What is the Best Social Trading Platform?

Social trading features are designed to help traders connect with one another, exchange ideas, and better understand trader sentiment and successful trading strategies. This can be done be through social messaging feeds, similar to those you’ll find on Facebook and X (formerly Twitter), which are integrated into the app itself, or community forums hosted by the provider, which usually sit on their own dedicated websites and are generally open to the public.

Some platforms, such as eToro, have gone a step further, offering ‘copy trading’ which allows traders to replicate the portfolios of some of the platform’s most successful traders.

Social trading has many benefits including:

• Making trading more accessible
• Demystifying the markets by allowing traders to gain from the knowledge, insights and experiences of others
• Enabling sharing of information on the positions and strategies of successful traders.

Copy-trading enables people to replicate the trades of other, usually more experienced and successful, traders in real time. The best outcome is that you find a trader with a proven track record, jump onto their strategy, and reap the same rewards they are gaining.

Why copy-trading is popular

Copy-trading is a quick way to start trading, and makes the markets accessible to those who have no prior experience or knowledge of how to research assets. Even more experienced traders may find there are benefits to copying the trades of other, more successful traders.

It’s not risk free

While this sounds like a win-win kind of situation, particularly if it’s free to do, it is not a guaranteed way to make money. There are some significant risks to copy-trading, which it’s important to be aware of before enthusiastically jumping onboard.

• Past performance is not an indicator of future performance: just because your copied trader has been successful in the past, does not mean they’re immune from experiencing future losses.
• The trader you decide to copy may be inexperienced and/or unqualified. They may have simply been lucky in the past!
• Your trader may suddenly decide to change their strategy to one that doesn’t suit your goals.
• Your attitude towards risk, and your financial tolerance to risk, may be very different from your copied traders’. That means, that while they may be able to comfortably handle certain losses, you may not.
• The copied trader have zero accountability and, unlike a professional financial adviser, no duty of care towards you either. There are no professional bodies policing the actions of copied traders.
• The information you’re relying on to weigh up the pros/cons of a trader, may be incomplete, inaccurate or unreliable.
• The trader you are copying may be making money from other sources, such as commission for being a copied account. This can cushion them from losses that could wipe you out.

If you are at all unsure on the suitability of a strategy to your personal circumstances and goals, consult a qualified financial adviser.

eToro’s CopyTrader™ system

eToro introduced CopyTrader™ in 2010 and was at the forefront of the introduction of this new social trading feature.

It works as follows:

• Find the investor you wish to copy through the ‘Copy Discover’ page where you can search for the kind of investor you’re looking for.
• Select an investor and press ‘COPY’.
• Choose how much you want to allocate
• You do not need to invest the same dollar amount as the investor you are copying
• Instead, you invest the same proportional amount to each position. For example, if the investor was to invest 5% of their capital in one asset, you’d invest 5% of your capital in the same asset.

Community pies

Trading 212’s Community Pies work slightly differently.

To add a pie to your portfolio, you simply tap on the ‘Copy Pie’ button when in the ‘Pies’ section of your app.

You’ll then go through the same steps as if you were creating a pie from scratch, except that T212 will pre-fill the slices for you, although you can add/remove/adjust them if you wish. You get to remain in control of your pie in this way throughout your time invested in it.

Even if you make amendments to your pie, however, it remains linked to the original pie. When the owner makes changes to their pie, you will receive a notification to let you know. It’s up to you, then, to preview the changes made by the owner, and decide if you want to apply these changes to your pie, along with any additional modifications you may desire. Alternatively, you can simply ignore the update if you it’s not something you want to follow.

This is different from eToro where your copy-trading portfolio will entirely follow in the footsteps of the copied trade and replicate their every move.

Mirror trading is similar to copy-trading but it has been around much longer and was traditionally offered by professional traders/investment managers within financial institutions. There are typically management fees and commissions to pay for this service.

Coat-tail investing is similar to copy-trading, as it centres around the idea of copying success by copying the investment decisions of successful investors. It is sometimes known as copycat investing.

It has never been easier for everyday investors to see what moves the world’s leading investors make. One example often used to illustrate coattail investing, is Warren Buffet and Berkshire Hathaway. The company’s investment returns have frequently beaten the S&P 500 index over more than two decades. Berkshire Hathaway is required, by regulatory bodies, to report some of its investment positions every three months. Coattail investors can create a strategy by looking at these reports and putting in place a similar strategy.

There are some potential risks to social trading, including:

• Advice being unsuitable for all traders. You must always consider whether the strategy or tip being touted is appropriate for your personal circumstances, goals, appetite for risk and your ability to absorb potential losses.
• Over-trading and misunderstanding the purpose and appropriateness of different strategies. If your goal is to build wealth over a long period of time to fund your retirement, for example, you do not want to find yourself caught up in strategies that see your funds moving around on the back of short-term market volatility.
• Traders dispensing advice on forums or social feeds do not have to face any regulatory body and are not accountable to anyone.
• Those giving advice may be inexperienced and/or unqualified to give investment/trading advice, and their advice could result in the value of your investments falling, or being lost altogether. There is no guarantee that the person you are listening to has done the appropriate amount of analysis.
• The risk of ‘pumping and dumping’, which is when traders deliberately promote the shares they hold by spreading misleading or exaggerated claims, to artificially inflate the share’s price. These traders will then sell their shares at high prices before the share price returns to levels more in tune with their intrinsic value.

Social trading was at the heart of the ‘meme stock’ phenomenon, where investors attempted to make quick profits by buying unloved shares, and then coordinating social media campaigns to drive up their prices. This retailer, GameStop, was famously targeted in this way in 2021, when users of the subreddit r/wallstreetbets, caused the GameStop stock price to rise by 10,000% over a nine-month period.

For this reason and others, you should not solely rely on the advice and information gained in social trading forums or feeds, but combine it with your own research.

Investors should always review the risk warnings displayed on each platform before engaging in social trading or copy-trading. If you are in any doubt as to the suitability of the advice you receive, or the strategy you are considering, please take professional financial advice.