FINRA research highlights investment literacy gap among U.S. investors

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FINRA highlights literacy gap

Highlights

Only 18% of 2,861 investors surveyed in the 2024 National Financial Capability Study demonstrate advanced investment literacy, with risk knowledge the primary differentiator.
74% of low-literacy investors rely on informal information sources, while only 51% of advanced-literacy investors do, correlating with higher fraud vulnerability.
Advanced investment literacy increases likelihood of retirement planning by nine percentage points and reduces costly credit card debt by 15 percentage points compared to low-literacy investors.

Research findings on risk knowledge

As reported by FINRA, citing the Financial Industry Regulatory Authority, the FINRA Investor Education Foundation and Stanford Initiative for Financial Decision-Making have released research based on the 2024 National Financial Capability Study examining how investment literacy shapes financial decisions and outcomes.

The study, titled “What Separates Sophisticated Investors? Risk Literacy and Investment Decision-Making,” uses data from 2,861 investors who hold investments outside retirement accounts. It introduces a measure that separates low, basic-only and advanced investment literacy across 13 investment knowledge questions.

Only 18% of surveyed investors demonstrate advanced investment literacy, while 66% fall into the basic-only group and 16% into the low-literacy group. The research says advanced literacy is largely defined by risk-related knowledge, with six of the eight questions separating advanced investors focused on issues such as diversification, interest rate risk, margin buying, short selling, option payoffs and bankruptcy claims priority.

FINRA Foundation President Christine Kieffer says the findings underscore the need to emphasize risk-related concepts in investor education and to strengthen fraud recognition as a complementary area. IFDM Research Director Andrea Sticha says most investors understand basic concepts, but far fewer develop the risk knowledge that marks advanced literacy, leaving a clear need for more tailored education.

Implications for fraud exposure and household finances

The research also finds that where investors get information is associated with what they know. Nearly 74% of respondents with low investment literacy rely on informal sources such as friends, family or colleagues, compared with 51% of those with advanced investment literacy.

Fraud vulnerability is also higher among those without stronger risk knowledge. Willingness to invest in a hypothetical offer promising a guaranteed, risk-free 25% annual return for five years reaches 54% among investors with basic-only literacy, compared with 49% among low-literacy respondents and 35% among advanced-literacy investors.

After accounting for demographic differences, investors with advanced investment literacy are 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 than investors with low investment literacy. The findings point to a broader financial services challenge in the U.S., where improving understanding of investment risk could support both investor protection and long-term household financial resilience.

In our earlier article on warning signs in the private credit market, we examined how opaque nonbank lending is facing rising redemption pressure and early defaults that could expose risks investors don’t fully see in real time. We also noted that liquidity limits at some large funds can amplify stress if confidence weakens, highlighting why understanding risk and product structure matters when conditions tighten.

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