How should you invest in a digital age of instant, if not always reliable, information? Especially when rapid-fire trading dominates the market. Answer: Stay informed, yet don’t over-react to the latest development and trade in a frenzy.
The days of watching the ticker tape at your broker’s office is long past, thanks to technology improvements and widespread Internet use. For those who don't remember, there once were days where no one got any financial news. Trading stocks, commodities, currencies and the like have come a long way. Costs are down, execution times are shorter and access to information is at our fingertips.
The question is not only what information is useful, but what is actually legal. Changes keep occurring, so it pays to stay abreast of what’s new.
Last July, Reed Hastings, the chief executive officer of Netflix, wrote on his personal Facebook page that his company had hit a record high in viewership. Typically, companies make such announcements in press releases and post them to the corporate website, not the CEO’s social media page.
The Securities and Exchange Commission then informed Netflix, a popular subscription service to view TV shows and films, that it was under investigation for violating the agency’s fair disclosure regulation. Under this rule, publicly traded companies must release material information to all investors at the same time.
Later, however, the SEC backtracked and said it wouldn’t slap Hastings with regulatory sanctions after all – and that social media disclosures were acceptable as long as companies tell investors where to look.
This changes the game for investors. If you want to stay up-to-date on a company’s doings, you must now follow the company’s key employees on Facebook, Twitter, Instagram and maybe MySpace, just to be safe. While the exact reason Netflix shares popped on the same day as Hasting’s status update is unclear, it’s reasonable to assume his announcement played a role.
Information is even more vital now that stock trading is faster. Nowadays, traders have less time to ensure that information is accurate before acting on it. Two emotions drive investors, fear and greed, with fear the stronger. More information leads to more emotion and more trading, which keeps Wall Street happy but may lose investors money.
Hearing some tidbit may tempt ordinary investors to move right away on it. That is usually a bad idea because today’s market is the realm of professional high frequency traders. They use extremely fast computers and algorithms to make hundreds, if not thousands, of trades each day.
According to a study mentioned in a February 2012 Barron’s piece, high frequency traders initiate 70% of all trades on the exchanges. Michael Hudson, a former Wall Street economist, stated that, in 2010, the average hold time for a stock was 22 seconds. That’s longer than it takes to make a cup of coffee.
The debate over social media news releases and high frequency trading will continue for years to come. What we all know for sure is things have changed and will continue to change. You must have a process in place to deal with and absorb the evolving world of investing.
I teach my students at Purdue to begin with the end in mind. Know what you are saving for; know what you own and why you own it. There is a flood of information that can influence our investment decisions. It’s our job to filter the noise and determine what’s important.
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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe_Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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