19 January 2023

What is Social Trading?

Education

Have you ever heard a friend or acquaintance boast to you how well (or not well) they are doing trading contracts for difference on stocks, shares or crypto currencies online and you always reply "ah, I don't know enough about the stock market to get involved”? You’re not alone. This problem gave rise to social trading, an innovative new approach to investing that leverages the power of social media with financial trading to connect novice traders with experienced investors.

 

This article will present the following:

 

·         Underlying Basic Idea behind social trading

·         Access points for beginners and experienced alike

·         Advantages for new and experienced traders

·         Community benefits social trading encourages

·         Functionality with regard to how it works in practice

 

Underlying Basic Idea behind social trading

 

The basic idea behind social trading is that it affords beginners the opportunity to gain insight into various investment strategies and knowledge by following the trading strategies of much more experienced investors. In return, the more advanced traders can earn a percentage fee for each profitable trade the beginners make, creating a mutually beneficial relationship. During the process beginners take insight or completely copy the trades of experienced investors varies, with those who engage in the later describing the practice as a ‘copy’ trading technique, rather than social trading.

 

Access points for beginners and professionals

 

Social trading platforms are typically web-based or accessed via mobile applications, providing traders with a wide spectrum of resources and tools that enables them to analyse professional users’ trading performance, identify opportunities, and generally assists them in making more informed investment decisions. Such platforms incentivise the sharing of investment ideas and strategies, in turn fostering an online community where traders can learn from each other, bounce ideas for future investment opportunities between themselves, and even collaborate with the aim of achieving better returns on their investments.

 

Advantages for new and experienced traders

 

As highlighted above, the key advantage of social trading methods for novice traders is that it allows them to access portfolio infographics of more advanced investors without having to spend years themselves learning and advancing their financial trading skillsets. This is particularly helpful if beginner traders engage in this activity alongside their main work or careers, with many not having the time or opportunity to gain extensive knowledge of the sector.

 

Additional attributes of social trading include:

 

·         Diversification: Traders can use these platforms to gain knowledge in market environments they have not used before. This affords them the opportunity to invest in other asset classes, diversifying their investment portfolio. For example, a commodities trader may use a social trading platform to familiarise themselves with foreign exchange markets. However, trades should venture too far from their comfort zones and always research in order to make informed investment decisions.

·         Evaluation techniques: Platforms such as these allow investors to analyse market data, performance statistics and news feed updates. However, while this data has traditionally centred on companies’ performance, now it also includes individual trader statistics. This can help users to make informed decisions on whether to copy the strategies of others, based on their individual market performance. Of course, however, prior returns are not an indicator of future performance and traders should always bear this in mind.

 

Therefore, by following the trades of experienced investors, novice traders in-turn learn how to identify potentially profitable opportunities and make more informed investment decisions. On the other side of this relationship, experienced traders use social trading to gain an additional source of income by allowing beginners to copy their trades, each time rewarding them with a fee for each profitable trade they make. 

 

Community benefits social trading encourages

 

Another benefit of this new investment pool is the community it creates. By connecting traders from all levels of experience, social trading facilitates in the sharing of knowledge and strategies and allow traders to collaborate on investment decisions. This may, potentially, lead to better returns. However, if the trade goes in the other direction, and no returns are seen, the community established by social trading can also provide emotional support to traders during volatile market conditions.

 

Functionality with regard to how it works in practice

 

Social trading typically consists of a platform where traders can share their strategies and trades, follow other traders and, if they choose, automatically copy the trades of more experienced investors. In practice, a  new trader will research and select a group of successful traders, who share similar risk to reward ratios, and copy their trades. Many platforms also include the ability to make status updates to followers and participate in chat rooms or forums.

 

What to look when choosing a social trading platform:

 

·         Execution speeds make all the difference to traders. The ability to buy / sell assets in milliseconds can make all the difference in a trader’s margins.

·         Low spreads play a fundamental role in CFD (Contract for Difference) trading, as it is the difference in the prices quoted for the purchase and sale of an underlying asset.

·         Popularity of platform is also a key factor when choosing which social trading provider to use. The competitiveness of these platforms rests not only on the above factors, but also on how many users they connect. The more popular a social platform is, the greater variety of different professional traders to copy is offered. As an abstract example, despite the wide range of functionality offered by LinkedIn, you wouldn’t make a profile if there were limited users and no one to connect with!

·         MetaTrader support, which is a familiar and popular trading Platform is also a highly sought requirement. While many social trading platforms may choose to adopt their own data visualisation software to clients, other traders may choose to open a social trading account with their existing brokerage firm as they are familiar with MetaTrader’s software experience.

 

Key Takeaways

 

Social trading is a new and innovative 21st century invention that combines the power of social media and financial traders. Through these platforms you learn and gain from each other’s trading activities. By connecting traders from all levels of experience in this unique and modern way, social trading platforms provide users access to a great wealth of data and information, allowing them to further learn from each other. Nonetheless, users should always do their own independent research before investing capital. Past performance of traders is not an indication of future performance.

 

Disclaimer: Any information presented is for general education and informational purposes hence, not intended to be and does not constitute investment or trading advice or recommendation. No opinion given in the material constitutes a recommendation by M4Markets that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

It does not take into account your personal circumstances or objectives. Any information relating to past performance of an investment does not necessarily guarantee future performance.

 

Trinota Markets (Global) Limited does not give warranty as to the accuracy and completeness of this information.

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