Thursday, November 26, 2009

Social Networks – The new address of investment ideas

How social networking sites are changing the face of collaborative investment research?

The recent financial crisis led market downturn and subsequent volatility deterred many retail equity investors to participate in stock markets. While the confidence is returning gradually, this time investors are seeking new sources for investment ideas. Apart from the run-of-the-mill market experts and office colleagues, investors are now looking up to the stock picks and investment strategies on social networking sites. In the past one year, sites like stockezy.com, MoneyVidya.com and FourStocks.com in India are bringing together investors/traders on an online platform. These websites are modeled on lines of international websites such as SocialPicks.com, zecco.com or covestor.com.

So how does these websites work? Members of the website make investment recommendations and based on the returns and success of the recommendation, the members are rated automatically by the software and they are allotted points. This makes it easier for other members to identify talented members and follow their investment strategy in future. In addition, there are forums on which members can discuss the market trends, trading strategies, upcoming news & its impact on market and almost anything else related to investments. The owners of the website provide this platform for free and make revenues from posted advertisements on the site.

The article I reviewed gives varied examples of how a wide range of people from new entrants to old players are benefitted from the stock tips on these websites. Investors are showing an increasing confidence in these websites and are starting to rely on the recommendations of co-investors more than those of experts. The main attracting feature of these websites has been the stock picks. In addition, the discussion forums are a source of news and how it might affect the stock prices. Interestingly an export trader even hedged his dollar currency risk after discussing currency movements on StockTalkS forum.

Amidst all the optimism of increasing proliferation of social networks based investing, the article points out that with increasing trend and number of members, the websites might become mere tip sheets. This implies, that these networking sites would become yet another money site and lose it’s intend to not just give stock recommendations but also to educate and empower the investors. In addition, the Indian social networking investment websites would need time to prove its sustainable business model before it can attract institutional funding (for expansion). There are also very high chances that in near future these websites would start charging for giving out the top recommendations. This doesn’t seem very unlikely given that there are talks of Facebook becoming a paid service in future.

But are these websites really safe? Can you bet you hard earned money on someone’s advice? We are all aware of “pump and dump” schemes in stock markets and a social networking site might be the best way to make large number of investors follow a conspired mad rush. Another concern is whether these sites would really educate investors or just give them blind tips? How would a new investor realize his investment objective if he/she doesn’t know the basics of investment? Does he/she want long, medium or short term investment? How dangerous can be following derivatives trading tips? Sure, discussion forums (as a part of these websites) can educate people, but can it really beat an in-person financial advisor?

In my opinion, even though there are few unanswered questions about the sustainability of these websites, investing through social networks is here to stay. Firstly, the success of Facebook and MySapce has proved the popularity of social networking sites. Similar sites on investing would for sure bring together lots of traders and investors. Secondly, members of these sites have a higher probability to give an objective opinion on stock picks than equity research institutions. Institutions can be biased towards certain companies or sectors owing to their prior investment or performance linked bonuses. Lastly, the number of like-minded people that you can meet here would provide more inputs than your busy financial advisor!

To conclude, investing through social networking is a fast picking trend. Investors should look forward to contribute and benefit from it. Website owners should continue to innovate and add more features to expand the usage and reach of these websites. Lastly, equity research and investment advisory firms should consider them as potential competitors and adapt their strategy to benefit from these websites.

Reference Article – “Investing via Social Networks”, Business Today, 7-Oct 2009 by Rachna M. Koppikar

http://businesstoday.intoday.in/index.php?option=com_content&task=view&id=12884&sectionid=1&secid=0&Itemid=1&issueid=48


Posted by: Manish Jain, Exchange Student

1 comment:

Christopher Tunnard said...

Good discussion. Investing is always a risk; you bring up questions about the risk, but a bit more on how SN sites could mitigate would be interesting. There's a lot out there on this topic.