Due to the speed of price movements, Forex trading offers opportunities for high profits. However, many investors are rather reluctant to invest due to their lack of experience. Social trading offers important support in this regard. Traders can copy investment recommendations from experienced traders and use them for their own strategy. Meanwhile, there are a number of social service providers where beginners can trade without special knowledge. 

Important facts about social trading :

  • Signal givers are called traders, signal takers are called followers. 
  • Signal takers can include several traders in their portfolio
  • The regulation and the implementation of the portal are of great importance.
  • The larger the number of leading traders, the better the social service provider. Etoro: 75% of private investors’ accounts lose money when trading CFDs with this provider.

What is behind the term “Social Trading”?

Social Trading 1
Source: Creative Common

Social trading is part of a development that also affects other aspects of everyday life. This can be summarized under the keyword Web 2.0. For example, the relationship between companies and customers is no longer conceived as a one-dimensional exchange, but as an interactive exchange. This development also increasingly extends to investment and financial advice.

Until a few years ago, it was taken for granted that investors would inform themselves about their investment through the advisor of their bank. Thanks to the Internet, investors now have many more options. The challenge is usually to filter the right investment strategy from the multitude of information available. This is where the idea of social trading comes in. Instead of paid advisers, it relies on the intelligence of all investors, find examples here .

The idea of social trading is that all investors can benefit from each other through their strategy. On the one hand, there are experienced traders who make their successful strategies available. On the other hand, there are potential investors who are always looking for the right strategy. Social Trading providers see themselves as a communication platform. In the meantime, a whole series of different providers, each with their own specific objective, have established themselves. We show what is important in choosing the right supplier and what needs to be taken into account in Social Trading.

The principle of social trade

In order to familiarise yourself with the principle of social commerce, it is useful to take a look at the procedure relating to funds. Here, financial institutions develop an investment portfolio in which investors can participate. Traditional investment funds are actively managed by a fund manager. This means that the fund is continuously restructured according to the current market situation. A fee is charged to the participating investor for this service. However, it is often the case that a fund’s performance falls short of that of an individual index.

Social trading represents a serious alternative to investment funds. Successful investors become fund managers that other traders can turn to. Signal givers are not just private investors. In the meantime, experienced financial experts and renowned business journals also provide their own portfolios. For the adept, this form of investment is significantly cheaper than funds. But without costs, social business does not work either.

Social Trading Strategy
Source:Shutterstock

Finding the right online trading provider

Investors have several options for becoming a follower. These always depend on the social service provider and personal preferences. In the simple variant, the tracker simply follows the information and activities of the selected signal provider. They can then be tracked in their own portfolio. Although this strategy is very simple and non-binding, it has its pitfalls. On the one hand, dealing with different budgets and on the other hand, there is a time lag. 

 Even small price differences then ensure that portfolios evolve differently. This variant was the original form of social trading but no longer plays a special role in practice. Automated trading, also known as mirror trading or copy trading, is now much more important. The commercial strategy of the follower is entirely linked to the activities of the signal generator. The procedure varies depending on the provider. Some providers, such as ZuluTrade, etoro or wikifolio, act in this context as pure platforms that bring the two groups of investors together. However, the offer does not include securities account management services. The follower must therefore open a separate securities account with a broker. A connection between the custodian bank and the platform is then used to establish contact between the signal giver and the follower’s securities account. In this way, the investor does not have to worry about anything else. There are also a number of portals that offer their members the management of their custody account and thus manage financial products themselves. One of these providers is Ayondo.

The social commerce provider goes further. Here, not only is it possible to copy strategies automatically but also certificates of the best traders are issued, which represent the portfolio. The certificates can be traded freely on the stock exchange. In contrast to classic copy trading, only the certificate is in the portfolio, but not the individual securities. This saves investors a lot of transaction costs. The disadvantage, however, is the so-called issuer risk, which is always borne by the owner of the bearer bonds. In the event of the issuer’s insolvency, the invested capital would be lost. Here is an example of a well known social trading services provider :

What else needs to be taken into consideration?

In principle, the same rules apply to corporate trading as to conventional investments. Opportunities for high returns are always associated with a higher risk. Investors can in principle assume that there is already a certain degree of diversification in the strategies of the best traders. With regard to the existing risk appetite, however, there are significant differences between the different signal generators.

Some strategies have a broad base and focus on sustainability. The emphasis is on maintaining long-term values. In addition, there are also a large number of leading traders who offer highly speculative strategies. In addition to equities, various leveraged products are also used.

Some platforms have specialised in certain financial products Etoro has a relatively classic presentation with shares, funds and indices. ZuluTrade, on the other hand, has specialized in risky Forex trading. In addition to currency pairs, binary options can also be traded here. The ayondo provider in turn occupies the CFD area in the field of social trading.

All in all, Social Trading offers a very wide range of investments. Investors should first think about the risk they want to take with their investment.

Finding the right social trading provider – Advice

How to recognize reputable platforms?

With well-known portals, one can basically assume that they work seriously and reliably. So far, there have been no negative experiences of fraud or scams in this area. In any case, responsibility for customer deposits generally lies with the custodian bank.

It is important that the platform helps the investor to find the best traders. Some providers focus mainly on the highest return when making their selection. Others strive to provide a balanced search function. Other criteria include the broadest possible selection of the best traders.

For whom is Social Trading useful?

However, due to the lack of control and the increased complexity of this trading concept, it is particularly recommended for advanced traders. Terms such as risk diversification and strategy should not be foreign words to the investor. Successful trading is only possible with Social Trading if the follower understands and can also understand the strategy of the signal giver.

A communicative exchange between the signal giver and the follower is not a prerequisite, but it makes sense. Many platforms are available for this purpose, such as online forums and chats.

Conclusion on Social Trading

Social commerce should soon establish itself as an integral part of the financial market. In any case, the investor must have a certain level of prior education. This is the only way to weigh opportunities and risks. It is particularly interesting for investors who do not feel concerned by conventional offers, but who cannot find enough time to actively trade around the clock due to their life situation. In this case, it is very useful to copy individual strategies.

Social Trading should only be seen as a support and not as a pure investment opportunity. Because there is also a risk.

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