Investing in stock has always been considered as challenging and risky. That’s why staying up-to-date with the news and feelings about particular stock is crucial to make informed investment decisions. With the huge influence social media have on our lives, it’s no wonder they can be successfully used for sentiment analysis to discover social opinion and emotions. How big a role does sentiment play in stock market fluctuations?
#1 Market perception
Social media have been known for some time now as quite effective in opinion building, as they are widely used for sharing opinions and news. Similarly, investors and traders often express their views on stocks, financial events, and market conditions through comments, tweets, and posts.
Such activity on social media, known as sentiment analysis, is a great opportunity to assess the collective mood of the market participants. There may be positive sentiments, expressing confidence and optimism, as well as negative sentiments to show fear or skepticism.
#2 News and events tracking
There is no faster source of information than social media, the real-time source of any news. Platforms like Twitter and Reddit echo with breaking news, shouting them out the moment they unfold.
Thanks to sentiment analysis by social media, traders and investors stay constantly informed about breaking news and rapidly changing market conditions, allowing them to moderate their investments decisions in no time.
#3 Algorithmic trading
Automated trading decisions based on trading algorithms often use sentiment analysis. It’s an easy and effective way of programming to be able to buy or sell on shifts in sentiment captured from social media data. Sentiment analysis is quite often used by high-frequency trading firms as part of their algorithmic strategies.
#4 Market reactions
The belief that the stock market is influenced only by financial metrics cannot be more wrong, as perceptions and emotions are almost equally important. Imagine how much a buying activity can be increased only by positive sentiment, resulting in higher stock prices. Quite the opposite, negative sentiments greatly declines selling and prices.
#5 Risks of misinterpretation
Stock market investors must be aware of the risks the investment may bring, and sentiment analysis will not magically decline the risk, as it’s not foolproof. After all, is it easy to interpret human emotions, especially when we only have social media messages to interpret? That means sentiment analysis may cause incorrect market predictions and consequently wrong trading decisions.
Read here to learn more about sentiment and the ways social media influence the stock market investment.