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BLOG: Buy on the fundamentals, but keep one eye on the online whispers…  

Joanna Faith
Written By:
Joanna Faith

You can’t always trust rumour and speculation when dealing with investments, but it’s certainly not something you should ignore altogether.

A lot of useful insights, which can help your investment strategy, can be gleaned from understanding market sentiment – especially through online social channels.

The dawn of social media and other methods of online communication has changed the way companies’ shares and markets are affected. It might seem subtle, but with the general public able to share its voice with the (estimated) three billion internet users around the globe, the world of investment has changed in recent years.

Where once stocks and shares were mostly affected by a company’s fiscal performance (i.e. how much money was in the bank), these days they are often affected by public opinion (sentiment).

News travels incredibly fast these days. If an earthquake happened in Japan 10-15 years ago, we would be first hearing about it in the evening news. Now when one occurs, we are hearing it, not within hours, but rather minutes – via social media, news sites, community forums and even blogs.

The same is true for investment opportunities. A breaking piece of news found on social media can lead to a major announcement from a company. But why wait for the company to break the story hours later, when the insight into that investment has already been mentioned?

On June 2, 2015, Alton Towers saw one of the worst roller coaster incidents in recent memory, when a carriage filled with 16 people crashed into the back of an empty carriage on the ‘Smiler’ ride.

After the news broke, shares in Merlin Entertainments PLC, Alton Towers’ (among other tourist attractions) parent company, significantly dropped from 458.80 to 439.00.

However, it wasn’t until nearly an hour (3pm) after the incident occurred that major news sites were picking up the story – yet it was mentioned on social media almost immediately (just after 2pm):

In investment terms, an hour can be a lifetime. Astute traders know what stories can potentially affect stocks in the companies they follow and they need to act as quickly as possible to ensure they stay on top.

More importantly to note, it wasn’t until the major news sites started reporting the incident that the shares in Merlin Entertainments dropped; they had been fairly steady that day, up until 3pm. Had an investor with shares in Merlin Entertainments been made aware of the situation as it broke (i.e. social media), they would have had an edge over those who waited for the major news sources to report anything.

The caveat, however, is that online rumours and ‘chatter’ should not be the basis of all investments made. Long term strategies are still a smart way to trade, but the rise of online rumour mongering will effect stocks more and more, so it’s a good idea to keep one eye on those online whispers.