Impact of social media on online trading: The good, the bad and the ugly
Social media is yielding many positive online trading outcomes, and traders having greater access to trade and investment tools is incredible – but only if they have the necessary knowledge
Social media has transformed business landscapes, opening new possibilities for all, including in online trading. Now an integral digital marketing aspect, user numbers continue growing in an industry valued at approximately $100 billion, with traders having new ways to connect with clients and alert them to opportunities.
However, social media has had something of a double-edged impact, with advantage and disruption creating a modern-day ‘the good, the bad, and the ugly’ scenario. Therefore, a question arises: What is the true impact of social media on online trading?
Evaluating the good
First and foremost, the retail trading environment has witnessed a healthy growth trajectory, and the masses are shaping economic growth through financial markets participation. Retail traders are making out 20 percent of the daily market volume, representing a 100 percent jump in the number of retail traders compared to 2019.
A new form of financial literacy has also emerged, with trading now for everyone rather than the privileged few. Anyone online can harness the wisdom of crowds, leading to increased success for all parties. Thanks to social media interconnectivity, inexperienced traders observe how others make trades and learn.
Traders can access information in milliseconds, platforms are creating new self-sufficient and self-driven online traders, and posts are building an enormous arsenal of financial data.
Furthermore, young traders and investors use Twitter, YouTube, Instagram, TikTok, and other platforms as virtual trading clubs to exchange ideas, promote stocks, and gain financial advice. Therefore, social media has forged a feeling of community among retail traders becoming more and more financially educated.
Considering the bad
As with any industry, negatives accompany positives. Online traders are all too familiar with meme stocks, those that skyrocket thanks to social media “hype” and sudden, violent movements. Small traders trigger meme stocks and cause a short squeeze on stocks themselves. And short squeeze is a phenomenon where short-sellers rush to hedge their positions or buy stock in the event of an advance price moment to cover their losses.
Crucially, it takes only 1.7 seconds to consume, for instance, Facebook content on mobile versus 2.5 seconds on desktop, and incredible social media speeds can cause powerful moves in the markets. To understand this scenario better, there are meme stocks phases.
Small traders trigger meme stocks and cause a short squeeze on stocks themselves.
Firstly, there’s the early adopter phase. Investors believe stocks to be undervalued and begin purchasing, with the stock price increasing slowly. Secondly, traders pay attention to volume increases, leading to investments snowballing. Thirdly, the ‘FOMO’ stage transpires. More investors generate fear of missing out when stock prices are high. And finally comes the profit-taking phase, where early adopters begin cashing out and the selling phase spirals out of control as traders fear losing money – with prices ultimately going down.
Traders become hooked on quick gains and are ultimately positioned on the wrong side of the trade, with brokerage firms and small and large traders alike affected. As such, meme stocks perhaps rank as the most negative of social media’s online trading impacts, although there are other unprepossessing aspects to consider.
Understanding the ugly
While Twitter, TikTok, and other platforms create self-directed online traders, they also encourage biased, ill-informed trading decisions. For instance, TikTok has accumulated a bad reputation for videos promoting volatile crypto investments and limiting educational content impacts. Another example implicates Twitter, YouTube, and Instagram giving rise to finance ‘experts ’or ‘finfluencers.’ These would-be experts promise fortunes to Gen Z and other credulous traders daily – an insidious trading community disease that must be eradicated.
A concrete plan for regulating finfluencers has not been established to date, yet preventative action is essential nonetheless.
Anyone can brand themselves a finfluencer; likely to be unregulated, with unmonitored content and social media algorithms pushing their posts onto inexperienced investors regardless. However, the UK’s Financial Conduct Authority (FCA) has warned social media platforms of potential action should the promotion of risky, fraudulent investments continue. Therefore, platforms could be forced to flag opinions and stock tips from ‘unverified’ influencers in due course. A concrete plan for regulating finfluencers has not been established to date, yet preventative action is essential nonetheless.
Financial literacy the key
Social media is yielding many positive online trading outcomes, and traders having greater access to trade and investment tools is incredible – but only if they have the necessary knowledge. Without this, the bad and ugly will endure, posing a global problem. Therefore, the solution rests with financial literacy.
A healthy trading and investing environment for traders and investors must be fostered, and social media must be used to promote financial literacy and contribute to the greater good. After all, educating inexperienced traders through social media can prevent poor financial decisions and drive self-sufficiency for a brighter future.
Ziad Melhem, chief business development officer, Amana Capital.
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By Ziad Melhem
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Impact of social media on online trading: The good, the bad and the ugly
Social media is yielding many positive online trading outcomes, and traders having greater access to trade and investment tools is incredible – but only if they have the necessary knowledge
Social media has transformed business landscapes, opening new possibilities for all, including in online trading. Now an integral digital marketing aspect, user numbers continue growing in an industry valued at approximately $100 billion, with traders having new ways to connect with clients and alert them to opportunities.
However, social media has had something of a double-edged impact, with advantage and disruption creating a modern-day ‘the good, the bad, and the ugly’ scenario. Therefore, a question arises: What is the true impact of social media on online trading?
Evaluating the good
First and foremost, the retail trading environment has witnessed a healthy growth trajectory, and the masses are shaping economic growth through financial markets participation. Retail traders are making out 20 percent of the daily market volume, representing a 100 percent jump in the number of retail traders compared to 2019.
A new form of financial literacy has also emerged, with trading now for everyone rather than the privileged few. Anyone online can harness the wisdom of crowds, leading to increased success for all parties. Thanks to social media interconnectivity, inexperienced traders observe how others make trades and learn.
Traders can access information in milliseconds, platforms are creating new self-sufficient and self-driven online traders, and posts are building an enormous arsenal of financial data.
Furthermore, young traders and investors use Twitter, YouTube, Instagram, TikTok, and other platforms as virtual trading clubs to exchange ideas, promote stocks, and gain financial advice. Therefore, social media has forged a feeling of community among retail traders becoming more and more financially educated.
Considering the bad
As with any industry, negatives accompany positives. Online traders are all too familiar with meme stocks, those that skyrocket thanks to social media “hype” and sudden, violent movements. Small traders trigger meme stocks and cause a short squeeze on stocks themselves. And short squeeze is a phenomenon where short-sellers rush to hedge their positions or buy stock in the event of an advance price moment to cover their losses.
Crucially, it takes only 1.7 seconds to consume, for instance, Facebook content on mobile versus 2.5 seconds on desktop, and incredible social media speeds can cause powerful moves in the markets. To understand this scenario better, there are meme stocks phases.
Firstly, there’s the early adopter phase. Investors believe stocks to be undervalued and begin purchasing, with the stock price increasing slowly. Secondly, traders pay attention to volume increases, leading to investments snowballing. Thirdly, the ‘FOMO’ stage transpires. More investors generate fear of missing out when stock prices are high. And finally comes the profit-taking phase, where early adopters begin cashing out and the selling phase spirals out of control as traders fear losing money – with prices ultimately going down.
Traders become hooked on quick gains and are ultimately positioned on the wrong side of the trade, with brokerage firms and small and large traders alike affected. As such, meme stocks perhaps rank as the most negative of social media’s online trading impacts, although there are other unprepossessing aspects to consider.
Understanding the ugly
While Twitter, TikTok, and other platforms create self-directed online traders, they also encourage biased, ill-informed trading decisions. For instance, TikTok has accumulated a bad reputation for videos promoting volatile crypto investments and limiting educational content impacts. Another example implicates Twitter, YouTube, and Instagram giving rise to finance ‘experts ’or ‘finfluencers.’ These would-be experts promise fortunes to Gen Z and other credulous traders daily – an insidious trading community disease that must be eradicated.
Anyone can brand themselves a finfluencer; likely to be unregulated, with unmonitored content and social media algorithms pushing their posts onto inexperienced investors regardless. However, the UK’s Financial Conduct Authority (FCA) has warned social media platforms of potential action should the promotion of risky, fraudulent investments continue. Therefore, platforms could be forced to flag opinions and stock tips from ‘unverified’ influencers in due course. A concrete plan for regulating finfluencers has not been established to date, yet preventative action is essential nonetheless.
Financial literacy the key
Social media is yielding many positive online trading outcomes, and traders having greater access to trade and investment tools is incredible – but only if they have the necessary knowledge. Without this, the bad and ugly will endure, posing a global problem. Therefore, the solution rests with financial literacy.
A healthy trading and investing environment for traders and investors must be fostered, and social media must be used to promote financial literacy and contribute to the greater good. After all, educating inexperienced traders through social media can prevent poor financial decisions and drive self-sufficiency for a brighter future.
Ziad Melhem, chief business development officer, Amana Capital.
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