One of the most prominent developments in the financial industry in recent years is ‘social trading,’ spurred by the fintech revolution. Moving trading practices from professional brokers into the hands of individual traders created a fertile breeding ground for the invention of new trading methodologies. Social trading combines traditional trading practices with online communities and has quite a few advantages for both novice and experienced traders. Here are four worth mentioning:
1. It saves you time
With social trading comes ‘copy trading,’ a specific feature invented and patented by eToro. Copy trading enables traders to replicate another trader’s actions in real-time. For every investment the copied trader makes, an investment is made for the copier at the same proportional amount. This way, people who would rather spend less time actively trading could let other traders do the work for them. Of course, putting your money in someone else’s hand could be quite scary — which brings us to the next item on this list.
2. It’s transparent
Let’s take a step back. Many people put their money in someone else’s hands. Whether it’s by using a broker, opening a pension fund, or even depositing money in the bank, you’re essentially letting other people use your money to make investments on your behalf. And all these examples have one thing in common: You usually don’t know where your money is being invested.
That’s not the case with copy trading. On eToro, every trader who can be copied has their public profile visible for all to see. Trader profiles on eToro contain an abundance of valuable information to help potential copiers make smart copy trading decisions, such as trading history, success/fail ratio, and gain and portfolio composition. Moreover, eToro gives each trader a unique Risk Score, which is a numeric value (ranging from 1 to 10) based on their trading habits and strategies. Therefore, traders can choose to copy traders who match their own willingness to take risks.
3. It helps you gain exposure
Even the most experienced traders can’t possibly master every market. Some specialize in certain geographical markets, such as the US or Europe, while others master certain asset classes, such as stocks, commodities or cryptocurrencies. Social trading introduces traders into markets they wouldn’t enter on their own.
For example, if someone wishes to allocate some of their funds to the Asian market, they could do so by copying a trader who specializes (and has shown success) in that market, rather than going into the complicated process of mastering a new market. Another example would be someone who is proficient at stock trading but would like to diversify and expand into other asset classes, in which case they could copy a crypto trader for instance.
4. It allows you to take a step back
Finally, it’s important to remember that social trading is not always about a lack of time or experience. Some traders are quite skilled and have the time to spare, but might want a break from actively managing their portfolios. After all, short-term trading styles, such as day trading, are quite demanding, requiring constant attention and are often stressful. If that’s the case, a trader could choose to copy others, and take a break from the fast-paced lifestyle while they trade for them.
Nowadays, we are so used to the internet being a social place, that we forget there was ever a time in which social networks didn’t exist. But social features are still somewhat of a novelty in finance, giving them the potential to advance the industry. Much like the Web 2.0 revolution changed the way people interact and communicate online, the social trading revolution is disrupting the world of traditional finance. It is safe to assume it will continue to evolve and offer online traders new ways to harness the power of the crowd to their benefit.
This content is for educational purposes only and is not investment advice. Past performance is not an indication of future results. Data taken on February 20th, 2018. Updated data can be found on the CopyFund’s page. CFD trading. Your capital is at risk.