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Social Media May Have Affected Your Way of Investing

The proliferation of social media has revolutionised information sharing. With more than two billion people using various social media platforms and many of them accessing it on the go, information has never been easier to obtain.

One may think that the speed at which retail investors can obtain the most up-to-date news and stock market analysis will help provide some parity between retail and professional investors. However, this may not be the case.

The spread of information can act as a double-edged sword in the world of investing as some investors unwittingly shoot themselves in the foot due to the “information overload” or information bias.

Echo chambers

Artificial intelligence used by social media sites help filter content that a user can see. This is based on the kind of information that the user “likes” or the content that they have clicked on.

Unlike traditional news outlets, where news is broadcast homogenously, social media creates an environment where users only see what “they want to see” and that reaffirms their beliefs. One of the best examples was during the 2016 United States elections. People who supported Trump and read articles on social media that were pro-Trump were more likely to be fed content that re-affirmed their political views. The same could be said for the blue camp.

Information spread regarded to investing can be no different. Investors who read news on social media can obtain a biased view based on the kind of articles that is fed to them. This inevitably creates an echo-chamber effect and makes social media users have even more polarised views.

Over-reaction to news

Another danger that retail investors may face is that the constant bombardment of information can cause them to over-react.

For example, news outlets often enjoy posting sensational headlines that may go viral across multiple social media platforms. This creates the illusion of big news and investors may, unfortunately, react rashly because of this.

The situation is even more amplified with live news broadcasts across various social media platforms. This can sometimes cause immediate sell-offs of a particular stock or even stock market as a whole. While in reality, there should be little effect on the overall business.

Information sensationalisation can also create unjustified stock appreciation. One such example is when Pokemon Go was released, and people were posting themselves playing the game on social media. Stocks of the parent company inevitably rocketed, but when the craze died down, the stock tumbled together with it.

The Foolish bottom line

The speed and ease with which social media allows information sharing has, for the most part, created a more educated and informed world.

However, social media information sharing does have its down-side. Investors should be aware of these two common pitfalls when it comes to investing and not fall into the traps.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.