What is social trading?

What is social trading?

Social trading is where investors can copy the trades generated by other experienced traders. It’s also known as “copy trading” or “crowd trading.” This form of finance capitalizes on two critical concepts: diversification and experience.

This innovative financial tool has been available to traders in Australia since July 2014, when economic forecaster IG Group Holdings plc provided it on its platform. The first day of social trading was chaotic due to the high demand for IG’s new product, but once things got started, investors loved it.

According to IG CEO Peter Hetherington, people had been asking for this sort of service for years because they were wary about risking their money online with an unproven trader—so being able to copy the trades of an experienced trader helps alleviate that fear.

IG has also seen significant growth in its social trading product, with more than 20% of all new IG customers signing up for this service.

Social trading is still relatively new to Australia but may grow in popularity as it gains traction abroad. It seems likely that other financial services providers will take advantage of this innovative concept to help distinguish themselves from their competition. Fintech companies like eToro ( eToro review ), which launched its platform in Australia earlier this year, may even be the first to bring these services to a global audience.

With social trading, investors have a dedicated community to build their financial brand and contribute positively to society as a whole. It is an exciting new development that could reshape how financial markets work as we advance. Have a look at the Saxo markets for an idea of how the markets develop over time.

How does social trading work?

Subscribe to a social trading platform

To subscribe to a social platform, you need to sign up and provide the necessary details. These details usually include a unique username, password, email address, country of residence and proof of ID or address. You must also provide your payment details to make trades on the platform.

Choose a trader to follow

Once you have an account set up, you can choose a trader from those displayed on the website or app. You can do this by browsing through their profiles online or using an interactive chart that shows how often they successfully made profitable trades in the past – much like a sports team’s league table. This way, you can see who has been most successful over time and select one that best suits your investment goals.

Make trades as instructed by your chosen trader

Using the platform’s trading interface, you place trades when your chosen trader tells you to. It keeps things simple and reduces the time needed to manage one’s investments.

Reap the benefits of social trading

The main benefit is that social trading enables investors to build a community around their portfolios and achieve further diversification through copy-trading rather than owning multiple accounts with different brokers. Investors can use it as a way to increase their assets under management (AUM) – especially if they have a small account and find it difficult and expensive to attract new business.

Risks of social trading

The trader may not be as experienced as they seem

This is a significant risk for those trading on social platforms because traders may not always understand managing risk and maintaining a balanced portfolio. Even if they do, there could be times when they lose money simply due to dumb luck.

Some requirements are needed before you start

It would be best also to have an active internet connection and computer or mobile device to make trades, which means you can’t trade from home during power outages caused by storms, hurricanes or other emergencies. It could lead investors to seek alternative ways of making money, such as selling their investments at a loss or withdrawing funds without consulting the trader first – both of which could lead to further losses.

Your private information may be more accessible

Information about your investments is shared with other community members in a social trading environment. If the platform doesn’t adequately protect this, it’s possible that third parties – such as hackers – could access this information and use it. You will be at risk of being targeted for scams or unsolicited emails offering useless products or services.

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