Joshs Finance

Is Social Media Useful for Buying and/or Trading Stock? – DataDrivenInvestor

Photo by Alexander Shatov on Unsplash

Is social media information reliable?

Where can we get information about what stocks to buy and/or trade? In the past we used our broker hoping that we could get on the bandwagon before anyone else. With the information revolution created by the internet and social media, information travels much faster than it used to. By the time our broker calls us (are we even first on the list?) the information is widely circulated.

There’s been a lot of interest in using social media to join the crowd as they trade stocks. Can we use social media to profit on the latest information?

Since information providers on the internet can be anonymous, it’s important to know if the source is reputable or a scammer. “Pump and dump” is a widely used strategy by swindlers. It involves hyping (pumping up) a stock so it soars in price. The initiators sell (dump) the stock as close to the top as they can. The stock price tumbles as there are more sellers than buyers, and the majority of investors are stuck holding the bag.

Here are some ideas to help you separate the good guys from the bad guys.

Using Twitter as an example, monitor social media carefully. Get a feel for who is reliable and who is not by looking at each member’s track record. Check whether their past ideas were spot on or way off the mark. Twitter marks authentic accounts with a blue check mark. Of course, not every authentic account is going to be worthy of your time, but be extra careful with accounts that lack that blue check mark.

Look to follow accounts whose views are rooted in facts and an understanding of the market. Also be sure to get a lot of different viewpoints rather than following only those who agree with you. It forces you to think when you see an opinion opposite to yours.

As Ronald Reagan said on a number of occasions (during nuclear disarmament discussions with the Soviet Union), “Trust, but verify.” This is another good rule for choosing anonymous traders to follow.

Watching what people are talking about online is not only useful for stock tips but can also alert you to examine your existing positions. You may get a heads-up on a potential downtrend in a stock you already own, for example. There may be a press release discussed that you missed which could have an impact on a stock you currently own. You can use the online discussions to prompt you to do more fundamental and technical research on stocks you already own.

Be careful of blindly following the crowd. Reddit in 2021 drove the price of AMC Theatres, GameStop, and others to dramatic highs, but totally out of whack with reality. Social media is perfectly capable of creating frenzies that will push prices out of the reasonable range, and make it harder for the investor to make rational decisions. Watch out for overpriced and overbought fad stocks.

Spend a lot of time separating the wheat from the chaff and by all means have an exit strategy. And don’t bet the farm. Don’t fall for get rich quick schemes. If they are too good to be true, guess what?

Disclaimer — I am not a professional investment or financial advisor. This article only presents material for your information. This is not financial or investment advice. Seek professional advice before making any investment or financial decisions.

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