The Dangers of Letting Social Media Influence Your Investing Decisions

The Dangers of Letting Social Media Influence Your Investing Decisions

We live in a world where information moves at break-neck speeds. Social media allows users to quickly and easily reach millions of followers and influence their decisions. This has transformed the world of investing in recent years. A single viral social media post can result in significant rises or dips in a company’s stock price. For example, a 2018 tweet from Elon Musk resulted in a 7% increase in Tesla's stock price. 

While the internet has brought a lot of benefits to retail investors such as giving more people access to stock trading platforms, dangerous trends in social media influences are emerging that could lead to catastrophic losses for investors. 

How Social Media Influences Investing

Across the globe, there are nearly 5 billion people who use social media. Users have the ability to access, read, and share information that they feel is useful or important to them. If enough users interact with the post, it can easily reach thousands of people in a matter of minutes. These posts can ultimately create bias or influence people to take action based on limited or incomplete information. 

In some cases, the impact of social media on stock prices is entirely coincidental. Other times, social media posts are directly intended to manipulate the market. In 2020, a group of people on Reddit worked together to buy large quantities of GameStop shares in an attempt to short-squeeze the stock. The thread went viral as millions of people hoped to cash in on the potential windfall. This resulted in the stock price surging over 1,500%. 

While this sounds great for investors, many people lost money in the mayhem. Due to volatility, the trading platform Robinhood halted trading which resulted in $10 billion in losses from retail investors who couldn’t sell when the stock price ultimately fell. Institutional investors also lost big. Hedge funds who had short-sold GameStop were forced to sell many of their shares at significantly higher prices than they purchased them. One hedge fund, Melvin, lost nearly $7 billion in a single month. 

These situations are not isolated events and have emerged several times over the past few years. In August of 2022, Bed, Bath & Beyond saw its stock jump 400% when retail investors pumped nearly $175 million into the stock in a matter of a few weeks.

Unfortunately, stories about investors who take big risks and make millions of dollars have encouraged others to take unnecessary risks. The reality is that the chances of making money on a trending stock is extremely low. Most people lose money. 

The Perfect Storm of Social Media Investing

There are a number of factors that have helped to create this irrational trading environment. It’s important for investors to know how to identify and avoid social media influence on their investment decisions. 

  • Emotionally Charged Content - Humans are naturally driven by emotions. Social media content that sows fear or excitement can influence people to make rash decisions to avoid missing out. Even institutional investors fall prey to this. One study found that 30% of institutional investors regularly use social media to drive some or all of their investment decisions. 
  • Increased Access to Trading - Part of the driving force behind social media-influenced trading is the increased access for the average person to trade stocks quickly. Robinhood, for example, gives millions of users the ability to trade stocks from their mobile device. While having fast access to trade stock is great, it can be dangerous for people who are easily influenced by social media content to make uniformed investment decisions. 
  • Biased and Unvalidated Information - Most social media content is based on the opinions and assumptions of the poster. Rarely are these posts entirely accurate or validated with real stock data and fundamental analysis. 

Making Wise Investment Decisions with AI-Based Research

Information found on social media could provide valuable clues as to what companies and industries can be profitable investments. However, purchasing assets without proper research can be a risky gamble. 

 

Deshe Analytics’ innovative AI engine helps investors by providing unbiased technical analysis to validate or refute trading information being shared over social media channels. Our technology uses millions of data points (including press releases, stock trends, company financials, etc.) to closely monitor the performance of over 40,000 companies across the globe. The platform uses this information to generate buy/hold/sell recommendations and create easy-to-understand reports in any language. Even inexperienced investors can have the confidence to invest like a professional. Check out our website today for a demo. 









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