Can social media really move the price of a company’s stock? Trading stocks has always been about rumours, sentiment, ill-informed opinions and a crowd mentality -all things that social media helps to foster. So it’s a hardly a surprise to find plenty of evidence that the likes of Twitter and Facebook can impact markets more than is healthy.

Yes Icahn

Carl Icahn announced on Twitter in 2013 that he had a large position in Apple, leading to a massive surge in the firm’s stock that saw its market cap rise $17 billion in few minutes.

In April of the same year, a hacked AP Twitter account falsely reported explosions at the White House – it was only live for a few minutes but the Dow Jones Industrial Average took a pounding as the tweet spread like wildfire.

Social Media is Old News

Malicious tweets aside, new research indicates that the time lag of many posts means that prices can be moved by old information.

A paper from Oxford University researchers shows the old news phenomenon can lead to increased volatility for investors.  Stocks can get bumped around for weeks because of the same report.

Repeated information is treated as if it were new, meaning perceptions can be susceptible to “random sentiment shocks”.

Stale news is a significant problem for trading stocks in the world of social media; much more so than in traditional media where facts are (usually) screened by knowledgeable reporters and editors.

“Stocks with high social media coverage in one month experience high idiosyncratic volatility of returns and trading volume in the following month,” the researchers say. “Conversely, stocks with high news media coverage experience low volatility and low trading volume in the following month.”

The stale news concept is not new – a 2007 paper by Paul Tetlock first looked at how investor overreaction to old stories can put temporary, but noticeable, pressure on prices.

So social media can be a problem for the careless trader perusing their news feeds, but it can also be turned to their benefit.

Using Social Media to Predict Stock Market Trends

Can you use social media to predict stock market trends? The answer from the research on this topic seems to be yes, but with the huge caveat that any attempt to ‘predict’ markets is fraught with all sorts of dangers.

Research published in the Journal of Computational Science in 2011 found a very strong link between Twitter feeds and the DJIA. The team found an accuracy of 86.7% in predicting the daily up and down changes in the closing values of the DJIA.

Forecasting stock and index prices using social is not for everyone, but it’s not that far off the kind of sentiment mappers for trading CFDs that are used to show how investors are feeling about certain trades.

Bullish or bearish, it’s worth remembering that traders are sheep all too ready to follow the crowds.