Internet communities have built serious power when it comes to swaying investment markets.
Five years ago, shares in video game retailer GameStop surged to early $500 from $19 as traders on Reddit’s WallStreetBets forum co-ordinated a frenzy of buying.
The retail investors won out against hedge funds who were betting against the stock, and cemented the idea of ‘memestocks’ driven by online popularity.
The significance of internet communities for many retail investors hasn’t waned since then. Recent research indicates that these online forums have become a major source of investing information.
Exclusive data from JP Morgan Personal Investing reveals that young men are particularly drawn to online communities for investment advice, with 23 per cent of male investors under the age of 35 looking to forums for investing tips.
Overall, it found 12 per cent of retail investors used online forums, such as Reddit, for investment advice.
Users of these forums can ask questions to other investors and take part in discussions
While newspapers and online financial news websites remain the top source of information, with 36 per cent using them for investing information, 13 per cent of investors look towards financial influencers, rising to 28 per cent of under 35 investors.
Wealth managers are used by 32 per cent of investors.
Reddit’s r/UKPersonalFinance community has more than 780,000 members alone, while r/UKInvesting and r/FIREUK (FIRE stands for ‘financial independence, retire early‘) have also grown into popular communities for retail investors.
Claire Exley, head of financial advice and guidance at JP Morgan Personal Investing, says: ‘As human beings, it’s in our nature to seek validation and inspiration from our peers.’
Can investors trust online advice?
Skimming through online forums, there are plenty of anonymous users asking for help and reassurance about their personal finances and investments.
Users of these forums can ask questions to other investors and take part in discussions.
For example, one recent question asks: ‘Currently have about 60k just sat in three per cent interest saving account, is there a better way to be using this money?’
Some replies pass muster, suggesting they look at stocks and shares Isas, index funds and paying down their mortgage, while others are slightly more ill-advised, recommending holding all their money in gold.
Exley says: ‘Common questions cropping up include “is it worth doing X?” or “what would you do?”
‘While tips and advice in response are often shared with good intentions, the quality and accuracy of advice and guidance can vary significantly on these platforms and is sometimes incorrect.’
Online forums can prove useful resources for investors, who can compare themselves to others with similar finances and but there are also concerns that advice shared by other users may not be suitable for others, may be inaccurate or poor quality.
Exley adds: ‘Investors need to take extra care when digesting details and information from online forums as the quality of investment advice and suggestions can vary significantly.
‘Ultimately, responses are anonymous so you don’t know who is giving you the advice, what their motivations are, and what experience they have to advise you.
‘For the untrained reader who takes this information at face value, this can lead to potential errors and costly mistakes.
Investors also risk jumping onto internet hype that could fizzle out quickly, or lead to long term losses.
‘As we saw with the Reddit frenzy around GameStop in 2021, some investors were influenced by the hype and bought the stock on the way up but were left with significant losses when the stock price pulled back over subsequent trading days,’ Exley explains.
‘On the flip side, if you get advice or guidance from an FCA regulated firm or adviser, you know they have been trained and have the right qualifications to provide expert support on financial matters.’
However, financial advice can often prove prohibitively expensive, with many turned off from paying for advice even if they can afford to do so.
Will new financial advice rules help?
While a significant number of investors do make use of wealth managers for advice, many avoid doing so due to the costs involved. Instead, most head to other sources for financial information.
Exley said: ‘The popularity of these forums and rise of finfluencers on social media highlights how our sources of financial information are evolving but also how there is a growing need for financial advice and guidance in the UK.
‘We know that many people are seeking reassurance that they’ve arrived at the right decision before going down a certain route with their finances and investments.’
However, from April, financial firms will be able to offer ‘targeted support’ to customers with pensions and investments.
This is designed to bridge the ‘advice gap’, offering generic guidance and resources for individuals based on what others in similar circumstances are doing with their money.
For example, it could include suggestions to people to invest for better returns if they are holding ‘too much’ cash.
This comes on the back of some seven million UK adults holding more than £10,000 in cash savings.
Exley said: ‘Targeted support is an important development in the industry as it will allow companies to provide suggestions and guidance based on the customer meeting certain criteria segments.
‘For example, there will be greater opportunities to say “people like you typically take this action”. The caveat is this guidance isn’t as comprehensive as full financial planning or investment advice.
‘However, it can help people to understand their options at every life stage and potentially spot a high-risk investment that might not be right for them.’
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