Essay #1 – Can social media be trusted to be used for investing?

               As many of social distance, they spend the majority of the time stuck at home. Those keen enough looking to grow their financial worth turn to investing as it is easily accessible from laptops, desktops, or even mobile phones. Such apps like Robinhood[1] and Wealthsimple[2] make it easy to start investing today. With high-flying stocks like Tesla[3], GameStop[4], AMC Entertainment[5] on the rise, it is no shock that people want to be apart of it. However, where are these new individual investors getting their stock and market news from and can these sources be trusted?

               Reddit (reddit, 2021) has been a staple public forum where users can chat and discuss any topic imaginable such as cats, memes, funny photos, but most importantly here is investing. With the help of subbredditstats.com, we can see the growth of popular financial subreddits such as /r/wallstreetbets and /r/investing.

/r/investing subscribers
/r/wallsteetbets subscribers

These graphs clearly show the spike in interest in these financial subreddits since the start of the pandemic in 2020 and forward. Since the content is easily accessible, free to everyone and on a popular and supported platform why not join its community?

               These subreddits feature the latest market news, discussion, and personal analysis on securities posted by members of their respective communities. Here discussion is powerful. Users can upvote or downvote the post or provide additional commentary that side with or against the posters. Additional others can upvote or reply to those as well. Aren’t the users of these communities mostly anonymous, how can we trust what they say? Because we are on Reddit, accounts have a footprint of users’ previous posts and comments. This is not a concrete method, but their profile behaviour can help with deciding whether their commentary is genuine, spam or a bot. A forum without rules or moderation can drastically drive down the quality of content and the community. These subreddits are self-moderating, where users can report posts that do not follow the community’s agree upon guidelines. If required, the moderating team can step in to uphold these rules. With enough interactions on posts, comments and moderations of a healthy community that encourages discussions, investors can build a feeling of sentiment on pieces of news from multiple perspectives to build and develop their knowledge and make investing decisions.

               What about the risks of using these forums as stock news or advice? To a novice investor, it is very easy to become overwhelmed and not know what to look for. Without the proper perspective that no user is providing financial advice, investors can get hurt by social trading[6]. This is where users take on unknown risks by following or copying trades from user posts or trends on these subreddits. An example here is a user taking “out a 20k loan + 3k savings to buy [GameStop]”[7] and being burned due to the GameStop hype in /r/wallstreetbets. Popularly in /r/wallstreetbets, users post great gains or losses and attract many viewers and upvotes. Out of those posts, the most harmful posts are the gains posts because they trigger the fear of missing out (or FOMO), an emotional response in regret theory. It is a common fallacy that “if others can make it big I can too”, so users emotionally panic buy, typically at all-time high price and attention. Once the attention fades, the underlying asset price can decline, leaving these investors losing. Here investors need to stay vigilant on these subreddits by investing in their advocation to avoid taking unnecessary risks.

               YouTube and Tik Tok are video platforms that have also seen increased financial content and they often pitch stocks. On these platforms, users can now a link between a real person and their content. However, that factor does not minimalize the risk or make them any more of a financial advisor. Content creators on these platforms get financial gains from the users that watch them from advertising and viewership. They can also be motivated to sell you products and courses that claim to make you a better investor. This opens investors to getting scammed or receiving a product not as advertised. Channels do have comments, but they are moderated by one person, the channel owner without absolute power. Users can discuss, but most comment sections are poorly moderated and full of spam and can be at risk of being removed if you do not agree. Transparency behind the stock’s channels pitch is a major concern behind these video platforms because the channels profit off their content but lock up their trades or secrets behind a paywall.

                Social media platforms are a great resource for investors to obtain, participate, review market news, research and discussions that arm them with the needed knowledge to make financial decisions. Without such platforms, investors would have much fewer options and access to news and resort to centralized media outlets. However there are many risks involved, but knowing how to navigate and filter through bad content on these social platforms will be essential for better personal research, decisions and new ideas.


[1] (Commission-free stock trading & investing app, 2021)

[2] (Get Rich Slow: Invest, Save, Spend & File Taxes, 2021)

[3] Tesla is up 78% in the last 6 months.

[4] GameStop is up 897% in the last 6 months.

[5] AMC Entertainment is up 208% for 2021 alone.

[6] (Social Trading, 2021)

[7] (Took out a 20k loan + 3k savings to buy gme. -50% loss is rough but I ain’t selling., 2021)

[8] (Regret Theory, 2021)

Bibliography

Commission-free stock trading & investing app. (2021, January 6). Retrieved from Robinhood: https://robinhood.com/us/en/

Get Rich Slow: Invest, Save, Spend & File Taxes. (2021, February 22). Retrieved from Wealthsimple: https://www.wealthsimple.com/en-ca/

reddit. (2021, February 22). Retrieved from reddit: https://www.reddit.com/

Regret Theory. (2021, February 22). Retrieved from Investopedia: https://www.investopedia.com/terms/r/regrettheory.asp

Social Trading. (2021, February 22). Retrieved from Wikipedia: https://en.wikipedia.org/wiki/Social_trading

Took out a 20k loan + 3k savings to buy gme. -50% loss is rough but I ain’t selling. (2021, February 5). Retrieved from Reddit: https://www.reddit.com/r/wallstreetbets/comments/lbxn76/took_out_a_20k_loan_3k_savings_to_buy_gme_50_loss/

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