The Influence of Social Media on Stock Market Trends

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The AP on the Street

The Influence of Social Media on Stock Market Trends

Our everyday lives now revolve around social media, which has a significant impact on the stock market, among other things. Information and opinions can spread quickly thanks to the popularity of social media sites like Twitter (now X), Facebook, and Reddit, which can cause significant changes in investor sentiment. The impact of social media on stock market patterns is examined in this article.

According to a Forbes article, the commission-free trading phenomenon on social media has changed market dynamics. It has an effect on both small and large traders, brokerage firms, and clearinghouses. Factors like COVID-19 pandemic lockdowns, stimulus checks, larger personal savings, commission-free trades, and social media postings have all contributed to the rise in retail trading involvement.

Social media platforms have become virtual trading clubs for garnering trade ideas, swapping tips, and hyping stocks. In this frenzied environment, naïve participants are chasing rewards without appreciating the underlying risks, and some are getting caught on the wrong side of their bets, losing lots of money. For example, the January 2021 surge in out-of-favor stocks like GameStop, AMC, Blackberry, Bed Bath & Beyond, etc., was triggered by a herd of retail traders mobilized via voluminous posts on the social media Reddit subforum called r/WallStreetBets (WSB).

According to Bloomberg, 50 meme stocks added $276 billion in value from the end of 2020 to the mania height. However, in just a matter of days, $167 billion had been wiped out. After the hysteria ended, it is unclear how the gain and loss fallout got distributed amongst the trading community. Reddit retail traders herding together move from sector to sector, targeting meme stocks, creating waves of volatility and price surges. Braggadocios postings on social media trading forums such as WSB help spark the surges. The postings create fear of missing out (FOMO), jealousy, and goad followers to trade, thereby galvanizing a massive herd mentality.

A study published in SpringerLink investigated the link between social media sentiment and the stock market using more than two million tweets posted in 2017 that include the name or symbol of twenty-five companies listed in the S&P 100. The study found a two-way relationship when using hourly and daily intervals: a higher proportion of negative tweets about a company posted within an hour/day leads to lower returns and a higher short volume for its stock (even after controlling for traditional-media news sentiment). A higher return for a stock in an hour/day leads to less negative sentiment within the next period.

These results suggest that social media sentiment includes signals beyond those found in traditional media that can impact the stock market. The observed results suggest that these signals are only considered reliable when the sentiment persists over a long enough period.

In conclusion, social media has a profound impact on stock market trends. Information and opinions can spread rapidly through social media platforms leading to significant shifts in investor sentiment. Social media platforms have become virtual trading clubs for garnering trade ideas, swapping tips, and hyping stocks. Studies have shown a connection between social media sentiment and stock market trends. As social media gains importance, it will be interesting to see how its effects on the stock market evolve.

In the Analytical Platform, we are going to focus more on the deep research of the influence of social media on the stock market trends in the coming months. 

We build on our previous research by analyzing the financial articles from Seeking Alpha and Yahoo finance websites. Financial news and analysis are most likely to affect the sentiment on the market, which is why looking at them is really crucial for pretty much all investors. However, it would be quite time-consuming to do that. 

To encounter that problem, there are several applications that analysts and portfolio managers use. And SFA (Summary of Financial Articles) is one of them. Our SFA tool helps analysts quickly check what is on the news outlets in a matter of seconds. Our state-of-the-art technology automatically analyzes all articles and tells the reader if it is positive or negative and many more interesting insights.