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Over the past decade, social media has exerted more influence than you might think on the financial markets. Here are four important ways that social media has helped to shape, change and transform Wall Street.
Wisdom of the crowd
First and most importantly, social media platforms like Facebook have democratized the financial markets, creating huge communities of small, retail investors pooling their resources and insights to make better investment decisions. This is the whole “Wisdom of the Crowd” phenomenon first detailed by James Surowiecki back in 2004. Put simply, it’s a lot easier to arrive at the correct value for a company when you are part of a “crowd.” In his book, Surowiecki used the example of a crowd correctly guessing the weight of a country fair ox, but you can use that same logic to guess the value of a “cash cow” like Google, Facebook or Twitter.
The ultimate hedge fund
Moreover, social media has created enormous amounts of qualitative and quantitative data for investors to analyze. In some cases, professional investors are able to use this information to get an edge on other investors. Forget balance sheets and financial statements for a second – what are people really buying and selling these days? By seeing what’s trending on social media, investors might be able to parse all those cryptic public statements by a corporate CEO to figure out that next quarter’s sales numbers are going to be awful. Or, just as likely, they might uncover a hidden gem. Maybe a viral product sensation on social media is the key to unlocking the value of a company’s new branding strategy.
The mood of the market
Also, social media offers unique insights into the mood of the market. Thanks to social media sentiment analysis, it’s possible to glean insights into how investors are thinking and feeling. By studying tweets over a certain time period, it might be possible to uncover a new shift in investor sentiment. In the same way that brands use sentiment analysis to see what consumers are saying about their products, investors can use the same type of analysis to see what fellow investors are saying about the market. Getting in early ahead of a massive bull run – or getting out early ahead of a steep market selloff – could be huge for your portfolio.
The new market movers
And, finally, social media has conferred new “market mover” status on social media influencers. People like Elon Musk – who tweeted about his plans to move Tesla out of California and his displeasure with California politicians – can send the value of companies up or down within minutes. In the “old days,” a few cryptic mutterings from the Fed chairman on CNBC might have been enough to send a market up or down. Now, people like President Donald Trump can send out a single tweet from anywhere in the world and a stock could go crashing down or skyrocket up.
Best of all, social media is helping investors of all sizes connect and share ideas. And this type of social networking functionality is starting to be included in financial apps widely available for iOS and Android. Invest in a company you like, and then share this investment far and wide on social media. A generation ago, it was only the big Wall Street powerhouses who had this type of reach and power. Now, it is anyone with a social media account and a smartphone.