Five ways young people can learn to invest (not gamble) in shares

1. Consider who is giving you advice

A licensed financial planner has a legal duty to act in your best interest. They must put your interests above their own. This is not true of journalists, websites, trading platforms, or anyone offering advice on a forum.

The rise of 'social trading' brings together many forces, and not all align with an investor's best interests. The sudden surge in US gaming company GameStop, initially spurred by some users in the Reddit community WallStreetBets, is just one example.

Another is the popular trading platform eToro, where investors can 'copy' the portfolios of top traders or institutions.

eToro says investors working together in this way can potentially improve their performance because investing is no longer a zero-sum game.

This is classic momentum investing, where a group pushes a price above its fair value. Inevitably, some investors are left to pay the price when it comes back down to a level closer to the underlying fundamentals.

2. Understand valuations

Buying a share is buying a slice of a company's future earnings. Often popular stocks among first-time investors are highly speculative or have never posted a profit.

There are many ways to value stocks, such as price-earnings ratios. Investors need to learn the basics of how to value what they're buying and not just look at the brand name and latest media coverage.

If you can't identify an economic reason why a stock is going to generate future profits in the form of dividends or compounding share price growth, you shouldn't own it. 

FOMO and momentum, rather than underlying valuations, are driving too many investor decisions. Time will tell if things really were different this time. We suggest investors stick with the fundamentals.

3. Know what you're investing in and understand the risks

The website of Superhero trading platform (backed by the founders of Afterpay and Zip) touts "Sick of financial FOMO?" on its pricing page.

Fear of missing out is not a reason to invest. As the small print at the bottom of the site also warns: "All investment products have an element of risk. As share markets go up and down, so too can the value of your investment."

The relationship between risk and return is a fundamental tenet of investing. Higher returns attract higher risk, which comes in many forms. FOMO implies that few are considering the downside.

Some asset classes are more volatile than others, with highly speculative assets such as cryptocurrencies gaining in popularity. Widespread marketing also influences perceptions among retail investors that these types of assets are commonplace.

CFDs, which last boomed in popularity before the Global Financial Crisis (2008-2009) have also made a return. ASIC recently put a new cap on their leverage and warned investors about the dangers.

Even eToro warns its CFD investors that "you may lose more than your initial investment" and that "67% of retail investor accounts lose money when trading CFDs with this provider".

It is incumbent on investors to consider the downside – not just the upside – of their investments.