Whether it’s an influencer on Reddit or YouTube or professional traders and institutions on LinkedIn and Twitter. The influence of social media on investing is undeniable. However, before jumping onto your favorite platform for advice. Make sure you know what you are doing.
The GameStop drama
GameStop sells video game machines in retail stores and online. Analysts had long viewed it as a bearish stock. Suddenly in January of this year the stock took off. The price rose more than 7,200 percent in one year.
What caused this unprecedented price jump? A Redditt thread (r / WallStreetBets) with 3.1 million subscribers. Touted the stock as an influencer. Readers rushed to buy GameStop. As a result, more bookings were made in the inventory on other platforms.
Sprout Social, a social media management and optimization company, tracked mentions on social media. From January 20-27, 1,582,000 tweets and 1,465 YouTube videos about GameStop were found. Sprout Social concluded that there was a direct link between the mentions of GameStop on social media and the rise in its share price.
Impact of Social Media on Investing
The price increase at GameStop was unprecedented. However, the impact social media has on investing is not new.
The Securities and Exchange Commission began allowing publicly traded companies to post news and earnings reports on Twitter in 2013. The result was an increased flow of information directly to investors. As a result, it also had unintended results.
At a 2016 American Diabetes Association conference. Attendees were told about a diabetes drug from Novo Nordisk. The information was supposed to be confidential but has been posted on multiple Twitter accounts. Investors who jumped on Novo Nordisk stock had a rude awakening the next day. The stock fell on news that their diabetes drug was less effective than hoped.
Social media as an indicator of investment success
Sometimes it’s not financial information or recommendations that move a stock.
A prime example is the growing interest in the film The hunger Games. Some investors noticed a sharp surge in hashtags related to the books. When Lionsgate acquired the film rights. These investors bought shares in the company.
In its opening week in March 2012, The Hunger Games grossed $ 152.5 million, the third largest at the time. Lionsgate stock rose 77 percent.
Institutional investors using social media
A recent study found that 80 percent of institutional investors use social media to do their jobs. And 30 percent say using it helped them make an investment decision.
The study, Institutional investing in the digital age: How social media informs and shapes the investment processwas conducted by Greenwich Associates. They surveyed 256 corporate and public pension funds, insurance companies and other institutions in the US, Europe and Asia.
“These results show that social media influences decisions that can lead to billions of dollars in investment being allocated around the world,” said Dan Connell, director of market structure and technology at Greenwich Associates and author of the study. “Since around 40% of the institutes worldwide assume that they will use social media more intensively in the coming year, we forecast a further rapid increase in the influence of social media on institutional investment markets.”
Risks of the impact of social media on investments
As the Greenwich study shows. Most institutional investors receive and make their information available through Twitter newsfeeds and LinkedIn. Likewise, more and more inexperienced investors are turning to Reddit and YouTube for information and recommendations.
The criticism of investment advice from Reddit and Twitter employees with names like Roaring Kitty, Fage 138, and SaintHakop is that their information may be speculative and based on emotion rather than value.
Forty-eight percent of people surveyed by Greenwich say the social media information prompts them to conduct further research rather than act on the fly.
After hearings on the GameStop pre-run, Democratic Congressman David Scott said the nature of investing in social media was “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 to add to your portfolio? Share your thoughts in the comments below.
If you’d like to read our blog posts and try your hand at blogging, we have good news for you. This is exactly what you can do with Saving Advice. Just click here to get started. Check out these helpful tools to save more. For investment advice, visit The Motley Fool.