Trading and Social Media

Using social media is one of the easiest and most expedient ways to share information, and it's become a popular research resource for traders in recent years. In fact, 42% of Americans—including 72% of Gen Z—rely on social media platforms and the internet for financial advice, according to the Charles Schwab Modern Wealth Survey 2024.

But when everyone has a platform, it can be difficult to distinguish reputable insights from ill-considered musings. Which raises the question: How can traders use social media to their advantage without being taken advantage of?

Here are three considerations for doing just that.

Several social media platforms have become go-to resources of breaking news and analysis from amateurs and professionals alike. As you refine your stable of sources, you should actively weed out self-interested and misinformed accounts—but be careful not to exclude a healthy mix of legitimate viewpoints in the process.

To that end, you might ask yourself a few questions before you select the Follow button:

• Does the source have a solid track record? You might be convinced by what they're saying today, but how often have they been right? Go back and check whether their past prognostications paid off or fell flat.
• Has the account been verified? Be cautious of accounts that lack a check mark or badge, often blue, next to the profile name—which indicates the account has been vetted and is one you generally can consider credible and trusted. Verification criteria vary across platforms, but typical requirements include a valid ID, confirmed contact information, and a consistent and active presence on the platform. That's not to say you should only follow verified accounts, but those without a check mark demand greater scrutiny.
• Is its perspective informed or dogmatic? If a source has been beating the same drum for months (or years) irrespective of market conditions and without any facts to back it up, steer clear. Instead, follow accounts whose perspectives are rooted in data and a demonstrated understanding of the markets.
• Does it challenge your biases or reinforce them? Social networks have a reputation for being echo chambers, so make sure to maintain exposure to different voices who might challenge your assumptions for the better.

Traders may pay close attention to the stocks that people are talking about online—not because they're looking for immediate trade opportunities, but because such conversations can spark new ideas or prompt examination of existing positions.

That said, it's wise to use social media posts only as a catalyst for further research. Then put the stock through a rigorous process, applying disciplined fundamental and technical research to better gauge the opportunity—or lack thereof.

You may recall when Reddit users demonstrated the power of the crowd in 2021 when they drove the price of AMC Theaters, GameStop, and other underperformers to absurd heights; most of which fell precipitously afterward.

You can keep an open mind when it comes to trying out new approaches, but remain skeptical of social media-driven stock performance because all that attention can push the stock price beyond what's reasonable and make it harder to identify realistic profit and loss targets. If social media hype has driven a stock price two, five, or even 10 times higher, a thorough analysis of its fundamental and technical characteristics is likely to reveal that it's overpriced and overbought already.

If you do decide to take a position in a trending stock, be mindful of your exit strategy and cautious about taking too big a position.

At its best, social media is a source of limitless trading ideas—so long as you separate the wheat from the chaff. And no matter which tips you ultimately choose to pursue, be sure you do so for the right reasons. In a world full of get-rich-quick schemes, the opportunities you don't go after can be at least as advantageous as those that you do.