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Stock Message Boards
A Quantitative Approach to Measuring Investor Sentiment
Y. Zhang
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eBook - ePub
Stock Message Boards
A Quantitative Approach to Measuring Investor Sentiment
Y. Zhang
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About This Book
Stock Message Boards provides empirical data to reveal how online communication not only impacts stock returns, but also volatility, trading volume, and liquidity, as well as an investing firm's value and reputation.
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Why Pay Attention to Stock Message Boards?
The Impact of the Internet
Can you imagine your life without the Internet? Even unexpected by its own inventors, the Internet has had a tremendous impact on our daily lives since the day it was created in the United States in the 1980s. More than thirty years since its debut, the Internet has changed not only social but also economic activities. The increasing influence of the Internet has been so profound that it is now nearly impossible to imagine living without it. As a primary source of information, as well as an efficient means of communication, the Internet offers people a colorful, more convenient, and higher quality of life than ever before.1 Nowadays, with the rapid growth of the knowledge economy and the desire of obtaining information quickly, the Internet is an absolute necessity.
In the network society, Web applicationsāsuch as Web browsers, e-mails, search engines, online gaming, online shopping, and online datingāare impacting almost all aspects of daily life. Meanwhile, we rely on the Internet for many things: from information retrieval to opinion sharing, from online shopping to online stock trading, from e-commerce to e-banking, and from e-mailing to video conferencing. All of these activities are now easily done with a click of the mouse.
In the cyber world, the informational websites may be divided into three main categories:
1.Information-service sitesāwebsites that act as primary news portals, delivering free information to netizens. These websites may be considered by some to be unsophisticated and relatively low-tech, but they are nonetheless well known, with a large number of visitors. Especially when compared with traditional mediaāsuch as newspapers and magazines (which are notorious for stale information)ānew media provide real-time information at minimal cost.
2.Function-service sitesāsuch as Google.com, Mapquest.com, and Zillow.comāprovide specific functions to Internet users, although some are with costs, mostly free of charge. Because of rapid development of the Internet and a series of technological breakthroughs, the emergence of function-service websites is unavoidable. These websites are relatively high-tech with a high level of user loyalty and rely heavily on their exclusive online functions and unique services. The prosperity of function-service sites implies a more universal acceptance of the Internet and an acknowledgment that information technologies have, in fact, further improved quality of life.
3.Life-service sitesāsuch as Facebook.com, Twitter.com, Myspace.com, Tumblr.com, Blog.com, and TheLion.comāwhich enable users to not only receive and read information, but to also create it at the same time. Life-service websites, dubbed Web 2.0, transform the primitive unitary and unilateral cyber world into a modern diversified and multilateral one. In contrast with Web 1.0 sites where the flow of information was in a single direction and people were limited to the passive viewing of content, Web 2.0 bridges great distances, reaches a mass audiences, and allows Internet users themselves to be creators of content.
During the Internetās overwhelming development, the above taxonomy is becoming blurred due to multifunctional and multilateral services. For instance, Yahoo.com is not a pure information-service site, but a mega website that mingles all three aforementioned categories by providing information, function, and life services. The merger of information service and life service is a win-win situation: information-service sites are eager for the powerful functions provided by the life-services sites while life-services sites crave the vast customer base associated with information-service sites.
The advent of mega websites, such as Yahoo.com and Google.com, is also a result of embedding advanced web applications to meet higher user requirements. In general, web functions have been substantially improved in recent years and with a growing number of powerful and user-friendly functions, people are more willing to use the Internet. This beneficial cycle is not only a trend, but also an inevitable outcome as the Internet continues to evolve.
The Impact of Social Media
Thanks to the advent of life-service sites and multifunctional mega sites, the entire cyber world has never been so rich and powerful. The fact that a Web 2.0 site allows Internet users to interact and collaborate with each otherāas creators of user-generated content in a virtual communityādifferentiates Web 2.0 from most traditional Web 1.0 sites. Social media, known as new media, refers to a group of Internet-based applications relying on the technological foundations of Web 2.0, enabling people to create, share, and exchange information and ideas within virtual communities.
In contrast to new media, old media are traditional means of communication and expression that existed before the invention of the Internet. āOld mediaā generally implies news dissemination via radio, television, and printed publication like magazines and newspapers. With a vast number of social media users and the substantial speed of information transmission, social media is believed to contribute to faster dissemination and analysis of breaking events nowadays than traditional media sources. More importantly, with broad use of computers, tablets and smartphones as network carriers, Internet users are receiving, creating, and sharing information through social media. Thus, social media redefines the concept of media as a medium that disseminates information.
Beyond a doubt, along with the robust growth and universal use of the Internet, social media has forever changed the way we interact with the world and has had profound influences on society as a whole. According to its structure, social media can be classified into seven major forms: blog/microblog (for example, Twitter), Wiki (for example, Wikipedia), social network site (for example, Facebook), bulletin board system (for example, TheLion.com), podcast (for example, YouTube), virtual game world (for example, World of Warcraft), and content community (for example, Pinterest).
As a new type of media, social media possesses the following five basic characteristics that differentiate a social network from a regular website:
1.Participation: Everyone is free to join. Social media encourages all users (with very few limitations) to actively take initiative, make contributions, provide feedback, and disseminate information online. No matter whether it is an individual, an institute, an association, or a corporation, everyone can participate.
2.Transparent and open: Social media promotes user transparency and plenty of online services and content are free to all users. Users are encouraged to participate, comment, respond, and share their opinions. Web pages can be easily shared by simply clicking a āshareā or ālikeā button.
3.Conversation: With traditional media, the flow of information was in a single directionācontent was updated by one user and read by Internet visitors, so that interaction and collaboration were almost nonexistent. With new media, the flow of information is bilateral, so that interaction and collaboration are commonly applied.
4.Community focus: One of the advantages of social media sites is the ease with which users can create groups, classify communities/subcommunities, and find and add friends with similar interests. For example, people who are interested in stock trading are grouped together in stock message boards or subscribe StockTwits;2 people who like golf can become members of Facebookās āThe Golfing Societyā group, or follow āThe Golf Digestā on Twitter. Grouping makes communication more organized and efficient.
5.Universal connectivity: Although there are many social media sites, there is not a single site that can meet all of the requirements of its users. Fortunately, wide use of mass texting, multimedia messages, forward and follow functions makes it easy to not only connect on social media sites, but to also share information via other sites. For example, an individualās information and messages can be simultaneously shared via Facebook, Twitter, MySpace, and LinkedIn. When clicking the āLikeā button on a webpage, a story appears in the userās Facebook news feed with a link referring back to the webpage.
Possessing these five unique characteristics, social media is widely accepted and used by the general public. It is because of strong public support that social media is flourishing with each passing day. For many of us, social media has become a routine part of our daily lives. Life without it would seem like a nightmare.
With the rapid global development of social media, many corporations and organizations will eventually adopt a social-business model and conduct social business. Companiesā use of social media platforms in advertising, recruitment, and customer service has seen a remarkable increase in recent years and the number of companies that are being followed on Twitter has substantially increased as well.
The Impact of Online Customer Reviews
Social media has become increasingly popular and has had a notable influence over the economy, as reflected in commerce, marketing, and customer relations, to name a few. Before making a purchase decision (either online or offline), many consumers now expect to fully understand product-related information and other consumersā opinions. Consumers are more willing to listen to advice from friends or people who have had experiences of using similar products or services. Purchase decisions, therefore, have dramatically changed from an old-fashioned, simple, linear model to a three-dimensional, hyperconnected model.
We have seen many different types of online customer reviews. For instance, Amazon.com not only allows each customer to leave detailed feedback with a rating from one star (the worst) to five stars (the best), but also provides an average rating for the product based on all reviewers. On HealthGrades.com, each patient can leave a comment and rating (also from one star to five stars) for the doctor he or she has visited and each doctor is given an average rating as well. RateMyProfessors.com allows college and university students to assign ratings to their professors. Users not only post ratings and reviews of professors already listed on the site, but they can also add professors to the site and then rate them. TripAdvisor.com is a travel website that assists customers in gathering travel information, posting reviews and sharing opinions related to travel, and engaging in interactive travel forums. So far, TripAdvisor has over 100 million reviews and opinions about hotels, restaurants, tourist attractions, and other travel-related businesses.
According to the level of engagement, enthusiasm, and credibility, we can classify social media users into four levelsāfrom naĆÆve to sophisticated:
1.Inactive users, who infrequently visit social media sites.
2.Fans, who frequently get involved in online activities.
3.Masters, who not only actively participate in online discussions, but also frequently express their opinions.
4.Gurus, who have high credibility in the community with many followers, provide insights into other usersā discussions and give frequent reviews and comments.
In addition, I provide another viewpoint from the angle of online activities. I reclassify social media users into the following four categories:
1.Posters, who post messages, create blogs, upload electronic files, and share content online.
2.Readers, who read other peopleās blogs and online discussions, watch videos, listen to podcasts, and search for user reviews and ratings. In Internet culture, readers who only observe, but do not actively participate, are known as lurkers.
3.Responders, who respond to content posted by others and sometimes give comments and reviews.
4.Researchers, who collect, aggregate, quantify, and analyze information circulated on social media sites for their own personal or commercial use.
With the development of network communication, word-of-mouth can be spread through a variety of forms. Technology has greatly enhanced the speed, breadth, and depth of transmission of word-of-mouth communication and opinion leaders in virtual communities are playing a critical role in the social media āgame.ā Opinion leaders voluntarily disclose their shopping experiences, product reviews and service ratings online. Followers or newcomers who trust these online reviews and ratings are likely to be influenced by the opinion leaders and change their purchase decisions accordingly.
Although the views of opinion leaders may carry the most weight, all consumer reviews count. Almost all websites display an average rating score for a product or service based on all consumer reviews. Consumer reviews and ratings, considered as unbiased opinions, are accepted by the general public as better and more reliable than the product information provided by manufacturers.
Forums and other forms of social media contribute significantly to the dissemination of consumer reviews and ratings. The impact of online consumer-generated reviews on sales is significant and most companies are aware of this new rule of business. For exampl...