New age investing

With social media playing an ever bigger role in our lives, Twitter now seems to have an effect on the markets too.

What was life like before Twitter? I can hardly remember.

You’d think that politicians and business leaders would avoid the social media platform like the plague…

After all, Twitter only allows you to post something in 280 characters or less. It doesn’t exactly lend itself well for nuanced statements.

And yet, it’s become the go-to place for newspaper hacks to find new stories.

They may as well cancel their subscription to Bloomberg because they hear the unfiltered thoughts of CEOs and even the US President there first.

On Tuesday Twitter was again the birthplace of a big media story as Tesla CEO Elon Musk mused about taking the company private.

It shows how Twitter might be an investor’s secret weapon to picking up gains in the markets.

By the time you read about something in the news, you’re already too late. You only get an edge when you have access to information as it’s happening.

Here’s how Twitter can give investors an edge.

The wisdom of Twitter crowds

Did you know that Tesla encourages shareholders to follow its CEO Elon Musk on Twitter?

They consider it one of the best ways to stay informed about the company. This proved true on Tuesday when Musk shared his plans to take the company private on Twitter first.

It’s just one example of the role social media has come to play in the investment world.

Why bother with boring press releases when companies can go on Twitter and reach millions of people at once?

Better yet, followers can immediately share your statements and basically do the PR work for you!

But Twitter isn’t just a convenient tool for companies to communicate with the world. It can also be used by investors to gauge market sentiment about an industry, an index and even particular stocks.

Market sentiment is something every analyst will acknowledge as playing a role in driving stock prices up or down, but it has always been hard to measure – especially in real time.

Enter Twitter.

Never before have investors had direct access to the mood of a wide range of people with regards to, well, pretty much everything. New film releases, music, but also the stock market.

Social media is where things go “viral”. It’s where new hypes are born. And a Twitter mob writing positive or negative messages about stocks or markets can have an effect.

Don’t know why Amazon shares have suddenly started to drop?

Twitter knows. A blog post about Trump threatening to use antitrust laws against the company is now “trending”, meaning lots of people are talking about it at the moment.

This phenomenon has now got the attention of academics. They want to know if Twitter can be used to help people invest better.

“A tweet-based asset-allocation strategy outperforms several benchmarks,” say scholars at the Massachusetts Institute of Technology.

A research team at the Erasmus University in Rotterdam has developed an algorithm that’s analysed over a million tweets about companies listed on the S&P 100 index.

“If you invested money in the S&P 100 and used the information gleaned from Twitter using our algorithm, you would beat the market,” assures Professor Ting Li.

The wisdom of Twitter crowds, eh…

How Twitter gives tweeters an edge

Elon Musk sharing big announcements with more than 22 million followers shows how big names can reach and influence big crowds in a short period of time.

Another obvious example is US President Donald Trump, who has an audience of over 53 million people on Twitter.

When the then President-elect slammed Toyota a few weeks before taking office in January 2017…

…the Japanese car maker lost $1.2 billion in market cap in the five minutes following the tweet.

It’s inspired the Wall Street Journal to create the Trump Target Index tracking the share price of 12 companies after the President tweeted negatively about them.

Though it shows that a negative tweet from Trump isn’t a stock killer – most stocks seem to do alright in the long run – the short term effect tends to be negative.

Eight of the 12 companies saw their share price drop straight after Trump directed his Twitter fury at them.

In addition to following big names with big influence on the markets or companies, Twitter may also be used to read general market sentiment.

On the day the Federal Reserve announced it would start buying and selling Treasury bonds to give the economy a boost, Twitter sentiment had been very negative.

The market fell 3% that day. Investors who spotted this negativity early and shorted the market before the announcement, could have gained nearly 4%, the MIT study found.

And then there’s the “breaking news” side of Twitter that gives people access to information before it’s disseminated to the market.

Reporters are always looking for a scoop. They often get wind of a big announcement before it’s made and Twitter is the perfect channel to immediately share this info with the world.

If you’re among the first to reach this news, you may be in a better position to anticipate market movements.

There’s still a lot to say for old-fashioned investing, though. The kind where you carefully examine a company’s underlying strengths and weaknesses instead of blindly following Twitter crowds.

Twitter can have an impact on the markets, sure, but it’s usually very short term and therefore more useful for traders as opposed to investors looking to hold stocks long term.

Social media doesn’t seem to influence stock prices long-term, as the Trump Target Index demonstrates.

Still, it probably wouldn’t hurt to sign up to Twitter and follow the CEOs of the companies you’re invested in, just of be safe…

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