Social Trading
In January of 2021, shares of the video game retailer GameStop skyrocketed more than 1,200%. Did something change in the company’s fundamentals? Did news break of an acquisition or mind boggling sales numbers?
No, far from it.
The surge of this typically lackluster video game store was based on one thing alone: the power of the meme. GameStop’s rise was driven by members of the subreddit group Wall Street Bets who coalesced around an effort to bid the retailer into the stratosphere.
With GameStop, we saw day-trading and social media converge in a move that both undermined Wall Street and handed power over the markets to the masses. Although the crowd has moved on from GameStop, the movement—social trading— continues.
The shift to social trading has implications for both investors and the companies that seek their investment. This new trend is here to stay, and it promises exciting economic opportunities for everyone in the market.
Where We Are
Thanks to social media, the center of influence has shifted from institutions toward individuals—for good (unity, equality, renewable energy) and for ill (division, misinformation).
In social trading, we see this shift’s impact on financial markets—a natural development based on younger generations’ willingness to seek out and accept financial advice online.
As with any other new investment method or strategy, social traders recognize that all reward is tempered by risk, particularly in the forms of bad advice and market volatility.
Still, the benefits of social trading are undeniable, especially for those who are just entering the market. If you’re new to investing, the best way to learn is to follow more experienced investors. Social trading makes that as easy as firing up your News Feed.
Retail investors used to rely on institutional players (banks, brokerages, planners, fund managers, etc.). Now, they can hop on Reddit and StockTwits or launch eToro to see what experienced investors are doing and glean the wisdom of the crowd as others join the conversation.
This ease-of-access to expertise has emboldened retail investors—young and old, newbie and veteran. An increased appetite for risk, along with pandemic stimulus funds and zero-commission trading, have enabled these social traders to make their presence known in the markets.
Where We’re Going and How to Get on Board
Unless federal regulators step in to throttle traders and the platforms that empower them, social trading is here to stay. Institutions are trying to catch up by using tech providers like TradeSocio to integrate social elements into their traditional offerings.
For investors, this trend represents an exciting opportunity to enter the market for the first time or to take back control from brokers and fund managers. Of course, brokers and managers have their jobs for a reason. For those who go the social route, it’ll be imperative that they continue to do their homework, weigh carefully the “wisdom” of the crowd, and resist the urge to jump on every bandwagon that crosses their path.
For publicly-traded companies (especially micro and small-caps), communication strategies will need to evolve to reach this new class of investors. As more traditional financial advisors are discovering, the key to engaging this increasingly-connected demographic is to reach out and engage them in the digital sphere.
If companies want to attract retail investment, they’ve got to be prepared to do the same. It’s one thing to reach a fund manager; it’s quite another to grab the attention of a young professional with an inkling to try his luck in the stock market or a middle-aged office worker looking to mess with his retirement portfolio during his lunch break.
The glory of social trading is that it gives the young professional and the office worker (along with their friends) the opportunity to work together toward the financial future of their dreams. Smart companies will weave themselves into that conversation and show investors how joining their mission will help make their dreams a reality.
