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Is social trading an appropriate investment platform?

Social Trading

The rise of social media has been difficult to ignore. The way in which we connect to people across the world – be they friends, colleagues or even celebrities – has moved onto influential online platforms and altered the way we work, rest and play.

But, what about financial trading? We probably all have an impression of what investing in the market looks like – clouded by the prism of Wolf of Wall Street-style fiction. Yet, the same sort of technology that gets us chatting about football results, Game of Thrones and Justin Bieber has been embraced by companies with an eye on the markets.

Millions of users have signed up for ‘social trading’ – but what is it, and is it an appropriate platform for you to consider?

Social trading explained

Social trading platforms bring together people with a desire to trade. They allow them to share wisdom and discuss trends and techniques. This is particularly attractive to younger and more inexperienced traders who would otherwise lack the confidence to invest without the ‘wisdom of the crowd’. These people are also digital natives and naturally turn to such technologies in other aspects of their lives.

Under the umbrella of social trading, you’ll see that the practices of ‘copy trading’ and ‘mirror trading’ are common. These are narrower forms of trading in which the user mimics the actions of others. Copy trading involves users deciding to copy every move made by an expert trader. It’s about choosing someone they trust – after discussions with other users on the platform – and pledging to put an amount of money into the exact same trading decisions as that person. That allows users to feel like they are acting with a level of expertise that they don’t possess. Mirror trading is the same process, albeit following an automated program instead of a person.

Anastasios Frangos of ZuluTrade explained: “Trading can be hard. But with social trading there’s no need to study the markets. It’s ideal for people who don’t know how to trade – they can simply copy more experienced traders.”

It’s worth noting, of course, that this means that an awful lot of people can suffer if one trader goes under. However, platforms do limit the amount of equity you can attach to the decisions of one person. So, by only having up to 20 per cent of your money copying one person, for example, you won’t have all of your eggs in one basket.

The pros and cons of social trading

It’s clear to see the attraction of this form of trading. With minimal effort and experience, people are able to tap into a wealth of investment knowledge and put their money into potentially lucrative trades. It’s easy to use, access and manage, removing barriers to more traditional forms of trading for people with no experience in the field.

But, before you begin, it is important to note that there are downsides.

We’ve already discussed how a lot rests on the success of the expert traders who are copied by others. There’s also a danger that people feel they don’t need to do their homework or put any time and effort into learning the vagaries of their market. Some also have unrealistic expectations. Simply copying an experienced trader won’t make you as rich as them overnight. It’s also worth noting that the ‘spread’ can be more expensive with social trading platforms than with other online trading operators too, so you should still weigh up all the different routes to entry for investments.

Still, provided you’re aware of the pitfalls and have patience, social trading can be an attractive way into investing your money – especially given that there is little or no joy to be had by squirreling money away in low performing savings accounts.

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