Section III: Potential Benefits and Risks
The growing influence of social media on investing behavior and decision-making can offer, in relevant circumstances, potential benefits for investors, but it also may carry potential risks that should be carefully considered. Certain potential benefits and risks are noted below.
Potential Benefits
- Increased access and wider ranges of investment information: Social media platforms may facilitate investor access to investment-related content, advice and ideas shared by a wide range of sources, including finfluencers and online communities. This may help expand access to financial information.42 In addition, access to social media sentiment data may serve as a new source of information for investors that may provide useful insight.
- Potential to improve engagement and understanding of financial services: Increased access to information on social media holds the potential to improve overall financial literacy, if investors discover accurate content that engages them. The interactive and accessible nature of social media-based investment content may provide investors with helpful financial information that they may not otherwise have and engage investors who may have previously felt intimidated by traditional financial services.43
- Identifying emerging trends: Monitoring social media activity may allow investors to identify emerging investment trends or themes before they are widely recognized by the broader market including by engaging with various groups on social media platforms.44 In addition, market participants may now be able to harness the information content from social media sentiment data, a different type of information than has traditionally been available for security markets analysis, to identify trends.
Potential Risks
- Misinformation and lack of transparency: Social media investment content may contain inaccurate, misleading, biased information or improper disclosures (e.g., failing to disclose a conflict of interest). In addition, persons who provide investment information on social media may lack any formal financial training or education, which can be particularly problematic if social media functions as the primary source of information for an investor. These factors could potentially lead investors to make decisions based on incomplete or unreliable information.45
- Fraud and market manipulation: Bad actors can exploit the anonymity, reach and rapid information dissemination capabilities of social media platforms to target vulnerable investors or manipulate markets before the platforms or regulators can intervene.46 As a result, investors may become susceptible to various forms of investment fraud including pump-and-dump schemes, impersonation of financial experts and coordinated misinformation campaigns designed to artificially influence security prices.47 There has been a recent rise of so-called “pig butchering” and investment club schemes that are generally advertised on social media platforms (including dedicated investment pages or communities) and carried out on private messaging apps.48 In addition, bad actors may use social media for impostor-driven or relationship-based schemes, as well similar scams to defraud investors.49
- Overreliance on social media: Investors who rely too heavily on social media-based investment insights may neglect other sources of information related to a company's fundamentals or the broader market conditions, potentially leading to investment decisions based on incomplete information.50 Moreover, as detailed by a recent FINRA Foundation study, investors who rely on social media for financial advice exhibited a far greater likelihood (72 percent) of taking on risky investments.51
- Additional considerations for sentiment analysis tools: Certain risks may be particularly important in the context of using social media sentiment analysis tools including:
- Accuracy limitations: During discussion with FINRA staff, some market participants indicated that sentiment analysis tools (similar to other tools that are designed to extract information from unstructured data) may struggle with sarcasm, idioms, misleading information and contextual language. This is particularly true when considering information across multiple languages, potentially leading to inaccurate classifications related to sentiment. Moreover, many sentiment analysis tools classify text into broad categories such as positive, negative or neutral, and may fail to capture more nuanced sentiments.
- Data quality issues: Similar to other data analysis tools, the quality of the output from sentiment analysis tools is highly dependent on the quality and relevance of the input data. As previously noted, social media may frequently contain inaccurate, misleading or biased information which may make the usefulness of sentiment analysis tools dependent on their ability to weed out data that may comprise its output.52
- Accuracy limitations: During discussion with FINRA staff, some market participants indicated that sentiment analysis tools (similar to other tools that are designed to extract information from unstructured data) may struggle with sarcasm, idioms, misleading information and contextual language. This is particularly true when considering information across multiple languages, potentially leading to inaccurate classifications related to sentiment. Moreover, many sentiment analysis tools classify text into broad categories such as positive, negative or neutral, and may fail to capture more nuanced sentiments.
Overall, while social media-influenced investing may offer potential benefits to both member firms and investors, it may also carry risks. Accordingly, market participants seeking to leverage social media for investment decisions to take advantage of the benefits social media may provide may also desire to carefully consider what, if any, processes they can use to limit or contain these risks.