Survey Shows Gaps in Investor Knowledge

Most investors mistakenly believe the government will cover them against fraud by their broker and lack basic knowledge of how investing works, a survey shows.

At least four of five investors surveyed failed a five-question “investor survival” quiz developed by the Securities Investor Protection Corp., which insures brokerage accounts in the event of firm bankruptcies, and the National Assn. of Investors Corp., an umbrella group for investment clubs nationwide.

Fewer than one in five investors polled knew there is no insurance to cover stock-market losses or losses from investment fraud. Many believe that the Securities and Exchange Commission or the Federal Deposit Insurance Corp. provide such insurance.

The telephone survey of 933 adult investors also found:

* Nearly two in three respondents did not know what to do first when they suspect they are dealing with a problem broker. Only 36% knew they should explain their concerns in writing to their brokerage firm and keep a copy for themselves. Documented complaints are crucial to investors’ efforts to recover money, officials said.

* More than four in five do not understand how margin accounts work, including brokerages’ ability to call in margin loans. Investors buy stocks on margin by borrowing part of the purchase price from their brokerage and putting up the securities as collateral for the loan.

To see the quiz on the Internet, go to https://www.sipc.org.