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Do Analysts Care about Social Media When Making Investment Decisions?

Posted by on September 24, 2009


I interned at Morgan Stanley many years ago and was actually very close to pursuing a full time career in finance.  At one point I was even in discussions with a friend of mine to start a hedge fund.  Needles to say, since then my interest in becoming a broker or financial adviser has since dwindled, but I’m still interested in the space.  I figured that if I’m going to invest time and money into anything it might as well be the greatest asset I have direct control over…myself.

Now that I’m done with the little back story let’s talk about the role that social media plays in the finance word, do analysts/investors care about social media when making their decisons on what stocks to buy/sell?  No, they don’t.  According to an article put out by PR Week:

“The corporate and financial relations firm polled nearly 500 institutional investors and sell-side analysts in the US and Europe, and found that only 4% ranked “new media” as the top influencer when making investment decisions or recommendations. New media was defined as blogs, message boards, and social networking sites like Facebook as well as Twitter.”

Now the question becomes, does social media have a place in the finance world in the future?  I think the answer is a definite yes. Will social media be able to one day affect the stock price of a company?  Yes.  Think about how breaking news spreads around the web.  If suddenly you read an article that was shared on facebook about a company that has just cured cancer you may want to consider investing in the company.  If you hear about a large disaster being live tweeted online you may want to pick up shares of the construction company that’s going to be tasked with rebuilding the damage that was done.  Considering the fact that news and information breaks on social networks before it even gets out to traditional media outlets I’d say that social media can definitely impact a company stock price; especially during launch events, new feature announcements, PR disasters, achieved company milestones, and just general news.

Of course this not only depends on how quickly the news breaks but on how many of the people (and specifically investors) actually saw that news.  Facebook just reached 300 million users and last time I checked twitter was over 50 million.  Can you imagine the information that’s going to be available when Facebook hits 600 millions users and twitter crosses the 100 million user mark?  The stream of information about companies and their products is going to be massive and there’s going to be a lot of research and analysis done by large investment institutions to understand the effects of social media on company stock price.  We’re not there yet, but it’s coming.

If you can gauge a company’s brand perception and online sentiment based off of information found from social networks then that information can be pretty powerful when making investment decisions.  Consider how news of fraud or internal company changes breaks across the web before sites like the NY Times or WSJ even have a chance to blink.  If you can monitor and get the inside scoop on what’s going on with a company before the large traditional media outlets do, then you have a competitive advantage over everyone else that waits for traditional media news outlets to break the news before they make their investment decisions.

According to PR Week:

“However, 58% of respondents stated that they believe new media will become increasingly important in helping them make investment decisions. Investors and analysts based in the US, as well as those focused on the technology sector, were particularly optimistic about new media’s future role.”

I think we’re going to see a huge change in the finance industry over the next few years and how it utilizes social media for research and investment decisions.

What’s your take on this?