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Social media has seamlessly integrated into our daily lives, becoming a primary source of information, including financial advice and investment tips. The rise of self-proclaimed financial experts on these platforms has led to a surge in individuals seeking investment guidance through social media. While the allure of rapid returns and effortless wealth creation is undeniable, the potential risks of relying on social media investment advice cannot be overlooked.

In light of National Financial Literacy Week, Nilesh D Naik, Head of Investment Products, Share.Market (PhonePe Wealth) examines the role social media plays in shaping our financial decisions. Social media can be a valuable source of information, but it’s crucial to be aware of the potential dangers. 

Risks associated with social media investment advice

01. Lack of qualifications – Many social media influencers lack formal training or qualifications in finance or investing. While they may present themselves as experts, their advice may be based on personal opinions rather than sound financial principles. Investors should be wary of taking advice from individuals who cannot demonstrate a solid understanding of investment fundamentals.

02. Conflicts of interest – Financial influencers on social media may have ulterior motives for promoting certain investments. They could be receiving compensation or incentives from companies to promote specific stocks or products, leading to biased recommendations. To attract more followers and subscribers, they may also share content that is not entirely accurate, which can lead to misinformation. Additionally, some influencers may have personal investments in the assets they promote, creating a conflict of interest between their own financial gain and the best interests of their followers.

03. Herd mentality – Social media platforms often foster a herd mentality, where investors blindly follow the crowd without conducting their own research. This can lead to speculative bubbles and market volatility, as seen with the recent GameStop frenzy fuelled by Reddit users. Following the crowd without critical analysis can result in significant financial losses when market sentiments abruptly shift.

04. Lack of regulation – Unlike traditional financial advisors who are regulated by governing bodies, social media influencers operate in a largely unregulated environment. This lack of oversight means there are few safeguards in place to protect investors from misinformation or fraudulent schemes. While the Securities and Exchange Board of India (SEBI) has taken several initiatives in the recent past to address this issue, investors should be cautious when taking advice from individuals who are not subject to regulatory scrutiny and accountability.

05. Overemphasis on short-term gains – Social media influencers often focus on short-term gains and speculative trading strategies rather than long-term investment principles. This can encourage risky behavior and lead to substantial losses for inexperienced investors. It’s essential for investors to distinguish between short-term speculation and sustainable long-term investment strategies to avoid falling victim to impulsive trading decisions.

How can risks be mitigated?

Despite the dangers, there are steps investors can take to mitigate the risks of following investment advice on social media:

Verify credentials

• Before following any financial influencer, verify their credentials and track record. 
• Look for evidence of past success and transparency in their investment approach. 
• Be cautious of influencers who make exaggerated claims or promise guaranteed returns without providing credible evidence to support them. 
• Trustworthy influencers should have a proven track record of making informed investment decisions and providing valuable insights to their followers.

Be sceptical

• Approach investment advice on social media with a healthy dose of scepticism. 
• Remember that not all influencers have your best interests at heart, so always question the motives behind their recommendations. 
• Blindly following the crowd or caving to peer pressure without conducting your own analysis and assessment of the investment opportunity is very dangerous. 
• Trust your instincts and be discerning when evaluating the credibility and reliability of information shared on social media platforms.

Conduct independent research

• Don’t rely solely on social media influencers for investment advice. 
• Take the time to conduct your own research and due diligence before making any investment decisions.
• Verify the information provided by influencers and seek multiple sources of validation to ensure accuracy and reliability.

While social media offers a wealth of information, relying solely on it for investment decisions is risky. The allure of quick profits can overshadow the potential pitfalls. Remember, sustainable wealth is built on sound financial principles, not impulsive social media trends.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)