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Investing in social media stocks

Social media stocks are trending, but stiff competition may give way to volatility.

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It’s exciting to say you own a slice of the technology you interact with on a daily basis. But social media stocks are far from secure investments. While the industry is on an upward trajectory, fierce competition may lead to increased volatility and company acquisitions.

What are social media stocks?

Social media stocks are stocks from companies that own and operate social media platforms, like Facebook, Pinterest and Twitter.

There are plenty of pure-play stock opportunities in this category, but some larger tech companies may also be considered social media stocks if they own social media companies. For example, Amazon owns Twitch, the live-streaming video platform, and Alphabet — Google’s parent company — owns YouTube. Both can be considered social media stocks and offer exposure to this category.

Why invest in social media stocks?

As our world becomes more connected and reliant on the Internet, it’s little wonder that tech sector subcategories like social media are on the up and up. With more brick-and-mortar businesses migrating to e-commerce sales channels, online advertising has become a booming business. And in the online advertising space, social media is a sizzling slice of real estate.

Overall, the social media category is doing well. Facebook reported an 11% year-over-year increase in daily active users in its Q1 2020 earnings report. Twitter is also seeing healthy growth, reporting a 24% year-over-year increase in monetizable daily active users in Q1 2020.

And the new kids on the block are thriving, too. TikTok reportedly amassed some 315 million downloads in the first quarter of 2020, amounting to the biggest single-quarter uptick for any app — ever.

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Risks of investing in social media

The biggest threat to an investment in social media is the inherent competition that dominates the industry — and the tech sector as a whole. This tech category moves fast and is highly competitive. And while competition can drive growth, it can also promote volatility, driving some stocks up, while crippling others.

Competition also paves the path for company mergers and acquisitions. If the social media stock you’ve invested in is acquired by another company, you may be reimbursed with cash or find your shares swapped for shares in the acquiring company, potentially disrupting your investment strategy or throwing off the balance of your portfolio.

Another consideration is the vulnerability of social media stocks to government jurisdiction. Tech companies have come under fire in recent years for infringing on data privacy rights. President Trump’s recent TikTok altercation is a prime example of this type of legislation at work. Companies may find themselves banned, limited or forced to rethink platform features in response to emerging governmental regulations.

Social media stocks

There are plenty of pure-play social media stocks on the market, like Facebook and Twitter. But you can also opt for larger tech companies with social media platforms under their belt, like Amazon or Google.

  • Momo Inc. (NasdaqGS: MOMO)
  • Pinterest, Inc. (NYSE: PINS)
  • Snap Inc. (NYSE: SNAP)
  • Tencent Holdings Limited (OTC Markets, Pink Sheets: TCEHY)
  • Twitter, Inc. (NYSE: TWTR)
  • Weibo Corporation (NasdaqGS: WB)
  • Yelp Inc. (NYSE: YELP)
  • Zoom Video Communications, Inc. (NasdaqGS: ZM)

What ETFs track the social media category?

There are a number of ETFs that track some of the major players on the social media scene. These ETFs include:

  • Global X Social Media Index ETF (NasdaqGM: SOCL)
  • Invesco Dynamic Media ETF (NYSEArca: PBS)
  • Communication Services Select Sector SPDR Fund (NYSEArca: XLC)

If you’re seeking a broader approach to the social media category, consider the Global X Social Media Index ETF (NasdaqGM: SOCL). This technology sector ETF was founded in 2011 and boasts net assets of over USD $211 million. It primarily invests in the Nasdaq and focuses on social media stocks from the US and around the world, including Facebook, Twitter, Tencent, Naver, Spotify and Yandex. The amounts in the graph below are in US dollars.

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Bottom line

The social media subcategory is growing — and fast. But industry competition and emerging data regulations may put a damper on profits.

Review your account options across multiple platforms for the brokerage best suited to your investment needs.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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