Looking for stock investment tips? Use social media selectively

GAINESVILLE, Fla. – Savvy investors and news buffs will recall the early days of 2021 when GameStop’s market value increased from about $2 billion to over $24 billion in just a few days. The significant gains stemmed from individual investors, who drove the gaming company’s stock to new highs based on a chain of conversation within the social media channel Reddit.

This is just one example of how social media is an increasingly utilized resource by investors who are looking for insights into their next stock trade.

However, new research from the University of Florida Warrington College of Business notes that the investment information users post on social media should be taken with a grain of salt.

Using data from a leading Chinese investor social media platform, Warrington Bank of America Assistant Professor of Finance Baolian Wang and Pengfei Sui of the Chinese University of Hong Kong found that investors are more likely to post on social media about their stocks the better their stocks have performed.

“Investors are basically more likely to talk about their investment successes than their failures to their friends,” explained Wang. “Their friends cannot see through this self-enhancing transmission bias, which is the tendency of investors to discuss their trades with others more after experiencing strong performance than after weak performance.”

When investors post more about their successful stocks, these postings also increase their followers’ tendency to buy the discussed stocks relative to the investor’s other stocks, the researchers found. In addition, followers of the investor are more likely to purchase the discussed stocks if those stocks are held by the followed investor. So, investor postings not only affect their followers’ trading but also if the investor is acting on their own investment advice, further influencing the stocks their followers will consider investing in with their own money.

Wang and Sui’s research also provides a note of caution to investors who look to social media for advice. Specifically, the researchers found that followers do not perform better with the stocks they purchase after seeing a social media post than they do with stock purchases that were not influenced by a post.

“This suggests that the online investor social network does not provide the followers any information advantage,” the researchers note.

Based on these insights, Wang notes that investors tend to mistakenly think that it is easy to make money from the stock market and take high risks once they begin investing.

“While getting into the stock market and making long-term investments many not be a bad thing, what is bad and value-destroying is investing too much into the stock market, concentrating the portfolio on volatile stocks, and trading too much,” Wang said.

For investors who use social media for stock information, Wang notes that using social media to make decisions should be done so with caution because you never know what information someone might not be sharing.  

“Think twice when you follow recommendations received through social media or, in general, through social networks,” he said. “Many people share information selectively.”