Following the Crowd: Investing and Social Media

Jan 29th '21

With zero commissions on trades and online trading platforms at our fingertips wherever we go, many investors are making investing and saving part of their routine. Investors have access to a variety of online sources to gather information to make investment decisions, from the news media to independent social media platforms to platforms associated with investment firms, among many others. No matter where you get your trading insights, and whether you are following a recommendation to buy stocks, bonds, options or something else, know this: where there is opportunity, there is also risk.


Here are some tips and resources from Financial Industry Regulatory Authority (FINRA) to consider.


  1. Consider your source. Independent social media platforms and some brokerage firms offer tools that analyze or aggregate information from social media sources to help investors make investment decisions. Depending on how it is presented, social sentiment information—particularly real-time discussion platforms and buy/sell indicators driven by social sentiment—can lead to emotionally-driven or impulsive investment decisions, which can be a risky way to approach investing. Learn more about Social Sentiment Investing Tools.
  2. Know the rules if you are day trading. Are you actively trading stocks? If so, it’s important to know what it means to be a “pattern day trader” because there are requirements associated with this kind of trading. And as the U.S. Securities and Exchange Commission’s, (SEC) Office of Investor Education and Advocacy noted in a recent Investor Bulletin, “[d]ay trading is serious business and not something you just dabble in for fun, particularly if you are using leveraged investment strategies or trading leveraged products.”
  3. Understand the costs and risks of margin investing. If you are trading in a margin account, your firm can force the sale of securities in your accounts to meet a margin call, sell your securities without contacting you, and increase its margin requirements at any time without providing you with advance notice. It’s also important to know you can lose more money than you deposit in a margin account. Learn more about Investing with Borrowed Funds.
  4. Know what to expect when trading is halted. Thousands of stocks are quoted and traded every day in U.S. securities markets, and most of this trading takes place without interruption throughout the day. But sometimes a stock may be subject to a short-term trading halt or longer-term trading suspension. To find out why and how trading halts occur, read When the Trading Stops.
  5. Get the basics on options trading. Options trading can be risky, and the options market has its own vocabulary and unique processes. Options A to Z: The Basics to the Greeks will help you become conversant in the language of options, and Trading Options: Understanding Assignment lays out how assignment—the fulfilling of the requirements of an options contract—works.
  6. Check your emotions at the door. In volatile markets it can be tempting to make rash decisions. One enduring truth about stock markets is that they go up, and they go down—and the steeper the rise or the fall, the more tempting it can be to derail a long-term strategy with a snap decision. Read more about Market Volatility.
  7. Stop and take three. Mindfulness is all the rage these days. Before you make an investment decision, be mindful of three things. First, ask yourself whether an investment aligns with your financial goals. Small dollar investments based on hype around a security might turn into big gains, but they can just as easily turn into big losses. Second, make sure your investment decision involves a level of risk you are comfortable with, and not the level of risk other people might be comfortable with. The problem with herd investing is that investing is personal: some people have the means to take risky bets, but many of us do not. Third, if you seek short-term returns, don’t sacrifice money you cannot afford to lose.
  8. Watch your wallet. Social media recommendations to buy the securities of a particular company may urge going all in through taking early withdrawals from retirement accounts or borrowing against one’s home. Be aware that leveraging long-term assets for short-term gains can have significant consequences—from fees and taxes to risk of loss and more.
  9. Focus on diversification. Speaking of going all in, remember that diversification—spreading out your investments both across and within different asset classes—can help you manage your risk.
  10. Contact FINRA to report misconduct. If you are aware of unfair practices or specific instances of abusive or prohibited conduct, FINRA wants to know about it immediately. File an investor complaint through the FINRA Investor Complaint Center or file a tip using FINRA’s online regulatory tip form.


When significant market events occur, it can be challenging to sort out what is actually happening, especially with a 24-hour news cycle and constant chatter from social media channels. To protect investors and ensure the market’s integrity, FINRA works every day to ensure that everyone can participate in the market with confidence. If there is market manipulation or other misconduct by market participants, FINRA will investigate and hold wrongdoers accountable. Where we lack jurisdiction over those who engaged in misconduct, we coordinate and share any information we uncover with law enforcement and other regulatory agencies to help them do their jobs.


Subscribe to FINRA’s Investor Insights newsletter for more information about saving and investing.


Source: FINRA


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