The advent of social media has drastically altered the way information is exchanged, while revolutionizing every possible industry in the world in the process.
The financial markets have emerged as a major avenue for social media channels to focus on, where traders and investors gather and exchange information regarding the instruments they are trading or looking to trade.
The effects of social media on financial trading cannot be understated and social media channels have influenced markets in a few key ways, which we will discuss in greater detail below.
The effects of social media on financial markets
The financial markets are largely dependent on the sentiment of traders and social media provides an outlet for traders to influence each other’s outlook on certain investments or the direction of the broader market, which often results in market trends being dictated by social media channels. While investing and trading social media channels are often small and unable to drastically affect the markets, in some cases traders may organize into much larger groups, which was seen during the GameStop short squeeze in 2021.
In other cases, traders create social media channels to collaborate and create new technical indicators. In fact, some of the best indicators for the MT5 platform have been reworked by traders and are available for sale online.
However, this is not all and we can discuss some of the most influential uses of social media on financial trading and market trends in more detail below.
Trading forums
As already mentioned, the most popular use of social media among traders is to organize into forums to discuss specific instruments and strategies. For example, stock and crypto traders have some of the biggest social media communities in the world.
More tech-savvy traders may create technical indicators of their own and post them on platforms like TradingView and others.
Copy trading is another social media feature that resembles a forum and allows a group of traders to track the portfolios of successful traders. Many online forex and stock brokerage firms offer copy trading features to create active communities on their platforms.
Sentiment analysis
Hashtags on social media can provide great insight into the trader sentiment regarding a particular instrument. For example, Stocktwists is a popular platform that has been tracking the tickers mentioned on Twitter/X and determining if the sentiment is positive or negative.
Traders can sign up at Stocktwits and use the sentiment data available on the platform.
When sentiment indicators are low, you may interpret this as a sell signal and vice versa. Such platforms have hundreds of thousands of users worldwide, which means that they can significantly alter the performance of certain instruments, especially those that are not characterized by a high degree of liquidity.
Influencer accounts
It is not rare for successful traders to interact with their communities on YouTube, Instagram, X, etc. where they provide tips, analyze markets and trade during live streams, where viewers can copy their trades in real time.
This is particularly popular on the forex and crypto markets, as both markets are open 24/7 and allows influencers to tap into a worldwide audience of traders to maximize engagement.
If an influencer has a particularly large following, they are subject to regulatory oversight in order to avoid market manipulation charges. While such instances are rare, they are nonetheless regulated by law.
How big is the influence of social media on market trends?
While certain social media groups may alter the price of a particular security, it is important to note that hundreds of billions of dollars are transacted on financial markets on a daily basis and small social media groups are unlikely to play a major role in determining the overall trends observed on the market.
For example, a group of traders, as seen on the WallStreetBets subreddit, may influence the performance of a few stocks like GameStop, AMC and Bed Bath & Beyond, but such activity is unlikely to materialize on stocks with a significantly higher market capitalization, such as Apple or Microsoft. The effects of such online communities becomes even more negligible when assessing major indices, such as the S&P 500 or the Nasdaq-100.
Therefore, the key takeaway is that social media can influence financial markets and trends to a certain degree on a smaller scale. However, most of the market is dictated by smart money and the billions of dollars in transactions executed by major financial institutions, such as pension funds, investment banks, endowment funds, etc.
It is also worth noting that as the trend of democratization of finance continues to grow, the role of social media in financial markets is expected to grow.
Summary
While the rise of social media has played an incredibly important role in bringing trading communities together and in some cases even influenced the price of financial instruments valued in the billions, the broader market is still too large to be dictated by groups of rogue traders and social media forums.
However, this does not mean that the influence of social media on trading decisions should be disregarded, especially considering the preferences of younger traders on the market.