How Social Media and Influencers Affect Financial Markets
- dummies stock
- Nov 9, 2021
- 3 min read
On January 27, GameStop's share price soared to $ 347.51. This was in stark contrast to the January 26 stock price of $ 147.98. And that was an even bigger surge from stock prices ($ 17.25) earlier this year. This 95% value change wasn't accidental and wasn't affected by what GameStop itself did. A group of people on the Reddit Wall Street Bets (WSB) forum campaigned to raise stock prices to take revenge on hedge funds that bet on failure. These funds tried to sell their stock. In response, members of Reddit, known as "Redditors," bought large numbers of shares to increase the value of the shares.
However, the unnaturally high reputation of GameStop stock did not last long. Robinhood, a popular retail investor app in the WSB community, has temporarily restricted trading in stocks. This prevented the stock price from rising any further. People ended up selling stocks in bulk and lowering prices. By February 12, stock prices had fallen to $ 52.40. The GameStop stock bubble is not the first of its kind. In the early 2000s, there were some unique stock market bubbles. This included the housing bubble that partially triggered the 2008 economic crisis and the dot-com stock bubble in the early 2000s, which plunged many overvalued tech stocks. As these stock market bubbles show, if a stock is overvalued, it may at some point match its true value.
Finance was also heavily influenced by social media.
Elon Musk, the founder of Tesla and SpaceX, has used his Twitter account to trade cryptocurrency and stocks.
According to CNBC, a tweet from the tech mogul on February 4 prompted the value of Dogecoin, a cryptocurrency inspired by a Shiba Inu dog meme, to increase by more than 50%.
Musk was charged with market manipulation by the Securities and Exchange Commission (SEC) in 2018 after tweeting that he was considering taking Tesla private, which resulted in a 6% gain in Tesla's stock.
Influencers' comments regarding equities, according to Peter Gloor, a research fellow at the MIT Center for Collective Intelligence, are significant variables in anticipating market activity on Twitter. "The last twist is looking at what influencers say in social media about a certain stock," Gloor said. "If you mine communication archives in a certain way — and the simplest way is just looking at the amount of tweets about a certain stock and the emotion of the tweets — the last twist is looking at what influencers say in social media about a certain stock."
Echo chambers, according to Gloor, were a significant element in the GameStop stock predicament.
“The dealers were basically in touch with each other on this Wall StreetBets forum,” Gloor said. "When [a person] hears something five times, and when [the person] hears it from someone he trusts, [he or she] believes in [what was said]. That makes sense. Social media seems to influence market activity regardless of whether echo chambers or influencers drive changes in financial markets. Gloor's research shows the use of social media as a forecast for stock markets. I was considering, but the market was soon being manipulated by social media.
"When people realized that tweets were actually a great way to measure it, traders tried to manipulate social media for their own benefit," Gloor said. The world of social media has also evolved the world of finance and law. A recent incident at GameStop has created a new surge in changes in the way stocks are handled. On Thursday, February 18, Congress will hold a hearing to discuss the impact of the GameStop stock event. Robinhood CEO Vladimir Tenev will be one of the witnesses to testify at the hearing.
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