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Can You Trade the Financial Markets Using Social Media?

Social trading has become increasingly popular during the digital age, which enables novice investors to target so-called “master” traders and observe their successful strategies.

Of course, social trading extends beyond dedicated apps and platforms too, with social media having become an increasingly viable source of information for a new and increasingly youthful generation of retail traders.

That’s right, traders are increasingly inclined to source data and insights from social outlets like Reddit and Twitter. But is this a viable strategy, and what are the advantages to such a technique?


The GameStop Saga and its Impact on the Market

 When the share price of GameStop exploded in early 2021, experts in the financial press were immediately caught unaware.

After all, this highlighted a tight-knit and prolific community trading on Reddit, who were relying on a collective bank of information across different social media sites rather than reputable trading platforms or resources like the Wall Street Journal.

What’s more, it was suggested that informed and influential traders actively used forums such as the Reddit chatroom r/wallstreetbets (which now has more than 5 million members) to manipulate the markets and encourage aspiring retail traders to buy shares en masse.

While the precise motivation behind this can be questioned, it undoubtedly delivered rapid results, with 24 billion GameStop and AMC Entertainment shares traded at the peak of speculation on January 27th, 2021.

To provide some perspective, this surpassed the previous daily record of four billion shares during the 2008 global financial crash, while no period of 24-hour activity has come close to matching this since.


Why Was This Event Significant?

 This event was significant for a couple of reasons. Firstly, it saw social media channels and forums used to inform and organise trades for the first time, signalling a significant shift from the use of traditional trading platforms and brokerages.

Secondly, retail trading activity had never previously been capable of moving the financial markets one way or another, with this type of manipulation usually the preserve of large-scale and institutional investors.

With these points in mind, it was clear that the Reddit trading saga represented a significant power dynamic, while highlighting the growing influence of social media in exploiting the vulnerabilities that exist in financial trading systems.

Beyond this, we can also see the rising influence of social trading and how this is enabling retail traders to gain a viable foothold in the market.

Social trading typically connects aspiring retail investors with more seasoned, ‘master’ traders, enabling them to borrow successful strategies and benefit from a collective bank of knowledge. Sites like Reddit work in the same way in the modern age, while the global social trading market is projected to reach a value of $3.77 billion by 2028.

In this respect, it’s forecast to grow at a CAGR of 7.8% over the course of the next five years, with sites like Reddit and Twitter crucial to this trading revolution.


The Bottom Line – Can You Really Trade the Markets Using Social Media?

 In truth, of course, social media in its various forms has always been a free and accessible source of information for traders.

Back in the early noughties, for example, it was Yahoo Finance that was the go-to source for investors. Reddit, YouTube and Clubhouse have evolved to fill this void along with staple social media outlets such as Twitter, while the growth and diversification of such sites has empowered younger retail traders across the globe.

The rise of social media as a preferred news source has also aided this evolution. For example, Millennials prefer to source news and insight from social media rather than newspapers (used by 47% of Millennials) and company reports (leveraged by 40%).

Technology has also aided social trading, as the evolution of artificial intelligence (AI) and big data have merged to successfully draw and analyse data from vast, unstructured sources such as social media. This means that retail traders can gain immediate access to new and real-time market insights, different to those provided by brokerage platforms.

While traditional trading platforms combine expert analysis with resources that explain macroeconomic factors such as what causes inflation, such datasets can also be sourced freely online and through social media.

At the same time, social media provides traders with real-time insights and a collective base of knowledge, while also making it possible to learn directly from successful and accomplished investors.

These factors means that social trading is definitely a viable and growing discipline, while social media is fast becoming a crucial resource in terms of identifying opportunities and informing your trades.

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