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The Rise of Social Trading Analysis in Stock Investing

By Ethan Ho

The Rise of Social Trading Analysis in Stock Investing

Ever wondered how successful investors make good investing decisions? The answer is simple: they know the market and its reactions better than the rest. But how did they evaluate a particular stock that makes them win?

Most successful investors use either technical or fundamental analysis to determine their entry prices. To some extent, some even utilize both maximize their returns. Technical and fundamental analysis are two distinctly different methods of analysis that serve different investors with different expectations and time horizons on returns.

Fundamental analysis is the way of assessing the valuation of a stock price based on its intrinsic value. It involves using a wide range of ratios, key figures and cash flow that are found in a company’s balance sheet or financial report. By using these financial figures and ratios from the company, fundamental analysis is able to derive the performance and intrinsic value of its stock. It can also include the analysis of anything else that can affect the value of the stock, including macroeconomic factors such as the overall economy and industry performance. Essentially, fundamental analysis allows people to assess whether a stock is undervalued enough to buy or overvalued enough to sell.

Fundamental analysis is usually utilized by investors who have a long investment time horizon and adhere to ‘value investing’, a strategy that was established by the famous Benjamin Graham in the 1930s and used by veteran investor Warren Buffett. As Buffett puts it, ‘price is what you pay. value is what you get.’

On the other hand, technical analysis focuses primarily on the historical price charts of stocks. It involves the studying the action of markets, movements and trends to determine future actions based on past data. A key assumption of technical analysis is that people will continue to make similar mistakes as they had in the past. With that being said, technical analysis is particularly useful when an investor wants to time the market and enter or exit at the best price. Some common terms within the field of technical analysis include moving averages, trendlines, price patterns, momentum, volume and the wide range of various indicators such as Bollinger bands and Stochastic. Indicator functions range from identifying momentum, volatility to support and resistance. Essentially, technical analysis studies the movements in a market to conclude what trend or direction a stock might be heading. It attempts to understand the emotions in the market by studying just the market itself, as opposed to its components.

As technical analysis focuses on market movements, it is usually utilized by stock traders or investors who have a shorter investment time horizon and expects to enter/exit at the best time.

Over the past few decades, there are many investors out there who strictly adhere to either one of the methods to make investing decisions. As both methods of analysis have its own benefits and shortfalls, sticking to a certain investment style may not be optimally effective.

The question is, how do we bridge the gaps between fundamental and technical and technical analysis to make better investing decisions?

Social trading analysis (or social trading in short) might be able to.

Traditionally, people would rely on newspapers, newsletters, financial institutions or their personal networks to get information on what and how successful traders trade. The quest to making good trades lies on the leveraging on the skills, knowledge and experience of the better traders. However, the information provided by these experts are often delayed – due to the limits of print media and conversations – which often resulted in entering the markets late, rendering the information untimely. Timely information is especially crucial to live trading, because every second counts.

Social trading is a contemporary concept based on the old, implied method of leveraging on experts to make better trades but enhanced by technology. Such technology is known as ‘disruptive innovation’, coined by Harvard Professor, Clayton M. Christensen. Big names like Uber, Airbnb and Uber, are disruptive innovations that have the magnitude to change the way industries and people work.

Social trading focuses on making information timely, amplifying networks and aggregating resources. Technology has contributed to compression of time and space, allowing us to send and receive information instantaneously. By also allowing people to expand their networks at undisputed lengths, it changed the way people connect. Social networks like Facebook and LinkedIn epitomize the extent and impact of technology on human connection. Social trading is almost synonymous with social networking. The main difference is that social trading platforms focus on the investor aspect instead of the social life of the user. Thus, information is not centered on the user as a person, but as a trader. It allows other users to not only connect with other like-minded investors, but also identify another investor’s opinions and investment style.

Although users in social trading platforms have different trading proficiencies and styles, successful and consistent users are recognized by the community. Most platforms have a reputation/ranking mechanism, which sets better users apart from the rest. For one, the number of followers of a user can ostensibly imply that he is successful. Ranking methods can differ between platforms but essentially employ the same mechanism.

As social trading is based on the constant free flow of information generated by individual users, it allows people to access and aggregate new information into resources that can impact trading positively. Like how Facebook feeds keep family and friends up to date, social trading sites feed inform users about why, what and how other traders are investing. The accumulation and aggregation of such information and data is termed ‘crowdsource sentiments’, which is essentially what other investors think. What is powerful is that through ‘crowdsource sentiments’, information is accumulated through a wide variety of sources and further aggregated collectively. Now people are able to share their investment knowledge and information at unprecedented speed and depths. It then becomes a resource that is able to help others make better-informed trading decisions and have better trading outcomes.

Welcome to the new age of trading, where sharing is caring.

Ethan Ho
Ethan Ho

Personal description: Ethan is a self-taught investor who started investing in the US stock market, and the marketing lead for InvestingNote. Prior to his role in InvestingNote, he was a personal banker dealing with unit trusts and bancassurance in the wealth management division of a bank. He has Capital Markets and Financial Advisory Services (CMFAS) certification. He is a strong advocate for financial and investment literacy as he believes everyone should be able to manage their personal finances well.

Company description: InvestingNote is the free social network platform designed specifically for crowdsource investment ideas, news and interaction for the holistic stock investing community. Besides having access to stock data, users can upload research reports, utilize technical charts and make stock price targets that will be visible to the entire community. Users can also gain reputation points when they have followers, likes and posts. It promotes financial literacy and helps people make more well-informed investment decisions.