ICAS Lecturer, Nisha Sreedharan CA, discusses the recent trend of financial advice being given on social media channels in our latest blog post and whether people are being made aware of the risks.
During lockdown many of us have used social media as a means of combating boredom, loneliness or connecting virtually with the world around us. As a distraction from working or studying, social media platforms such as TikTok are often used. TikTok is well known for its short videos of dance routines, comedy sketches, lip syncing and of course cats… we can’t seem to escape cats on social media.
However, lately there has been an increase in the number of videos released on TikTok with hashtags such as #fintok or #stocktok. These short videos provide investment advice and tips to any user with a TikTok profile. These videos raise questions as to whether TikTok users are being misled or given poor financial advice. The stock tips sometimes allude to large returns in short time frames without advising users of the various risks involved. The number of these type of videos on TikTok has increased following the recent events involving GameStop.
In January 2021, GameStop, an American high street shop selling games, consoles and other electronics, saw a massive increase in their share price as a result of users of the social media site Reddit influencing other users to invest in the company. Many hedge funds had expected the GameStop share price to fall due to the impact of the pandemic and had structured investments in such a way as to profit from a falling GameStop share price (this is known as short selling). Millions of people on the Reddit forum #wallstreetbets were able to use ‘the power of the people’ to increase the share price of GameStop, thereby costing the hedge funds millions of dollars while possibly making profits themselves on the share price increase.
Following the publicity around the GameStop saga and the subsequent increase in the number of investment tips being shared on social media platforms, the UK’s Financial Conduct Authority issued a warning saying people should be cautious of social media users “promising high-return investments” and recommended that further research should always be undertaken on any investment product being considered.
Risk and Reward
When undertaking any investment, risk should always be considered. Risk is the exposure we have to events that affect the return on an investment. Understanding the risk involved and risk appetite is imperative. Higher rewards usually mean higher risk. An investment portfolio containing riskier assets may produce higher returns but could also result in the loss of the principal. A diversified portfolio of investments can reduce this risk, although it will never fully be eliminated.
The level of risk people are comfortable with is a very personal decision and can depend on many factors including age, wealth, and personality traits.
Knowledge and Experience
Contrary to the videos on TikTok that imply experience doesn’t matter, knowledge and experience will assist with good investment decisions and judgements. A better understanding of the company, the industry, the market, its financial position, and key ratios will help make more informed investment decisions.
Seeking professional financial advice, speaking with experienced investors, and undertaking research will help mitigate losses.
Focusing on long-term strategies enables investors to withstand the upward and downward fluctuations of share prices. The stock market can be influenced by a variety of factors and world events can increase the economic risk and influence market perception. A longer-term investment strategy can benefit investors, providing a better chance of obtaining positive returns.
TikTok has advised that it has removed deceptive content promising high returns but personally I’ll take my financial advice from the experts and leave social media as a source of entertainment… and hilarious cat videos.