Monday, 14 May 2018

The Social Influence

We are living in the golden age of social media. Social media introduces us wide networks between different people, businesses and even products. These networks are shaping our society and questioning the regular business models: For example, social media influencers on YouTube have managed to revolutionize the whole retail industry with cosmetics. An article from Financial Times show that a single YouTube-video has a power to generate quick revenues for different companies.

Social media influences businesses, so why not investing? Does social media affect the average investor behavior?

It sure does.

What you say public in social media has to affect the stock markets in some way. I think it isn't even necessary to mention Donald Trump and the power of his Twitter to the stock markets. Also, the things individual people say in their blogs or Facebook-statuses, must effect on behavior of some (but not all) investors. Of course this depends on the amount of influence that the person has and the amount of the audience following the influencer.

If I would say that Metsä Board and Nokia are the best stocks currently to buy in the Nasdaq Helsinki Stock Exchange, maybe some of you would just follow and buy some of these stocks. So few of you would buy these stocks that it would hardly change the quote of these stocks. But if it's an analyst or an other expert seen as reliable who would say this, these stocks will start to go up since more people are buying them and more capital is flowing into these securities.

For example socialite Kylie Jenner posted in her twitter that she (from all the people) doesn't believe that Snapchat is any good at the moment. This tweet sent Snap Inc. on the way to lose 1,3 bn USD from its market value at the time.

This is nothing new. Only thing that is the new is the variety of opinions and the amount of information available for the average investor is much more than it was 15 years ago. Back then you could only get this information if you could afford the monthly subscription of Bloomberg or Financial Times. Now you can get it from Google or from Facebook for free by just asking from a community of thousands of people.

For example a Finnish Facebook-group Sijoituskerho (The Investment Club) has over 30 000 members making hundreds of daily posts with statements and questions about different stocks, commodities and businesses. And the best thing is that you can join this group for free and get different opinions from real investors for your investing decisions. You don't have to buy Bloomberg.

The Facebook-group isn't official investment advisory, but if you get 100 "buy" recommendations from other investors, you would probably take that as a suggestion to buy the stock, am I right?

Now when we are presumably living in the boom-phase of the stock-market, it is expected that the volatility will increase. But how about now when we have the social media, its influencers and its incredibly good capabilities to distribute information to millions of investors worldwide? Could that increase the volatility even more in this phase? I would say yes. Could social media be also one reason to the unexplainable market reactions during announcements of quarterly results? That I don't know but would like to.

The availability of all kind of information isn't only exploited by investors, but also investment funds with their AI's searching for key-words or themes from blogs and forums all over the internet to interpret the investor attitudes and to predict stock-market activity. With capital sizes of that big that really could turn the tides of the stock-market on a daily basis.

The power of the communities is real everywhere, in investing it isn't any different. Also this introduces all kinds of ways to misuse. A while back Swedish amateur bloggers were sued for market manipulation. In their popular blog they gave recommendations to the stocks that they owned to inflate the prices of their stocks. Social media platforms like Twitter and Facebook were also used to accelerate the distribution of this kind of behavior.

We live in the 21st Century where we have more information in our hands than ever and we are integrated to interact with each other more than before. Due to the increased availability of transparent information the investor behavior and the stock-market are effected in some way. It is in the hands of the investors to process this information to make their best investment decisions and judgements on what to do with their wealth.

Text: SW

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