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Social Media and the Stock Market

Trends and Insight 17 Add to collection

Digital Natives explore three current trends in social media as they relate to the financial market

Social Media and the Stock Market

Social media has reached the point when it touches every part of the business landscape. As an instantaneous and direct method of communication and a mass indicator of sentiment, it has become an undeniably useful tool for businesses regardless of industry. When you consider that opinions, emotions and beliefs always had an effect on the financial markets, it raises questions about social media’s influence in this sector and the opportunities and challenges this may present. As the financial markets are so confined by strict regulation, its role is slightly different by coming into its own for disruptors. In this piece Digital Natives will explore three current trends in social media as it relates to the financial markets.

Earlier this year, we saw the power of social media when we witnessed the highs and lows of the GameStop saga that was predominantly driven by users on Reddit and Twitter. US video game retailer GameStop had been suffering financially for some years as a result of digitization of the industry. By 2020, several large hedge funds on Wall Street bet that GameStop would go out of business by ‘shorting’ the company’s stock: a risky investment tactic in which you sell borrowed shares intending to buy them back later at a lower price to make a profit. It eventually got to the point where there were more short positions than shares to go around with 71 million shorted and only 20-30 million available to be actively traded.

This is when social media began to play a pivotal role in the events that followed. Redditors on the subreddit r/WallStreetBets (WSB) noticed the situation and decided to rally together to buy the remaining GME stock to drive up the price.  Word spread across social media, as even Elon Musk tweeted about it: “Gamestonk!!”, causing the share price to soar by 135%. Soon, so many had invested that they had bought up all the available shares, pushing up the share price even further and forcing a ‘short squeeze’. With limited shares available and prices skyrocketing, investors can be forced to limit their losses and buy back the shares to cover their short positions before the price rises further. Subsequently, this caused the price to rise even higher and led to more investors covering their positions, resulting in huge losses.  

Reddit had a huge influence on the stock price with more and more Redditors encouraging investors to buy and hold GME shares, the stock price reached $347 by January 27th, far beyond the $3 it was at the beginning of the month. As the price continued to soar, hedge-funds were forced to try and cover their positions and buy back the stock at the higher price to prevent themselves from making even bigger losses. Hedge-fund, Melvin Capital, reportedly lost $7 billion as a result of these events, highlighting just how big of an impact social media had within the financial markets. 

However, it wasn’t just the hedge funds that suffered. The role of social media in the financial space made investing more accessible and open to ordinary people from any background, with some people choosing to invest who never would have before. But the cross-over has also allowed uneducated ‘investors’ to be more easily exploited at the hands of those on the platforms, especially given the high level of anonymity that makes it hard to see users’ true intentions. Redditors were still advocating for investors to buy in and hold, posting messages such as, “Guys, this only works if we work together" when the price had already reached above $300. Any investors who had followed this advice would have soon fallen victim to the price crash days later when early investors cashed out. 

The GameStop saga has drawn attention to how social media has influenced a shift in the power balance between Wall Street and ordinary retail investors. This has presented new opportunities and challenges due to its capacity for mass coordination and communication through for all those involved in the finance space.

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Digital Natives, Mon, 23 Aug 2021 09:47:28 GMT