Editor’s note: This article was first published in April 2011; it was written that month, as its reference to this week shows. Twitter was renamed X in 2023.
This week the BBC covered a study by a PhD student at the Technical University of Munich that linked tweets on the microblogging network to stock market movements. According to the student, the study analyzed a total of 250,000 tweets that included the ticker symbols of listed companies.
The student’s conclusion was emphatic: according to him, Twitter makes it possible to predict whether a stock will rise or fall with an 87% probability of being right. Of course, the explanation is both more complex and simpler than that.
It all comes back to the same thing: common sense. Twitter doesn’t predict anything, nor is it a forecasting algorithm. Quite simply, a piece of news that speaks positively about a company reaches an investor, or is tweeted by a newspaper whose followers are investors. That news spreads virally, quickly reaching many more investors, who then invest in the company.
As a consequence, and following the very logic of the stock market, the company’s share price will rise. The opposite would happen with bad news about another company: the same impact, but negative.
In conclusion: Twitter doesn’t tell you which stock will go up or down, but it can practically tell you what other investors will do based on the news they receive. Knowing that is like having “inside information”.
If you know what others are going to do, you know exactly what you should do. There’s no more mystery to it than that.
Further reading
Featured image: Katrina.Tuliao, CC BY 2.0, via Wikimedia Commons.
