Should Social Media Be Your Financial Adviser?

  • Market Overview

“Buy 10- ABC at Rs. 1234; Target-5678; STT- 4321” 

Inboxes of stock market investors - new and experienced are cluttered and flooded with such messages, in a hope that one day a social media forward will help them double or triple their money overnight. 
SEBI (Security and Exchange Board of India) has recently reaffirmed that such distribution of investment advisory without relevant licenses and procedures needs to stop - immediately. 

Background - 

Sometimes schemes are fabricated in order to manipulate the market for one’s own gains. In a recent SEBI investigation, it was found that some people were misrepresenting themselves, through a Telegram Channel and inducing investors to buy stocks by promising high returns. These stocks were already bought in bulk by the people in question, who would then sell them as soon as the price went up due to the investor influx. 

For example, when a person buys 5000 stocks worth 45 rupees each and instigates other people to buy the same at the target price of 75 rupees each, the increase in demand leads to the increase in stock price. But, the person then sells the stocks as soon as they hit 55 as a result of the increase in demand, gaining 50,000 rupees.

Despite the high anonymity maintained by Telegram, SEBI was able to trace the administrators of the group whose phones were seized to collect further information.

Source: SEBI Interim Order & Show Cause WTM/SKM/54/2021-2022

Revisiting History - 

This has not been the first of its kind investigation by SEBI to curb unfair practices and illicit gain. In December 2021, SEBI imposed total penalties of Rs 1.1 crore on 22 entities for non-genuine practices in illicit stocks that resulted in the creation of artificial volume to the tune of 826.21 crore units or 54.68 per cent of the total market volume in the stock options segment of BSE.

Such practices fall within the ambit of Section 4(2)(e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, which provides that any act or omission amounting to manipulation of the price of a security is an unfair practice prohibited by law.
As a result of such fraudulent and manipulative trades, not only do such persons succeed in manipulating the price & volumes of trades in those scrips but also unjustly enrich themselves at the cost of other investors. It is the fiduciary duty of an investment advisor to protect the interests of investors to the best of their capabilities.

The Way Forward- 

Not just messaging apps but broader social media platforms like Twitter (NYSE: TWTR ), Youtube and Instagram have seen a spike of such incidents. One of the most significant ones is, Elon Musk casually tweeting “Gamestonk”. GameStop Corp (NYSE: GME ). shares saw a skyrocketing increase of over 150% and caught curiosity and scrutiny. Nothing but this small almost meaningless tweet from Mr Musk and a link to one of Reddit’s WallSteetBets Forums could rationally explain the price soar. 

With increased couch surfing, pink slips and pay cuts during the ongoing pandemic years retail investors are naturally attracted to the stories of frenzy in the stock markets. For first-time investors or beginners, social media network channels like Youtube and Instagram were game-changers. There is also a significant hike of investors from Tier II and Tier III cities in India, following the internet boom and cheaper data plans. The financial education and investing advice from social media channels are inexpensive and help them break down the industry jargon.  

The positive influence of social media in terms of its learning and making the globe truly globalized should not be discounted by the negative and coercive factors of the same. 

What Should Retail Investors Do? 

  1. Do your own research and due diligence - 

The Telegram channel with approximately 30,000 people said that they were in the process of getting a SEBI registration but did not claim to have acquired it.
Investors must ensure that the advice they are seeking or receiving is from SEBI registered intermediaries and not from the numerous social media channels claiming to be experts in finance.

2. Social media, its usage, and influence should be restricted to learning- 

The lack of knowledge of personal finance in people makes them an easier target for such fraud schemes. Caveat Emptor, which is Latin for Let the buyer beware must be followed in principle. An investor should always be open to learning and experimenting with new ideas but to follow a tweet or a string of comments made by an influential personality blindly should be strictly avoided. 

3. Consult a SEBI Registered Investment Advisor for all your personal finance requirements

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  • Nikhil Bhandarkar @Nikhil Bhandarkar
    Nicely written article. I agreed with your points and SEBI took this step at a very critically important time.
    Like 2

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