As Canadians seek to educate themselves more than ever on investing, social networking websites are rapidly gaining momentum as a source of advice and information, which is challenging the role of financial services firms, a panel of experts said on Monday.

At a panel discussion on social networking tools for investment and trading advice, the speakers commented on the rapid speed in which social networking Web sites have developed into a prominent tool among investors.

“People are typically going to use social media for one of two reasons: they want information or they want education,” said Sam Seiden, a professional trader, author and director of online education at Online Trading Academy.

With so much information so widely available online, he believes social networking sites could permanently erode the role of financial services firms going forward. This is especially true at a time when a major financial crisis has hampered consumer trust in financial industry firms, he said.

“I think it’s really changed things forever,” Seiden said. “I don’t think Wall Street is ever going to go back to what it was before, no matter how much they rebuild the trust, because now every person has an alternative.”

The surge in demand for alternative sources of information has been witnessed first hand by Online Trading Academy, which offers educational courses on trading and investing. In each of the past three months, the organization’s revenue has hit record levels. On Monday, the academy launched a new high-tech educational facility in Toronto.

Discount brokerage Questrade has also seen investors actively embracing such alternative sources of information. In response, the company is expanding its offering of social networking tools available to clients. This week, for example, the company is launching Facebook applications that will allow Questrade clients to share their favourite sources of online investing information as well as buy and sell recommendations.

“They’re all about user-generated content,” explained Jeffrey Beck, chief sales and marketing officer at Questrade. “It’s all about forming a community of online traders and providing them with the empowerment and the ability to become even more successful in trading.”

But the panelists noted that social networking tools can involve risks for investors. Since advice on Web sites such as Twitter and Facebook could be coming from inexperienced investors, it’s crucial to consider the background and track record of the person providing the advice.

“There’s a lot of noise out there,” said the author and blogger behind the Web site MillionDollarJourney.com, who goes by the name FrugalTrader. He uses social networking sites for investing ideas and as a starting point for his investing research. Once equipped with ideas or tips from such sites, he digs up the balance sheets and price history of the stock before making any decisions.

“In terms of investing, it’s just for ideas,” FrugalTrader said. “Always do your own research.”

Seiden added that the social networking phenomenon tends to lead to more prominent herd mentality trading patterns, with high volumes of investors actively trading in response to rumours or news that quickly spread across the Internet. This is something investors should be cautious to avoid, he said.

For example, when getting tips to buy a stock, investors should check to see whether the stock has already rallied.

“Bring in some of your own simple logic,” Seiden said. “Don’t buy after a period of buying. Don’t sell after a period of selling.”

As much as he believes social networking could have long-lasting impacts on the financial services industry, he admits that investing fundamentals will always remain the same.

“The principles that work today are the same principles that worked 80 years ago,” Seiden said. “Social media can’t change that.”

IE