By Chris Camillo
Over the past decade, being social media savvy has become a prerequisite for building a successful brand. Now, social media is also changing how investors monitor emerging trends and make decisions on which companies they want to invest in. Data and analytics gathered from online blogs, forums, and social media channels such as Twitter and Facebook take the real-time pulse of the investment community and give direct insight into emerging market trends, products gaining traction and more. This form of early knowledge empowers investors to make new discoveries, validate a potential investment and create a network of like-minded investors.
Here are three ways social is impacting finance and investing:
1. Online investment forums 2.0
There are several social media platforms and micro blogging networks connecting investors with each other and giving them a platform to access critical information in one place. The discussion boards at Yahoo! Finance and Motley Fool have been mainstays for years, but new outlets such as StockTwits are quickly taking over the space and have the potential to replace standard sources of financial chatter. While using StockTwits, you can search for top investing pros, follow them, collaborate and quickly scan trending stocks or mine chatter related to the stocks you already own.
2. Social financial chatter analysis
Technology has made it possible to aggregate and analyze real-time streaming financial chatter across a multitude of investment forums, blogs and microblogging networks to generate a stock’s buy/sell rating based on “sentiment.” Sentiment reflects how investors feel about a particular publicly traded company. This process is called financial chatter analysis. HedgeChatter, a financial chatter analysis startup (of which I am an investor and board member), is one company that aims to turn financial chatter into a reliable financial insight tool for investors. Advanced algorithms track interactions and measure how many people are participating, who is talking, whether the discussion is positive or negative, and each person’s level of influence or historical “sentiment correctness” for the particular stock being discussed.
The resulting insights and data provide a real-time snapshot of what influencers are saying about a particular stock, and the degree of weight an investor should place in their opinion. A great example is Carl Icahn—a notable, if not controversial, investor whose tweets about Apple and eBay have become market movers in and of themselves. Social chatter analysis is becoming more accepted by institutional investors and will make its way to the mainstream in the coming years.
3. Social information arbitrage
Simply put, social information arbitrage is diving into unstructured conversations and trending topics in order to identify meaningful and tradable information that has not yet been curated and published for consumption by outside the traditional financial establishment (e.g., Wall Street). For example, it was “mommy bloggers,” not Wall Street analysts, who were first to foresee record holiday demand for the newly launched Leap Pad Explorer educational children’s toy in 2011. That single new product launch fueled an unexpected jump in year-over-year sales at publicly traded LeapFrog Enterprises, rewarding investors with triple digit returns. At the time, the company was only trading for $3 a share and had not made any waves in the news cycle for several years. Although mommy bloggers have no affiliation to the financial world, savvy investors tuned into this community would have benefited greatly.
Chris Camillo, a pioneer in social information arbitrage investing, is the author of Laughing at Wall Street (St Martin’s Press, 2011). In 2006, he leveraged social information analysis to invest $20,000 in the stock market, and in just over 3 years, grew it to more than $2 million. He is a regular speaker on the real and perceived predictive effectiveness of social chatter on public securities markets and its role in investment analysis.