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Social media – 6 red flags for investors

Investing has become a popular topic on social media networks like TikTok, Instagram and Reddit. We share six red flags investors should look out for.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

There are more and more people using popular social media platforms like TikTok, Twitter, Reddit, Discord and Instagram than ever.

Recently, we’ve seen trending topics like sea shanties, Parish Council meetings, and lawyers who aren’t cats.

And also, investing.

The Financial Conduct Authority said people should be wary of social media users “promising high-return investments”.

While there are some great creators out there, with some engaging content, there’s also a lot to be cautious about.

Here are our six red flags for social media content you should watch out for.

This article isn’t personal advice. Investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, speak to a financial adviser.

1. Are they qualified or experienced enough to give investment tips?

Professional investors and advisors spend years studying to get the necessary qualifications and experience to give advice or invest on people’s behalf. Social media users might not have the right qualifications or know-how to give investment advice.

A lack of regulation on social media also means if their information is wrong or leads to a bad outcome, you have no way of complaining. You’re relying on the social media company to police this content, and they might not be experts in this area either.

2. Their content is too short

TikTok videos can be up to 60 seconds long and Instagram stories just 15 seconds. Perfect for copying the latest dance trend, but less so for investment advice.

While multiple stories and videos can be combined to talk about an investment, it’s unlikely a strong case can be built off the back of a video or post that’s so short. It’s also unlikely they can cover all the important information you need to know in that time.

Although it might not be fun reading a company’s latest financial report or the factsheet of a fund, it’s important to have all the facts before investing your money.

3. They ignore the risks

There are risks to investing but that is not always a bad thing. You might not meet your goals if you don’t take the right amount of risk.

But you need to be aware of the risks you’re taking. A lot of the content on social media we’ve seen doesn’t give any of this information.

Sometimes we might feel very adventurous and willing to take a high risk for a high reward, but you need to be ready to lose it all.

Would the loss impact your retirement plans, or your lifestyle? If the answer’s yes, then you shouldn’t be investing that money.

Everyone’s situation will be different, and risks that make sense for one investor might not be right for another. Make sure you’re happy with the amount of risk you’re taking.

Find out more about Risk

By investing directly in shares, bonds, ETFs, investment trusts or funds, you can lose the money you initially invest, or any potential future interest or income. But some leveraged investments promoted by content creators, like Contract for Difference (CFDs) and spread betting, could mean you lose more money than you invest. Investments like these are normally only suitable for sophisticated investors.

4. They only talk about the gains

A lot of the time, users will only show an investment that’s made them money, and how it could make you rich too.

Although someone might have done well in a rising US market, which we’ve seen since the coronavirus crunch, that doesn’t mean they’d do well in a falling one.

Investments go up and down in value – that’s just a fact. And if someone is only talking about the good times, what about the bad times? Remember, past performance isn’t a guide to future returns.

The examples they give are usually where they’ve bought at a very low price and sold at a high price. These trades might have been specially chosen to show the best performance possible. In reality it’s near impossible to get that right every time.

Even the best fund managers and stock pickers suffer losses.

Your returns could be very different from the ones shown on social media and you could get back less than you invest.

5. They think short-term

Investing is for the long term. Buying and selling stocks for short-term profit is pure speculation rather than investing.

Some social media investment pundits don’t plan on you holding the investment for a long time. Instead they suggest you sell it soon after, without telling you when.

It’s not easy knowing when to buy and sell. Knowing whether something will continue to go up or not is like flipping a coin. Even experts can’t predict short-term price movements all the time.

It might also cause you a lot of anxiety staring at the screen and checking up on it constantly. While it might be exciting for some, it could be distracting or harmful in the long term.

We can learn from one of the most famous investors of all time (though he’s not TikTok famous yet). Warren Buffett said, “if you wouldn't feel comfortable owning a company's shares for ten years, you shouldn't own them for ten minutes”.

Having “diamond hands” should really be about holding a well-diversified portfolio for the long term – by long term we mean 5-10 years, not days, weeks or months. That means when some investments aren’t performing so well, you’ll have others to pick up the slack.

Read more on investing vs speculating

6. Why are they helping you?

Sometimes you need to ask yourself why someone is offering you help or content. Is it because they’re genuine and want everyone to succeed?

It might seem great if lots of people club together as a community to make some money, but the narrative might be hiding what’s really going on in the background.

Some users will try and make a stock look good and persuade others to invest so the price rises which benefits them. You don’t know if the information they give is false or irrelevant.

This can steer investors into herd behaviour – where investors follow what everyone else is doing, rather than doing their own research. Just because an investment is right for someone else it doesn’t mean it’s right for you.

Herding can also lead to stock market bubbles where the price of an investment doesn’t reflect the real value of it. The share price moves, which seems to back up the claims of the person who started promoting the stock.

But a bubble will eventually burst and prices will fall back – your investment could suffer.

Stock Market Bubbles – lessons from history

Learn more about investing

If you’re looking for the best ways to get started or want more knowledge about investing, we can give you the information and tools you need. That way you can invest with confidence and thank yourself later.

We've covered what we think you need to know, from rules of thumb, to understanding how to manage behaviours to make the right decisions.

Learn more about investing

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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