This means traders need to be discerning about the strengths and limitations of the different social media channels available to them. So which social media platforms are most useful for investors?
Michael McCarthy, chief market analyst at CMC Markets, says Twitter lends itself to instant information – data releases, breaking news, market action – and it is a valuable resource for investors.
“It’s a must-have for day traders. But it has its limitations. When you only have 140 characters to express yourself, there’s no room for detailed analysis. The Twittersphere also reflects the real world – some information is timely and useful, and some is mistaken, misleading or wrong,” he says.
According to McCarthy, you can generally judge a tweeter’s authority by the number of followers he or she has, “although the ability to buy followers makes this a less reliable metric”.
He says investors and traders need to look outside social media for more thorough research.
“Trust is a key issue with the explosion in market material available to online traders. In the past, brokers’ reputations and businesses depended on them standing behind their market reports. But now anyone can express a market opinion online,” McCarthy says. This can make online information less reliable, as demonstrated by the hoax that wiped tens of millions of dollars from the Whitehaven Coal share price, he says.
Traders and investors need to verify informal information. “Thankfully, exchanges and companies also operate online, and the ASX website or a company’s investor website are useful sources for traders looking to act on social media information,” McCarthy says.
Indeed, Alice LeMessurier, managing director of stockbroking firm LemSec says unregulated forums are a concern, given it’s impossible to know how contributors come up with an opinion about a stock.
“My understanding is that in these forums there is the opportunity for people to encourage others to buy a stock, driving the price up, while they are selling on the other end. This creates an unrealistic market price and disappointment for investors who see the price slide when the seller stops and the market for that opportunity dries up,” LeMessurier says.
“I would also be wary of sites that produce content to sell a specific investment idea, because this creates bias and inability to verify all information,” she says.
To avoid this, LeMessurier suggests sourcing information from a number of sources. “Taking a conservative approach, I would focus on sites that are associated with a brand or a person, for the obvious reason that their reputation is on the line . . . I think transparency in understanding the reasoning for an opinion or view is really important for retail investors.”
LeMessurier says the place to start is sites focused on education such as ASIC’s Money Smart site and the ASX’s site. “These sites will help you find ways to set goals and understand risk. They also give tips on how to select a stock and what types of stocks are out there.”
Michael Miller, a financial adviser with MLC Advice Canberra, says the key to using social media sites as a resource is to be scientific.
“Before you start browsing, have a thesis and use the content on social media sites to test whether it’s correct,” says Miller, who adds that industryspecific web forums can be a great way to find the views of experts in the field. particularly if the company you’re researching has a real business-to-business focus.
It is also important to maintain a healthy dose of scepticism, he says.
“A few complaints on Twitter don’t mean that a company has no happy customers, and a forum post tipping some great results from a new mining operation is no guarantee that those results actually exist.‘’
The Australian Financial Review