When Facebook superseded Google as the world's most visited online resource in 2010 according to comScore, the trend was set for a significant period of social media dominance. Given that Google's considered response was to create its own unique social networking function, it became clear that the diverse and interactive nature of social media suddenly held the key to success for businesses, consumers and commercial interests alike. In fact, 2011 saw social media begin to influence the global investment markets, to the point where it is now playing a significant role in helping to determine trading strategy and stock value. (For related reading, check out 4 Companies Behind The Social Media Curtain.)
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The Twitter Hedge Fund: Using Social Media Data to Enhance Electronic Trading
It is interesting to note that a recent study from KPMG found 70% of businesses now boast a clearly defined and integrated social media presence, while market leader Facebook boasts more than 800,000,000 active users. These users are making social media an increasingly significant part of their daily activity and decision making processes, with consumers utilizing brand pages and recommendations from within their network to help define their purchasing habits. Businesses have also followed suit, by analyzing the trends and behavior of consumers to help improve their own product or service accordingly.
This meeting of brands and consumers also marks social media as the single largest source of online data, and research conducted by the Universities of Manchester and Indiana in 2010 suggested that the scrutiny of this data could actually help to reveal stock market trends and movements. This notion encouraged U.K.-based company Derwent Capital to create what has become known as the Twitter Hedge fund, which during its first month of trading outperformed the established S&P 500 index by analyzing random tweets to gauge specific market moods. Its initial success encouraged other investors to adopt similar methods and start evaluating social media information for commercial benefit. (For additional reading, see Is Your Portfolio Beating Its Benchmark?)
The Social Media Popularity Contest: How Fans and Mentions Can Also Boost Prices
Twitter is a vast resource of real time emotion, and the instant nature of emotive posts makes data mining far easier than it may otherwise be. However, what about resources that operate differently and do not boast the benefits of micro-blogging principles? While sites such as Facebook and YouTube do not offer commercial users the chance to articulate such succinct emotions, respective fan counts, likes and company page views can instead be used to predict the performance of individual stocks and markets with relative success.
The research that was conducted, which was influenced by the sentiment analysis tools used to assess Twitter as a data source, revealed that as specific company mentions increased across social media so too did the respective stock price and market performance. So, although the data provided by Facebook and YouTube does not offer the same level or nature of market insight as Twitter, it can be evaluated through different criteria to predict trends and mood. This may be especially useful in forecasting which markets are thriving, and, more specifically, where money is most likely to be invested.
Retail Trading: Taking Part in a Global Community of Investors
While utilizing the tools of social media to predict market trends remains an unpredictable entity, individual retail investors can rely on these resources to gain knowledge and actively share information. The ambitions of active online retail traders is diametrically opposed to those of professional practitioners, in so much that they thrive by interacting as part of a large network to share and gather ideas. As there is no more significant or far reaching network than that accessible through social media, it is a natural home for traders looking to build or become part of a community.
With Facebook's Zecco's Wall Street application allowing potential investors to like, track and buy their chosen stocks, and specialist online trading resources adopting networking principles to benefit communal users, it is possible to access a wider range of market information than ever before. Social media is also allowing individual traders the opportunity to interact with and follow investors who boast a similar portfolio, with a view to improving their craft and taking part in collaborative successes.
The Bottom Line
Refreshed from revolutionizing the way in which businesses market themselves and interact with consumers, social media is now having a significant influence on traders and the ways in which they choose to evaluate potential investments. Although the disorganized nature of the information accessible through social media must be intelligently filtered in order to be used effectively, there can be little doubt that the sheer volume of data holds significant value to individuals looking to trade successfully on the markets. (To learn more about social media companies, read How Big Are They?)