Social Media Influences Stock Price

Social Media Sentiment Influencing the Price of a Stock

Sentiment analysis determines whether the text tone is positive or negative. Information gathered from sentiment can be used as actionable data for algorithmic trading. Sentiment analysis are very useful especially when you are trying to understand large data sets of stock market. For instance, if a company makes an announcement on the change of its products, there should be statistical connection between the news and stock price at an earlier period which then influences the trading system. Contrary to beliefs of the many, high positive sentiments levels may not always be good to the traders. It is actually the stock with average sentiments which is mostly unnoticed but which can reap much benefits.

According to a survey by 360 UK financial professionals, the share price is affected by the public opinion on social media applications such as Twitter and Facebook. The survey was supported by a research by Colt Technology Services which found that 63% of the respondents (heads of trading desks and brokers) believe valuation of stock prices are linked to public sentiment contained in social media channels. This means that social media definitely has a role to play on stock market trends.

While the relationship between share price and global sentiment is considered positive, there are still some concerns about sentiment-based trading. One third of the respondents in the research

by Colt Technology Services, believe the ability of stock prices to respond fast enough to social media sentiments is a barrier to adoption. In addition, the volume of data from social media also poses another challenge to forming successful trading strategies. Indeed, the millions of tweets and Facebook posts adds the increasing large volumes of information in a firm’s IT systems.

The amount of relevant data available for stock trading is becoming too much for human traders to handle. For sentimental amount of information to be used effectively, the large amounts of data mainly in form of unstructured texts with information about stocks need to be summarized in terms of numbers to ensure sentiment analysis become useful.

The most important thing to note is that sentiment analysis influences the stock prices. But the positive sentiment levels are not always the most significant for trading. For example, if Apple announces a new product today such as a new version of iPad to the universal media, the stock price reacts quickly, making it difficult to take advantage of available information. The same concept applies for the negative sentiments. However, moderate positive sentiments tend to be overlooked by the market and may therefore have less effect of the stock prices, but still make good buys for Apple.

David Milberg is an investment analyst from NYC.