It's no secret that technology has changed the face of investing forever, especially over the course of this pandemic. Technology has leveled the playing field, making it possible for more individuals to invest in the stock market and cryptocurrencies, both through trading platforms and greater access to company information.
Social media has had a dramatic impact on retail investing. However, individual investors should be doing more research on the stocks they invest in than just reading what the crowd is saying about them on social networks. Here are some ideas about how to use technology to improve your odds of investing success.
Social media: no turning back
Let's start with social media, which has served as the gateway to investing for many retail traders. In the early days of the pandemic, individuals who had never invested on their own before had some excess time and money on their hands. As the days of COVID stretched into months and then years, more and more individuals dove into the markets.
The Reddit forum WallStreetBets captured the attention of Wall Street as retail traders appeared to coordinate their efforts to purchase large quantities of shares in heavily shorted stocks like GameStop and AMC Entertainment. These so-called "meme stocks" brought some hedge funds to their knees for using massive amounts of leverage to short those names.
Believe it or not, WallStreetBets has been in existence for about 10 years and now has over 11 million users, so it's not like it's a new thing for individuals to discuss their trades online. However, what has been new over the last couple of years has been the extent to which this subreddit and other online forums like it are affecting the markets.
Warnings about using social media in investing
A review of some of the conversations during the meme stock frenzy in early 2021 suggests that many investors might have been picking stocks based on what the masses were talking about. Such a practice calls into question whether any of those investors were doing their own due diligence before buying any of those meme stocks. It certainly appears as if a significant portion of the upward movement in those stock prices was due to investors following a trend blindly without thinking things through.
There are some critical things to keep in mind if you are getting your stock ideas from social media. According to Dennis Koutoudis of LinkedSuperPowers Group, a globally-recognized LinkedIn and social-selling expert, retail investors should take care to avoid comments left by potentially fake profiles.
“We need to be cautious when it comes to comments left by accounts that use nicknames instead of real names,” he said. “[If] they have images of little kids (or fake-looking images), they use fake names, they don't have a profile picture or incomplete profiles, no posts, or, generally speaking, you see something that causes a red flag for whether this profile is real or not. The last thing we want is to be influenced [in]to investing or not investing in a company because of comments left by a vast number of fake profiles online!”
A twist on using social media in investing
Social media certainly has cemented its place in the world of investing, and it can be a great way to find stock ideas, but perhaps not in the way you might think. Moez Kassam of Anson Funds talked about how he uses social media to surface stock ideas based on what the masses are saying.
However, he isn't just buying what everyone else is buying. He uses social media to gauge when retail sentiment on a particular stock is about to change. This practice enables him to predict with some level of success what will happen to stocks that make frequent appearances in social media conversations.
In the same way, social media users can analyze posts about various stocks as they make decisions about what to buy or sell. Instead of just buying what everyone else is buying, they can look for shifts in sentiment among other individual investors and try to be on the leading edge of any changes in viewpoints as they occur.
Technology for due diligence
In addition to social media, retail investors also have other technology available to them to improve their investing outcomes. One form of technology a growing number of retail traders are using is charting platforms such as TradingView or Stock Rover. Many trading platforms like Robinhood also offer their own charting capabilities.
Investors who haven't yet looked at other technology to use in their efforts might initially be stumped about how to use stock charts. However, a little reading can make a tremendous difference.
For example, reviewing stock charts enables you to identify trend lines, which show whether the stock is moving up or down or bouncing around. You can also spot support and resistance lines where a stock price tends to bounce off if it's remaining range-bound.
Additionally, you can pick up a greater understanding of historic trade volumes so that you can detect when a stock is suddenly seeing more or less activity than it has seen historically. You can also see when a stock becomes volatile.
Avoiding a short-term mindset
It's important to look at the long term when gauging any stock. Many inexperienced retail investors only look to see what a stock is doing in the short term and make their decision based on that. However, it is far too easy to get sucked into a short-term trend on a stock that has no true, lasting longevity.
Of course, stocks don't usually move in one direction continually because there are going to be blips, but looking at the longer-term trends in a stock can be very eye-opening. Commission-free trading may be increasing short termism among retail investors because they are no longer racking up fees on every single trade.
Using one of the many digital tools available to you will help you avoid this pitfall. Most online and mobile brokers have an array of tools they make available to their investors. If the only technology you've been using to inform your trades is social media, it wouldn't be a bad idea to check out what your online broker offers.
The more you can learn about the stocks you're watching, the more informed your trading decisions will be in the long term.
One area in which advanced tech is not serving retail investors
One more recent trend in retail investing is the surge in options trading. According to data from Options Clearing Corp., a record 39 million options contracts traded daily in 2021, up 35% from the year before, and retail investors account for over 25% of that activity. The problem is that technology has advanced so far that individual investors now have access to options trading, but that isn't necessarily a good thing.
Some might consider Robinhood and other commission-free trading platforms to be the poster children of democratization of investing, and that may be true. They placed the ability to trade literally in the hands of the masses through their mobile apps. However, just because new technology allows you to trade options contracts doesn't mean that you should.
Eleven percent of the monthly active users on Robinhood made an options trade in the first three quarters of last year. However, fewer than 1% completed a multi-leg options trade involving two or more simultaneous transactions.
CNBC explained that the most basic put and call options commonly used by retail investors have a much lower probability of profit and are more expensive than the more advanced strategies used by professional traders. Most options brokers have three to five options trading tiers, and they don't grant access to the more advanced strategies until the third tier.
That means investors can only learn about options trading and advance to the higher tiers where more money can usually be made by potentially losing a lot more money beforehand. Thus, it might be a good idea for retail investors to let this area of investing technology go. Just being able to do something doesn't make it a wise move.
Final thoughts
As time goes on, retail investors will learn more about the technology available to them, and the playing field will become even more level. There was once a day when institutional investors had access to vast amounts of information before retail traders, but that has changed. Former hedge fund manager Dominique Mielle noted this important change over the past 20 years.
However, many retail investors aren't aware that they have access to this information or the technology that can help them keep up with professionals. The more you can learn about the stocks you watch, the better-informed your trading decisions will be. Technology has improved to the point that it allows retail traders to not only complete trades themselves but also make wiser decisions than they could have years ago.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Ari Zoldan
Ari Zoldan is the CEO of New York-based Quantum Media Group, LLC. The company provides investor relations, public relations and equity research services to publicly traded companies. As an on-air media personality, Ari can be seen regularly on major media outlets and is frequently quoted in mainstream news outlets covering business, innovation and emerging trends.
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