Social media isn’t your financial advisor: 5 reasons to be cautious

The Indian stock market has been on a roll over the past few years. This has given rise to several social media platforms sharing stock tips and market insights. A famous class of ‘Finfluencers’ have emerged out of the fame the stock market has earned over the past few years. These financial influencers offer tips, strategies and ideas to their followers. These ideas are shared freely with most of the ‘Finfluencers’ lacking the required SEBI registration.

Now, this trend looks harmless, still it poses a significant risk for investors, and it is essential to approach such social media advice with caution. Here are 5 key points to consider and keep in mind when evaluating investment advice on social media:

Lack of qualifications and conflicts of interest

It is important to acknowledge the fact that most social media influencers lack formal education, training or qualifications in finance. The ideas shared by them are often based on personal opinions rather than sound financial principles. Further, they may even have biases and conflict of interest, such as receiving a hefty compensation for promoting specific stocks and businesses. This can simply lead to biased recommendations.

For example: Some influencers can have personal investments in the asset they promote, creating a clear conflict between their own financial aspirations and the best interest of their followers. That is why all financial influencers on social media should not be considered as final authority on investment decisions. Rather you should reach out to registered investment advisors through SEBI for proper and fair guidance on market investments.

Emotional manipulation and fear-based tactics

Social media influencers often use emotional manipulation and fear based tactics and tricks to drive engagement and influence stock market investment decisions. Fear of missing out i.e., FOMO is a common tool used to create a sense of chaos and urgency, pressuring followers to make hasty stock market investment decisions without proper research.

Further, some influencers may use thrill based words about market crashes or promising overnight money generation to trigger spontaneous emotional reactions rather than encouraging rational thinking.

For example: An influencer might post about a “once-in-a-lifetime” stock opportunity, urging followers to act immediately or risk missing out. This thrill based emotional pressure can cloud rational thinking and proper judgment and lead to impulsive and purely speculative investments. That is why to avoid falling into such traps, take a step back, understand the situation calmly before making decisions.

Herd mentality and market volatility

Social media platforms often foster herd mentality, where investors follow the crowd blindly without conducting their own research. This can lead to speculative bubbles and market volatility as was witnessed during the time of the dot com bubble. Such scenarios can hence result in significant financial losses when market sentiments shift abruptly.

As human nature has it, social media platforms often fuel herd mentality luring innocent retail investors in making similar investment decisions. A situation where investors follow the crowd without doing their own research. Now, it is a given that herd mentality is comforting and luring both, still this idea as a concept should be avoided. Investments should be made after proper research work only and not without intellectual content such as: brokerage reports, earnings of companies, GDP figures etc., backing decisions.

Lack of regulation and scams

Unlike traditional financial advisors, social media influencers operate in a largely unregulated environment. This lack of oversight and any proper regulation makes investors vulnerable to misinformation, expensive financial market courses, exorbitantly high subscription charges, and fraudulent schemes.

SEBI has recently taken steps to regulate financial influencers, but the landscape still remains risky for investors. Sophisticated scams are on the rise, with scammers using social media to impersonate financial experts and lure victims into fake investment schemes.

For example: There are numerous fake telegram and Whatsapp groups. These groups and channels use the names of well known media personalities and market experts to lure innocent retail investors and make them buy lucrative penny stocks. You should be careful of all such groups and avoid any thrill based decisions in your investment careers.

Mitigating risks and alternatives

To keep yourself safe it is important to verify and check the credibility and credentials of any financial influencer. For this you need to conduct independent research before blindly making investment decisions. Go to the official SEBI website and check the list of registered investment advisors before blindly following any financial influencer.

SEBI has taken strict steps in this direction to regulate ‘finfluencers’ to protect the larger interest of investors. There are glaring instances where even individuals participating in famous business media channels have been held accountable by SEBI. That is why, do remember, for sound financial advice, consider consulting SEBI-registered investment advisors who provide tailored guidance based on your individual case.

Conclusion

Now, social media can definitely offer valuable information on financial markets. Still, relying solely on it for investment advice and final investment decisions is completely unreasonable, risky and careless on the part of any sensible investor.

That is why understanding the potential risks, pitfalls and taking calculated steps to verify information along with seeking professional advice from SEBI registered investment advisors can definitely protect the financial well-being of investors and help them in taking sensible investment decisions.

Disclaimer: This article is for informational purposes only and should not be considered financial advice; always consult a SEBI-registered investment advisor before making any investment decisions.