By Ben Hobson, Markets Editor, Stockopedia
When users of the online discussion site Reddit banded together recently to bid up the price of shares in GameStop Corp., it showed just how influential – and risky – some online investing communities can be.
But Reddit isn’t the only online resource that’s proving popular with investors. Social media platforms are attracting large audiences looking for ideas – including TikTok.
Videos with the hashtag #Investing have so far racked up over 2.2 billion views on TikTok, opening up a world of investing to millions of younger people. But it comes with big risks – there is a very real danger of losing money if (and when) things go wrong.
Ben Hobson, Markets Editor at Stockopedia talks about some of the dangers of the TikTok investing craze and how to avoid the risks…
More and more young people are turning to social media platforms like TikTokto find investments with the promise of life-changing profits.
Economic turmoil and low trust in financial institutions has left a generation of investors thinking differently about where they invest and who they listen to. In fact, according to brokerage Charles Schwab, 80 percent of millennial and Gen Z investors believe recent economic difficulties are making it harder to get good investment returns.
With social media platforms like TikTok enjoying huge global reach, it’s no surprise that they’re now influencing the investment decisions of millions around the world.
Earlier this year, the now infamous trading frenzy in US games retailer GameStop Corp, showed how “viral” trends can have a huge impact on individual securities. That was intensified by TikTok videos encouraging viewers to take considerable financial risks in return for what they portrayed as a guaranteed win. For many, the episode simply resulted in losses.
Events at GameStop and other stocks like it have raised fears that apps like TikTok are a new frontier for the kind of stock market manipulation regulators have been battling for decades.
Recently, the Financial Conduct Authority has specifically warned that videos on apps like TikTok are a major risk to young and inexperienced investors.
Part of the problem is that the sense of community on social media platforms can lead to herd mentality. This psychological togetherness is what makes the apps popular. But it’s a huge risk in investing and it’s often blamed for whipping up manias and bubbles.
Sadly, it’s the unprepared amateur investors that are most likely to be left with stomach-churning losses when the frenzy dies down.
Beware of scams
Beyond videos that overpromise, there are also outright scams. And TikTokhas been a lucrative target for criminal groups.
These scams range from the notorious ‘Money Mule’ money laundering scam to much more common ‘day trading’ cons and even celebrity-endorsed money-making schemes.
Videos from these accounts often promise high returns for following their advice and signing up for exclusive subscription services to get ‘insider knowledge’ on the markets.
Users can find themselves enticed to visit websites that often have very little information about the company’s management, location or details about what they do. These are serious red flags and should be avoided at all costs.
Be careful who you trust
Social media has created a revolution in the way consumers connect and interact. But the risks for investors tempted by the promise of quick wins are very high.
Excessive promotion, clickbait, herd mentality and even criminal scams are not always easy to detect. So be wary of these risks.
Always double-check any advice you find on social media using a trusted, independent source. With additional research, you can make an informed risk versus reward calculation to see if something is worth investing in while guarding against false claims or scams.
Here are some top tips to remember:
Be wary of users that promote high-return investments. Remember that risk and reward go hand-in-hand, so if what is on offer seems too good to be true, it probably is.
Investigate investment ideas by doing your own research. There is no easy button in investing but doing your homework can pay off. There’s no such thing as a perfect investment, but financial data will tell you what you are dealing with.
Remember the age-old warning about consulting a financial adviser. At the very least, discuss your ideas with someone you trust before parting with cash.
Never open an e-currency account to transfer money to an investment scheme. This is an unregulated space that fraudsters use to avoid detection.
If you’re keen on becoming a successful investor, consider signing up to a reputable investment platform for expert guidance, ratings and portfolio management support.
If you’re in any doubt at all, swipe-up and walk away.