Written by Sanni Heikkinen

Investing in the age of social media - How does it influence your investment decisions?

Investing has grown in popularity over the last ten years, for example, and is no longer just for professionals. With the mainstreaming of investing, it is also increasingly present on social media. Almost 80% of institutional investors regularly use social media in their work, and around 30% report that information from social media has influenced their investment recommendations or decisions (Technology in Society 2022). In this post, we explore the opportunities and challenges that social media can bring to investing.

Let's start by looking at why investing is so popular today.

Technological advances have opened up numerous opportunities for investing. New easy-to-use platforms allow you to invest directly from your phone, making it more accessible than ever before. The threshold to start investing is therefore much lower. On the other hand, technological advances have made it easier to exchange ideas and thus learn new things. You can find investment-related content just by browsing the social media.

Low interest rates are another key reason for the growth in investment popularity. Traditional forms of savings, such as savings accounts, no longer offer a significant return on money, which has led many people to seek better returns in the investment market. In addition, growing uncertainty about future pensions is prompting many to invest their assets to secure their future income.

Since the beginning of 2020, it has also been possible to invest in Finland through an equity savings account, which has contributed to making investing simpler and more attractive, as investors only have to take tax into account when withdrawing income from their account. The ease of opening and maintaining an equity savings account is therefore likely to attract more people to invest.

HOW DOES SOCIAL MEDIA AFFECT INVESTING?

Social media is full of information and tips on investing. On different platforms, private investors can engage in discussions about the market, watch educational videos or read analyses written by professionals. Information structured in an easy-to-understand format is available to everyone, making investing itself more accessible. It also brings a sense of community to an otherwise rather lonely investment hobby.

Young people in particular have taken to social media as a source of investment information, which may help to explain the growing popularity of investing among young people. Did you know that up to 44% of investors aged 16-25 in Finland have heard or learned most about investing from social media (OP Group 2023)? Podcasts and videos offer a comprehensive range of diversified information and picking up a book is no longer the only way to learn about growing your wealth. For older age groups, on the other hand, the bank is the main channel for learning about investing, while traditional media such as newspapers and television play a more important role compared to young people. Family and friends also have a major influence on learning about investing, especially for young people.

On the other hand, social media can even make investing look too easy. Indeed, you often come across stories of sudden wealth creation, which gives the impression that you can double your wealth very quickly. In reality, however, investing is a long-term activity that requires time and patience, which may come as a surprise to many beginning investors.

FOMO, the fear of missing out on something important if you don't participate, is also an essential part of social media. Investors may also feel pressure to participate in trends when they see others succeeding and hear about it on social media. This can even lead to overly hasty investment decisions, which may be based more on emotion than on thorough research. Hastiness is therefore one of the downsides of the social media.

It is also possible for investors to influence markets and, for example, individual share prices through their collective actions, but this requires a number of people. More on this next!

SOCIAL MEDIA & INVESTMENT SCAMS

While social media is a great platform to find good information and useful tips, there is also a lot of misinformation out there. It is therefore extremely important to take all information with a grain of salt and not directly believe everything you see on social media. It is also wise to do your own research before making a purchase decision, rather than blindly following the masses. It is also worth bearing in mind that tips or advertisements that often seem too good can be deceptive. Let's look at some of the common scams that you may come across on social media.

Pump and Dump is a well-known investment scam where investors artificially increase the value of a stock or other investment by spreading positive information about it, creating demand and causing the stock price to rise. They then sell their own shares at a high price, which causes the value of the item to fall sharply and other investors may lose money.

In 2021, GameStop's share price exploded. This event was triggered on Reddit's Wallstreetbets discussion board, where retail investors encouraged each other to buy a stock that had been shorted by many large hedge funds (a mutual fund that seeks to increase its value regardless of market conditions). This phenomenon is known as meme investing, where investment decisions are based on social media hype and not necessarily on traditional analysis. The schematic below explains in more detail what really happened back then.

Short-selling is an activity where an investor borrows shares with the intention of selling them on to the market in the hope that they will fall in value and can be bought back at a lower price, thus making a profit.

Cryptocurrency scams are also unfortunately common on various social media platforms. Advertisements, made as believable as possible, are used to promote shady sites that claim to offer a cheap and fast way to buy cryptocurrencies. Often the risk is claimed to be almost zero and the returns are high. Scammers seek to create a sense of urgency and pressure on their target, making irrational decisions more likely.

A typical feature of such scams is that the investment is often initially rewarded in order to make the activity look credible and to induce the client to invest larger sums. In reality, however, the investor may never get their money back as these sites turn out to be scams.

In 2023, Finns lost at least €16 million to investment fraud and up to €44 million to all online fraud (Finanssiala ry 2024). The increase from the 2022 figure was as much as 91%, which may be partly explained by the growing popularity of cryptocurrencies and the resulting rise in the number of related scams. In reality, the amounts are likely to be much higher, as not all information is passed on to the banks.

But don't be discouraged! There is also a lot of valuable and interesting information on social media. The key is to use your own common sense and think twice if something looks too good to be true.