Why the Future of Stock Markets Hinges on Social Networks

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A study conducted a New York based university tracked the daily stock prices of popular companies like Nike, Starbucks and Coca Cola for a period of ten months and mapped it against the social media engagement like fans, followers and video views from its followers. The study was able to point out an interesting correlation between the companies’ popularity on social media and its performance in the stock market.

From the outset, the correlation might seen just coincidental. However, at the core, stock trading and social media engagement are driven by the same basic parameter. A Stanford University study too has confirmed that ‘public mood’ as gauged through the sentiment analysis of thousands of Twitter feeds was effectively the same factor that influenced the prices of stocks.

Natural language processing (NLP) techniques for predicting stock movements is not exactly new science. Banks and financial institutions have used news reports as a base for their algorithmic trading divisions for a long time now. But unlike conventional trading that was based off technical reports from stock analysts, the new form of algorithmic trading might work through a larger dataset that is derived directly from consumers – the effect is real-time and is much closer to reality than the technical reports that have often come under scrutiny for being swayed by the analyst’s individual preferences and biases.

But algorithmic trading that is influenced from social media has its own fallacies too. In April 2013, the Syrian Electronic Army hacker group hijacked the Twitter account of the Associated Press and sent a tweet announcing explosions at the White House. The news was debunked within a couple of minutes – but the damage had been made and according to a Bloomberg estimate, nearly $ 136 billion worth of equity market value was erased. A stock market that depends on social media for analysis is always treading on thin ice.

However, there is no gainsaying the fact that social media has indeed impacted the stock investor community in a positive way. Take the example of StockTwits, a popular social network for investors to exchange and share notes, or the likes of copyop and eToro that bridge the gap between seasoned investors and newbies by letting the latter copy the trading patterns of their successful counterparts. This helps new investors rise up the learning curve much more quickly than earlier. In addition to this, such social trading tools have enabled investors collaborate and share knowledge much more effectively. The result is that buy/sell decisions today are much more rationale and scientific today than they were a decade or two earlier.

According to Shay Datika, the founder and CEO of copyop, a staggering 80% of their users are in the age group of 18-35 years. Various statistics have shown that the millennial crowd are among the most socially active audiences on the internet. With a significant population of these users likely to start accumulating disposable income over the next decade, the percentage of this crowd investing on social trading platforms is only likely to rise.

The influence of social networking on the stock markets, either through algorithmic trading or via social trading is here to stay. While there are always risks with an unregulated medium like the social media, the pros far outweigh the cons. It will be interesting to see how this medium matures over the next decade. What do you think?

Image Courtesy: StockInvestingSimplified.com

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