How do social investment networks work and what are the alternatives?
The symbiosis of online trading and social networks provide the world with a tremendous advantage – social investment networks. They give retail traders easier and more simplified access to financial markets by pooling the wisdom of multiple traders.
What is social trading?
Social investment networks connect traders globally so that they share their ideas and knowledge with one another. Rather than relying on fundamentals or a broker’s advice, traders arrive at collective investment decisions based on the shared experience and then implement them in their portfolios.
The key plus of social investment networks is that they enable investors to automatically replicate the trades of other network members by linking to their trading accounts.
There are two ways social trading networks can be used:
For information sharing: in a Facebook-like form, such networks connect traders with one another. When you become someone’s follower, you can view, react to and comment on their trading performance, and gain trading ideas from experts.
For copying trades: new services offer more than just inspiration and information. Rather, they enable to connect your account with an account managed by an investment ‘guru’ and automatically copy each trade.
How to copy traders?
The process may differ from service to service, but it all usually starts with reviewing an investors rating. A copying trader browses the list of top investors to find the most successful or suitable one.
Once you find your top trade leader, you choose to follow him or her and set a particular amount of your account equity that will be dedicated to replicating.
After this, all the trades made by the selected professional will be automatically copied in your account. A copying trader can follow several ‘gurus’ simultaneously.
Copy trading vs. mirror trading
Copy and mirror trading are both examples of social trading in a sense that they involve interacting with other investors. However, there is a slight difference between the two trading types.
Mirror trading involves a large volume of trades. Thus, it is suitable for investors with large sums of funds, who are ready for significant fluctuations and activities on their accounts. This means you have to keep an eye on the account balance and make sure that everything goes right.
In contrast, copy trading is for small-scale traders who are unwilling to invest considerable sums of money. Whereas mirror trading is for more experienced traders, copy trading is for beginners who prefer to rely on other traders’ strategies instead of developing their own.
Copy trading vs. copycat investing
Although both trading systems mean that you invest your funds based on other traders’ investments, the essence of copy trading and copycat investing is different.
Copycat investing implies that a trader copies the investment activities of famous investors and successful money managers. A copycat trader may find inspiration in Warren Buffett’s investment ideas and build his or her portfolio based on Berkshire Hathaway’s investments.
Generally speaking, buy-and-hold investors like Buffett are favoured and followed by copycat investors. Another source of information is activist traders who share their investment ideas via their social networks profiles or blogs.
In copy trading, you join a social investment network to follow top members. You seek a suitable trader within the system, rather than outside, and can choose to follow his or her strategy.
Social trading has altered the way traders make investment decisions. Now, there are a lot of sources of inspiration, knowledge and information. Social investment networks, mirror and copycat investing are all ways to make your people-based portfolio.
However, relying on other people, even on knowledgeable ones, can be risky. That’s why you should aim to learn as much as you can before investing your money.