What is social trading?
Social trading combines trading with social media to create an investment environment filled with collaboration and information. With access to unprecedented amounts of information never before seen in trading, investors are better equipped to make decisions by copying strategies from successful investors or simply acquiring more data before making judgments. This type of investing is primarily geared to the younger generation, who are just getting involved in the stock market. Many first-time investors, not knowing where or how to start, have the opportunity to look at strong portfolios and base their investment strategy upon them, avoiding common mistakes newer investors often make. Some social investment vehicles even let full-scale copying of portfolios, taking out the headache of coming up with a strategy for newer investors.
According to a survey from Charles Schwab, 15% of current U.S. stock market investors began investing in 2020.
Market participation in the pandemic is growing as people with more time at home, and savings from stimulus checks, look to cash in on wealth-creation opportunities. With crypto being a hot investment field in 2020 and 2021, many new investors need help to get started, and social trading provides this specialized assistance without the need to hire a financial advisor.
Through the power of online communities, it enables users to share information with community members about financial markets, allowing other users to observe and replicate trades made by the experts. This can even empower beginners to potentially earn the same kind of returns drawn by experienced traders. Arguably, this provides new investors with a safer way to obtain access to a multitude of financial markets and gain experience and understanding before heading out to invest on their own.
The risk of leaving the fate of your investments in the hands of someone else is prevalent. While it is likely that the copied trader will have a sufficiently impressive track record, past performance is no guarantee that similar success will be achievable going forward. The community environment and the opportunities to communicate with experts certainly negate that problem to some degree; however, the intention of initially copying other investment strategies would be to learn and gain a higher understanding of trading yourself to then formulate a personal investment strategy and not have to rely on the trades of others to succeed in the stock or crypto market.
When asked if she feels burdened by the responsibilities of traders coping her positions, Jordan Brookes Baker, one of the top investors eToro, stated, "I take it seriously, but I'm just doing what I would be doing for myself. That's the integrity that you hope for in a copy trader, right? You're copying what they're doing because what they're doing is in their best interest. I feel pretty confident in how I'm moving forward with my money in this arena. I'm grateful that others are confident in me too.”
Benefits to social trading
The investment community as a collective is able to become more innovative in their trades and even successfully beat big hedge funds. Earlier this year, the GameStop (GME) phenomenon highlighted what can happen when you combine social media and investments. Retail traders on Reddit's WallStreetBets spurred a massive short squeeze on shares of the heavily shorted video game retailer. A "working class vs. hedge funds" narrative ensued, with the “working class” ultimately winning the fight.
The popular zero-commission brokerage platform Robinhood (HOOD) was the central platform to be caught up in the sage; however, other social trading platforms saw this experience as a huge win as well.
"We want to democratize access to data. We want to democratize access to tools that hedge funds are using. We want to make sure that it's a level playing field," Guy Hirsch, U.S. managing director for eToro, told Yahoo Finance.
The transparency in social trading extends beyond just friends and influencers. "People are sharing their ideas, sharing their thoughts about what to buy, what to sell," he said. "You can actually see what they're trading. You can see their portfolio, you can see their track record, you can see if they actually went ahead and took action on the idea that they're posting," he added.
A popular example of such transparency can be seen with House Speaker Nancy Pelosi. Although Nancy Pelosi herself doesn't trade stocks, her husband does, and that's enough for some social traders, who see his trades as hers. A debated topic in investing has always been if politicians are able to obtain insider information to help them with their trades. If this is allegedly the case, why not join them?
"We've been tracking their performance, and every single stock she has bought in the last two years has gone up significantly," Christopher Josephs, cofounder of Iris. Iris is a social investing app allowing users to see the same stocks friends, influencers, and professionals are buying.
Popular social trading platforms, eToro vs. Public
Currently, the top two social trading platforms are Public and eToro.
Public was founded in 2019 after a rebrand from the former title Matador. The app-based investment platform offers investors a commission-free experience, offering fractional share investment opportunities and automatic reinvestment options. Public provides a vast community of stock traders who are always willing to help beginners get started.
The more popular of the two, eToro, was founded in 2007 as an international trading platform. However, it was not introduced into the U.S. market until 2018 as a cryptocurrency-only trading platform. Although additional assets are likely to be added in the future, for now, U.S. investors can only use eToro to trade digital currencies. With eToro, you can start trading cryptocurrencies with as little as $50. The platform's social features will allow you to mirror the actions of successful traders with a minimum of $200. With over 15 different cryptocurrencies available, eToro is a viable option for new crypto investors to learn and get ahead of their counterparts.