The Influence of Social Media on Investment Decisions

Social media has become an indispensable source of investor data; however, not all the information posted to these platforms is of high-quality.

Researchers used data from the 2021 National Financial Capability Study (NFCS) to explore investment behavior among investors who held investments outside retirement accounts. A primary dependent variable for analysis was use of various social media platforms for investment advice.

1. Information

Social media has emerged as an indispensable component of society in an age of instant information, providing many people with direct communication and participation platforms – turning consumers into media creators themselves. Social media’s impact extends far beyond consumer communications – having profound effects on politics, business operations and even how we connect. Once considered superficial or distracting – it now functions as an indispensable resource for both individuals and companies alike.

At the same time, this increased accessibility creates the potential for misinformation and scams – particularly among younger generations that use social media as their source of financial advice. According to one recent study, those who rely heavily on social media as an information source tend to possess lower objective and subjective investment knowledge than their counterparts who don’t utilize this avenue; moreover they tend to invest for entertainment rather than financial stability which may lead them down an unwise investment path.

2. Influence

Social media’s influence has had a profound effect on individual investors. According to Ismail et al. (2018) in their research paper titled, “Impacts of Online Social Media on Speculator Choice”, online media can have an influence on venture choices of financial investors, while Kumari (2017) states that certain content may create biases in retail investors when making investment decisions.

This study conducted a nationally representative survey to investigate demographic and financial characteristics of those who utilize social media for investment advice. Results demonstrated that women were less likely to rely on it, which confirms prior literature (Florendo and Estelami 2019). Furthermore, ETF holders, whole life insurance holders, microcap stocks or penny stocks investors were significantly more likely to invest via social media; moreover these consumers did so out of wanting to connect with others or be socially responsible when investing on these platforms. Thus these findings highlight how further study needs should investigate all nuances associated with consumers using social media for investment advice.

3. Emotion

Every day we are exposed to an abundance of information via social media platforms such as TikTok or news shared by friends and family members – not all of it reliable and can significantly skew your investment decisions.

According to NFCS’s study, respondents who relied on social media platforms for investment decisions had lower levels of both objective and subjective financial knowledge compared to those who did not utilize them; however, their likelihood of using groups or message boards on these networks to make investment decisions did not vary significantly between long-term investors and those who focused solely on short-term investing strategies.

People with bachelor’s degrees were less likely to rely on social media for investment decisions, perhaps due to being unfamiliar with the type of investment being promoted or how it was being promoted through social media.

4. Relationships

Social media offers quick access to information, making it a useful investment tool. However, consumers must conduct their own research before turning solely to social media for investment advice.

The National Financial Competence Survey offers respondents the choice between 11 social media platforms for survey participation: YouTube, Facebook, Reddit, Instagram, TikTok, Discord Twitter LinkedIn Clubhouse Stocktwits (NFCS). Respondents were then asked how heavily they relied on these groups and message boards in making investment decisions – an association was found between subjective financial knowledge and increased use of these sources (Hypothesis 1). Hypothesis 1 was thus supported.

Florendo and Estelami (2019) found similar findings. Additionally, this research confirmed previous literature by discovering that investors who utilized social media for investment decision-making were less likely to be women and were more likely to own ETFs, whole life insurance, microcap or penny stocks than those who did not – supporting hypothesis 2. Furthermore, age was negatively associated with using social media for investment decision-making, thus supporting hypothesis 3.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *