In this so-called ‘digitalised’ trading environment, investors have access to a variety of online information sources to make investment decisions — right from news media to independent social media platforms to channels associated with investment firms, among others. Many brokerage firms have also been offering tools that analyze or aggregate information from social media sources to help investors make decisions.
Let’s understand how social media operates. Through LinkedIn, relevant networks of people and businesses are built. As with Twitter, it is simple for investors to connect with experts in any industry to obtain further insights into their markets, while LinkedIn is also a great place to carry out due diligence on investments, as investors can assess both individuals and industries.
Facebook popularity has also become popular among investors and many try to gauge market sentiment based on Facebook posts. YouTube is mostly being used for training, conferences and dissemination of ideas.
In simpler words, with the rise of social media, there is now a quicker, more efficient way of dissemination of data and information to influence investor judgements.
One study showed almost 80% of institutional investors today use social media as part of their regular work flow, and approximately 30% obtain information about the investment through social media. This has become possible thanks to the democratisation of market data and new avenues to tap the minds of Investors. It’s clear that social media has become an extremely important part of the investment world and recent trends like Meme Investing, Reddit groups taking on Wall Street biggies and the cryptocurrency mania all go on to underline the role that social media is playing in influencing our investing behaviour.
On the flip side, while social media can provide many benefits, risks are also many because of the diverse quality of users and the propensity among some of them to manipulate these platforms for their own gains.
As an intelligent investor, it is your responsibility to take any information with a grain of salt. The best way to use crowd sourcing in trading is to establish a base at your own risk. Developing a strategy that might include borrowed ideas is an evolving process that constantly needs to be tested and refined.
The information that is shared through social media may be incomplete or misleading, and in some cases may not comply with securities laws. One thing to bear in mind is that when significant market events occur, it can be challenging to figure out what is actually happening, when we constantly follow the social media.
Investors’ tendency to follow and copy what other investors are doing is herd behaviour, which is against the best principles of investing. Regardless of the channel where the information is sourced from, investors should take steps to get full details about any company or investment product before making an investment decision. One should make it a point to fetch information from a source that is authentic and balanced, meaning one that is unbiased in communicating both favourable and un favourable news or information about a company or an investment product.
(DK Aggarwal is the CMD of SMC Investment and Advisors)