Social media has rapidly become part of our lives over the past decade. While there are plenty of advantages — such as keeping in touch with friends and staying up to date with the latest news — there are also many dangers from it.
The social dangers are well known, including keeping your children safe or strangers potentially knowing your whereabouts, but there is a new danger emerging on various platforms: activist day traders.
With the likes of Instagram and TikTok investment influencers, we are starting to see a serious risk to people’s wealth. They are incredibly easy to find and, once you have viewed one, the algorithm shows more of the same topic in your timelines.
There are hundreds of accounts across Facebook, Instagram, Reddit, TikTok and YouTube that make bold claims about the returns they have made and manipulate viewers into thinking they can achieve the same results by using extremely high-risk methods.
The Financial Conduct Authority has said that consumers should be wary of users “promising high-return investments” because many videos give advice on stock trading without any disclosures or regulatory approvals.
The Reddit platform has gained notoriety for users promoting investments. In January, the subreddit WallStreetBets made headlines when a small group of members caused a short squeeze (a rapid increase in the price of a stock due to short selling), resulting in major financial consequences for some hedge funds.
The brokerage app Robinhood then restricted trading of certain stocks, which caused uproar from the subreddit members, and US politicians also waded in, with representatives Alexandria Ocasio-Cortez citing the restriction as “unacceptable” and Rashida Tlaib labelling it as “market manipulation” to protect hedge funds.
Whether or not you believe that the events at the start of the year were lawful, it is clear that there is next to no protection or regulation when it comes to day traders and social media influencers for investments.
Chief executive and founder of deVere Group Nigel Green says the so-called activist investors have tapped typically inexperienced, younger people who may lack the financial resources to be resilient against usually highly speculative and volatile investments. He adds: “By being unaware of the high level of risk involved in these social media-led activist investment campaigns, people are playing a potentially very costly game.”
Green says there is a big difference between investing and gambling.
“I would avoid piling in to stocks pumped by social media influencers. If you want the thrill of chasing big gains, you really should ensure that you have a sound, diversified long-term plan beforehand,” he says.
Platforms and regulators must get a grip on this bad advice
Social media influencers dabbling in the investment space were a fascinating feature of the pandemic. Providing investing tips and using affiliate links to trading platforms
are a lucrative source of income for those with a significant online following.
Most of the investing content we see on social media is ill informed or downright dangerous.
While it is excellent to see a new generation getting fired up about stocks and investing, the platforms and regulators need to take a more proactive approach to protect vulnerable investors from bad advice and scams.
Martin Bamford is a non-advising chartered financial planner at Informed Choice
The concern is about not just potential activist investors losing money, but also the possibility of being scammed easily. AJ Bell senior analyst Tom Selby warns that the UK is in the grip of a scam epidemic, particularly on pensions.
He says: “Holding social media firms and internet companies accountable for the content they display would be a huge step in the fight against fraudsters, allowing authorities to get a grip on a scam-ridden world that increasingly resembles the Wild West.”
There are plenty of scams out there, particularly regarding cryptocurrency and foreign exchange, but the FCA has no power to stop such accounts.
With many in the industry calling for investing to become more accessible, especially to younger people, it could be argued that videos and social media platforms are a useful way to attract investors. Given the difficulty in regulating these accounts, however, the question remains whether social media needs to do more to protect investors, including working with the FCA to control accounts that promote investments.
This article featured in the May edition of MM. To read the full digital magazine click on the cover image below.
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