The growth of social media allows entrepreneurs and businesses to communicate to millions of people in seconds. While the use of social media can provide important information quickly, sometimes that information can be unreliable, such as when it comes to investing in securities.
A broker should be a responsible discerner of information. Making a reckless investment can cause loss to a client. However, social media may encourage investments that responsible brokers should not make.
Sample bias in online posts
Investors looking for trading news may find brokerages are putting out a lot of positive posts online about their success with trading in certain companies. However, instead of providing an honest picture of the market, the large number of positive posts may create sample bias.
According to a CNBC article, brokerages are more likely to post about their successes than their failures. As a result, an investor looking into certain commodities may find many posts about trading successes while locating fewer posts talking about the tens of thousands of dollars a broker lost on an investment.
Acting on information too quickly
An investor may also make a poor investment by failing to do the proper research. Upon reading a social media post that promotes a hot new company, a broker may quickly decide to start buying shares. This can lead to mistakes such as investing in a company that has a similar name but is not the one mentioned in the post.
Social media posts that spin
Investors should also be aware that brokers may exaggerate or spin their online posts. A broker that has enjoyed success on an investment may spin the accomplishment online as proof that anyone can beat the market by investing in a similar manner. Investors should regard such bragging with caution.
It is part of a broker’s fiduciary duty to act in the best interests of a client. This includes exercising proper judgment when evaluating claims that an investment is a “sure thing.” Investments come with degrees of risk and a responsible broker should resist online messages that suggest otherwise.