Social trading can be an informative way to invest, as long as you approach it with caution
Know when consensus in opinion among forum participants starts resembling herd mentality
Understand there isn’t always safety, let alone wisdom, in numbers
In late January, we saw some quiet and underperforming stocks unexpectedly rise in value in a matter of days. It was a “shock and awe” moment for Wall Street that brought financial social media platforms into the spotlight.
If you’re unfamiliar with this new trend, here’s a primer to help you get caught up. What is social trading, how do you navigate the social trading platforms, and what are the potential benefits and risks attached to them?
What Is Social Trading?
Social trading is a method of investing in which some investors use social media platforms to follow the opinions, recommendations, or trades of fellow investors or industry experts. “The idea of making investing decisions based on what you think others might be thinking is nothing new,” said Tasha Matsumoto, senior content producer at TD Ameritrade.
“Speculative investing does require a level of metacognition—thinking about how other investors might be thinking,” Matsumoto said. “And social channels provide a way to directly tap into those thoughts so you can form a general consensus.”
As more people gravitate to online groups, it’s only natural to see more financial social media groups pop up. Its evolutionary course is interesting as well. Remember before 2010, when you’d check out chat comments on the finance pages of Yahoo! and Google? Well, that evolved to trading platform add-ons that allowed you to see and communicate with other traders who post their strategies, opinions, and positions.
And that leads us to today’s social trading world, where investors often use social media platforms like Facebook (FB), Twitter (TWTR), TikTok, and Reddit, the Condé Nast-owned social news website. As a side note, companies such as LikeFolio chart social media “buzz” and “purchase intent mentions” surrounding certain stocks, and TipRanks calculates the entire universe of analyst ratings, blogger opinions, news and investor sentiment, hedge fund activity, and other fundamental and technical indicators. And within these larger platforms are more focused networks that concentrate on specific topics.
So, how do you find platforms and groups that align with your personality and goals?
Navigating the Financial Social Media World
Stock markets are mostly driven by emotions, and social media sites tend to be outlets for people to express their emotions and opinions. This can be done through tweets, posts on forums, blogs, or videos. And if they’re not sharing, people could be lurking and digesting the info they see.
A possible starting point for social media sites: the larger platforms like Twitter, Reddit, or TikTok. Start by using keywords such as stocks, finance, or investing. For example, if you visit reddit.com and type “stocks” into the search field, you’ll see related “subreddits” (a group dedicated to a particular topic) such as r/stocks, r/investing, and r/pennystocks. And below that you’ll see the subreddits where the term “stocks” is discussed the most. Within the subreddits are different threads. Right off the bat, there’s plenty to navigate through. The challenge may be to find those that align with what you’re looking for.
You may notice that certain people score higher on the influencer scale or that some stock symbols get talked about more than others on any given day. Instead of falling into the trap of following an individual or group, it may be worth checking out what groups on other platforms are saying about the stock.
For example, you could hop on Twitter and enter a “cashtag” or stock symbol prefaced with a dollar sign (for example, $AAPL). “Cashtags can be great for finding conversations around a stock, but there’s a lot of noise and spam there,” said Andy Swan, founder, LikeFolio. People tend to talk positively about stocks they’ve already purchased, which may not add much value. “What’s more valuable is to focus on what people might be buying more of this year versus last year because this could help understand which companies or brands are more popular,” he added.
Enter the cashtag into the search field on Twitter, Stocktwits, or any search engine, and you’ll see the people or groups talking about the specific stock. “On Twitter, you can read the conversations below ‘big’ tweets, which helps to see what other people are saying about a stock,” Swan explained. It can be a great way to see things from other points of view.
And let’s not forget about the finance corner of TikTok. Yup, people are using the video platform for financial content. And a few personalities have attracted a large following for their short video clips on budgeting, investing, and trading. Type stocks, investing, or retirement into the search field and see which ones appear at the top of the list.
“On social media, understanding what matters and what doesn’t can be a challenge, so you should focus on conversations that give you insight,” Swan said. The challenge is to separate the wheat from the chaff.
The Risks and Potential Benefits of Social Trading
For traders and investors, being a part of a financial social network should be considered an educational tool with opportunities to learn about investing or social sentiment. “While these forums can help generate ideas, think of them as a jumping-off point for you to start your own research,” Matsumoto suggested. Investors and traders should exercise caution before entering a position based on recommendations seen on social media. “For any position you enter, make sure you have a strong rationale that aligns with your personal investing goals, a price target, and an exit strategy,” Matsumoto added.
Should I Participate in Social Trading?
The short answer is that it’s entirely up to you. When investing, there’s nothing wrong with seeing what the “crowd” is doing as long as you’re collecting information, and not just blindly following the herd.
It’s a good idea to assert your own independence as an investor instead of investing based on what you hear on financial social media sites. Do your homework.
Social media content should not be used alone when making investment decisions. Remember that the true identity, knowledge, experience, and motivation of site participants is unknown. The information provided has not been vetted.
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