Is social media influencing online trading?

There is no doubt that the Internet impacts online trading with information readily exchanged and regulated/unregulated advice available on any topic. We've also seen the emergence of finfluencers, online influences with millions of followers, talking about, promoting and encouraging online trading. However, is this really having an impact on market movements?

 

Online influencers

 

Before we look at the impact of the Internet in more detail, it is important to recognise the role of the finfluencers. While we tend to focus on Facebook and Twitter, TikTok, Instagram, and YouTube are also active mediums for those looking to discuss investment and online trading. Consequently, seeing the reach of just a handful of influences with millions of followers is not difficult.

 

Social media, where fiction can very quickly become fact

 

They say:-

 

"If you tell a lie big enough and keep repeating it, people will eventually come to believe it."

 

While by no means suggesting that all social media comment on online trading and investment, in general, is untrue, this is an environment where fiction can very quickly become fact. It is also an environment where the power of the masses can literally move share prices.

 

We only need to look at January 2021, when members of Reddit worked together to combat hedge funds which had been short-selling GameStop shares. This illiquid market could be impacted by a flurry of relatively small buys and sells. Consequently, when Reddit members started buying GameStop shares en masse, this caused a massive price spike, and many shorters lost significant amounts of money.

 

They weren't buying on fundamentals, inside information or any expectations for the future; they were simply buying to burn the shorters.

 

Appeal of finfluencers

 

The Reddit example was a situation where the masses came together under one campaign to impact the share price. When it comes to finfluencers, these are leaders of would-be investors, many of whom may be relatively new to online trading. They can publish an online diary of their investment ideas and thoughts, and followers will follow them into the market. In many cases, this can create a self-fulfilling prophecy, buying pressure, often on relatively illiquid shares, significantly impacting the price. A recent survey confirmed that 9 out of 10 young followers changed their financial stance following "advice" from finfluencers.

 

It is also important to note that many finfluencers do not give specific trading advice, instead choosing an educational approach. Interactive Q&A sessions allow investors to ask the questions many are too embarrassed or afraid to ask in public. Considering the younger investors of tomorrow are active on social media and often heavily influenced by comments, this could be an exciting route to enhanced financial literacy. There needs to be a greater degree of regulation, something that the FCA is addressing, but this is a potential opportunity for proactive compliant regulated advisers.

 

Is social media threatening the regulatory structure of investment?

 

The fact that the FCA has been forced to step in to firm up UK financial service regulations suggests that social media is a potential threat to the broader regulatory structure. In the future, we will likely see finfluencers working in a more structured manner with regulated companies, with the FCA holding these regulated companies to account. When looking to protect online trading regulations, this is perhaps the most sensible route; unable to control social media, regulated partners will be responsible for all social media output.

 

In many ways, social media and the rise of the finfluencers should be seen as an opportunity to tap into a growing market. A market with an eager audience looking at online trading but needing improved financial literacy/education. Social media will continue to influence the online generation, whether we are looking at finances, spending activities or simple advice and guidance. Therefore, financial service companies and regulators must learn to adapt to this changing world.

 

Conclusion

 

The rise of the finfluencers demonstrates a significant shift in how people approach and learn about personal finance, investing and online trading. Social media will play a pivotal role in shaping the future of financial advice in the digital age. The fact the FCA has made specific reference to social media and finfluencers in a recent consultation reflects this new world.

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