#Trending: Does Twitter Add Value to Stock Research?

by on Dec 02, 2015

Social media has twitter_for_stock_research-1.jpgbecome a powerful platform for evaluating public sentiment and, more recently, a popular forum for analyzing financial trends. This January, TD Ameritrade became the first brokerage firm within Corporate Insight’s e-Monitor coverage group to introduce social media, specifically Twitter, as a stock research tool for clients. Fidelity recently followed suit with the launch of its Social Sentiment tool. While these new tools surely add an element of flare to the firms’ stock research capabilities, the utility of social media chatter as an indicator of a company’s financial well-being, however, is less certain.

TD Ameritrade’s pioneering Social Signals tool, powered by LikeFolio, contains screenshots of selected recent tweets about a company and its associated brands. Along with the display of tweets, the firm provides a Sentiment Indicator, expressed as a percentage, representing the amount of positive coverage of a company and its subsidiary brands. According to the firm’s press release, tweets are filtered based on a number of factors, including re-tweets and favorites, and are refreshed in near real time. Similarly, Fidelity displays a Sentiment Score generated by third-party provider Social Market Analytics (SMA) Inc. SMA captures and filters Twitter messages about stocks from sources that are deemed relevant, though what constitutes relevance remains unclear. SMA then evaluates the tweets’ collective sentiment through an internal metric system and generates a total Sentiment Score ranging from -4.25 to 4.25 for each firm. According to SMA’s research methodology, a high S-Score may lead to an increased stock price, while a negative score could have the opposite effect.

td_ameritrade_social_signals.png TD Ameritrade Social Signals

fidelity_social_sentiment.pngFidelity Social Sentiment

While on the surface these two tools seem to provide clients with up-to-date information on specific companies with tweets that may be relevant to the company in general, a glaring question arises: are these tweets relevant to a company’s financial health? We examined a sample of tweets on TD Ameritrade’s Social Signals tab covering companies such as Apple and Starbucks, and a staggering amount of them came from customers unqualified to speak about a company’s financial health and included trivial questions and statements. Given the fact that these types of tweets are being shown, one must consider how their content factors into sentiment ratings? Can these tweets help investors in any way, or do they only muddy the waters? Fidelity’s Social Sentiment page is even less transparent, as it does not provide any tweets used in calculating a company’s S-Score. This denies clients (especially those without Twitter accounts) the ability to read and interpret the tweets themselves to aid in their own research.

td_ameritrade_social_signals_page_selected_tweets.png TD Ameritrade Social Signals Page Selected Tweets

Another factor investors must consider is that Twitter can be used maliciously, as a means of spreading false information. It is fairly easy for con artists to tweet fake news about a company, posing a threat to investors. For example, earlier this month, the SEC filed charges against an individual who created fake Twitter accounts posed as research firms and made false accusations in an attempt to affect companies’ stock prices. Though this may be an extreme case, it exemplifies the growing power and reach of social media, and the pitfalls in its lack of regulation.

As the brokerage industry continues to adapt to a client base increasingly accustomed to social media as a means of gathering news and research, both Fidelity and TD Ameritrade remain ahead of the curve. However, investors should be wary when using these tools to influence their financial decisions, as the information they provide may not be completely indicative of a company’s stock price or financial well-being. If firms put in the effort to limit inclusive Twitter content to that of verified financial industry professionals, brokerage industry specialists, analysts, news providers and the like, these tools could add true value, making them a more trustworthy source of information for investors.