Last week, the securities industry watchdog FINRA issued a new Investor Alert concerning “Social Sentiment” tools and investing. According to the regulatory agency, a new form of investing data has been taking hold of investors, and it’s not so reliable.
What Is Social Sentiment Investing?
“Social sentiment investing” is a like crowd-sourcing for investment decisions (they used to call this mass psychology). FINRA listed several examples of social sentiment investing tools and data that are becoming increasingly prevalent especially among retail investors. Some financial firms, in addition to their traditional analyses, are providing so-called “social media data analysis” which uses natural language and other complex computer processing techniques to aggregate information available through social media sources in order to aid in the evaluation of securities. In other words, these firms are using social media listening to help them rate stocks and trading and investment strategies.
Examples of Social Sentiment Investing
The following are some examples of social sentiment analyses data sets according to FINRA’s alert:
Social networking platforms. Some financial services firms have their own social networks.
Direct trading from social media websites or mobile applications. Some financial services firms offer investors the ability to trade in their brokerage accounts directly from social media.
Crowdsourced research and analysis. Some firms have created "crowdsourced" social media research tools.
Dangers of Social Sentiment Investing
While this type of data has the flash of newness and a unique kind of relatability for retail investors, FINRA has cautioned that the data can be unreliable misleading. According to the regulator:
Stale social media data may impact the effectiveness of a social sentiment investing tool.
Social media posts can have a hidden agenda.
Social sentiment information may lead you to make emotionally-driven or impulsive investment decisions, which can be a risky way to approach investing.