Impact of Social Network in Capital Markets

Topics: Twitter, Social network service, Stock Pages: 8 (2564 words) Published: April 24, 2013
Before going to the detail about our report, we would like to pay our gratitude to the Almighty Allah for helping us to prepare this report. We would also like to thank our honorable faculty in charge, Sayba Kamal Athoi (SBK) for giving us such a nice assignment to implement our knowledge in the context of the real world.


There has been an increasing use of the social networking sites to aid in the decision making process for making investments in the capital markets around the world by both individuals and organizations. Social networks enable a faster and easier access to information regarding capital markets to all. According to various researches, data from the social networking sites can be used to create models that can accurately predict the future stock prices up to a certain extent. Although this is a great achievement for the financial world, these models are in their preliminary stages and thus have various weaknesses. Even so these models are used by some organization for making investment decisions. The major drawback of the usage of social networking in capital markets is that it is very easy to provide false information to the people to manipulate stock prices. However, social media disseminates information through viral propagation, which is of great value in the world of trading. Thus, the convergence of social media and capital markets remains a promising area for research.

Social Networks
When a computer network connects people or organizations, it is called an online social network. A social networking site is an online platform that focuses on facilitating the building of social networks or social relations among people who share common interests, activities, background or real-life connections. A social networking site consists of a representation of each user (often a profile) his or her social links and a variety of additional information. Some of the most popular social networking sites in the present day are Twitter, Facebook and Google+.

Capital Markets
It is a market in which individuals and institutions trade financial securities. Organizations or institutions both in the private and public sectors also often sell securities on the capital markets in order to raise capital. This type of market is composed of both primary and secondary markets. Primary market is where organizations issue IPO (initial public offering) to raise capital and secondary market is where individuals and institutions trade second hand securities. Examples include: NASDAQ (National Association of Securities Dealers Automated Quotations) and NYSE (New York Stock Exchange). Social Networking in the Capital Market

The capital market has always been at the forefront in adopting new technology mainly because effective technology deployment has a direct impact on the stock prices. Faster execution of trades, algorithmic trading and complex analytical tools are just a few instances where technology use has been critical to staying ahead of competition. We are now experiencing another innovative use of technology in this industry, the use of social media. The way stocks are discussed among investors today is different than it was even five years ago. Nowadays people share and discuss stock information and their views and opinions on stocks over the various social media. Studies show a rapid increase in daily time spent in social networks.

Positive Effects of Social Networking in Capital Markets
1) Prediction of stock prices has become more accurate. Research studies indicate a strong correlation between social mood and stock prices. Social mood is found to be a lead indicator of stock prices. The volume of data posted on a daily basis on social media is huge. Twitter alone has over 100 million tweets a day. Here are some of the results of research studies that have been conducted to prove this correlation: a) According to CNBC, Indiana University researchers...
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