Social Connectedness Essay

Published: 2021-07-07 00:03:27
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Category: Sociology

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IntroductionAn investment fund that is based on the current trends is known as a momentum fund. The trends that are usually observed include trends of price movements and earnings. Thus, the managers invest in the companies that have positive momentum, and they may also sell the stock of the companies that have negative momentum. Further, individuals must invest in such type of fund as these funds contain high probability of fetching high return investments. However, there is an important point to understand that these funds require a high level of monitoring because the directional changes might occur during the period and also the momentum factors can be of short-term. They consider different characteristics of a stock, thus end up with an informed investing decision. The most common factors which are considered while analyzing either to invest in the momentum fund or not include earnings, price movement, and revenue. The investors must utilize the benefits offered by the momentum investing by investing in these funds. There are various other companies which offer such type of investing. However, there are also certain risks which such momentum funds contain that must be in the knowledge of the investors. They must understand those factors which are being considered while constructing a portfolio. For instance, there are funds that only focus on the past performance of the company and others that not only follow the performance momentum but also consider the expectations for the future as well.DiscussionResearch studies suggest that social networks provide easy accessibility to the resources, information and allow sharing and coordination. Thus, those who have strong connections and are socially active they are in a better position relative to those investors who do not have such connections. It is because the social connections regulate the behaviour of the society. They influence the behaviour by affirming or negating them. Further, it is easier to verify the information in the social networks. These social relations thus can help an organisation to get the benefits by seeking an adequate level of financing. This notion can be well explained by the embeddedness approach; this concept explains that why economic transactions become embedded in social relations and thus affect differentially the valuation and allocation of the resources. Further, there has been a debate that due to efficient market hypothesis stock returns cannot be predicted (Hong, 1999). However recent studies show that information is a major factor that has a potential to influence stock returns (Qian, 2007). Also, that the information contained through social media reaches to a broad audience (Risius et al., 2015).However, there are negative implications of such social connections as well. For instance, these social connections also contain the probability of restricting the actions by imposing the normative behaviour. Moreover, a gradual Information flow model highlights that the contemporary world differs in two different ways as assumed by the EMH. Firstly, some information is restricted as private and is not available to the public. Secondly, even if the information is disclosed to the investors, their cognitive biases tend to limit their ability to perceive the information (Sul & Yuan 2017).Research studies on momentum trading have shown the consensus on the point that in the intermediate horizon where the period remains between three to 12 months the stock returns show persistence in generating returns. However, the reasons for such persistence may differ. It depends on the factors which are at the core of the momentum funds and which are kept under consideration while formulating such funds. There are also considerations regarding a view that associate abnormal returns with the momentum strategies and suggest that these momentum strategies fetch abnormal returns as a compensation for the unidentified source of non-diversifiable risk (Carhart, 1997). Further, studies also suggest that the earning related new also play a significant role in the price momentum trading (Burch, 2002). This study also strengthens the notion of social connectedness as well. Social connectedness also affirms the theory of efficient market hypothesis. Thus when the information is available to all the investors than the tendency, inclination and the probability to buy such funds increases. It is very important to know that what type of information that is being rotated in these social networks as it works vice versa as well.Research studies suggest that the naïve investors may also cause the momentum with biased expectations (Hvidkjaer, 2009). It has also be studied that individuals may use heuristics or cognitive biases cause them to suffer. That is the reason these individuals rely on particular models of risk and expected return. Thus by these models, investors tend to buy or sell the same securities at the same time. To conclude, the cognitive biases of the individuals and prices tend to formulate the behaviours of the individuals. This is linked to the social connected as well. In an environment of increased networking and social connected such factors contain the probability of creating negative ties. Thus, It is very important to understand about the behavioural disposition of the abnormal returns that either they are due to the proposed explanation of the behaviour or they are caused by the rational motivations. Thus the social connectedness works at both ends.To sum, the social connections play and important role in increasing importance and potential of a fund among the public so that individual investors may look forward to investing in it. The impact of such an impact can be measured by looking at the trends, and the behaviours of the people towards the fund of that are being offered. Research studies suggest that social ties and networks play a significant role in the financial contexts and a broader sense they also influence the decisions and outcomes of the managers and directors (Bertrand and Schoar, 2003; Xuan, 2009)Conclusion:Thus, the basic demand and supply functions are being disturbed by such kind of trading.ReferencesBertrand, M., Schoar, A., 2003. Managing with style: the effect of managers on firm policies. Quarterly Journal of Economics 118, 1169–1208Burch, T.R. and B. Swaminathan, 2002, “Earnings news and institutional trading,” working paper (Cornell University).Carhart, M., 1997, “On persistence in mutual fund returns,” Journal of Finance 52, 83-110.Hong, H., & Stein, J. C. (1999). A unified theory of underreaction, momentum trading, and overreaction in asset markets. The Journal of Finance, 54(6), 2143–2184.Hvidkjaer, S., 2006. A trade-based analysis of momentum. The Review of Financial Studies, 19(2), pp.457-491.Qian, B., & Rasheed, K., (2007). Stock market prediction with multiple classifiers. Applied Intelligence, 26(1), 25–33.Risius, M., Akolk, F., & Beck, R. (2015). Differential emotions and the stock market—The case of company-specific trading. European Conference on Information Systems, Completed Research Papers, Munster, Germany, Paper 147.Sul, H.K., Dennis, A.R. and Yuan, L.I., 2017. Trading on Twitter: Using social media sentiment to predict stock returns. Decision Sciences, 48(3), pp.454-488.Xuan, Y., 2009. Empire-building or bridge-building? Evidence from new CEOs’ internal capital allocation decisions. Review of Financial Studies 22, 4919–4948.

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