The Financial Industry Regulatory Authority Investor Education Foundation and Stanford Initiative for Financial Decision-Making released research finding that only 18% of surveyed investors demonstrated advanced investment literacy, while 66% had basic knowledge only and 16% had low literacy. Advanced knowledge, largely reflecting an understanding of investment risk, was associated with lower fraud susceptibility, stronger retirement preparedness and healthier financial behaviors. The study assessed 2,861 investors with holdings outside retirement accounts using 13 questions from the foundation’s 2024 National Financial Capability Study. Six of the eight questions distinguishing advanced literacy concerned risk concepts, including diversification, interest rate risk, margin, short selling, option payoffs and priority of claims in bankruptcy. In a hypothetical offer promising a guaranteed, risk-free 25% annual return for five years, 54% of investors with basic-only literacy were willing to invest, compared with 49% of low-literacy investors and 35% of advanced investors. Information sources also differed by knowledge level. Informal sources were used by 74% of low-literacy investors and 51% of advanced investors, while 43% and 13%, respectively, followed recommendations from social media personalities. After accounting for demographic differences, advanced investors were nine percentage points more likely than low-literacy investors to have planned for retirement, eight percentage points more likely to hold emergency savings and 15 percentage points less likely to carry costly credit card debt.

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