It is no secret that we are completely immersed in social media. These platforms provide information on virtually every product or service available. Companies have been using these platforms extensively to reach out to prospects and customers. Every time we use our phones, we receive various pieces of information. Some of this information is genuine, while other content is misleading, leading to scams that can deceive people.

In the financial space, financial influencers, also called “finfluencers, have used platforms like Twitter, YouTube, and Instagram effectively to build a business on financial literacy or education. They have played a pivotal role in making finance- and investment-related information relatable, easy to understand and relevant to the next generation.

Today investors now seek out information from the various platforms.  Google, X , YouTube, and Reddit have emerged as crucial sources of financial information for retail investors. They rely heavily on these sources for the investment decision-making. Now here comes the twist: while we believe that investment decisions are taken rationally, the fact is that they are very emotionally driven. And this is where relying completely on these platforms for investment decisions can be tricky.

Social media has made financial information more accessible to everyone, but it has also increased the risk of impulsive, emotional, and herd-driven investment decisions. Over the past couple of years, many individuals have fallen victim to investment schemes and scams.

If you look at it closely, you will see that social media influences investment decision-making in several significant ways:

Firstly, herd mentality and FOMO (fear of missing out): platforms tend to amplify trending topics, themes, and financial products like stocks or crypto assets, making it sound like we will be missing out if we don’t take action immediately. This makes investors rush to buy or sell based on hype rather than analysis, fearing they’ll miss out on quick gains. Investors forget that it’s a journey, a marathon, not short sprints; understand if the product aligns with your goals before investing. This herd mentality and FOMO have led to a surge in both crypto and Demat accounts. Did you know India has almost 95 million crypto users and 175 million Demat account holders? As per SEBI report, the number of individual traders who traded intraday through top 10 brokers had increased 4.6 times to 6.9 million in 2023 (this could be more now) from 1.5 million in FY19. 

Secondly, access to unfiltered opinions and tips: while there are qualified and genuine influencers whose insights are valuable, there are bad apples too. Many influencers, self-proclaimed experts, and anonymous users share investment advice freely, much of which could be speculative or misleading, leading to uninformed decisions.

Thirdly, echo chambers and confirmation bias: we all know that platforms work on algorithms that will keep pushing the same data and information repeatedly, not allowing you to see and understand counterviews. This can lead to you thinking that you are in the right direction, but that may not necessarily be the case, as you will realize later (too late, perhaps).

So as an investor who seeks information from the various online platforms for your investments, it’s important to

–          Verify the information.

–          Check if it aligns with your risk and goals.

–          Do not take immediate action; pause before you act.

–          Discuss with professionals if the amount being invested is big.

–          Analyze data from different sources.

–          Don’t get carried away with videos and reels; get into the depth of it. 

Critical thinking and due diligence are more important than ever in the social media era.