Abstract
Social networking has become a necessity in the modern day investment markets. The use of social networks has increased due to their adaptation in making an investment decision especially at the capital markets. Individuals and corporate organizations rely on social networks in making investment decisions that concern the capital markets.
Influence of social markets has resulted in quick and simple ways of accessing capital markets’ information by all interested individuals and companies. Researches from various scholars indicate that the data collected from various types of social networks can be useful in the prediction of the future prices of stocks in the capital markets. Information from social networks can be used in developing capital market predictive models.
Literature review further indicates that the advent of social networks is a great achievement in the financial world. However, researches show that social networks cannot be fully reliable in matters of finances since it has no clear checks for accountability. This paper is a literature review on the impact of social networks on capital markets.
Introduction
Social networks have become a vital tool in various facets of development in the modern world of finance. Individual investors, groups, and companies rely on social networks for financial information. Investors adopt the financial information from social networks in making financial decisions.
Capital markets across the world cannot distance themselves from the modern tools of communication due to the view that they highly depend on communication. Social networks adopt the use of computers to connect people, groups, and organizations. A social network includes an online site or platform that facilitates building of social relationships or communities.
The social network groups often have a common interest in various matters, activities, foundations, and lifestyles. The users of social networks rely on individual profile portal. Every individual has a distinctive identifier that links him or her to other users. Due to its individualistic and communal reach, social media has been widely accepted in the world of finance.
The traditional ways of communication and conducting business at the capital markets have thus changed after the inception of social media. There are various examples of social media platforms; for example, Skype, Facebook, and Twitter among others. Although there has been a speculation on how the social media with little or no regulations can be adopted in the financial markets, the social networks seem to have overtaken the speculations.
Capital markets are the financial markets where different investors sell and buy securities with secure backing and with long-term debts. Active users of social media are thus in a position to realize the current trends in the markets, hence they can make use of money offered to them by the capital markets and invest it for long-term use.
Investors who make use of social networks in accessing capital markets include individuals, groups, and governments. All the capital markets across the world are volatile in nature. Consequently, national banks and security and exchange commissions are charged with the responsibility of supervising capital markets. For instance, in the United Kingdom, the Bank of England is in charge.
Social media networks are thus supposed to be handled with care by organizations, individuals, and governments who adopt social media. This paper seeks to discuss various literatures that have been written in the past and modern researchers on impact of social media on the capital markets.
Literature Review
Forms of social networks adopted in capital markets
Various forms of social media have affected the capital markets. With the digitalization of most mediums of communication, various forms of social networks have been developed.
These forms of social networks have widely been accepted by the regulatory officers, clients, marketers, and shareholders in the capital markets. Andzulis et al. (2012) observe that the widely adopted forms of social media include “Internet forums, magazines, social blogs, wikis, weblogs, social networks, micro-blogging, photographs, video and even social bookmarks” (p.309).
All these forms of social media have been useful to different stakeholders in the capital markets in exchange of information. Exchange of identities and profiles has become a common activity during meetings and forums where stakeholders meet. In addition, the social distance between stakeholders has been reduced.
A social media network can be differentiated according to its use in its seven building blocks, for example, “for conversation, sharing, identity, presence, reputation, groups, and relationships” (Kietzmann et al., 2001, p.244). Out of these functional uses, the social media networks have become widely adaptable in the capital markets. There is a need for exchange of market information in the capital markets; therefore, it suffices to conclude that stakeholders can easily adopt the most adaptable method of communication.
Building the reputation of the capital markets is also a factor that has resulted in the adoption of social media networks since information is crucial in capital markets. Mcquarrie et al. (2013) note that the most applicable social media networks are “collaborative social media like Wikipedia, micro blogs and blogs, content communities like You Tube, social network sites like Facebook and Twitter, virtual networks like Warcraft world, and virtual worlds like Second Life” (p. 144).
Reasons behind wide adoption of social networks in the capital markets
Social networks save time
Obamuyi (2013) posits that in capital markets, social networks are used to exchange financial information through instant emails and messages. The need for speedy exchange of market information has resulted in the adoption of social networks that have instant reach in communication. Most stakeholders in the capital markets have adopted the use of Twitter, Facebook, MySpace, and Bebo. In the contemporary markets where the trading landscape is changing incessantly, speed of is essence in conducting business.
Fortunately, these types of social networks are very fast and stakeholders in the capital market have used them in conducting business. Andzulis et al. (2012) posit that the social media has grown into popularity due to its applications on mobile phones. Most modern mobile phones have Internet portal, and thus they can easily be Internet enabled. Thousands of capital markets stakeholders have thus bought mobile phones that are Internet-enabled for purposes of using social networks.
Rodriguez et al. (2012) hold that social networks applied on mobile phones are referred to as mobile social media. Rodriguez et al. (2012) further note that the capital markets have widely adopted the use of mobile social media. Tetlock (2007) indicates that special types of social networks that enhance speed of communication are preferred in the capital markets.
Social networks reduce the cost of doing communication in capital markets
The cost of communication is reduced through the adoption of social networks in capital markets. For example, in the traditional way of conducting business at the capital markets, communication to shareholder and customers would only be conveyed through letters, radio, or television. The cost of sending information through the traditional media is very expensive. Tetlock (2007) holds that social media networks have reduced the cost of communication significantly.
Capital market users only require loading airtime on an Internet enabled mobile phone or computer. Four space timers account for the location of the user and the time of use. For example, “Facebook and Foursquare, the space-locators that account for the location only like Yelp and Qype, the quick timers that account for time only like Twitter, and slow timers that do not account for location and time like Wikipedia and You Tube” (Tetlock, 2007, 1141).
Capital markets adopt social networks that account for time and location. Galunic et al. (2012) note that capital markets authority officers have used the social media to reach millions of people with information, news, education, and other messages under very little cost.
Compared to traditional forms of media like newspapers, radio, and television, the social media is cheaper and more accessible. Traditional media of communication is expensive and time consuming; for instance, newspapers have to be printed and transported to various locations, which takes time and resources. However, with the inception of social networks, the cost of communication in the capital markets has gone down
Wide reach
Social media networks have also broadened the reach of capital markets authorities. The stakeholders of the capital markets have been in a position to use social media to publicize information to a large number of people instantly. Tetlock (2007) posits that market reach is an important force in business. Various researches realized that the number of people that a certain medium of communication can reach is important.
Galunic et al. (2012) also assert that social networks expose the audience to a particular message for many times. Exposure of the capital markets authority stakeholders to a particular message for many times results in better understanding and remembrance of the information conveyed. Speed of communication regulates the level of exchange that can take place in the capital market in a typical day. Tetlock (2007) further affirms that it is easy for investors to obtain instant information on capital markets via social media.
Change in methods of interaction in the capital markets
The social media networks have altered significantly the way various stakeholders in the capital markets interact. Since social media networks make use of the Internet and mobile phones, there has been a substantial overhaul of interaction methods in the capital markets. The adoption of social networks by various facets of capital markets has resulted in better interaction in the financial markets.
The use of the Internet and Internet-based networks has allowed the socialization of more stakeholders in the capital markets. With only a click of a button, an officer at the capital market can interact with millions of stakeholders almost in real time. Agnihotri, et al. (2012) found out that social media are the various Internet-based platforms and tools, which facilitate the exchange of information between people.
Further research by Mcquarrie et al. (2013) indicate that social media is a new platform of communication that enables those who use Internet exchange text messages, audio messages, and video and photo messages. The level of interaction in the capital market in the modern society highly depends on social media. Most investors in the capital markets own computers, tablets, and mobile phones that are Internet-enabled.
Investors and customers in the capital markets authorities are thus in a position to share current information on the trend of shares and bonds in real time. Galunic et al. (2012) found out that in the modern day, social media is being used for both business and personal communication. The view that the capital market has been using Internet-based networks in its conduct of business over the years is evidenced by its adoption in communication among sellers, marketers, customers, regulatory commissioners, and bank officers.
Exchange of information in the capital markets has thus become very easy and fast. Various stakeholders are also in a position to relate at a personal and business level. Galunic et al. (2012) further affirm that close ties among shareholders, customers, and market officers are established through the social media. Investors are in a position to negotiate, agree, and make profits through social networks.
Accessibility of social media enhances efficiency of the capital markets
Organizations, groups, and individuals can easily access various social network platforms for communication. According to Mcquarrie et al. (2013), since the prices of various social media devices are relatively low, most investors, customers, and officers of the capital markets can easily afford them.
For example, mobile phones are relatively cheap devices that can be used to access social media networks. Accessibility by a large number of people assures the stakeholders of instant communication whenever there is a need. Social media enables various people to access capital markets information. Kietzmann et al. (2011) note that the use of social networks also enables stakeholders to reduce time wastage and energy, which would have been used in the traditional communication methods.
Information on social networks can be easily edited hence errors on capital markets information can be corrected instantly
Social media networks are instantaneous in nature, and thus it is possible for users to edit errors in messages sent. In comparison to traditional media, social media enables capital market users to enhance accuracy. Kietzmann et al. (2011) assert that the social media has less permanency for information disseminated through it can be edited almost immediately through comments.
Although there are many erroneous, false, and misleading messages on the social media, its proper use can be of great benefit to capital markets. Capital markets users can also use the social media to confirm information or an issue that they are not sure. Since social networks are quick and cheap to use, users are confident to adopt them in communication.
Since information about capital markets keeps on changing with time, the authorities use social media networks to make comments and effect the changes. Kietzmann et al. (2011) further affirm that investors can also respond to customers’ comments on decisions taken with immediacy via social media. This aspect means that erroneous messages and steps taken by the capital markets can be corrected within no time.
Speedy spread of false information
In the same way social media is used in speedily in spreading of correct investment information, it has also been used in a negative way. Mcquarrie et al. (2013) assert that since there is little or no control of the content that goes into the social media, the information posted can be erroneous and damaging to the capital markets. Researches also indicate that increased adoption of social networks in communication and accessibility has resulted in an increase in online fraudsters.
Hate mongers have also turned to the use of social media in spreading negative messages. Users of social media who use it to access information on capital market have to be careful to avoid fraudsters and hate mongers. The reliability of financial information conveyed through the social media is thus low (Mcquarrie et al., 2013). Matters of finance and investment are sensitive and business people are likely to trust information that is conveyed through reliable sources.
Conclusion
Social networks have many impacts on the capital markets. Literature review on this topic indicates that various works of researches have been conducted in this area. The social media has been widely accepted in the modern day investment communication.
Investors in the capital markets have adopted social media due to its impacts; for instance, social networks save time, reduce the cost of doing communication in capital markets, wide reach, changes methods of interaction in the capital markets, and enhances accessibility of information, hence efficiency of the capital markets.
Moreover, information on social networks is easily edited, and thus errors on capital markets information are corrected instantly. However, the uncontrolled nature of social media results in speedy spread of false information across a wide audience. Nevertheless, weighed against each other, the merits of social media effects on capital markets outweigh the demerits, which can be corrected via setting regulatory policies for responsible and secure use of social media.
References
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