What is Social Trading? — AAX Academy
Trading financial markets has become increasingly accessible to more people over the past decade. Whereas investing used to be reserved for the wealthy, anyone can now download a mobile brokerage app and start buying and selling securities at near-zero fees. This change is part of the ongoing shift towards digitalization, where information and services are brought online to reach more people at lower cost.
Over the last 20 years, even the way we interact with other people has changed. We now use digital platforms to keep contact with friends and family, meet new people with similar interests, share information, attend classrooms, or even work in distributed and decentralized teams.
Those same dynamics are now changing the way retail investors trade financial markets, with social trading becoming a notable force in the industry. The global headline grabbing Gamestop saga, the short squeeze a reddit trading forum inflicted upon Wall Street Big Money, is perhaps an extreme example but it certainly shows the combination of social media and trading is a powerful force that can influence financial markets.
Different forms of social trading
Social trading is not a singular trading method, instead it refers to a spectrum of trading methods that all vary in the degree to which active participation is required but all share a heavy social component.
Copy trading is arguably the most known form of social trading, popularized by retail brokerages like eToro, ZuluTrade, AvaTrade and many others. In copy trading, you choose to follow the exact same strategy of another trader’s portfolio. The size of each holding in absolute numbers is user specific, but the idea is that the allocation within the portfolio mimics that of the trader you are following. This form of social trading is especially popular with beginner traders who simply want to set and forget their investing strategy, relying on the knowledge of other traders instead of spending hours themselves researching the market and identifying trading opportunities.
On other end of the spectrum is a more community and dialogue-based approach towards investing. Digital communities form around specific markets or investing strategies, and every member of the community shares ideas about the opportunities at hand and how to capitalize on those opportunities. It is still up to each individual investor to make their own decisions and take positions according to their own risk appetite, financial means, and investment goals.
There are retail brokerage apps dedicated to this form of social trading such as Pocket Trader, as well as a vast range of informal forums and discussion boards such as the now infamous reddit form WallStreetBets.
The long evolution of social trading
While it may seem like the newest and hottest trend in investing, social trading is in fact nothing new.
Copy trading in its current form is somewhat of a novel form, but the community and dialogue-based form of social trading has been around for a long time. Your hairdresser talking up the hottest stock that week in the 80s and Yahoo chat rooms discussing the emerging tech market in the late 90s, all are part of the same trend. The biggest difference between then and now is scale.
Never before have so many people from all different backgrounds been able to access the same information and discuss ideas in a single place. As scale increases, so too does impact. The Gamestop short squeeze may be an extreme example, but we should expect retail trading communities to have more influence over financial market as more people tap into the same source and band together.
Crypto in a broad sense, but Bitcoin specifically, was practicably born with digital social trading dynamics. It wasn’t long after the creation of Bitcoin that forums and community threads emerged where people discussed and informed each other about the potential of crypto. For years, Crypto Twitter has been one of the largest digital communities dedicated to, perhaps even obsessed with, all things cryptocurrency. Long time BTC HODLers echo the same sentiments seen in the reddit forum pushing GME: Hold the line. To the moon. We’ll make it if we stay together.
As more people new to investing enter the world of trading through social trading, they will inevitably stumble upon the many digital communities that exist online dedicated to crypto. As one meme leads to another, we might just be at the cusp of a monumental shift in crypto as a wave of newly minted retail traders start to dabble in the crypto charts.
Originally published at https://academy.aaxpro.com on February 10, 2021.
