In an era of social media explosion, how has this new way of communicating transformed financial trading? It’s had a massive impact, especially on the way individuals conduct their online buying and selling activities. In little more than five years, internet discussion groups, forums, and platforms like Facebook and Twitter have become major players in the securities world. Is the development a good thing or bad? Will it continue or die out? Who benefits most and least from it?
Those are just a few of the questions everyone should be asking. The answers are not shrouded in mystery. In fact, all it takes is a little digging and a few minutes of online research to learn all the necessary facts about how social media has changed the face of investing and trading. As with most other phenomena, this new way of exchanging information comes with its own set of pros and cons. Fortunately, there’s a point somewhere between total social media-based investing and avoiding it altogether. Some call it the middle way, and it offers the chance for individuals to get the best of both worlds.
The Positive Effects
It’s important to remember that there are dozens of reputable online brokers, like easyMarkets, where people can set up accounts and begin doing business in a matter of minutes. Some prefer to check with all their social media accounts before making a purchase or sale of any security. Those who decide to take up the gauntlet and try their hand at social trading gain access to a style of decision-making that has its good and not-so-good sides.
The positive aspects include the chance to get started quickly by imitating other traders or simply choosing stocks and other securities based on what social media forums suggest. If the crowd is taking up ABC Corp’s shares today, many internet chatters and new investors might decide to jump on the bandwagon and buy ABC. Consequently, ABC’s price could rise and deliver fast results to those who bought in. That precise situation has occurred dozens of times in the past year and is one of the reasons, so many people view this form of crowd-sourced securities dealing in a good light.
There are several negative features of crowd-based trading, but one is a standout. When prices rise based on a massive and rapid influx of buyers, as in the ABC example above, the increase is not a natural one and is typically followed by a major decline. Anyone still holding the security can lose all their gains and more. Trying to time the top of the price increase is an almost impossible feat and has caught many social trading enthusiasts off guard.
The Middle Path
What’s the commonsense version of using social media to inform your buying and selling decisions? It’s to monitor social media accounts and see what others are saying. Use the information as just a part of your overall research on a particular security. If you’re considering a purchase of XYZ shares, include what you hear and read on social media as one component of your overall research, but don’t make choices based on social media forums and chatrooms alone.