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Popularising nonprofessional economic analyses on social media is potentially positive. Encouraging millennials to start saving and investing. A broad discussion of financial assets in public forums can help improve capital allocation efficiency. But sometimes, it does not work perfectly in a divergent outlook.
Why Should You Avoid Social Media Stock Tips
Stock exchanges regularly warn investors not to invest in stocks based upon recommendations circulated in social media groups. Here are the threats that make market authorities warn investors:
Fraudulent Companies
Fraudulent companies often circulate tips and advice. They spread false and misleading information about stocks and can easily manipulate the stock price or impact trading volume. The Securities and Exchange Board of India (SEBI) caught one such fraudulent group. One company was circulating stock recommendations among more than 5 million members via various social media platforms without SEBI registration. You should consider reputed discount brokers to open your demat account as the SEBI keeps a hawk-eye on each transaction carried out by brokers. Safety of your stocks is one of the key demat account advantages.
Pump and Dump Schemes
Fraudulent groups circulate stock tips to draw a large number of retail investors to a specific stock. The sudden rise in investors’ interest pumps up the stock price. Once the prices peak, the fraudulent group sells or dumps the stock. It is a fraud strategy for stocks with low trading volumes as they are easy to manipulate. They purposely provide misleading information about stocks to manipulate the trading volume.
No Financial Advisory Credentials
Generally, social media group operators are not registered with SEBI and do not have financial advisory credentials. No one is checking the qualifications of those advisors, and there is a question on accountability, the veracity of returns, recourse, and the quality of the stock.
Just Big-name Media Outlets
Social media groups’ recommendations are based on what users read and look for. Most of the time, they recommend content connected to big-name media platforms and suggest more of the same stock given there.
How To Make Stock Investment Decisions
Investment decisions should not be hasty and certainly should not be made based on social media stock recommendation tips. Investors must do their due diligence before buying or selling their investments. You can complete a free demat account opening process with a reputed discount broker to start investing in the stock market. Here are a few aspects that can help you in your research about a company and decide on investments:
Industry Trends
In this era of technology, numerous advancements across industries can decrease the usage and value of certain products. Investors should examine the capacity of a business to evolve with changing market trends. You can see how the company invests in advanced technologies like machine learning and artificial intelligence to succeed in the current technological environment. Most investors keep an eye on strong companies in the shining segments, like infrastructure, real estate, green power, etc.
Profitability of the Company
Investors can analyse the last few years’ profit growth in the company. If there is consistent growth, it is a go-to sign to invest in the company performing well. However, it is also necessary to look at a company’s valuation as profitability and valuation are analyzed together to check if the company is worthy of your investment. You can look at the company’s plans to increase profits with an increase in sales and introduce new products. To check the profitability, you can look at financial ratios – gross margin, operating margin, and return-on-equity ratio. The ratios price-earnings, earnings per share, and price-book ratios will help you to know the market value of the company relative to its book value.
Assess the Economic Moat
Economic moat means the capacity to maintain a competitive position in the market to hold a significant market share. Investors can consider the company’s market share, USP, and how it is going against its peers in the industry. It is really tough to defeat these companies by their competition in their industry. Asian Paint, Maruti Suzuki, and Nestle are among the Indian companies with big moats. These are the common brands and enjoy almost half of the market share.
Strong Management
A company’s management can help the company reach new heights. Investors can look at the length of the tenure of management. Find details about the key persons in the company and their past management experiences. Look at how the company is to distribute dividends. It will help you to know the company’s financial stability. Find the current or retained earnings to pay its shareholders. The management should declare unbiased quarterly and annual results.
Investments in the stock market are one of the most lucrative ways to make significant gains, and the influence of social media on stock markets is greater than ever. You should remember that social media is full of stock investing advice, which may not always be right for your risk appetite. Thus, getting encouraged with social media platforms is fine, but avoid deciding on investments based on those tips. There is no accountability as you cannot check the advisor’s qualifications. If you wish to follow stock advice from social media, be ready to take a certain amount of risk.
By Nancy Ahuja Delhi
who is a self-dependent girl who has been running her business for the last 3 years in Delhi. She has a couple of years of experience in the field of business and loves to write about finance, gadgets, business, and lifestyle.
Member since October, 2022
View all the articles of Nancy Ahuja Delhi.
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