Dark Side of Social Media and Stock Market
When Ronaldo was getting ready to start a press conference, he lifted a water bottle, took two Coke bottles off the table, and spoke "agua" in his native Portuguese. That was sufficient to cause Coca-worth Cola's to decrease from $242 billion to $238 billion. Another instance is when Snap shares fell after Kylie Jenner announced she stopped using the service.
We now can handle and analyse enormous amounts of internet data thanks to the development of data intelligence technologies, which allows us to verify Kostolany's hypothesis that emotions greatly influence market behaviour. It is increasingly possible to link sentiment and market movements by tracking and examining data from social media sources, particularly about stock-related conversations.
The financial sector communicates by exchanging information and data over the Internet and, eventually, through social media, like most other industries. Through blogs, forum postings, and tweets, users who communicate on social media produce emotional data.
The attitudes, feelings, and opinions others express impact them since they also ingest the same. Scientific research demonstrates that people frequently consider these online facts they consume while making decisions or taking action- leading to false depictions through stock market bubble.
A significant increase in stock prices that do not correspond to an increase in the value of the companies whose stocks represent is known as a stock market bubble. A company's business fundamentals, including its earnings, growth rate, and similar criteria, should be used to calculate its valuation. A bubble is characterised by speculation and exhilaration. The most recent well-known illustration of a stock market bubble may be the dot-com bubble of the late 1990s.
High hopes for a new digital economy drove a boom in tech equities. Nearly all of the technology stocks that had progressed in value during the years fell when those expectations were not met, or the underlying businesses went bankrupt. It may be argued that the 2021–2022 decline in high-growth tech stock prices was proof of a bubble.
All stock market bubbles eventually deflate, resulting in an abrupt and significant drop in stock values. While a bubble can burst for several reasons, stock market crashes frequently happen after a substantial credit source closes. The primary cause of the housing bubble burst in 2008, which started a worldwide financial crisis, was a reduction in credit.
Economic Analysts agree that there are five stages of a financial bubble:
This incident shifts paradigms. This resulted in lower interest rates (due to the Federal Reserve Board's looser monetary policy) and the fact that U.S. real estate prices had not experienced a sustained, nationwide decline in generations in the case of the housing bubble.
At this point, asset prices start to rise quickly. New investors are drawn to rising prices (or homebuyers in the case of a housing bubble), but it is not yet certain whether the price increase is unjustified.
Investors behave irrationally during this stage because they believe the bubble will continue to expand. The more significant fool theory, which refers to anyone who will always be interested in paying more for a holding than you did, is what some people refer to as. In the housing market, unqualified homebuyers were purchasing to generate enormous profits.
When prices reach their peak, shrewd money starts to sell. The mood of the market begins to change. This stage of the housing bubble was more difficult to spot because housing prices aren't as easily listed as stock prices. However, there were indications that easy credit was disappearing and defaults were beginning to mount.
Retail investors frequently lose all of their money during bubbles, and the housing bubble fall was no exception. Between 2006 and 2012, home prices nationwide dropped, leaving homeowners underwater, in debt, and with ruined credit. Prices tend to be discounted during a bust, just as they are at the pinnacle of a boom.
Let us dive into what an actual bubble looks like a bit more.
As cited by Warren Buffet, the ratio of GDP to market capitalisation is the best indicator for identifying stock bubbles. This indicator currently has a value of 145%. This is far over the 75% average. In actuality, it has never before reached a higher value. The scenario in stock markets around the world is the same. One of the enormous bubbles in human history may exist right now.
More often than not, a strong connection has been observed between rising share prices and rising profits. This is not the situation right now. For the past two years, the earnings have been increasing at a relatively modest rate. The majority of businesses reported typical, unremarkable performance. However, it appears that prices are growing quite quickly. As a result, it sounds uncannily like the tech bubble of 2001, when valuations surged to record heights for no apparent reason.
The U.S. interest rate has been kept at historically lower rates by the Federal Reserve. This decision is influenced by an increase in growth and recovery from the market crash.
However, equities aren't being challenged because interest rates are so low. Nobody is investing in things like certificates of deposit or similar things. The stock market has received almost all of the money. Future developments are probably going to follow this trend.
A small number of tech companies received a significant valuation during the 2001 crisis. Microsoft, Intel, Cisco, and Dell were the businesses driving the charge during the 2001 financial crisis. Tech businesses are now driving the market as well.
Think about how Jezz Bezos rose to become the world's richest man throughout this time. More wealthy than Bill Gates has ever been, he is! Also, take note of the 2500% increase in Netflix shares over the last five years. Even though Netflix and Amazon both have solid fundamentals, the current values appear a little high.
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The phenomenon known as the "network effect" describes how more people or participants raise the value of an item or service. The network effect is demonstrated via the Internet. Since the military and a few research scientists were the only people who used the Internet at first, there weren't many users.
Due to website development and enhancement, more people were drawn to connect and transact business with one another. A network effect resulted from the Internet offering more value as traffic increased.
Network effects are prevalent in social media. For instance, Twitter becomes more beneficial to the general public when more people submit material on the site, such as links and media. The network effect has led to exponential growth rates for networking sites like Facebook, YouTube, and Instagram.
The usage of social media platforms by users has had numerous network effects. Companies wishing to advertise their goods and services race to join these sites as more individuals sign up and engage to take advantage of the trend. The number of advertising grows, increasing the revenue for social media platforms. The websites develop as a result and can now provide users with new services.
COVID Lockdowns due to pandemics, stimulus payments, increased personal savings, commission-free trades, and social media posts have contributed to a surge in retail trading activity on the financial markets. Meme investing, leveraged bets on stocks, options, and cryptocurrencies through social media, is disturbing the market and causing wild volatility.
Social media platforms have transformed into virtual trading clubs for gathering trade ideas, exchanging advice, and promoting stocks.
The January 2021 spike in unpopular stocks such as GameStop, AMC, Blackberry, Bed Bath & Beyond, and others were brought about by a herd of retail traders inspired by several posts on the social media site Reddit's r/WallStreetBets subforum (WSB). However, $167 billion had been lost in a couple of days. It's unclear how the gain and loss consequences were distributed throughout the trading community once the panic subsided.
Reddit retail traders herd together, target meme stocks, and migrate from sector to sector, sending prices soaring and causing waves of volatility. Surges are sparked by boastful posts on social media trading sites like WSB.
A screenshot showing a 95% loss on the Chinese coffee company's stock was posted on Wednesday on Reddit by a person with a pretty nasty screen name. The user, a 28-year-old fitness instructor from Europe, expressed interest in Luckin's 300% growth between November and January. Disaster struck after they invested more than €235,000 ($264,000) in the company's shares.
Not many high-profile stocks could have generated such tremendous losses and attention. After an internal inquiry revealed that Luckin's COO had falsified sales of 2.2 billion yuan ($310 million) throughout 2019, the company's shares dropped by 80% on April 2. The coffee chain informed investors that previous earnings reports and guidance were no longer valid.
Due to India's deficient levels of financial literacy, the regulator, stock exchanges, and institutions must do much more.
GP Garg, executive director of SEBI, remarked at an NSE event to kick off World Investor Week, "In a country like India, we have close to 80% literacy, but when it comes to financial education, we are not that blessed. Because of this, it is incumbent upon all institutions, including exchanges and Sebi, to determine how best to spread the message of financial literacy throughout the nation.
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