The invention of different technologies for offering solutions and making an impact in different sectors has caused quite a global transformation. However, among these technologies, social trading tops the list in the world of investing. Platforms for social trading are a game changer for investors, redefining how investors make decisions for their investment stakes and plans. These platforms are designed to create an open system in trading communities where users learn, observe, and even duplicate the strategies of experienced traders, promoting financial inclusion and sustainability. Financial inclusion is further buttressed in scenarios where professional investors join retail investors to share knowledge and trade uniformly without one party having access to high stakes, leaving the other at a disadvantage. Social trading is empowering and has built a thriving and enabling environment for more traders and investors, shaping investment decisions, risks, and the benefits involved. This article therefore explores how social trading has built an inclusive investor ecosystem, enhancing the impact and efficacy of the financial industry.
Here’s a quick picture: Imagine gaining access to watch the strategies of skilled investors unfold, from their plans to the risk involved and the opportunities that the plan presents. This technology allows users to discuss, learn, and even directly copy trades with just a click. Social trading is characterized by different features, including the ability for traders to replicate the trades of experienced investors. It also provides signals to traders, from the experienced to the non-experienced, looking for a successful trade. Social trading is also characterized by its interactive nature, where trades and the market performance open discussions for analysis and evaluation. This evaluation usually stems from the transparent show of traders’ performance in order for followers to make informed decisions on the trades to replicate.
Historically, social trading gained ground with forex brokerage due to the accessibility rate of the forex market. Long before the reign of social trading platforms, Forex already had technological features that stood them out among other financial markets; other features include its cost-effectiveness, requiring low capital to startup. The market is open round the clock for 24 hours non-stop, and it has a global reach. These features prompted social trading to commence its operations using Forex brokerages. It became the most suitable option for social trading to bloom. Social trading capitalized on providing tools and knowledge needed to simplify the trading process and create avenues for strategic collaboration, particularly for beginners.
It’s from this backdrop that Forex brokerage platforms like ZuluTrade and eToro evolved to design their platforms in a more inclusive dimension, such that it offers features like copy trading, enabling users to copy the trades of seasoned traders whose trades have been kept on track for transparency’s sake. Users on social trading have the leeway to monitor and examine the trading history of experts, taking into consideration their risk dimension, success rates, and the degree of followers following their trades. Social trading simplified the complexities with forex and stood as an intermediary between professional and beginner traders, building a thriving trading environment without fear or bias.
Through social trading, a community of traders was formed, where each user shared knowledge and interacted about strategies for potential successful trades. Interaction like this incorporates feedback that fuels growth and collaboration that eases risk involved in trading. This integration of social networking and trading not only enhanced user experiences but also established forex as the ideal launchpad for a concept that would later expand to other asset classes, such as stocks and cryptocurrencies.
A recent survey by the Financial Market Association (2023) holds that approximately 70% of retail investors feel more confident in their trades when they are copied from top-performing professionals on social trading platforms. This simply connotes that the knowledge sharing in social trading platforms empowers new retail investors to make accurate decisions, removing the fears of long technical trading knowledge. This is quite evident at eToro, where over 60% of its users, who are new traders, had their investment ventures driven by copy trading. (eToro Annual Report, 2023).
Through the social trading technology, there’s been an integration of many users, plunged into experiencing different levels of the financial market, which in turn expands the returns of the financial industry.
Social trading helps shape the strategies of investors basically because of knowledge-sharing. For new investors, trading sometimes becomes difficult, especially when their mentors are putting them on vague lessons and unsure portfolios, but with the help of social trading platforms, experienced investors explain trading in bits; hence, the platform turns into a masterclass for mastering the market and navigating both uncertainties and opportunities. This wholesome function offers beginners the opportunity to invest and immediately get returns because they either replicate someone else’s pattern or add creative dimensions to the trade lineup of others. This creative input is born from the display of the performance of traders and their trading histories, allowing new traders to make informed decisions.
A case study in this regard can be drawn from a Nigerian trader, Chidi, who used the Chaka social trading platform to track top-performing traders in U.S. stocks. After a year of steady utilization and learning, Chidi had his portfolio grow up to 15%, taking up trading insights from high-profile traders. This experience indicates that social trading platforms through knowledge-sharing help to increase user profit and also help to develop a nuanced understanding of the principles of investing.
With social trading, not only do users have access to mimic the trades of experts, but it also further exposes them to different trading assets, from stocks, forex, cryptocurrencies, and commodities to Nigerian equities. This wide range of assets has different investment patterns and values, and all can be accessed from the platforms. When users access strategies of experienced traders, they adopt these strategies and apply them to different trades across a range of assets, which improves their portfolios and performs as a form of risk management.
Bamboo, a popular social trading application in Nigeria, helps Nigerian traders reach a variety of U.S.-based stocks and ETFs, which allow for easy portfolio diversification. Investments would be spread across different assets in different markets to give investment balance, mitigate the volatility of currencies, and prevent the wastage of user’s investment capital; if one fails, another could reclaim the losses incurred.
While for eToro, the data check confirms that diversified portfolios were as a result of social trading, which has led to high returns of investment up to 15%; this, however, contrasts with portfolios that aren’t diversified, underscoring the importance of portfolio.
Social trading has fostered financial inclusion in numerous dimensions, one of which includes the drastic reduction of entry barriers usually faced by new retail investors. In Nigeria, this problem is prominent in financial markets, where many traditionally inclined investors who would attempt transitioning to digital financial markets find it difficult due to a lack of knowledge and the high amount of capital needed for investment. Social trading platforms like Trove have changed the narratives, where users can invest even if it’s as little as N1,000, allowing for more entry from a lot of people. This is in contrast to times prior to social trading platforms, where only the rich and wealthy were privileged enough to enter the stock market, but now, social trading has ceased the barrier, allowing anybody with the interest to invest to participate.
Prior to social trading, retail investors struggled with making decisions regarding their trades because of lack of experience. The aftermath of social trading platforms has enabled retail investors to read and understand financial data, leading to taking strong and informed decisions. Platforms for social trading expose users to trading histories of professionals, throwing insights into risk assessment considerations and metrics employed to determine investment success. This provides a strong base for new investors to come up with decisions for and by themselves. The International Journal of Financial Markets, in a study published in 2022, confirms that about 80% of social trading users have their strategies shaped in making better and more confident decisions, majorly because of trading cycles learnt from other traders (IJFM, 2022).
While social trading has its merits as stated above, it also comes with its challenges. Social trading poses risks that make trading difficult for traders who often end up being unsuccessful traders. Below is a list of explored risks that traders go through in the hands of social trading.
Deception: Blind Following of Unsuccessful Traders
Some social trading platforms operate on deception to manipulate their users to invest in portfolios that appear on the social trading website to look great but are actually underperforming in reality. The platforms manipulate by showcasing the trades of experts, whose trading history speaks volumes of success, but when users replicate the trades, it often results in a loss or doesn’t amount to the same share of success as the showcased trade. Social trading platforms bank on the herd mentality, where they project trades of high-profile traders based on short-term gains, which lures users to invest but turns out to be a thing of luck, as it works for some and declines for many.
Users follow social trading platforms blindly, all because of the drive to quickly make a profit, as they move recklessly to overlook due process of observation and critical analysis of trades. Most of the users go into the market thinking that they will get the same results when successful traders are keenly followed, forgetting that underlying factors such as oversimplified trading, individual risk tolerance, and deliberate deception are all in the picture to derail success. The marketing aim for social trading platforms is to beautify the success stories of experienced traders, downplaying the risks involved. A platform might showcase a 100% return from a trader just to attract users to copy trade without highlighting the difference of results when traded individually according to different stakes involved.
Social trading sometimes acts as an anchor for deception, deceiving many to invest in advertised glossy trades when in reality they produce different results for users; this is in consonance with the data from The Journal of Financial Integrity in 2023, where it was revealed that about 15% of social trading platform users are misled, emphasizing why social trading platforms should be properly vetted before engagement.
Undoubtedly, social trading is to copy the trades of others, but when there’s excessive reliance on the strategies of others for success, it hampers personal growth and the overall understanding of financial markets, which populates the trading industry with quacks rather than professionals.
Social trading has created a cycle where traders become too comfortable with the predictions of others without building independent knowledge in trading analysis and techniques. The repercussions of this stretch to hinder individual growth and, by extension, reduce the competence of the collective in the trading industry, where the majority of traders would be addressed as “quacks” because of their lack of substance in trading, leading to an increased rate of poor decision-making and a high rate of financial loss during market downtimes.
Buttressing on a broader impact of the financial landscape, overreliance of social trading users on the strategies of others reduces the professionalism and integrity of the industry. While it should be perceived as an evolving industry with a thriving environment necessitating growth and skills, it’s rather perceived as an industry populated with incompetent amateur traders whose skills aren’t farther than replicating trades.
In some social trading platforms, there are regulations guiding users’ functions, which in themselves form a risk for gullible users with little or no experience in trading. Social trading encourages the “quick profit” syndrome; hence it is rapidly utilized. This crowd has blurred the effect of some general trading regulations, where some brokers turn social trading platforms into a Ponzi scheme, further embezzling funds of users. This was the case with Mirror Trading International (MIT) in 2020. The South Africa-based social trading platform was exposed as a Ponzi scheme, defrauding over 260,000 investors and accumulating over $589 million. This quickly turned ugly because of loose regulatory systems guiding social trading platforms, with zero performance audits and inadequate entry laws.
Before replicating the trades of advertised experts on social trading platforms, users should analyze the traders’ long-term performance and weigh the risk involved when replicated with a different stake. Users should utilize profound metrics like drawdowns, win rates, and portfolio diversity for proper evaluation.
Social trading is great as it helps introduce novice traders into the trading world; however, it would be better complemented with self-development in the form of acquiring trading knowledge. Social trading users are encouraged to obtain educational tools to give their trading skills better grounds for development. Social trading platforms can counter overreliance on advertised trades by offering educational kits for users on their platforms, detailing the need for education, transparency, and accountability as important tools to being a successful trader.
Investors should carefully choose social trading platforms for their investments. They should look out for reputable financial authorities with a longstanding account of accountable service that complies with global regulated trading practice that results in operational efficiency.
Undoubtedly, social trading has transformed the financial world, particularly in investment and financial literacy. These interactive platforms have contributed to shaping strategies for investors and promoting financial inclusion. It has allowed for free entry into the financial markets, allowing new traders to move from small-scale investments to high-stakes of a diversified portfolio. Through simple and accessible platforms known for knowledge-sharing and community building, social trading has changed how people invest and are properly involved in financial folds. However, the challenges involved with the platforms are daunting and should be properly mitigated following the strategies aforementioned.
Financial markets are set on a pedestal for growth, and as it evolves, social trading platforms must also evolve by setting up quality systems to address the risks and challenges they’re faced with. It also has to stay ethically inclined in accordance with laid-down financial rules. Social trading is more than a financial tool; it’s a movement leaning towards ensuring that the future holds inclusivity and education for the financial world.
Temitope George Ijibadejo is an award-winning Forex fund manager with over 15 years of experience as a Forex fund manager, business developer consultant and trainer in Forex trading
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