"Sentiment analysis" How useful is it in investing?

Can we have an edge in picking winning stocks while investing using sentiment analysis of stocks and sectors?

First of all, let me explain what is sentiment analysis for the people new to this concept.

“Sentiment analysis refers to the use of natural language processing, text analysis, computational linguistics, and biometrics to systematically identify, extract, quantify, and study affective states and subjective information.” (Source: Wikipedia)

With the advancement of AI & machine learning, sentiment analysis has become a great tool lately for both traders and investors to analyze stocks, markets, industries, etc. It can help us to understand the sentiment, whether it is positive, negative or neutral.

For traders, they can make their next moves based on the stock sentiment along with technical indicators to get an upper edge. A combination of positive sentiment, rising momentum & increasing moving averages can give a better signal to the traders compared to technicals alone.

For investors, they can use the sentiment analysis to find trending/rising themes, industries, stocks, etc which may be favorable to invest. For example, if the sentiment of a theme, let’s say, electric vehicles, is positively high and continuously increasing, it may be a good opportunity for them to invest way before the others realize the same. Even the contrarian investors can use sentiment analysis tools to find out which stocks/sectors people are pessimistic about and can invest against the crowd.

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For a very long time, investors have relied on the traditional data available in the annual reports like financial statements (balance sheet/ income statement/ cash flow statement, etc) or financial ratios, to make their investment decisions. However, lately, a lot of alternate data through blogs, social media, news channel, etc are freely available for the investors to study. By studying these twitter sentiment or news sentiment, investors can make better decisions way ahead of the masses.

Overall, I believe sentiment analysis can be a useful tool for investors.

Resources to read:

1 Like

Thank you so much, @Kritesh_Abhishek I’m trying to perform sentiment analysis with python. Wbu?

I’m also using python for sentiment analysis. Have written a script to analyse twitter sentiment using textblob. However, I’m not happy with the NLP analysis accuracy using this library and hence recently, trying to train my own model.