The GameStop phenomenon — where Reddit users rapidly drove up the price of GameStop stock, much to the dismay of Wall Street investors shorting the stock — is a prime example of the impact of social media on online trading.
Lorenzo Bizzi, associate professor of management at Cal State Fullerton, recently explored this intersection in the study “The Double-edged Impact of Social Media on Online Trading: Opportunities, Threats and Recommendations for Organizations.”
Bizzi’s research determined that heavy social media users (two or more hours a day) were more likely than light social media users to trust and follow what other investors were recommending and doing.
Social media makes it easy for influencers with limited investment knowledge to share their opinions, and human “herding behavior” leads to their followers blindly accepting and acting on such advice. It also makes it look easier to make money investing than it actually is. “The vast majority of people — about 90% — lose money when they trade online,” said Bizzi.
He warns that when a group of people all begin to invest and trade at once on a stock, it can lead to something like the GameStop incident. He suggests that investors stick to index funds and invest for the long term if they want to have a better chance at being successful in the stock market.
Read more about Bizzi’s advice and research in the Orange County Register.