Gen Z turns to TikTok, Instagram for personal finance advice despite misleading investment tips

Young Americans – including Generation Z and millennials – have turned to social media platforms such as TikTok, Instagram, Facebook and Twitter for investing advice to get trade ideas and swap tips in a virtual trading floor.

Their newfound power on their smartphones comes with risks.

Financial regulators worry that this year’s viral trading craze of meme stocks and cryptocurrencies has fueled unrealistic expectations for first-time investors, who face the possibility of losing money because of the spread of misinformation and fraudsters, according to the Financial Industry Regulatory Authority, a brokerage watchdog.

“Investing is fundamentally complex. You can’t boil it down in a single tweet. You can’t distill it to just a few words or images,” says Gerri Walsh, president of the FINRA Investor Education Foundation.

“There is a great deal of information that is good on social media platforms, but there is also a great deal of information that is bad, whether it’s people who don’t know what they're talking about or malicious intent, which is frightening for regulators,” Walsh says.

Gen Z turns to TikTok, Instagram for financial advice and takes it

Social media and the internet have become important tools for investors to research stocks and find guidance on investing strategies.

Young investors can more easily access the stock market and other investments than previous generations after the rise of online trading platforms such as Robinhood, which helped shape their investment behaviors.

Young Americans, who have been hit by the second recession in their lifetimes and prime earning years, are flush with stimulus money and savings in the pandemic. There’s a fear of missing out (FOMO) to cash in big on everything from GameStop to cryptocurrencies.

Meme stocks such as GameStop and AMC are companies whose share price doesn't match their underlying business fundamentals such as profitability from producing and selling goods and services.

This year, small-time investors on Reddit took on a few hedge funds in the GameStop “short squeeze” frenzy. That spurred millions of others to join in, as their effort to drive up the price of a stock perceived as undervalued soon shifted to a campaign to “Stick it to Wall Street.” They used the “squeeze” to rally the share price and make profits for themselves while forcing the hedge funds who had bet it would fall to buy it to prevent greater losses.

Investor knowledge in the USA is low, and many are confused about the various fees they pay for investing, according to FINRA.

Few young and new investors rely on financial professionals for their investing decisions, according to a study in 2020 from the FINRA Investor Education Foundation and the NORC research organization at the University of Chicago. White investors (44%) were much more likely to use a financial professional than Black (28%) or Latino (23%) investors.

Those under 30 were nearly three times more likely to use social media as a source of information for their investing decisions, and new investors were twice as likely than more experienced investors, according to the study. Using social media for investing decisions was much more popular for Black investors (21%) than for white (8%) or Latino (4%) investors.

Young investors have sought help from social media to assist with their meme-inspired investing ideas and for personal finance advice on everything from budgeting, taxes, credit card debt and home buying.

About 56% of Gen Zers (born between 1997 and 2012) and millennials (born between 1981 and the mid-1990s) say they intentionally seek out information or advice about personal finance online or through social media.

The majority of Gen Z seek this information on Instagram (57%) and TikTok (52%), according to a study conducted by Qualtrics on behalf of Credit Karma.

Millennials mainly seek out this kind of information and advice on Facebook (53%) and Instagram (39%), the study found.

Although technology and social media can be a powerful tool for young Americans who have taken steps to inform themselves on their finances, it’s important for consumers to do their research and verify the information they find online before taking action, according to Colleen McCreary, chief people officer at Credit Karma.

She says this is especially true when it comes to more risky advice such as investing in the stock market or cryptocurrencies.

“Most of the time, you don’t know who these people are, and they don’t know you. You may be taking advice that doesn’t necessarily apply to your financial situation,” McCreary says. “I’d strongly encourage people to use this as an entry point to get more clarity on their personal finances and then decide to talk to an expert.”

Young generations most confused about investing and filing taxes

Lofty values and the wealth generated in the pandemic have drawn young Americans to investing, even though they have been hit by two “once-in-a-lifetime” recessions early in their prime earning years and may feel that they have not saved enough for their nest eggs.

The ability to become rich quick seems close at hand.

But the drive to get in on the action comes with big risks: Low levels of financial knowledge leave most Americans at risk of losing more money than they can spare when markets turn volatile or crash.

“In many situations, you hear people boast about how much money they’ve made trading, but you never hear about people who lost money. People tend not to brag as much about things that don’t go in their favor,” McCreary says. “There are a lot of stories recently where I don’t know how much of it is skill versus luck.”

Younger generations are most confused about investing (24%), filing their taxes (21%) and credit score factors (18%), according to the study.

The study shows that when it comes to the parts of their financial lives that feel too daunting to even address, Gen Z and millennials list 401(k) vs. Roth IRA options (27%), stock market investments (25%) and cryptocurrency and digital assets investments as the most daunting.

Gen Z has received home buying advice (26%) and advice on opening a credit card or bank account (22%), while millennials have received advice on how to invest in the stock market (29%) and advice on credit card rewards and points (28%), the study shows.

Twenty-two percent of millennials have received advice on investing in bitcoin/cryptocurrencies, which are essentially digital coins created and exchanged over a decentralized computer network where transactions are secured and verified through coding.

Among cryptocurrency owners, the top sources of information are Facebook (46%), Twitter (41%), friends and family (37%), Reddit and Instagram (35%), according to a Harris Poll, whose data of more than 2,000 adults was given exclusively to USA TODAY.

That poll found Reddit (68%) is regarded as the most credible social media platform, followed by Twitter (63%), Facebook (62%) and Instagram (59%).

Bitcoin, the world’s most popular digital coin, has been highly volatile.

In late 2017, the digital token rose to nearly $20,000 before crashing to almost $3,000 the following year. It had a dizzying rise this year when it doubled in value to above $64,000, then it briefly tumbled below $30,000 this summer as regulators called for tighter controls on cryptocurrencies.

The stock market has surged more than 100% since March 2020, when the COVID-19 pandemic dealt a huge blow to the economy.

“The stock market has been on a tear, but how long will the good times last? You have to ask yourself whether you are preparing yourself for shocks or risks if things don’t sustain over the long term,” McCreary says.

More than a third of Gen Z, millennials say they would take financial advice at face value without fact checking

Though social media can provide many benefits for investors, it also presents opportunities for fraudsters.

This year, FINRA and the Securities and Exchange Commission issued warnings about the risks that come with social-media-influenced investing.

Through social media, fraudsters can spread false or misleading information about a stock to large numbers of people with minimum effort and at a relatively low cost, according to the SEC.

They can conceal their identities by acting anonymously or even impersonating credible sources of market information.

Some social media influencers use their platforms to artificially inflate or depress the prices of stocks, according to Mark Gorzycki, an investor behavior expert and co-founder of OVTLYR, a behavioral analytics tool for retail investors.

“The most clear-cut, surefire way to protect yourself from a malicious actor is to understand their motivation,” Gorzycki says. “Why are they giving you information to follow? If the answer is because they want to have a big following on their YouTube channel, that’s wrong.”

Roughly 75% of Gen Z and millennial respondents who intentionally seek financial advice online or through social media say they follow specific social media influencers who create content relating to personal finance, the Credit Karma study shows.

Forty-five percent of those who sought out this information say they have taken financial advice from someone they didn’t know online, and 69% of those who took advice say the advice they received made a positive impact on their lives.

In a troubling sign, many young Americans don’t fact check information on social media, according to Credit Karma.

Among all Gen Z and millennial respondents in the Credit Karma report, including those who have and haven’t taken advice from someone they didn’t know online, 37% say they would take such financial advice at face value without feeling the need to fact check the information.

The report found nearly half of respondents say they’re likely to share financial advice or information found online with a friend or family member.

Of those who have taken advice from someone they didn’t know online and intentionally sought advice, 25% received tips on investing in the stock market and 19% got advice on investing in bitcoin/cryptocurrencies, according to Credit Karma.

Personal finance influencers see the pros & cons of TikTok

Deacon Hayes, 38, a personal finance TikToker, is an influencer who takes a measured approach with investment advice when it comes to meme stocks and cryptocurrencies.

Hayes, who has more than 15,000 followers on TikTok, worked as a financial planner at Ronald Blue, an investment management firm that assists high net worth individuals.

He and his wife, Kim, who reside in Scottsdale, Arizona, paid off $52,000 in consumer debt in an 18-month span in 2009 and 2010 after the global financial crisis. The payoffs included car and student loans to credit card debt.

After that experience, he decided he wanted to work with average Americans to give them personal finance and investment advice.

Hayes founded Well Kept Wallet, a personal finance site aimed at helping visitors save and grow their money with financial tips.

He’s found that TikTok is a popular way to share his advice, which he’s noticed has helped boost interest in investing, saving and retirement topics among young adults. He’s also seen incomplete information on risky investments on the platform for things such as meme stocks.

In July, TikTok barred the promotion of financial services including cryptocurrencies, unless users disclose it through a branded content option in the app.

Hayes had a mixed reaction to the decision but thought it was needed, he says.

“TikTok as a platform has a responsibility to make sure people have accurate information,” Hayes says. “It’s important that people aren't being taken advantage of. You do have to have checks and balances on those platforms."

Hayes, who says he doesn’t sell products on the platform, asks, "What’s in it for them? Are they trying to sell you a product or a course to ‘get rich’?”

Red flags to watch on social media

Investment fraud criminals use a wide array of sophisticated and highly effective tactics to target and influence prospective victims. Learning to recognize such tactics can help Americans avoid being a victim, says Walsh of the FINRA foundation.

To avoid becoming drawn into a scam, look for warning signs of investment fraud. Be suspicious of anyone who guarantees an investment will perform a certain way because all investments carry some degree of risk, financial experts say.

Many investment scams involve unlicensed individuals selling unregistered securities –ranging from stocks, bonds, notes, hedge funds, oil or gas deals – or fictitious instruments, such as prime bank investments, according to FINRA.

Any investment that goes up month after month – or that provides remarkably steady returns regardless of market conditions – should raise suspicions, especially during turbulent times, Walsh says.

“When you’re dealing with somebody who is giving investment advice but isn't licensed, all of the investor protections that surround a registered professional, whether they’re a broker or adviser, don’t exist,” Walsh says.

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Be sure to deal with licensed professionals.

“Even when it comes to a well-intended person who is giving advice, if it ends up turning sour for you, none of those investor protections that a regulated person would be subject to would apply to that person,” Walsh says.

To be a professional trader requires exams and a FINRA license to execute orders for a Wall Street securities or brokerage firm. An average person isn't required to do that if they're day trading for themselves.

“The perfect storm is brewing. Young retail traders have seen success with things like meme stocks,” Gorzycki says. “They’ve had some early wins. But when you mix early success with inexperience, you get overconfidence real fast. You can’t go into the market thinking you’re bulletproof. Be sure to get education on how markets function.”

GRAPHICS George Petras/USA TODAY

“Young Investors: Risk and Reward” is a series that examines the aspirations and anxieties of young Americans as they invest money in the market boom, which is lifting traditional stock prices to record highs and elevating a new, risky marketplace for virtual goods, from digital art to Dogecoin.

Have a tip on personal finance or market stories? Reach the reporter at jmenton@usatoday.com or on Twitter @JessicaMenton.

This article originally appeared on USA TODAY: Stock market: Gen Z turns to TikTok for investing advice despite risks