A new study examines the characteristics, behaviors, and outcomes of retail investors who use social media and follow finfluencers to inform their investment decisions.
The research was released by the FINRA Investor Education Foundation (FINRA Foundation) in its report called ‘Finfluencer Followers and Social Media Scrollers: The Profile, Patterns and Pitfalls of Social Media-Informed Retail Investors.
It takes a look at the demographic characteristics, investment knowledge and fraud vulnerabilities of retail investors who reported using social media to inform their investing decisions or making decisions based on the recommendation of a social media personality (i.e., finfluencers).
The findings are drawn from the Investor Survey component of the 2024 National Financial Capability Study. (NFCS). They show that while social media is successfully engaging previously underrepresented market participants, these investors may also face elevated fraud risk due to knowledge gaps.
“This research shows that social media is a significant resource for investors, but it comes with both potential benefits and costs,” said FINRA Foundation President Gerri Walsh. “These platforms are drawing in investors who might otherwise remain on the sidelines, providing educational content and fostering community. However, the fact that many of these same investors exhibit low objectively-assessed investing knowledge, high self-rated confidence in their investing knowledge and are vulnerable to investment fraud raises serious concerns. This research underscores the critical need for more targeted financial education efforts to help financial consumers find unbiased information, better assess risk and spot red flags of financial fraud.”
The report points out that social media constitutes an increasingly relevant information source for investors. Survey data showed that 29 percent of retail investors reported using social media or message boards for investment decisions, a proportion that rises to 60 percent among those aged 18 to 34. Part of this trend has included the rise of “finfluencers,” social media personalities who dispense a wide range of financial advice and education.
Among the key findings of the research were as follows:
- Demographics: Social media users and finfluencer followers were predominantly younger (60% of investors aged 18-34 use social media vs. 9% of those 55 or older; 61% aged 18 – 34 made an investment decision based on recommendations from a social media personality vs. 6% of those 55 or older), male, had lower portfolio values and were more likely to be a person of color than those who do not use social media or finfluencers to inform their decisions. Nearly half reported not identifying as “typical investors.”
- Knowledge-Confidence Gap: Social media users and finfluencer followers often exhibited overconfidence, with more rating their subjective knowledge high while scoring low on objective investment knowledge tests compared non-users or non-followers. Social media users and finfluencer followers answered an average of 42% questions correctly on an objective investment knowledge quiz, yet 63% rated their investment knowledge as high.
- Fraud Risk: Social media users and finfluencer followers reported substantially higher fraud exposure and victimization. Among those who reported being targeted for fraud, 68% of social media users and 69% of finfluencer followers reported losing money to fraud (compared to 29% and 26% for non-users and non-followers, respectively).
- Information-Seeking: Social media users consulted an average of 7.6 information sources versus 4.0 for non-users and were more likely to check the background of a financial professional (36% vs. 14%).
- Non-Monetary Motives: Social media users reported significantly stronger motivations beyond profit motives for investing, including entertainment (59% vs. 18% for non-users), social activity (59% vs.11%) and supporting personal values (66% vs. 31%).
The authors of the study conclude that investors who use social media to inform their investment decisions are predominantly younger, male and more likely to be Black/African American, Hispanic/Latino, or Asian/Pacific Islander and less wealthy than other investors. “They demonstrate a concerning pattern of overconfidence: scoring lower on objective measures of investment knowledge than other investors while, on average, rating their investment knowledge higher,” the study said. “This manifests in heightened vulnerability to fraud, with both groups more likely to report fraud targeting and fraud-related financial losses and less likely to detect the red flags of investment fraud.”
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