For decades, stock investors have been getting their financial news and investment advice from the same sources. In 2021, with a couple of heavily shorted stocks, everything changed. Social Media became the primary medium for financial news as a younger, more tech-savvy generation of traders joined the market. Bloomberg, Reuters, and CNBC were replaced by Twitter, Reddit, and YouTube. As we would soon see, this social media stock market impact would change Wall Street forever.
What followed was a movement with a strong mob mentality that united millions of traders worldwide. For all of the negative things that social media can convey, it also has an unparalleled power to unite people towards a common cause. This power is how social media has had such a major impact on the stock market.
The Social Media Stock Market Impact: the Great Equalizer
Social media is also quickly becoming a nightmare for financial regulators. Can millions of investors agreeing to buy or sell a stock be considered collusion? Technically speaking, touting a stock is not illegal. Most posts will also preface their comments with NFA or Not Financial Advice. This magic phrase seems to remove any responsibility from the poster. But millions of investors agreeing to buy a stock on the same day to initiate a squeeze? This is tip-toeing a fine line between stock manipulation and stock discussion.
Like most things, investment information on social media platforms can be a veritable minefield. One false step can make for a terrible result. Financial Twitter or FinTwit is chock-full of excellent stock and crypto inventors. Unfortunately, it is also full of fraudsters and others who either spread misinformation or, even worse, have malicious intentions. A recent study in British Columbia, Canada, showed that 32 percent of investors aged 18 to 34 get financial advice from social media. A similar study run by CNBC showed that 35 percent identified social media as a place to look for investments compared to just 7% who spoke to a stock broker or financial advisor.
It should be no surprise that younger generations are quicker to turn to social media for advice. After all, sites like Twitter, Reddit, and Facebook are the fastest way to obtain information or news. A Pew Research poll after the Capitol Riots revealed that 71% of Americans prefer to get their news from social media. This trust leads younger investors to also believe what they are told about investments.
The Power of FinTwit
Twitter is arguably the most important source of information for our generation. It is a platform that was built for breaking news and real-time updates. Financial Twitter or FinTwit is an incredible resource, rich with skilled traders and knowledgeable accounts. But there is a dark underbelly to Twitter as well. As Tesla CEO Elon Musk found out when he was looking to buy the platform, Twitter is overrun by bot accounts. These bot accounts are more advanced and can mimic human conversation and even provide financial advice.
If you can parse through the army of bots, Twitter is an excellent place to learn about investing. In fact, gauging Twitter sentiment by scanning for Cash Tags and ticker symbols is one of the best ways to get in front of a massive move for the stock. Social media sentiment scanners can instantly scan the platform and provide real-time updates on which stocks are trending and getting mentioned the most. Some can even identify bot activity in real-time! These are truly the next generation of stock screeners; perhaps, more than any tool on the market, they can provide insight into what the collective investing mind of social media will do next.
The Age of Tik Tok
It’s not just Twitter and Reddit where young investors receive their advice. Emerging social media platforms like Tik Tok provide some questionable investing advice in the form of short videos. Some myths circulated as truths on Tik Tok include: only buying Tesla call options as a trading strategy, influencers giving mortgage payment advice, and even starting a shell company to avoid paying taxes.
If you’ve ever used Tik Tok, you can understand why influencers have such a devoted audience. The videos are quick, catchy, and get right to the point. Watching a 30-second clip of someone trading call options is more appealing to younger investors than studying trading strategies from a book or website.
Tik Tok undoubtedly has its share of well-intentioned influencers. In fact, some financial education Tik Tok accounts are extremely good at simplifying investing for new investors. But should you take actual advice on what to invest in? You might be surprised at how many traders actually are.
Facebook and Instagram: Zuckerberg’s Grip on Information
There is rhetoric circulating around younger generations that nobody uses Facebook or Instagram anymore. The truth is, Meta Platforms still consistently sees nearly 2 billion global active daily uses and 3 billion monthly active users across its platforms. Despite being a company that seems to be struggling to maintain its growth, Meta’s social media platforms are still the market leaders in the industry.
It shouldn’t be surprising then that Facebook and Instagram are both at the top of the list of social media sites used for investing advice. Specifically, millennials and generation-z traders strongly use Facebook investing groups, even more than Twitter. Ever hear of the GNH or Gross National Happiness Index? This metric measures sentiment across Facebook to see how happy people are on a given day. Researchers have used this data to gauge mentions of stocks or the stock market. The GNH can quite literally tell us how the stock markets in each region of the world performed based on the happiness of traders. This is one clear example of Facebook’s stock market impact.
Elon Musk: With Great Power Comes Great Responsibility
Is there anyone on social media that is more influential than Tesla CEO Elon Musk? Not only do his tweets impact Tesla’s stock, but retail traders have been known to take social posts as investing gospel. One only has to look at the meteoric rise of cryptocurrencies when Musk mentions them in his tweets. He single-handedly caused Dogecoin to reach an unimaginable all-time high price of $0.73 per coin. Unsurprisingly, Musk has also had several brushes about stock market manipulation with the SEC. No matter how you feel about Elon Musk, his social media activity’s impact on the stock market is not denying.
YouTube has Education for All Levels of Traders
YouTube is another platform that has gained popularity in stock trading. Like Tik Tok, YouTube is an example of how newer generations prefer to consume their information by watching videos. It is an excellent financial and trading education source when you follow the right accounts. YouTube has valuable material for beginner and intermediate traders from some of the best in the business. Whether it is something as simple as learning about dividends or as advanced as option spreads, there is something for everyone.
Reddit: Beware of the FOMO
As most of us know, Reddit is at the center of the retail trader movement. The GameStop short squeeze originated in a subreddit called r/WallStreetBets, a forum that has grown to include millions of retail traders. Of particular interest to Redditors: penny stocks, short squeezers, and YOLO option lottos.
One thing becoming evident on Reddit is that some are taking advantage of other traders. Things like penny stock pumps and dumps take advantage of the FOMO culture developed on social media. FOMO is the Fear Of Missing Out and investing, it is usually accompanied by greed. The fear of missing out on potential gains makes inexperienced traders buy stocks they have never even heard of. All the buying pressure can cause these penny stocks to skyrocket, at which point, the original stock pumper exits with a nice profit.
But we also know about the power that Redditors possess. It became the rallying point for highly shorted stocks like GameStop and AMC. Retail traders used the Reddit discussion boards as a home base for their attack on hedge funds. That subreddit sent GameStop’s stock from $5.00 to nearly $500.00 in weeks. In a 2021 Motley Fool poll of Gen-Z and millennial investors, Reddit forums trailed only YouTube videos for where they most commonly got their investing information from.
Social Media is a Double-Edged Sword
It is difficult to quantify how important social media has become in the financial world. Certain sites track social media sentiment based on stocks mentioned across various platforms. Companies can use APIs to directly extract this data for anyone to see. Social media sentiment is now being used as a barometer for the performance of the markets. It’s effectively a more advanced way of calculating the GNH sentiment from Facebook.
So why would we say that social media is a double-edged sword? Since 2021, institutions have also been monitoring social media sentiment and activity. In fact, according to a Wall Street Journal report, 85% of hedge funds and 42% of asset managers track social media sentiment daily. Some have even been accused of posing as retail traders in Reddit forums.
Has social media been compromised? Yes and no. Ultimately it’s up to each investor to believe what they read on a social media site. If it sounds too good to be true, it usually is. Social media might be a double-edged sword, but it is also the great equalizer that has leveled the playing field and had a clear impact on the stock market.
How to Use Social Media as a Trader
First, no matter what you invest in, you should be researching the asset or company to the fullest. If it’s a stock, learn about what the company does and why it could be a good investment. Strong cash flow and industry moat are much better reasons to buy a stock than ‘because a guy on Reddit told me to’.
Do not give in to FOMO and never invest what you cannot afford to lose. At the same time, embrace the free education and invaluable information that social media provides to positively impact your stock market trading. You can learn everything you want about trading by watching YouTube videos. If you want to use some quantifiable metric of the impact of social media, then sentiment scanners are probably the most applicable form of information. These are unbiased and provide a broad sweep of which ticker symbols and stocks are being mentioned across social media.