A social trading network is an online trading platform where traders can buy or trade shares of companies, commodities, or exchange-traded funds and interact with each other.
The idea behind the social trading platform is that it allows traders to connect with other investors and exchange their views. Once they enter the trading community, they can discuss their investment strategy, trading experience, and the latest trends in the financial markets.
Most of these social networks offer auto-trading capabilities, meaning that investors can choose to copy other traders' moves directly from the platform itself. So if somebody finds a person with a particular style of trading they like and deem as successful, they can imitate their strategy at the push of a button.
In addition, such platforms usually give access to many potential investors who may not otherwise be able to invest in the financial markets by supporting small trade lots and/or fractional shares.
Social Trading Characteristics
Social trading is an approach to analysing financial data by looking for what other traders are doing, comparing their techniques and strategies, and then copying them.
Before the start of social trading networks, traders primarily worked alone or in their social or work circles. They relied on technical and fundamental analysis to make investment decisions. Now, social trading investors can use social indicators from the data feeds of other traders to form their investment decisions.
Social trading allows traders to trade online with the help of others, and some have claimed it shortens the learning curve from novice to experienced trader. By copying trades, traders can learn which strategies work and which don't.
There are three main kinds of trades:
- Single (or non–social) trade: Trader X places a single trade by themself.
- Copy trade: Trader X places the exact trade that Trader Y has just placed.
- Mirror trade: Trader X automatically executes trader Y's every trade, meaning that trader X follows trader Y's trading activities exactly.
Some platforms offer variations where users can copy another user's portfolio and follow a user's decisions. Hence, whenever a copied portfolio or funds are withdrawn, a proportional amount of the followers' funds will be withdrawn from their balance in real-time.
How Safe Is Social Trading?
Social trading can be risky because investors rely heavily on others' experiences and knowledge, which can be found and evaluated via stock sentiment. If you're brand new to investing, chances are you don't know much about stocks or bond investments. So you might turn to an expert for guidance.
The risk involved with such an approach is that you might be picking an asset allocation that doesn't suit your goals, risk tolerance levels, or time frame for investing. There are also unknown factors regarding what kind of performance you can expect and what fees might incur.
Investors should also consider what investments are available to them. For example, not all social trading platforms allow U.S. and U.K. investors. Moreover, those that exist don't always offer the same investment choices as you'd find with a traditional online broker.
As a general rule, you should also consider whether the platform allows you to invest in different assets before deciding if it's right for you.
If your primary focus is cryptocurrencies, your personal risk tolerance will determine if social trading is the right fit for you.
Cryptocurrency investing is generally riskier than stock trading. So, if your personal risk tolerance is low, you might be better off sticking with online brokerages and joining some investment forums or groups instead to get the social contacts you're looking for.
Reasons to join a social trading platform
Interact with other traders
Social trading networks are ideal for traders who want to do something about the 'loneliness of the long-distance investor'. You can interact with other people, access data, statistics and analyses, and change your portfolio based on what others are doing.
Professional traders' loneliness and mental health are significant issues, and social trading platforms could help with coping. You might even find friends you can connect with and talk about trading and other endeavours in life.
Get trading ideas via social newsfeed
Many social trading platforms offer a 'social newsfeed' function which helps you follow the financial instruments and traders you like. You can see what is 'hot' and 'popular' amongst other fellow traders and get new investment ideas you would have missed by only reading financial news or broker websites.
Social trading offers investors the possibility of working together in trading teams to trade the markets in cooperation. This can be done by sharing information on particular stocks and putting one's heads together for sharing research. In addition, some platforms offer the possibility to pool funds and thus achieve diversification with others.
Earn extra commissions or performance fees
Most social trading networks offer the ability to share your portfolio with the public and earn a commission if somebody else is copying your portfolio or investing in it.
Different sites offer different commission structures, and typically, you would earn based on your performance. Therefore, if you are a great trader, why not open your abilities to other investors and be rewarded.
First Steps To Social Trading?
To start, you need to find an appropriate platform that you want to join. Then, depending on your country of residence, you can create an account and start searching for potential investors to follow.
It might be helpful to spend a few weeks observing and interacting with other traders through a social trading platform before jumping into the deep end. Remember that when using social trading or copy trading, your success is directly tied to the success of the investor you're mimicking.
Therefore, as you get to know different investors, take a look at how they performed in the past. Consider how often their stock pick performed well and how often they chose losers. It is essential to familiarise yourself with the risk level they go up against and how it compares to their returns. This can help you identify potential investors who most closely match what you are looking for.
You should also consider how much of your portfolio to devote to social trading. As the risks may be higher for a more significant allocation, keeping your allocation small, no more than 5%, might make sense. This way, you can protect yourself from losing too much money if the investor you bet on fails to meet expectations. It can also help with managing investment costs.
Social trading networks are becoming increasingly popular among individual investors. People like the idea of attracting followers by positing their trading ideas and generating helpful content for others.
It may help with the problem of loneliness traders are facing glued to the screen by allowing them to interact with each other like on a social network.
Another key attraction is the possibility that millions of other investors can copy your trading strategy, and you can even earn additional performance fees on it.