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The Risks of Trading Based on the Use of Social Sentiment Investing Tools

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In a recent Investor Alert, the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) warn investors against the potential risks of using social media as the basis for trading and the perils of social sentiment investment tools.

What are Social Sentiment Investing Tools?

Social sentiment tools refer to a group of investment tools offered by financial services firms that analyze and aggregate social media data from a variety of social media sites like Facebook and/or Twitter. There are four main types of social sentiment investing tools. These include:

  • Social Networking Platforms: Various financial services have their own social networks that will provide their users access to specific stock-related social media sentiment information while also allowing them to discuss and share trading and investment ideas with other investors.
  • Social Media Data Analysis: Social media data analysis utilizes natural language and various other computer processing techniques that are designed to compile and analyze social media data, including blog posts, tweets, and messages. They may even claim to show indications of future market and economic performance and positive and negative ratings of particular stocks with potential investment and trading strategies.
  • Direct Trading from Social Media Websites or Mobile Apps: This is where financial services firms offer their investors the ability to trade from their brokerage accounts directly from a social media platform or even a mobile application.
  • Crowdsourced Research and Analysis: Some firms may have created their own “crowdsourced” research tools that use a website or mobile app to crowdsource ideas and options from either institutional investors or the public at large.

What are the Risks of Using Social Sentiment Investing Tools?

Investors who are considering using social sentiment investing tools should understand there are potential risks associated with these. Some risks include:

  • Social media posts could have a hidden agenda and be used to spread misleading or false information in order to manipulate a stock’s price to go up or down.
  • The information you get from these sources could be inaccurate or incomplete.
  • There is a chance you could be emotionally driven to make investment decisions based on the information that is presented, especially in a situation involving real-time discussion platforms.
  • Information could already be stale, which affects the tool’s effectiveness, which means old information could be ineffective at this point.

Tips for Potential Investors 

The SEC has provided some helpful tips for those who are considering using social sentiment tools as part of their investment strategy. Some of these include:

  • Don’t rely only on social sentiment investing tools. You should also be reviewing all publicly disclosed company info as well as other types of analysis and metrics.
  • Read all of the background information, disclaimers, and disclosures provided by a social sentiment investing tool, which includes how the particular tool collects the data and what methods are used to analyze it. Also, are there any risks or conflict of interests?

Contact a Florida Securities Attorney

If you have questions about social sentiment investment tools or you are a company that needs assistance with the private offering of securities or starting an IPO, the Florida securities attorneys at the Law Office of Clifford J. Hunt, P.A. can help. Contact our Seminole office today to schedule an initial consultation.

Resource:

sec.gov/oiea/investor-alerts-and-bulletins/ib_sentimentinvesting

https://www.huntlawgrp.com/what-are-edgar-filings-in-florida/

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