The emergence of free-trading platforms has made it easier for individuals to invest in the stock market, regardless of their financial background. This has opened up opportunities for many who were previously unable to participate in the market due to high fees and other barriers. Furthermore, pandemic lockdowns created a unique situation where people had more time on their hands and were looking for ways to make money. The stock market became an attractive option for many, leading to a surge in new investors.
One might easily assume that the “meme-stock” mania of 2021 and subsequent market scorching of 2022 has driven retail investors away from the stock market for a while. Wrong. During 2023, retail investors have been pouring record amounts into U.S. stocks. It was the flows of retail cash that helped drive a powerful market rebound at the start of 2023, despite the lack of enthusiasm from professional fund managers.
In February 2023, the Financial Times reported that “smaller investors on average have put an unprecedented $1.51bn to work each day over the past month” and “data tracked by JPMorgan showed that in January retail investors accounted for up to a quarter of all stock trading — a record.” This tells us that this army of retail traders is here to stay, and with renewed vigor.
According to a BC Securities Commission survey, Millennials and Gen Z 18-34 are 32% more likely to have purchased or considered an investment they found out about on social media compared with 18% of respondents aged 35-54.
One of the most significant benefits of social media for investors is the abundance of data and information available at their fingertips. Platforms like Twitter, Reddit, and Facebook provide immediate access to news, company updates, opinions, and analysis from industry experts and peers. Social media's real-time nature allows investors to stay informed of the latest trends, events and analyze the market quickly, and make informed decisions, but the fear of missing out (FOMO) can lead to risky investment decisions.
In the past, brokers, analysts, and fund managers were the voice of the markets – a group seen as qualified, regulated, and sufficiently experienced to offer advice. But this new generation of investors are less interested in consulting with financial advisors. The status quo is being disrupted by social media financial influencers, or “fin-fluencers.”
The so-called social media fin-fluencers are providing their followers with a variety of finance-related content, including ads for financial products, personal anecdotes, and knowledge sharing on budgeting and investments. Many do not have financial designations or licenses, and the space is currently largely unregulated.
While social media is easy and free to access, the quality of information on specific trades can be poor, and influencers can overhype certain trades or strategies because they are hoping to make a profit on that strategy.
The increasing popularity of fin-fluencing has piqued the interest of regulators, who are concerned about the potential risks associated with providing inappropriate financial information to the masses. Many (if not most) of these social media personalities are not aware of the laws and regulations that apply to them.
Regulators worldwide are increasingly targeting these individuals who offer investment tips and advice on platforms like TikTok, Twitter, and Instagram. For example, Kim Kardashian agreed to pay a $1.26 million settlement with the SEC for promoting crypto security EMAX on her Instagram account without disclosing she was paid $250,000 to do so.
As new investors look to make their first moves in the market and seasoned investors seek out new information and strategies, it's important for those consuming these influencer posts to know that their advice may not always be trustworthy or accurate. Regulators urge caution when taking financial tips from non-experts on social media, stressing the importance of checking sources and conducting due diligence before investing in anything. While social media provides a wealth of information at our fingertips, it's essential to take responsibility for our own investment choices rather than blindly following popular influencers online.
Financial literacy is a need for all generations, especially given 84% of Gen Z rely on family members for financial guidance. AI and machine learning can help in this effort by simplifying complex topics with natural language generation and helpful graphic representations of information.
The new age of retail investing is not only here to stay - it’s still a growing sector of the stock market. Social media and fin-fluencers have disrupted traditional financial advisory practices, which has drawn regulatory attention. However, there are a lot of young traders and investors now doing the research and learning from their past mistakes. Market investors should not ignore the importance of the “unsophisticated money” crowd.
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