How Social Media Influences Investing
May 21, 2021
Ever since the advent of online chat rooms, internet users have gathered to share information and advice about investing.
More than a quarter century after those early forums served as the place to go for stock market tips, social media networks have become the modern-day equivalent. These massive global networks boasting hundreds of millions of users give investors an environment to connect and share, no matter whether they’re working at a desk somewhere or simply holding a smartphone.
What makes social media networks uniquely interesting from the standpoint of an investor, however, is not just their ability to facilitate the kinds of large-scale connections that helped drive recent spikes in otherwise-overlooked stocks such as AMC, GameStop, and the cryptocurrency Dogecoin. It’s the manner in which the information shared on social networks serves as a reliably accurate barometer for the emotions and reactions that ultimately drive so much stock market activity and investment decision-making.
However, no matter how experienced individuals may be either as social media users or investors, caution is always warranted when attempting to leverage potential investment opportunities uncovered or discussed on social media. Here are some things to be aware of.
Make sure information is accurate and trustworthy
The information shared through social media channels is often not 100 percent reliable, so some rigorous checking of sources is always required. Is the account you’re looking at legitimate, or is it an imposter posing as someone else? Is the advice based on sound investment strategy, or an emotion-based gamble like the recent Dogecoin surge?
Even when posts come from official, verified accounts, they may not always tell the whole story, or provide adequate context. In some circumstances, posts may be deliberately misleading. Needless to say, it's important to check that you have all the available facts before making an investment decision based on information obtained from a social media account.
What’s right for someone else isn’t always right for you
Sometimes, even trusted sources can’t be trusted to give you reliable investment advice. Say a fellow social media user whose opinion you respect advocates for a certain investment purchase. While you might be tempted to jump on board, remember that the other person doesn’t necessarily understand the realities of your personal position. You and the other user may have different investment time horizons, risk tolerances, and objectives. Some advice is universal. Other times, you need something that’s tailored to your specific situation.
Don’t let emotions get the better of you
Social media interactions tend to provoke strong emotions in people, and our reactions aren’t always in line with the exchange that initiated them. In such an emotionally charged, combustible environment, it’s not always easy to maintain the clear-headed, rational mindset that typically leads to wise investment decisions. If you’re feeling fired up about something you read or saw in a social media post, consider taking some time to cool down to give the decision some sober second thought before making a move you might regret later.
While social media can be a good starting point when it comes to connecting with trusted sources and advisors, a sound investment strategy does not typically involve jumping on the latest trending stock that is being fuelled by a speculative frenzy. Though there are lots of headlines about people who made a lot of money in just a few days by investing in a temporarily buzzy stock, there are just as many stories of those who lost money on the same stock. Unless you are both willing and expecting to part with those funds, it is best to invest your hard-earning money using a proven, long-term strategy developed by a reputable advisor.