencies explained.
2. Contracts for Difference (CFDs)
In June 2024, the FCA charged seven reality TV stars with promoting Contracts for Difference (CFDs) on social media without proper authorisation. This was in response to its ‘ongoing concern’ about the sale of CFDs to people who were unprepared for the risk involved.
When you invest in a CFD, you don’t own any underlying asset. Instead, you bet on whether it will gain or lose value. CFDs are illegal in Belgium, Hong Kong and the US, and have been heavily restricted in the UK since 2019.
One such restriction is that if you go to invest in a CFD, you’ll receive a warning along the lines of: ‘70% of retail investor accounts lose money when trading CFDs with this provider’.
You’re unlikely to find a provider with a percentage lower than 50%, so it’s not just that there’s a chance you’ll lose what you put in, it’s the most likely outcome.
- Find out more: a beginner's guide to investing.
3. Venture capital trusts (VCTs)
Buying into public companies – that's those listed on a stock exchange – is the bread and butter of investing. But, sometimes people want to go further and invest in private companies.
Venture capital trusts (VCTs) are a type of trust that invest in private equity which come with tax benefits. They offer 30% income tax relief on an initial investment of up to £200,000, tax-free dividends and no capital gains tax on profits.
The catch is that you're more likely to end up with no returns to claim tax benefits on. FCA says only ‘sophisticated investors’, with more than £250,000 to invest and annual incomes higher than £100,000, should use VCTs because of the much higher likelihood of sustaining big losses.
Unlike public companies, private companies aren’t required to provide regular detailed financial statements, so you’re less likely to know if your investment is in trouble and be able to get out before it collapses. The chance of a business collapsing is far higher for less-established companies.
- Find out more: investment trusts explained.
4. Commodities
Some investors aren’t content with investing in companies, but want a direct share of the raw materials that power industries. This could come in the form of metals such as gold or copper, oil or even crops such as sugar.
Investors usually buy into tangible assets such as these through exchange-traded commodities (ETCs).
Commodities and related assets tend to be highly volatile, related primarily to circumstances that are harder to predict. For instance, an abundant wheat harvest could drive down prices, while increasing extreme weather events or an outbreak of war could do the reverse.
- Find out more: investing in gold explained.
Questions to ask before you invest
- Can you afford to lose what you put in? While all investing involves risk, with unregulated and other 'adventurous' investments, losing money is more than an unlucky possibility, there’s a good chance you could end up with nothing.
- Would you need to be able to take your money out of the investment without difficulty? If you invest in a complex financial instrument such as any of the above, it will take a lot longer to get your money out.
- Do you know enough about the type of investment to stake your money on it? Investments such as commodities or cryptocurrency require a level of expertise in the subject matter to reduce the risk involved, so consider if you're knowledgeable enough on the area to understand the influences on your investment.
- Are you putting money into an unregulated area? The Financial Conduct Authority doesn't regulate cryptocurrency or 'real' investments, such as wine or art. This means you won't be able to complain to the Ombudsman about any type of poor service from a company. Only FCA-regulated investments will come with FSCS protection of up to £85,000 if the platform you're using to invest goes bust, although investments themselves are never protected.
Find out more: best investment platforms in the UK 2024.
