Social Sentiment Investing Tools—Think Twice Before Trading Based on Social Media
FINRA and the SEC's Office of Investor Education and Advocacy are issuing this Investor Alert to inform investors about social sentiment investing tools and highlight their risks. This Alert provides tips to consider before using tools that analyze or aggregate information from social media sources to make investment decisions or attempt to predict changes in the stock market's direction or in the price of a security.
Social Sentiment Investing Tools
Investors use a variety of sources to gather information to make investment decisions. These sources can include analyst estimates, news stories, various measures of market volatility, and other tools. Recently, some investors have started using a new source of information to help make investment decisions—"social sentiment" investing tools offered by financial services firms that seek to aggregate or analyze social media data from various sources (e.g., Twitter or Facebook).
Examples of social sentiment investing tools include:
- Social media data analysis. This type of social sentiment investing tool, offered by some financial services firms, uses natural language and other complex computer processing techniques to compile and analyze social media data including tweets, blog posts, and messages. These tools may claim to provide investors with indications of future market and economic performance along with, in some cases, positive/negative ratings of stocks and potential trading and investment strategies.
- Social networking platforms. Some financial services firms have their own social networks that offer users access to stock-specific social media sentiment information and allow users to share and discuss investment and trading ideas with other investors.
- Direct trading from social media websites or mobile applications. Some financial services firms offer investors the ability to trade in their brokerage accounts directly from social media platforms or mobile applications.
- Crowdsourced research and analysis. Some firms have created "crowdsourced" social media research tools. These tools use a website or mobile application to crowdsource ideas and opinions from the public at large or from institutional investors. One emerging trend is to provide an "open platform" that allows contributors (such as analysts, investors and academics) to offer crowdsourced earnings estimates.
Potential Risks of Using Social Sentiment Investing Tools
Some investors may find value in using social sentiment investing tools to inform their investment decisions, but every investor should be aware that:
- Information you get from social sentiment investing tools may be inaccurate, incomplete or misleading.
- Stale social media data may impact the effectiveness of a social sentiment investing tool—for instance, the tool may contain old chatter and retweets, so the information provided by the tool might not be effective for its intended purpose.
- Social media posts can have a hidden agenda. Posts can be used to spread false or misleading information to try to manipulate a stock's price (either positively or negatively), resulting in real consequences for companies, particularly small or micro-cap companies, and investors who trade on this information. For example, an SEC complaint charged an individual who sent false tweets to influence stock prices in two companies, using Twitter accounts resembling well-known securities research firms.
- Depending on how it is presented, social sentiment information—particularly real-time discussion platforms and buy/sell indicators driven by social sentiment—may lead you to make emotionally-driven or impulsive investment decisions, which can be a risky way to approach investing.
If you decide to use social sentiment investing tools as part of your investment research, please remember the following tips:
- Do not rely solely on social sentiment investing tools to make investment decisions. Carefully review publicly disclosed company information, and consider reviewing other types of investment analysis, including fundamental value metrics.
- Read all the disclosures, disclaimers, and background information provided by a social sentiment investing tool, including how the tool collects and analyzes social media data, and any risks or conflict of interests (for example, incentives from issuers or third-parties to promote a particular security).
- Know your time horizon for investing. Information from social sentiment investing tools is generally short-term in nature (i.e., it focuses on events that may have an immediate impact on investments).
- Track the performance of any investment decisions made using social sentiment investment tools. If you use information from a social sentiment tool to make decisions about buying or selling individual stocks or funds, remember to monitor their investment performance against major market or sector indices.
- Create and follow a long-term financial plan. Do not let short-term emotions about investments disrupt your long-term financial objectives.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.