DUBAI, UAE — Social media has exerted a significant influence on the way business is conducted, and the online trading industry is no exception. With 4.76 billion active social media users worldwide, as reported by Kepios, comprehending the advantages and disadvantages of social media’s impact on online trading and investing is crucial.
The Pros
Social media has opened up opportunities for independent and self-motivated online traders. As cited by Bloomberg, retail traders accounted for 23 percent of the stock market’s total volume in late January. Financial guidance is actively sought on social media platforms such as Twitter, YouTube, Instagram, and TikTok, especially by younger traders and investors.
According to Forbes, a remarkable 79 percent of millennials and Gen Z members have sought financial advice from social media. Platforms like Twitter and the video-sharing app TikTok, often referred to as “Fintok,” have fostered a sense of community among traders. The transparency of social media has also made it more accessible for inexperienced traders to learn from seasoned peers.
The sheer volume of social media messages has created an unparalleled repository of financial data for the online trading industry. Copy trading platforms have further democratized capital markets, allowing individuals to automatically replicate the trades of experienced traders.
The rise of copy trading platforms has democratized capital markets, enabling a larger segment of the population to participate in the economy. For instance, Robinhood estimates that the number of monthly active users investing through the company’s platform reached 11.4 million as of December 31, 2022. The expansion of retail trading to an increasingly broader audience has become a driving force in economic growth.
The Cons
According to MIT neuroscientists, the human brain takes 13 milliseconds to recognize an image upon seeing it. As noted by AdAge, Facebook mobile users spend an average of 1.7 seconds on each post, compared to 2.5 seconds for desktop users. Consequently, markets can react swiftly and dramatically to news disseminated at the speed of social media.
The rapid pace and fervor surrounding social media have introduced volatility into financial markets, leading to instances where stocks, particularly “Meme stocks,” become overvalued as investors chase short-term gains.
Notably, Reddit’s r/WallStreetBets played a pivotal role in amplifying this trend. In the middle of 2019, a Reddit member with the username Roaring Kitty boasted about a $53,000 investment in GameStop that went relatively unnoticed due to the company’s financial struggles.
However, Roaring Kitty’s persistent online promotion of GameStop on platforms like YouTube and TikTok in 2020 caught the attention of Redditors, resulting in increased investments in the stock. This highlights the profound influence of social media in reshaping market dynamics.
The proliferation of commission-free trading driven by social media has disrupted the market’s traditional infrastructure, impacting both brokerage firms and traders. This disruption is further compounded by the emergence of independent online traders who often promote biased and inaccurate trading decisions, particularly on platforms like Twitter and TikTok, known as “FinTok.”
These platforms have given rise to a new generation of self-proclaimed financial “experts” or “finfluencers” who make extravagant wealth claims to unsuspecting investors, primarily among Generation Z.
The “finfluencer” phenomenon facilitates the dissemination of unverified information within the trading community, amplified by social media algorithms. In response, in April 2021, the Financial Conduct Authority (FCA) issued a warning to social media platforms regarding the promotion of potentially unsafe or fraudulent investments.
While discussions about potential legislation to label influential users’ recommendations as “unverified” or “risk assessed” have taken place, a concrete strategy to address this issue remains elusive. This unchecked trend has broader consequences, including the fear of missing out (FOMO), addiction, delusion, and unproductive comparisons in online trading, underscoring the uncertainties associated with social media’s impact on financial markets.
Joy Dabeet is Chief Marketing Officer at amana.
The opinions expressed are those of the author and may not reflect the editorial policy or an official position held by TRENDS.