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1 Why Pay Attention to Stock Message Boards? 2 a Variety of Stock Notes 1 Why Pay Attention to Stock Message Boards? 1. The term quality of life (QOL) references the general well-being of individu- als and societies. 2. www.stocktwits.com 3. http://www.empathica.com/retail2012 4. http://www.accenture.com/us-en/Pages/insight-shopper-preferences.aspx 5. For stocks priced under $1, add 0.5 percent of the principal value to the $7 commission. 6. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171513574. Regulation Fair Disclosure is a regulation that was promulgated by the SEC in August 2000. The rule mandates that all publicly traded companies must disclose material information to all investors at the same time. 7. http://www.sec.gov/news/press/2000-135.txt 8. http://www.ftc.gov/opa/2007/06/wholefoods.shtm 9. Penny stocks are usually unlisted, highly speculative, and usually selling for a dollar or less. 10. Asset liquidity refers to how quickly an asset can be converted into cash without a significant loss in value. 11. For the definition of short selling, please visit http://www.sec.gov/answers/ shortsale.htm. Not all the stocks can be shorted. In order to sell the stock short, you must have margin privileges on your brokerage account. Your broker must have available shares to lend to you. You cannot sell short a stock which is under $5. At any time, you must maintain enough capital in your account to place a buy to cover order on your short position to return shares you borrowed to your broker. 2 A Variety of Stock Message Boards 1. Day traders, as defined by the SEC, “rapidly buy and sell stocks through- out the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits.” Please see http://www.sec.gov/answers/daytrading.htm 268 Notes 2. Trade types include buy, sell, buy to cover, and sell short. Order types include market, limit, stop, stop limit, and trailing stop. 3. Based on Fama and French (1995) and Carhart (1997) research, there are four widely recognized systematic risk factors: stock market premium fac- tor (Mktrf), size factor (SMB), style factor (HML), and momentum factor (UMD). 4. http://www.sec.gov/news/press/2011/2011-268.htm 5. http://www.sec.gov/news/headlines/intmm.htm 6. The ClearStation, a semiprivate chat room, is now an E*TRADE commu- nity. Chatters need to be E*TRADE customer to use the chat room. 7. http://www.sec.gov/news/headlines/tokyojoe2.htm 8. http://www.sec.gov/news/headlines/intmm.htm 9. The “Short” sentiment suggests short selling while the “Scalp” sentiment implies buying and selling quickly with the intent of a day trade profit but without any specific sentiment. 10. Poster’s credit score is a proxy for the poster’s reputation. Such reputation systems have been adopted in a wide range of online applications, includ- ing auction sites such as eBay.com, reseller sites such as Amazon.com and file sharing sites such as YouTube and Flickr. For a detailed explanation of the validity and effectiveness of an online reputation system, see Ghose, Ipeirotis, and Sundararajan (2006). 11. http://hotcopper.com.au/posts.asp?fid=303 12. On Yahoo! Finance, if a message board for a company you are interested in does not exist, you can create one. 13. http://www.siliconinvestor.com/subject.aspx?subjectid=6136 14. One can also sort the board by messages so that all messages will be listed reverse chronologically based on posting time. Sorting by topics is the default setting. 15. Big-Boards, which tracked the most active message boards and forums on the Web, used to be a popular Board of Boards, but it is no longer in service. 3 About Stock Message Board Posters 1. An ISP is a business or organization that offers user access to the Internet and related services, such as Comcast, Verizon, AOL, etc. 2. For example, http://www.thelion.com/bin/disclaimer.cgi and http://raging- bull.com/about 3. To further understand stock “pump-and-dump” manipulation, visit http:// www.sec.gov/investor/pubs/pump.htm 4. In July 1998, the SEC formed the Office of Internet Enforcement, a unit cre- ated to eliminate securities fraud occurring over the Internet. 5. Here is an example of companies and individuals who were charged with security fraud: http://www.sec.gov/news/headlines/intmm.htm 6. https://bulk.resource.org/courts.gov/c/F3/318/318.F3d.465.01-1120.html 7. http://www.thelion.com/bin/disclaimer.cgi 8. http://www.sec.gov/news/digest/1996/dig112096.pdf Notes 269 9. www.sec.gov/news/press/2000-135.txt and www.ftc.gov/opa/2007/06/ wholefoods.shtm 10. http://www.sec.gov/litigation/litreleases/lr15953.txt 11. https://www.sec.gov/litigation/admin/33-7885.htm 12. http://www.sec.gov/litigation/admin/3-9768.txt 13. http://www.sec.gov/litigation/litreleases/lr15855.txt 14. https://www.sec.gov/news/digest/dig090903.txt 15. www.hitwise.com and www.claritas.com 16. In finance, a long position in a security means the holder of the position owns (bought) the security and will profit if the price of the security goes up. In contrast, a short position means that the holder of the position does not own but borrowed the security from the broker and will profit if the price of the security goes down. Going long is the more conventional practice of investing and is contrasted with going short. 17. In the literature, when constructing a sentiment index, a common practice is to assign +2 to “Strong Buy,” +1 to “Buy,” 0 to “Hold” or “Scalp,” –1 to “Sell,” –2 to “Strong Sell,” and –3 to “Short.” 4 Why Do People Post Messages on Stock Message Boards? 1. In the United States, the SEC defines a penny stock as a security that trades below $5 per share, is not listed on a national exchange, and fails to meet other specific criteria. See http://www.sec.gov/answers/penny.htm 5 Modeling the Value of a Stock Message Board 1. A text classifier uses its algorithm to assign a sentiment score to a non-self- disclosed message. Details of text classifiers will be discussed in the next chapter. 2. SPY is SPDR S&P 500 Exchanged Traded Fund while DIA is SPDR Dow Jones Industrial Average Exchanged Traded Fund. 3. Many message boards provide a sentiment indicator for posters to explicitly disclose their sentiment on a voluntary basis. For instance, Yahoo! Finance allows a poster to choose one of the following sentiments: Strong Buy, Buy, Hold, Sell, Strong Sell, or not disclose (by default). TheLion.com offers two more sentiments: Short and Scalp. The Short sentiment suggests short selling while the Scalp sentiment implies buying and selling quickly with the intent of a day-trade profit but without any specific sentiment. Raging Bull also requires the author to specify his or her short-term and long-term sentiments (Tumarkin and Whitelaw 2001). 4. To be more realistic, the value of a message could also depend on the author’s reputation or credibility. Logically, a high-ranked author’s message should contribute a higher value than that of a low-ranked author’s, ceteris paribus. 270 Notes For example, when two social media accounts give out the same information and same recommendation, a higher value should be given to an Associated Press account than an unknown individual’s account. Another example is, one author’s credit score is 100 and the other author has just 1 credit score. If both of them are correct, we can define the value of a message’s value to be 100(+1) = +100 for the former author and 1(+1) = +1 for the latter one. But to keep my derivation simple, I define the value is +1 unit if the message’s sentiment is right and –1 unit otherwise. 5. Shorting is the practice of selling securities or other financial instruments that are not currently owned, with the intention of subsequently repurchas- ing them (“Buy to cover”) at a lower price. 6. In reality, it is possible for an author to have one or more messages deleted by the administrator. However, it is unlikely for one author’s messages to be consistently deleted over a considerable amount of time by the administrator because this type of author would be blocked by the message board. Thus, we do not consider a case with a negative bA in the model. 7. A reputation-recognition mechanism could be implemented either manda- torily by the forum design or voluntarily by all participants in the message board. An effective voluntary reputation-recognition mechanism would occur when an author makes a correct forecast and other participants grant him or her positive credit, and vice versa. 8. Rank’s upper limit 1/|2aF| can be set by the forum developer. Each author’s rank needs to be updated in real time based on his/her cumulative forecast accuracy. 9. http://www.sec.gov/news/headlines/intmm.htm and http://www.sec.gov/ news/headlines/tokyojoe2.htm 6 How to Measure Stock Message Boards’ Activities? 1. Although the Yahoo! Finance message board currently allows posters to dis- close their sentiments, it did not launch its self-disclosed sentiment function until June 2001. Thus, several earlier studies faced data restrictions. For example, studies using year 2000 messages from Yahoo! Finance as their data sample required researchers to hand-classify (hand-code) messages to obtain the training data set.
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