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Author: Editorial Team Ayondo
Published on: 21 October 2022

Investments - Growing influence of social media

They are springing up like mushrooms: When scrolling through social media, it is hard to imagine life without them - so-called (F)influencers. In the social networks, they provide information about finance, investments or the stock market and are met with lively interest, especially among young users. But how trustworthy is this particular species of supposedly experienced investors really? What qualifies them to share knowledge about sometimes highly complex issues and not infrequently high-risk products with others? Is it real expertise, entertainment or just self-promotion? A closer look behind the scenes seems advisable in any case.

Technology as a gamechanger

The bursting of the telecom bubble in the context of the Technology stocks or the global financial crisis of 2008/2009 - the reputation of the stock market in this country suffered particularly from these two formative events, but never really had it easy before and after either. But German conservatism, which is almost unique in this respect, seemed to take a remarkable turn in the course of the Corona pandemic at the latest. Yesterday at the Playstation or X-Box - today in the virtual trading room. This is how one could describe the phenomenon that led to stock market trading gaining massive popularity from one day to the next - especially among the younger generation of 18 to 30-year-olds and certainly played no small part in the fact that after the Corona crash in March 2020, a run on listed companies started as if there were no tomorrow.
The smartphone generation, which until then had primarily spent its boredom with online games, discovered something in the app stores that opened up access to completely new worlds for them. This circumstance - in combination with a largely shut-down public life and the time that was inevitably freed up as a result - led to the effect that many people occupied themselves with topics that had previously been rather unimportant. In addition, new players were on the market: FinTechs such as neobanks, which poached in the realms of established investment firms under the synonym "smartphone broker" with subliminal messages, gamified apps and low barriers to entry.

New trend gets rolling

Anyone familiar with the functioning and architecture of social networks and who understands the role they play today in e-commerce, marketing and sales could anticipate that it would not be long before the new playground would soon be accompanied by the media on a larger scale. And there they were: experts in their mid-20s who at first hesitantly, but later more and more confidently, commented on daily events on the global capital markets in a way that was appropriate for the target group.
In order to be able to clearly identify them in the world of social media, a term was quickly adapted to give the group of people an identity: the (F)influencer was born. When it came to naming their own profile, it was clear that the new centre of life of the online missionaries was not yet recognisable as such. Under sometimes strange, or at first glance rather less serious, sounding names, interactive media and streaming services such as YouTube channels in particular were gaining in popularity, which had set out to bring financial education to everyone, as easily digestible as possible and, above all, understandable to the man or woman free of charge. Voilá!

It is worth taking a close look

Visitors eagerly discuss the online channels' operators' assessment of passive income, the latest dividend payout or the paths to financial independence and are happy to recommend stocks to each other. Hot tips are exchanged, the next ten-bagger is raved about or penny stocks are upgraded by Reddit analysts to the next Tesla. Why work when the world is so simple? Oh yes - even if you are still in the old world yourself: the chanting of the analysts who are regularly interviewed on the floor of the New York Stock Exchange also confirms that there is no alternative to shares.

Where are the differences

TV was yesterday - via Instagram, Twitter, Facebook, YouTube or now also TikTok, thoughts are developed, and ideas shared in short message style. Nobody is interested in what happened yesterday. The world is happening in the here and now. It becomes difficult when, because of expressions of opinion, explicit calls are made for certain actions, such as recommending the use of a certain app with which a financial service is linked. A "if you want to test the whole thing, just click on the following link and you're in" goes over quickly and is also what the audience wants to hear. Neither motivation nor reputation need to be questioned, since the good advice comes from someone who knows his trade and would never recommend something that has not been tested extensively and promisingly. Only rarely do you see valid and well-founded discussions come about. The important thing is that everything has to be done quickly and the complexity that often exists is overlooked in order to present the content in a way that is as consumer friendly as possible.

Motivation & Commitment

The majority of the authors active on the relevant social media platforms do indeed provide their contributions with a reference to the fact that no investment advice or other aspects relevant from the perspective of supervisory law would come into play. The author's opinion is to be interpreted as a purely subjective representation of his own perception. But is this really the case? It becomes interesting when one takes a more detailed look at the people involved and the products or providers presented. It is not surprising, for example, that a notable proportion of the know-how intermediaries place certain service providers prominently in the focus of the target group. Content shared with users leads to smartly designed landing pages that are reached via so-called affiliate links. If, for example, a contract or account is opened via this type of recommendation, the "tipster" receives a commission. From this point of view, it cannot be ruled out that - at least in the case of active, targeted or prominent highlighting - conflicts of interest can occur.

Be smart before you do harm

It can be unpleasant for inexperienced and information-seeking users if the links not only lead to opening a securities account with a wide variety of new brokers, but also to websites that advertise financial products that promise to multiply the capital invested in the shortest possible time. The entry hurdles are usually very low: download the app and participate in foreign exchange, crypto or margin trading from 100 euros. But this is precisely where caution is called for! The number of dubious operators is growing exponentially, at least if you take the publications of consumer protection agencies and regulatory authorities as a reference. Those who really cannot resist the call of fast money should in any case check carefully beforehand which company is behind the offer and where it is based. A look at the small print, a little Google research and verification of the findings in information portals known for their independent data collection are necessary for this, but the effort is worth it.

Flip side of the coin

About 15 years ago, a development began that today can be understood as the direct networking of common interests of connected investors. These are online platforms that act as marketplaces to bring together target groups. In common parlance, the synonyms social trading, copy or mirror trading are used today. What is it all about? In a nutshell: Experienced investors enable other people to view their trading decisions publicly and - if the marketplace operator provides for it technologically - to subscribe to the trading decisions as signals. The subscriptions range from receiving e-mails and messenger messages to copying the signals in one's own trading account. Investing ("following") couldn't be more convenient, could it?
As with all business models in the financial market, there is light and shadow. Where opportunities exist, risks must be weighed. As an example of the latter, consider a trading system developer who made his trading strategy available for following via a marketplace. While the platform provider advertised high returns and a convincing hit rate, the opposite occurred over time and the losses of the signal subscribers added up to a high six-figure amount.
Cases like the one described above are not uncommon. Although social trading in particular is highly transparent per se due to the disclosure of trading decisions and the insight into transaction histories, past successes are no guarantee that these will continue in the future. As with all other forms of investment, a certain degree of caution applies and definitely the advice to deal with the acting actors in detail beforehand.

Conclusion

Especially those who have not yet dealt intensively with the topic of investment and have not been able to gain any distinct experience in this area due to a lack of available opportunities should always take a close look before investing to see who is behind the supposedly good advice and what personal interest is guiding the recommendations. Cui bono, as it is called in Latin. The same applies to companies to which one entrusts one's money. It is always worth taking a look at the imprint. Because there you will find out whether, in case of doubt, German or European law can be invoked, or whether the place of jurisdiction is on an island in the Caribbean.

Risk note:

Every financial commitment on the capital market offers opportunities but is also associated with risks depending on the product features. As a rule, higher opportunities correspond to higher risks, which under certain circumstances can lead to a total loss. Only invest in financial products that you understand how they work and that fit your risk profile. On the other hand, avoid complex products or those that are associated with considerable risks. Only invest capital that you can afford to lose. Diversify your portfolio.