Social media has become an important new source for many people, including for investors looking for ideas to guide their strategy. That said, social media users must be careful when sifting through the vast quantities of information on the web to make sure they’re relying on legitimate sources.
There are a variety of social media platforms that investors use for information, including Twitter, Facebook, LinkedIn, Stocktwits, and even TikTok. While there are potential benefits to using social media to invest, there are also plenty of pitfalls.
Why Understanding Social Media Investing Is Important
In 2013, the Securities and Exchange Commission (SEC) allowed companies to start using social media platforms like Facebook and Twitter to communicate information to investors. As long as companies tell investors which website to check, they can use social media to announce information like company metrics that may influence stock price. Individuals interested in investing in a particular company may want to follow that company directly to stay abreast of breaking news.
Social media can also be an important place to gather information from analysts and financial bloggers who post their thoughts about stocks and news events or upcoming IPOs. Since these folks are typically reacting to news, following them may be a way to stay on top of popular investment trends. More than a third of young investors say that they now use social media to look into possible investments, making it their most popular source of investing information ideas.
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Recently, social media has entered the investment space in a new way with the rise of meme stocks. Meme stocks are companies that experience increased volume in trades due to hype on social media. Perhaps the original, and most famous, meme stock is GameStop. Retail investors encouraged each other to buy shares of the company over the subreddit message board r/wallstreetbets to force a short squeeze among hedge fund investors betting against the stock. Together these retail investors drove the share price up nearly 8,000% by late January 2021.
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Because investor sentiment, rather than company fundamentals, often fuels meme stock price increases, they can be extremely volatile. While meme stock investing can be exciting, it can also expose investors to large amounts of risk.
How to Use Social Media When Investing
Individuals aren’t the only ones using social media to guide their investing decisions. Fully 80% of institutional investors said that social media is part of their regular workflow. If you want to use social media as a way to inform your investment decisions, there are a few strategies to consider.
1. Follow Companies in Which You Invest (or Want to Invest)
Directly following a company’s social media accounts ensures the information you receive is timely and accurate.
2. Follow Informed Experts
Follow news sources, journalists and analysts who cover the companies and sectors, such as healthcare or electric vehicles, in which you’re interested. Consider people who have large followings, a good clue that they provide information that is useful to a broad range of investors.
3. Use Tech Tools
Some brokerages offer social media tools such as social sentiment trackers that aggregate and analyze information that’s posted on social media sites. For example, some firms use software to compile information from Tweets, blog posts, and messages. Others offer in-house social media platforms that allow investors to communicate with each other to discuss trading ideas. Or they may offer crowd-sourced research and analysis, using a website or app to gather ideas and opinions from the public at large. For example, analysts, investors and academics might weigh in with their thoughts on earnings estimates.
It’s important for investors to beware that these tools can be inaccurate or misleading. Data gathered from social media may be old, or contain hidden agendas. Read all disclosures offered by social sentiment tools to understand how they collect data and any risks or conflicts of interest.
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Social Media Investing Mistakes to Avoid
While social media can be a helpful tool for investors, it also has several pitfalls that investors should understand.
1. Impulsive Decisions
Information driven by social media, such as discussion boards or buy/sell indicators based on social sentiment can drive investors toward emotional investing, especially when information appears in real time. Impulsive investments carry additional risks. Trading securities without proper due diligence can lead you to buy stocks as prices are peaking, or sell as prices tumble, locking in losses and missing out on potential rebounds. Avoid allowing social media to feed the tendency to time the market.
2. Failing to Do Your Own Research
Think of information you get from social media as a jumping-off point, something that sparks your interest and leads you to do more research.
For example, if someone posts about how great they think a stock is, take a look at the company’s financials yourself. Look at past and present earnings reports to understand trends. You can find out this and other information on a company’s quarterly report. Look at the annual report as well. It will let you know about any risks the company foresees in its future. In addition, look at what a number of analysts are predicting the company’s earnings will be in the future.
You may also want to consider broader economic indicators or market measures, such as the Fear & Greed Index.
3. Trusting Bots
Bots are programs—not humans—built to engage on social media. It’s not always clear what their agenda is, and they certainly don’t have your best interests in mind. There are several signs that an account could be a bot, including:
• No profile picture
• Strange numbers of characters in the account name
• Posting at irregular hours
• Repetitive, formulaic language
• Repeated posting on the same subject or the the link
Social media has become an important way to gather investment information. But learning to recognize reliable sources is critical to finding accurate and useful information to create a strategy whether you’re investing in stocks, bonds, options, or other financial securities. What’s more, investors must understand the behavioral biases that social media investing can trigger, namely the temptation to time the market.
To avoid this pitfall, create and follow a long-term financial plan. Use social media to research stocks and funds that fit your plan, including your time horizon and tolerance for risk. Ready to invest? You can open an account on the SoFi Invest brokerage platform to get access to both active and automated investing services with competitive fees and no account minimums.
Photo credit: iStock/GOCMEN
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