Financial Premises: Impact of Social Media on Capital Market – Part 1

Financial Premises: Impact of Social Media on Capital Market – Part 1

Social Media

Social Media platforms offers unique features to communicate directly and immediately with any individual or corporate. With ease access of social media sites through mobile and laptops, Social platform like Facebook, Twitter, Google+, pinterest and many others are increasing used by large number of people to share information, news and their thoughts. People are freely expressing their opinions and sharing information about investment on online forums, micro blogs and on social networks. So, the news becomes viral within fraction of seconds. Thereby, social sites, which can be regarded as extension of word-of-mouth information spread has given everyone, power to influence opinion of other and in turn influence other’s purchase. Social sites act as an indicator of people’s mood and enables investors to learn about other people’s opinion about stocks and index.

Capital market

Efficient Market Hypothesis (EMH) theory states that stock prices are basically driven ‘news’ type of information. The strongest form of EMH assumes that current stock price fully reflects all public and private information. Any new information is quickly and properly reflected in the market prices. The major factor impacting stock price – ‘news’ is highly unpredictable. Further, news cannot be predicted with accuracy. In addition, the mosaic theory suggests that analyst may look for early indicators to predict changes in economic or company-specific indicators that may affect stock prices.

Behavioural finance is a combination of traditional finance, psychology and neuro-economics. It focuses on how individual behave and make financial decisions. Extending this anomaly to capital market, it can be assumed that the public mood and sentiment can drive stock market movements. In other words, capital market is based on sentiments. Social media acts as a hub of information related to people’s mood. Also, humans are more likely to follow the behaviour of their peer, especially when the market is uncertain. This accelerates the impact on people’s sentiment on stock price. Thereby, market participants can pick early signal related to sentiments and moods from online social media like blogs, Twitter feeds or facebook post.

Social Media enables quick spreading of news and opinions, which forms the basis of movement in stock prices. In recent study by Wei Pan on ‘Decoding Social Influence and the Wisdom of the Crowd in Financial Trading Network’ by MIT Media Lab concluded that social trading was more profitable than individual trading.

In India, Companies disclose all corporate information to shareholders through its website. In addition, many companies are using social media to promote its product or services, communicate with its customer and build its corporate brand.

In Part 2 and 3, few incidents on social media across the globe that has impacted capital market are explained. None of incident (similar to those mentioned below) has impacted Indian capital market. However, to ensure that Indian Capital Market is protected from any similar cases, SEBI has disclosed that it is working on guidelines for use of social media by corporate. There is greater likelihood that social media would be increasingly preferred to seek investment advice as India is estimated to have largest population over facebook and twitter by 2016.

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Financial Premises: Impact of Social Media on Capital Market – Part 1

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