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Avoid Fraud

Following the Crowd: Investing and Social Media

Hand holding a smartphone with stock graph

With zero commissions on trades, lower investing minimums and online trading platforms instantly at our fingertips, investing’s barriers to entry are lower than ever. And investors are joining the market in force: According to the 2021 National Financial Capability Study Investor Report, 21 percent of participants began in investing in non-retirement accounts within the past two years.

Along with an increase in the number of investors has come growth in the variety of sources available to assist in making investment decisions. Use of online resources, such as social media, is prevalent among younger investors in particular. In the 2021 NFCS, a majority (60 percent) of investors under 35 reported using social media as an information source. While ease of access to financial knowledge has its benefits, it also comes with risks.

If you’re among those using social media as an investment tool, here are some tips to consider.

1. Evaluate your source. Social media content can range from interactive discussions between numerous, unverified users to “finfluencer” videos to posts from industry professionals. Many of these individuals might tout financial qualifications or market savvy, but keep in mind that it’s easy to misrepresent yourself online—and even those with legitimate credentials might not provide investment advice that fits your circumstances.

If you’re taking tips from a celebrity or social media personality, consider that person’s qualifications and potential conflicts of interest. Are they a registered financial professional? Do they have a verifiable financial degree or employment experience? What might they have to gain by promoting a particular product? Does their investing philosophy match your own?

Even third-party sources should be approached with caution. Independent social media platforms and some brokerage firms offer tools that analyze or aggregate information from social media sources. Depending on how it’s presented, social sentiment information—particularly real-time discussion platforms and buy/sell indicators driven by social sentiment—can lead to emotionally-driven or impulsive investment decisions, which can be a risky way to approach investing.

2. Check your emotions at the door. Social media thrives on emotional engagement, and investment content is no exception. But it’s wise to separate your feelings from your finances.

Before you make an investment decision, ask yourself whether it aligns with your financial goals. Small dollar investments based on hype around a security might turn into big gains, but they can just as easily turn into big losses. Make sure your investment decision involves a level of risk you’re comfortable with, not the level of risk others might be willing to accept. Social media is public, but investing is personal: Not everyone has the means to take risky bets.

This is especially important in volatile markets, when it can be tempting to make rash decisions. One enduring truth about stock markets is that they go up and down—and the steeper the rise or the fall, the more appealing it can seem to derail a long-term strategy with a snap decision. Rather than acting out of anxiety, focus on your original investment goals and the overall health of your portfolio, and make decisions from there.

3. Know the rules and the risks. Some social media forums encourage investing strategies that can be complex or risky. Make sure you know what you’re getting into before you engage in those behaviors.

For starters, if you’re actively trading stocks, you might qualify as a pattern day trader. It's important to know what that means, because there are requirements you must meet to participate in this kind of trading.

If you’re trading in a margin account, you’re purchasing securities with borrowed funds and can lose more money than you deposit. In addition, your firm can force the sale of securities in your accounts to meet a margin call, sell your securities without contacting you, and increase its margin requirements at any time without providing you with advance notice.

And if you’re trading options, you’ll want to understand this complex market’s unique vocabulary and processes. Take the time to become conversant in options terminology, the different types of contracts available, how assignment works, and the risks involved.

4. Watch your wallet. Social media recommendations to buy the securities of a particular company might urge going all in through taking early withdrawals from retirement accounts or borrowing against one's home. Some forums are particularly inclined to encourage investors to commit large amounts of money or hold onto investments even if it means taking big losses. Be aware that leveraging long-term assets for short-term gains can have significant consequences—from fees and taxes to risk of loss and more.

Remember, there are no “sure things” in investing. This is particularly important to keep in mind when you’re getting information on social media, where you might be more likely to be swayed by confirmation bias or peer pressure. Weigh the potential pros and cons of any investment recommendation carefully, and don’t compromise your financial security by investing money you can’t afford to lose.

5. Avoid and report fraud. Unfortunately, there are bad actors who provide investment advice online while engaging in deceptive or fraudulent practices. Some sophisticated schemes—such as "pig butchering" scams—can be insidious and cost investors considerable sums. If you participate in financial discourse online, be vigilant: Don’t reveal any of your personal financial information, and know the red flags of fraud.

If you’re aware of unfair practices or specific instances of abusive or prohibited conduct, file an investor complaint or submit a regulatory tip to FINRA. If you think you’ve been the victim of internet fraud, file a report with the FBI’s Internet Crime Complaint Center.