Trading Stocks Based on Tweets: Clever Crowdsourcing or Silly Fad?
Can tweets and status updates predict changes in stock prices? Paul Hawtin, CEO of Derwent Capital Management, certainly believed in the predictive power of social media tools when he created the first-ever "Twitter hedge fund," which we reported on a few months ago.
In its one month of existence, the fund's overall 1.86 percent return outpaced both the market at large as well as the average hedge fund's performance.
Then Hawtin shut it down so that he could turn his "sentiment analysis" machine into a trading platform that could be used by everyday investors.
Ladies and gentlemen, that day is now upon us.
Market 'Chatter' for a New Generation
Derwent Capital's website has officially launched its new DCM Dealer, an online trading platform that lets any investor decide whether to buy or sell stocks based on social media "sentiment" -- or the general tone surrounding the latest tweets about a company.
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According to Hawtin, its ranking system works like this: Each company's sentiment is ranked on a 0-100 scale on a second-to-second basis throughout the trading day. If a company is being tweeted about fondly, its number will be closer to 100. If a company's number is closer to 0, it might be time to reevaluate its position in your portfolio.
Currently, DCM Dealer offers daily sentiment ratings for around 250 U.K.-based companies, but Hawtin says the website will include 8,000 companies across Europe, the U.S., and Asia within the coming weeks.
Of course, the question remains: Should you take the plunge and trade on the tweets?
Sometimes a Tweet Is Just a Tweet
At the moment, signing up for the new DCM Dealer is free with registration, so there's no harm in taking a look and learning more about what the company is trying to do. But if you're hoping to use the site to get out of doing your own financial research, don't bother. In fact, if that's the case, you may want to avoid investing in stocks, period.
Buying and selling stocks based strictly on what is being tweeted about them is exactly as silly as it sounds. Social media is still such a new concept that it's difficult to put a finger on exactly where its monetization strengths are. Even Facebook (FB) itself has struggled to make money off social media, so how does Derwent Capital hope to cash in on it?
DCM Dealer may be a unique new way to view the market, but even its CEO has admitted that the website should only be used as a supplemental tool for investing, and not your sole source of Wall Street guidance.
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Motley Fool contributor Caroline Bennett does not own shares of any company mentioned in this article. Motley Fool newsletters have recommended Facebook.
