Introduction
Social trading gives those with limited financial knowledge an insight into the stock exchange by allowing a real time analysis of individual trader performance. Seen as one of the most significant shifts in trading, social trading has the potential to open up opportunities for those interested in stock markets.
What is social trading?
“Blonde Trader closed a buy GPP/JPY position at 121.344. Profits: 35 pips”. Meet the very different world of social trading. Seen as one of the most far-reaching developments in investing, social trading is light years away from the days of stock tips whispered furtively between brokers and clients.
That’s because, when Blonde Trader closed her (or his) position on the British pound and Japanese yen in late October, anybody who wanted could see the strategy of this particular Forex investor. Indeed, if they liked Blonde Trader’s style, they could copy pretty much exactly what she does, share in her insights and generally go along for the ride.
The New York Stock Exchange this ain’t, or indeed any other stock exchange. Until the phenomenon of social trading first began to surface about four years ago, the investment process was conducted mostly behind closed doors and clients paid heavily for the privilege of having their finances managed by investment funds, hedge funds, guru traders and the like. Indeed they still do.
But now social trading is rapidly becoming a subversive influence that threatens this centuries-old model. Based on the web, it allows anybody with $2,000 or sometimes considerably less to see what star investors are doing and to piggy-back their trading. All they have to do is sign up and behave – that is, follow the rules.
The eToro OpenBook is a fairly typical example. It runs a live stream showing which traders are winning and which losing in real time, how often, even how much they’ve put up for the trade. The software won’t guarantee profitable investment of course, but it does open a door into some of the most successful retail investors in the world.
The name derives from the fact that social trading harnesses burgeoning social platforms such as Facebook,Twitter and LinkedIn. More recently, a number of specialist investment platforms have sprung up such as eToro, ZuluTrade, Zecco.com, Currensee, FXStat, IBFXConnect and Covestor – to spread user-generated knowledge for investment purposes.
It’s also referred to as social financial analysis. As one definition puts it: “Unencumbered access to information is held to be of premium importance in financial trading, and that makes the free exchange of information of interest to small scale as well as individual investors.”
Social trading could hardly be more democratic. “We want to give our users a better position to succeed by transforming the lonely art of investing into an exciting collaborative activity,” says eToro chief executive, Johnathan Assia.
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