How Social Media Marketing Affects Stock Prices

Much is written about social media and the multitude of fun, cutesy brand campaigns it spawns. But when it comes down to the brass tacks for large, publicly traded companies, there’s far less coverage.

So, today we’re going to stray from comfortable waters and swim into a side of social media many of us marketers rarely consider: social media’s influence on stock prices and the larger financial landscape.

In this article, we will explore the dynamic relationship between social media marketing and stock prices, delving into how companies leverage these platforms and the potential risks and rewards involved.

After all, gone are the days when stock market movements were primarily driven by traditional factors like earnings reports and economic data. Today, a well-timed tweet, viral video, or trending hashtag can send ripples through financial markets.

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The 3 Ways Social Media Impacts Stock Prices

Social media platforms such as Twitter (or, X, if I must), Facebook, Instagram, and TikTok have permanently changed the way information is disseminated and consumed, extending their reach far beyond their initial purposes of connecting friends and family. In the world of finance, these platforms have emerged as key players in both shaping investment decisions and influencing market sentiment.

Before we get into the juicy stuff, let’s cover the three basic ways social media impacts stock prices.

Real-Time Information Flow

Social media provides investors and traders with real-time access to information, often ahead of traditional news outlets. Companies can use these platforms to quickly disseminate important news and updates, ensuring that stakeholders are informed promptly. This immediate access to information can significantly impact stock prices, as market participants react swiftly to breaking news.

Crowd Psychology and Herding Behavior

Social media platforms also serve as breeding grounds for crowd psychology and herding behavior. When an influencer or celebrity discusses their investments or trading strategies, their followers often mimic their actions. This can lead to large groups of retail investors buying or selling specific stocks en masse, causing rapid price movements.

Reddit's WallStreetBets community is a prime example of this phenomenon. In early 2021, the group famously orchestrated a short squeeze on GameStop (GME) and AMC Entertainment (AMC) stocks, driving their prices to astronomical levels. These actions were fueled by social media discussions and a collective effort by retail investors to defy hedge funds.

Sentiment Analysis and Predictive Analytics

Advanced algorithms and machine learning tools now enable investors to analyze sentiment on social media platforms, offering predictive insights into market trends. Sentiment analysis tools can scan millions of social media posts to gauge public opinion about specific stocks or industries, helping traders make more informed decisions.

While sentiment analysis can be a valuable tool, it's important to remember that social media sentiment is not always a reliable indicator of stock performance. Sentiment can be driven by emotions – and social media can manipulate those quite easily – so this may not always align with the underlying fundamentals of a company.

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What this means for brand leaders

Ok, with the basics out of the way, let’s examine what this means for brand leaders at the helm of large, publicly traded companies. Here’s how business leaders and savvy marketing departments are leveraging social media platforms to drive higher stock valuations:

Brand Building and Awareness

Social media platforms offer a dynamic stage for companies to construct and amplify their brand stories on a global scale. By crafting engaging content, orchestrating interactive campaigns, and employing viral marketing strategies, businesses can not only raise brand awareness but also attract a wave of new customers and potential investors.

In short: a compelling brand presence can significantly influence a company's stock price by instilling confidence in its stakeholders.

Look no further than language learning platform, Duolingo.

The brand harnessed the power of social media to augment its brand recognition and, in turn, experienced impressive bottom line growth. According to their CEO, “we have tested our way to a marketing strategy that inserts our brand into pop culture events and social media moments in order to expose it to new audiences and drive word-of-mouth growth. We call this social-first marketing… This strategy is relatively low cost, and has generated outsized returns in terms of social media impressions, press coverage, and, ultimately, new users to Duolingo.”

Last November, you could get the company’s stock at $66.56. At the time of today’s writing, only 11 months later, that piece of stock will cost you $173.00 (a 160% increase).

Check out the below highlights from their Q2 shareholder letter this year to see what’s driving this:

• Daily active users (DAUs) are up 62% year over year (YoY) to 21.4 million.
• Monthly active users (MAUs) are up 50% YoY.
• Their successful strategy is exemplified by the remarkable DAU/MAU ratio, reaching an all-time high of 29%, showcasing the level of user engagement.
• Paid subscribers are up a whopping 59%.

Most of the CEO’s shareholder letter goes on to rave more about how the company’s social media presence is driving such impressive bottom line results. It’s worth a read, and you can find the full letter here.

Earnings Announcements and Updates

In the past, businesses typically relied on traditional methods such as hosting earnings conference calls or publishing financial reports through regulatory filings to communicate with their investors. Although these conventional approaches are still in use today, social media has introduced a more immediate and easily accessible means of engaging with stakeholders.

Social platforms have become valuable tools for companies, allowing them to disseminate essential financial information, provide updates on ongoing projects, and outline their future growth strategies directly to a global audience. This shift toward using social media in investor relations not only enhances transparency but also fosters trust between businesses and their shareholders by facilitating real-time and open communication.

Crisis Management

Social media serves as a crucial platform for companies to swiftly address crises and manage negative publicity. Effectively handling a crisis through a well-crafted social media response can significantly mitigate reputational damage and prevent drastic declines in stock prices.

And, when done at its best, the obstacle can be turned into an opportunity for growth. A prime example highlighting this modern approach to crisis management is the case of KFC's chicken shortage crisis in the UK in February 2018.

During this episode, KFC faced a significant challenge as a result of supplier issues, leading to the closure of over half of its stores in the UK. Instead of taking further steps backwards, the global brand made a genius pivot forward by launching a “FCK” apology campaign. The humor, honesty and transparency of the campaign resonated with customers, and it quickly became a viral sensation. In the first 48 hours, they generated over 1.2 million social media mentions, with positive sentiment reaching 90%...!

This incident truly demonstrates how leveraging social media for crisis management can not only mitigate the impact of a crisis but also effectively transform it into an opportunity for positive brand reinforcement and customer loyalty.

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Risks and Challenges

Because we’re in the murkier waters of stocks, let’s get two disclaimers on the table.

1. Social media is so powerful that it can (quite easily) be wielded by unscrupulous characters to deceive and manipulate financial information for their own gain. Please don’t be one of them.
2. I’m not a certified financial anything. So, while social media marketing offers numerous benefits, it also introduces several risks and challenges that businesses and investors must navigate. And it feels reckless to not address them here, so please keep these things in mind:

Market Manipulation

The ease with which false or misleading information can spread on social media creates opportunities for market manipulation. Pump-and-dump schemes, where fraudsters artificially inflate a stock's price through false information and then sell their shares at the peak, have become more prevalent.

Social media influencers have also entered the financial world. Some influencers provide investment advice, stock recommendations, and trading strategies to their followers. While this can be a valuable source of information, it also raises concerns about the accuracy of financial advice provided by non-professionals.

In early 2021, the SEC charged a popular YouTuber, Keith Gill, also known as "Roaring Kitty," with securities fraud for allegedly promoting GameStop shares without disclosing his own financial interests in the stock. This case highlights the need for transparency and accountability when influencers provide financial advice on social media.

Regulatory Scrutiny

Regulators around the world are increasingly monitoring social media activity related to financial markets. The Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada, for instance, has expressed concerns about market manipulation and misinformation on social media platforms. Companies and individuals engaging in deceptive practices can face legal repercussions.

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Conclusion

Social media marketing has undeniably transformed the landscape of finance and investing. Companies can leverage these platforms to build their brands, communicate with stakeholders, and drive investor sentiment. Conversely, retail investors can access real-time information, engage in discussions, and make investment decisions based on social media trends.

However, it's crucial to approach social media with diligence. Brand leaders should not only monitor and analyze how their owned marketing efforts are affecting the company’s stock prices, but also should keep a close eye on business crises, plus what influencers and celebrities are saying about the brand within their content.

In this dynamic environment, the stroke of a single tweet or trend is simply too powerful for publicly traded companies to miss.