Social media has changed our world over the past decade. Sometimes it seems hard to remember a time before Facebook and Twitter played such a dominant role in our everyday lives.
Now, as we spend more time on social media than ever before, many people are starting to look at the possibility of investing in these platforms. But is this the right option for you, and what should you consider before you invest?
Here are some tips to keep in mind when it comes to investing in social media tech stocks.
What's the Attraction?
Investing in social media is very attractive for many investors. But why?
Part of the attraction is that you are investing in something exciting. You're not just investing in a company, but in a disruptive force that has changed the world—and that will continue to change it in the future.
There is also a lot of potential for growth. According to this Forbes article, one in every four minutes that people spend online is on social media. Social media is popular all over the world, and if it continues to grow at a fast pace, it could well prove to be a very sensible investment. It all depends on whether you think that social media companies will continue to grow, but if you do, investing in them could be a good option.
It's also worth remembering that social media advertising is going up all the time. According to the Forbes article, it made up 22.3% of total advertising in 2012, but by 2017 it is predicted to make up 31.1%, which could make the stocks attractive.
Is It Too Risky?
Part of the thing that makes social media stocks exciting is that they are also volatile. They have a history of being volatile, and this is unlikely to change anytime soon.
Just look at Facebook's IPO in 2012 where it plummeted significantly before increasing again, and now it is going very strong. Others like Demand Media rocketed before falling again.
Social media is an area that changes rapidly, but this could make it too risky for some investors. You have to decide whether it is right for you. If you like risk, it could be an exciting investment.
Perhaps the biggest concern is that social media is still something of a fad. And despite the popularity of sites like Facebook, there is no saying what will happen in the future. Many social media companies have come and gone—who can forget MySpace? And although Facebook is huge right now, will this continue?
MoneyWeek recently reported on the possibility that interest in social media might have peaked and that we may be reaching our limits of how much we can post, and this could be bad for social media stocks. There is a limit to how much free content we can produce, and to how much we can keep on updating, and perhaps this is not good news for stocks.
Top Tips for Investing in Social Media Stock
If you are considering investing in social media stock, there are a few things you can do before you actually make an investment.
First of all, nothing can beat educating yourself more on social media. You may already know a lot about social media, but social media stocks are unique because of the way that social networks earn revenue. So learn more about them, including how they work and how they earn revenue.
It's also worth following various stocks for a while. Use online sources like MoneyMorning.com/tag/facebook-stock-price/ to keep track of what is going on with the big social networks, the follow them for a few weeks or months before making a decision.
Also know that volatility is virtually a guarantee, so be prepared for this. Surges followed by declines may make social media stock more suitable for long-term investing.
And, of course, remember to diversify your portfolio. Consider investing in numerous stocks including Facebook and Twitter as well as smaller review sites like Yelp or business sites like LinkedIn. Just because one social media company's shares increase, it doesn't mean they all will, so always diversify.
More of a Long-Term Investment Option
There are opportunities with social media investing to make good returns, but you have to be prepared for the highs and lows. But if you stick with it for the long term, it could be a great way to grow your portfolio as long as you have a high tolerance for risk.
Social media is here to stay, and it could even become even more prevalent in society. By selecting social media stocks with care, you can diversify your portfolio, and you could enjoy some handsome profits.
With a background in investment banking, Chloe Middleton enjoys writing on a wide range of investment topics; particularly taking an interest in the new tech trends which are helping investors find their feet.