Nowadays everyone has the possibility to invest in the financial markets from everywhere in the world, just using a laptop or a smartphone. Before investing in stocks, bond, mutual funds or other financial products, it is important to study and increase the knowledge about financial markets, financial analysis, risk management etc., because investing and trading in the financial markets can be an extremely rewarding and profitable activity, but it does come with varying degrees of risk.
There is also another way to invest in the financial markets, which requires little or no knowledge. It is the social trading, which is a form of investing that allows investors to observe the trading behavior of their peers and expert traders and to follow their investment strategies using copy trading or mirror trading. Traders also, can interact and discuss trades and markets, pooling their knowledge and instincts for mutual benefit. That is how social trading comes in handy, carrying a load of benefits and risks with it, especially to traders who are yet not feeling ready or confident enough to operate their personal investments by themselves.
Benefits of social trading
Social trading has many benefits for the traders. Here are 6 of the most crucial benefits that might convince you into going for this trading mechanism.
- Accessibility and reliability of information. One of the main benefits of social trading is because this trading strategy contain immense quantities of useful and reliable information. Moreover, this information is highly valuable to traders, specifically those who are less experienced or don’t have the needed knowledge or confidence for solo trading operations.
- Becoming part of a community. It is definitely a huge plus in the world of trading to be part of the community of seasoned investors. Just like investors usually have a mentor that helps them, social trading can be observed as a social network where everyone can have support, not from a single but from many different non-proclaimed mentors.
- Reduced costs and risks of becoming a professional trader. Another one of the many benefits of social trading is to lower significantly the costs and the risks. By going for social trading, everyone can actually start trading with reduced costs and risks in oppose to the traditional way of individual investing even though you lack expertise.
- Diversified strategies. Traders can perform trading operations under own terms and with strategies that have already tested, but also, they can discuss their way towards observing the situation in the market from several angles that way presenting diversity in trading strategies.
- Collective knowledge in trading. Social trading provides to everyone independent (not always) opinions of other traders on the evolutions of the markets on which they want to trade. These useful first-hand insights are actually a product of collective knowledge of many individual traders and investors.
- Risk management. Another benefit is the improvement of the skills for managing the risk that always comes hand in hand with trading. By following up with diverse and various strategies as you are copying the traders from other investors, you will be able to learn which strategies work and which are not as effective.
Risks of social trading
Social trading has many risks for the traders. Here are 4 of the most crucial risk that everyone needs to know before going for this trading mechanism.
- Non independent opinions. The opinions are not always independent and this could be a big problem for less experienced traders, who can assume high risk by listening to the opinions of other traders.
- Unrealistic expectations. The big attraction of social trading for most people is the opportunity to make large gains with little investment. When people see these exceptional results, they set their expectations accordingly. However, many fail to realize that by magnifying their potential gains, they’re also magnifying their potential losses.
- No diversification. Most of the less experienced traders invest all their funds in just one trader or signal provide. Every network has a good choice of different traders available for you to follow and copy, so spreading your investment between a number of traders should reduce your overall risk.
- Risk management. Poor risk management can occur at a number of levels and pretty much always leads to large losses. If the trader doesn’t limit the maximum capital that could lose, the risk to lose all the many is very high, even the trader copies 5 other traders who are doing well.
Conclusions
Social trading has many benefits but also many risks for everyone who decide to invest in the financial markets by using the social trading platforms, especially for less experienced traders, who need to be very carefully when invest their money by copying the other traders or listening to the opinions of the others, because the risk to lose part or all their money is very high.