Buying the same hat or going on holiday to the same place as your favourite influencer will soon be a thing of the past. Now there’s also social trading. We explain what exactly this type of securities trading is, how it works and what the advantages and disadvantages are.
Social trading – become a broker using social media
Observing the investment strategies of other users, commenting on or even emulating them – social trading platforms, such as wikifolio, make all this possible. Apply the functions of social media to the world of finance, and you could become a broker.
What is social trading?
Social trading is a form of stock market trading based on social media that combines stock market trading with the operating principles of social networks. As on all social media, social trading networks are all about the people on the platform – the community. Unlike platforms like Instagram, however, the focus of social trading platforms is not on lifestyle matters, but on the developments on the financial markets and how traders deal with them. There are signal providers, who are the social traders, and their followers, known as signal followers.
These networks function in a very straightforward way: asset managers and ambitious private securities traders publish their views regarding securities or even their entire portfolio on a website and act as experienced traders. In turn, investors can view this information, comment on or even emulate the approach. Investors do this via copy trading, where they decide on the amount of money they wish to use to follow a particular trader. Once they have decided, the trader’s purchase and sale transactions are automatically replicated. In contrast to traditional trading, there is complete transparency. Investment decisions are immediately published, and there is the opportunity to openly discuss them.
Wikifolio: a platform where you get involved
Wikifolio is one of the social trading providers where private traders, asset managers and financial media can create model portfolios that typify various trading approaches. If these certificates obtain a sufficient number of followers, they are issued in conjunction with the financial services provider Lang & Schwarz. A virtual wikifolio therefore becomes a certificate which can actually be invested in on the stock exchange. If the certificate turns out to be successful and performs well, all three parties benefit: firstly, the trader, who receives a percentage, secondly, the investor who gains from the increase in the value of the capital deployed and, thirdly, wikifolio, which levies fees. In this model too the benefits lie in the transparency: all transactions and charges are public from the outset and performance is completely traceable. The price trend provides an indication of the effective success of the trader’s investment strategy.
You can read how to create a wikifolio certificate in our article “Social trading: how to invest in wikifolio certificates”.
What advantages do social traders enjoy?
Probably the biggest advantages of such networks are the low fees and the opportunity to create your own portfolio with little money. Instead of paying a fund manager, you can follow top traders and learn from them. On top of that, the trading is transparent.
What are the disadvantages of social trading for users?
However user-friendly these social trading networks may seem, they can be recommended to financial market novices only to a certain degree. To understand the strategies and risks in the first place, a basic knowledge and a certain level of experience in trading financial products is required. That said, social trading still opens up exciting new opportunities for both interested private investors and asset managers.