The Impact of Social Media on Investing

Whether it is an influencer on Reddit or YouTube or professional traders and institutions on Linkedin and Twitter. Social media’s impact on investing is undeniable.  However, before you jump on your favorite platform to get advice. Make sure you know what you are doing.

The GameStop Drama

GameStop sells video gaming equipment at retail outlets and online.  Analysts had long regarded it as a declining stock.  Suddenly in January this year, the stock took off. Its price increased more than 7,200 percent in one year.

What caused this unprecedented leap in the stock price?  A Redditt thread (r/WallStreetBets) with 3.1 million subscribers. When influencers touted the stock. Readers rushed to buy GameStop. Subsequently, other platforms saw increased postings on the stock.

Sprout Social, a social media management and optimization company, tracked mentions on social media. It found 1,582,000 Tweets and 1,465 YouTube videos about GameStop from January 20 to 27.  Sprout Social concluded there was a direct relation between social media mentions of GameStop and the rise in stock price.

Social Media Impact on Investing

The surge in the price of GameStop was unprecedented. However, the social media impact on investing is not new.

The Securities and Exchange Commission began allowing publicly traded businesses to report news and earnings reports on Twitter in 2013. The result was an increased flow of information directly to investors. Consequently, it also had unintended results.

At a 2016 American Diabetes Association conference. Attendees were told of a diabetes drug from Novo Nordisk.  The information was supposed to be confidential but was posted on several Twitter accounts. Investors who jumped on Novo Nordisk stock had a rude awakening the next day. The stock fell on news its diabetes drug was less effective than hoped.

Social media as an indicator of investment success

Sometimes it is not financial information or recommendations that move a stock.

A prime example is the swell of interest in the movie The Hunger Games.  Some investors noticed a large increase in hashtags related to the books.  As a result, when Lionsgate acquired the movie rights. These investors bought shares in the company.

In its opening week, March 2012, The Hunger Games movie grossed $152.5 million, the third-largest at that time.  Lionsgate stock jumped 77 percent.

Institutional investors using social media

A recent study found 80 percent of institutional investors use social media in their work. And 30 percent say that use has helped them make an investment decision.

The study, Institutional investing in the Digital Age: How Social Media Informs and Shapes the Investing Process, was done by Greenwich Associates.  They surveyed 256 corporate and public pension funds, insurance companies, and other institutions in the United States, Europe, and Asia.

“These results show that social media is influencing decisions that can result in the allocations of billions of investment dollars around the world,” says Dan Connell, Head of  Market Structure and Technology at Greenwich Associates and author of the study. “With approximately 40% of the institutions globally expecting to increase their use of social media in the coming year, we’re projecting a further, rapid increase of social media influence in institutional investment markets.”

Dangers of social media’s impact on investing

As the Greenwich study shows. Most institutional investors get and provide their information through Twitter newsfeeds and LinkedIn. Likewise, more novice investors are turning to Reddit and YouTube for information and recommendation.

The criticism of investment advice from Reddit and Twitter contributors with names such as Roaring Kitty, Fage 138, and SaintHakop, is that their information may be speculative and based on emotion instead of value.

Forty-eight percent of those surveyed by Greenwich say the social media information prompts them to conduct further research instead of acting on impulse.

After hearings on the GameStop run-up, Democratic congressperson David Scott said that kind of social media investing is, “a threat to the future of our financial system”.

Is GameStop a good choice for investors? Would you use Reddit  or other social media platforms to find investments for your portfolio? Share your thoughts in the comments below.

Read More:

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started. Check out these helpful tools to help you save more. For investing advice, visit The Motley Fool.

Read More Source