Sat. Feb 29th, 2020

Comparison Of The Best Social Trading Providers 2017

9 min read

Forex trading is now more popular than trading stocks because of the faster price movements. However, many investors are reluctant to invest in this market due to a lack of experience. With social trading you can simply copy the trades of the most successful traders and invest your money without special knowledge.

In our test, eToro quickly turned out to be the best social trading platform. The reason for this was the very good combination of trading offer, bonus, demo account and beginner-friendly service.

Inform yourself now further about Social Trading or choose your platform directly from our Top 4!

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Selection of a provider

When choosing your platform for Social Trading, pay attention to the following points to find the best provider. The choice of the right platform determines the long-term success of Copy Trading.

Important criteria

Social trading is part of a development that now affects many areas of our lives and can be summarized under the keyword Web 2.0. For example, relationships between companies and customers are no longer conceived as one-dimensional from company to customer, but increasingly as an interactive exchange. This development can also be seen in the area of investment and financial consulting. While until about ten years ago it was a matter of course that questions about the right financial investment were primarily discussed with a client advisor from the bank, the possibilities offered by the Internet now provide potential investors with many other sources of information and, above all, exchange opportunities. The knowledge base available with few Klicks for the individual investors thereby clearly widened. As much as this wealth of information is to be welcomed, the challenge for the investor to filter out the appropriate strategy from this sea of information in terms of knowledge and possibilities is just as clear. This is exactly where the idea of social trading comes in. Instead of paid and from the respective institutions dependent advisors sets this principle in the ideal case above all on the intelligence of all investors.

An initial thought is thereby that all investors with their individual strategy can profit in principle potentially from each other. In principle two groups of investors meet. On the one side thereby the more experienced ones stand occasionally also professionally active investors, who are with their respective strategy on the search for trailers. While the first group is referred to as top traders or so-called signalers, the passive investors are followers. On the other hand, there are simple investors who are looking for suitable patterns and strategies to follow. Both sides find each other on platforms in the Internet. In addition to the function of bringing top traders and followers together, many social trading providers also see themselves as communication platforms. This means that investors can discuss among themselves or with top traders. In the meantime, a whole series of different providers with specific orientations have established themselves. We explain what is important when choosing the right provider and what else has to be considered with regard to social trading.

Background_Information – What is important with social trading?

Before, however, we will deal with specific facets of social trading, we will first explain the basic principles and mechanisms, which the investor should know in any case, if he wants to enter this segment.

The principle of social trading

In order to understand the principle of social trading, it helps to orientate oneself first to the approach of funds. In the end, a financial institution issues an investment portfolio in which investors can participate if it meets their expectations. Regular investment funds are actively managed, i.e. the fund manager(s) constantly restructures the composition of the values bundled in the fund according to their assessment of the market situation. For this active management, the fund administration charges a fee that is deducted from the actual performance of the fund. However, it is often the case that the performance of funds lags behind the market performance, i.e. the performance of individual indices. This gives rise to the justified question as to whether it makes sense to invest in an investment fund. A serious alternative to investing in a fund is social trading. Here, successful investors also become fund managers who other investors can use as orientation. And it is no longer just simple private investors who can be found as signal givers. Meanwhile, renowned business newspapers and experienced financial market experts also offer their own portfolios. In comparison with investment funds, this form of passive investment is much cheaper for followers, as there are fewer fees. However, this form is not free of charge. In addition to, albeit significantly lower fees, fees may also be charged for the performance achieved.

Social Tradings exist in different forms and facets

In order to participate in Social Trading, there are several ways for the simple investor to become a follower. This depends on the one hand on the provider but also on the personal preferences. In the simplest version, the follower merely tracks the information and activities of the signal provider(s) of his choice and follows them in his own portfolio. This strategy is the most non-binding and simplest, but also has its pitfalls. In particular, it is not always possible to choose the same stock denomination as the signal generator, since usually the identical budgets are not traded. In addition, there is inevitably a time delay so that small price differences between the buy signal and the reaction of the follower can ensure that the portfolios of the signal generator and the follower do not develop identically. Even though this simple form of imitating certain action patterns is considered the original form of social trading, today it hardly plays a role

On the other hand, so-called automatic trading, also known as mirror trading or copy trading, is much more widespread. Here the trading strategy of the followers is completely linked to the activities of the top trader. This can happen in different ways. Some providers, such as ZuluTrade or wikifolio, act in this context as pure platforms that bring the two groups of investors together, but do not offer portfolio management themselves. The follower must therefore have a separate custody account through which the transactions are executed. Via an agreement between the custodian bank, social trading platform and investor, a connection is then established between the signal provider and the custody account of the follower. The investor must worry thereby in the consequence in principle about nothing more. In addition, there are also a number of providers from the social trading sector who also offer their customers portfolio management, i.e. managing the money or financial products themselves. One of these offerers is about ayondo.

A step further offerers go like for instance wikifolio. In addition to the possibility to copy strategies automatically, wikifolio also issues certificates which reflect the portfolio of a top trader and also track his restructuring. The certificates are issued jointly with Bankhaus Lang und Schwarz and are therefore freely tradable on the stock exchange. The investor can exactly track the success of the investment strategy of the top trader on the basis of the price development of the respective certificate, as these are issued at an original issue price of 100 euros by default. In contrast to the classic copy trading variant, only the certificate is in the custody account and not the individual securities. This initially saves a lot of transaction fees. A disadvantage, however, is the so-called issuer risk, which is always borne by the current owner in the case of a bearer bond. In concrete terms, this means that the investor who has the certificate in his custody account is left empty-handed in the event of the issuer’s insolvency.

What else there is to be observed?

In principle, the same rules apply to social trading as to investment in general. On the one hand, this means that high chances are synonymous with high risk. This results in a number of special features with regard to social trading. In principle, the investor can initially assume that a risk-minimizing diversification is already invested in the respective strategies. Although this is true, there are massive differences between the individual top traders with regard to their risk appetite, which the investor should deal with as closely as possible. In addition to broadly and conservatively structured strategies, which are primarily geared towards sustainable and long-term performance, there are also a large number of top traders with highly speculative strategies. In addition to the stock, all other possible financial products can also be used. Individual social trading platforms have specialised in certain market segments. While wikifolio traditionally focuses on equities, funds and indices, ZuluTrade has concentrated on highly speculative forex trading. In addition to currency ratios, binary options are also traded. The provider ayondo in turn occupies the field of CFDs in social trading.

All in all, the entire investment spectrum is also possible in social trading. Those who enter social trading should therefore first become clear about their risk appetite and their preferred trading strategy in order to choose the right provider on this basis.

Why_does_the investor recognize effective and reputable social trading platforms

In principle, one can assume that the known platforms act seriously. At least no case of fraud or rip-off has become known in the area of social trading so far. However the risks for the investor lie on completely different level. Since most companies in the social trading segment see themselves more as platforms anyway and have nothing to do with the concrete administration of customers’ money, in most cases the responsibility for the deposits lies with the custodian bank anyway. The central competence of the social trading platforms, which is decisive for the investment, also lies in supporting the selection of the right top trader(s). Here, too, the providers pursue different philosophies. For example, wikifolio has endeavoured to provide an extremely balanced search function that enables customers to find the right top trader for them on the basis of a wide range of parameters. On the other hand speculatively aligned offerers set above all on the net yield obtained in a certain phase as substantial selection criterion and arouse thereby the appearance that also in the future such a net yield is to be expected. Experts, however, believe that such a conclusion is inadmissible when trading in speculative products. Quite a few experts also see this type of social trading as a form of gambling. Also with the height of the actual risk some platforms argue rather marginal and place above all the enormous profit chances into the foreground. However, investors should also know that providers in social trading are not subject to any control and are therefore largely free in their risk appetite. Even if the platforms have formulated regulations and use the community as a controlling body, one is never immune from unpleasant surprises.

The most important principle should therefore always be to deal with the respective risk and adjust the trading budget to it. As an exciting admixture, possible products are quite suitable. Whether investors should entrust however a majority of their money to a highly speculatively aligned Top Trader, is to be recommended also in view of a dream net yield reached in the past in no case.

For whom is social trading worthwhile

However, with all the risks involved in social trading, this form of trading should ultimately be seen as what it definitely is: a serious alternative to classic financial products such as funds or ETFs. Due to the lack of control and the increased complexity of this trading concept, however, it is particularly recommended for advanced traders who have already dealt with terms such as strategy and risk diversification in relation to their own financial investment. The basic prerequisite for successful trading is first and foremost that you understand the strategy of the top trader and select it accordingly.

Even if intensive exchange is not necessarily presupposed, this is certainly desired through the communicative aspect of social trading. In addition to the pure connection between top traders and followers, many platforms also provide communication opportunities in the form of forums and online chats. In these forums, the players can exchange information on questions relating to the financial market. However, in order to be able to have a say here and to draw appropriate conclusions for one’s own strategy, previous knowledge is required.

Fazit – Social Trading as a good alternative for advanced

Social Trading will establish itself as a fixed component within the financial investment or spread further. However, it is not suitable for the mass model as it is linked to certain prerequisites. This includes, in particular, a certain level of prior education on the part of the investor in order to be able to assess trading strategies beyond the mere number of returns. It is interesting above all for investors, who do not feel addressed by the conventional offers, which cannot raise however due to their life situation sufficient temporal resources for active trade around the clock. Here interesting and above all economical alternatives are offered by the possibility of following individual or also several Top Trader. However, the basic principles of the financial market cannot be undermined even with social trading.

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