Regulators: Investors Must Exercise Caution in Using Social Sentiment Investing Tools

A US regulator warns investors of the risks involved in utilizing social sentiment investing tools, which gather data from social media and news as guides to their investing decisions.

The Financial Industry Regulatory Authority (FINRA) said in an alert that while some investors can benefit from these tools, they might give inaccurate, insufficient and misleading information.

FINRA’s alert mentioned examples of social sentiment investing tools, which include social media data analysis offered by some financial services firms; social networks run by financial services firms; social media websites or mobile applications that enables direct trading; and crowdsourced social media research tools for analysis developed by some firms.

Using these tools can expose investors to certain risks like stale data that may reduce the usefulness of an investing tool, social media posts with a hidden agenda that can be used to manipulate stock prices, and the possibility of leading investors to make impulsive or emotionally-driven decisions.

FINRA suggests investors to use social sentiment investing tools merely as a guide and not to depend solely on them in making their decisions.

Investors should also read all the disclaimers, disclosures, and background information supplied by a social sentiment investing tool, which include how the tool gets and examines data from social media and the Web.

Traders should also know their time horizon for investing as data from these tools often only focus on events that can have a quick impact on investments. They should also track the result and performance of any investment decisions they made using these advanced tools by monitoring the performance of their stocks against the vital market or sector indices.

FINRA also advise investors to create and pursue a long-term financial plan and avoid short-term emotions to disrupt their long-term financial goals.