Sentiment analysis and the stock market

Sentiment analysis has many uses, from customer service to marketing insights. But could it also prove helpful when it comes to financial decisions and the stock market?

The argument goes that general sentiment is a force that acts on the stock market. So, if you find a way to tap into general sentiment, you can use it to inform your next financial decisions.

But how can you unlock that insight? Here, we explain how sentiment analysis could help you navigate the stock market.

Social media, sentiment and the stock market

Knowing the feelings of an audience helps to understand them. That is, if you know the public mood towards something, you can predict future decisions surrounding it. For example, if a product is enjoying a surge in positive sentiment, it is more likely to be investable.

But knowing how the population feels about something is easier said than done, right?

This is where social media enters the mix. Social media, particularly Twitter, can act as a window to the general sentiment of the population. So, now you have a bank of public data to mine and measure. Tracking the social media sentiment towards a company or product gives you a view of opinions that could impact the stock market.

Sentiment analysis

Enter sentiment analysis. With a sentiment analysis tool, you can parse data from a wide variety of locations. This includes social media sources like Twitter, RSS feeds, and almost anywhere else. Then, it can generate a sentiment report about that data.

When used as part of an automated workflow (via a platform like ThinkAutomation), sentiment analysis follows the instructions you give it. So, you specify where to pull the data you want to analyse, and what brands, products and services you’d like to track. Then, you define what automated actions should follow.

For example, you might choose to get an email report if a specific brand starts to generate rising sentiment scores. Or, if a product you’ve invested in suddenly sees a sharp downturn in public sentiment, you might want to receive a triggered alert.

The sentiment scoring process

Your sentiment analysis tool parses retrieved data for positive and negative keywords. This works by checking content against a bank of words and phrases pre-programmed to flag as positive, neutral, and negative. (Plus all the shades in between.) You can also add your own, industry-specific key terms for the software to look out for too.

Next, the software generates a sentiment score. This is based on the density of the positive and negative terms surrounding the chosen topic. So, you get calculated insight into the current feeling towards a given interest.

If you’ve added any actions to run off the back of your sentiment score results, they will also execute following the score generation.

What are you looking for?

Sentiment analysis unlocks the window to the general sentiment that social media offers. With it, there are three things you might be looking for. These are positive sentiment, negative sentiment, and changes in sentiment.

  • Positive sentiment

If sentiment about a topic is positive, it means people like that subject right now. This could, then, lead to a rise in the stock market, as people that feel good about something may be more likely to invest.

  • Negative sentiment

Studies show that positive and negative sentiments on social media have different effects on the stock market. It’s thought that negative sentiment has a stronger effect than positive sentiment. Negative sentiment could indicate an incoming drop in the stock market.

  • Changes in sentiment

You could also use sentiment analysis to track significant changes in sentiment. If a company or product suddenly experiences a surge in positive or negative sentiment, then it could be indicative of a coming change in price.

Insight, not answer

Sentiment analysis and the stock market might not be the most obvious match up. But using it to track the public mood about your interests and investments provides some extra insight.

With sentiment analysis, you have more information to base your ultimate decisions on. You could avoid missing out on an opportunity, or mitigate an approaching risk.

So, want to use sentiment analysis to help you make smart decisions? Give it a try, with a 30-day free trial of ThinkAutomation.