Adam, 30, from the UK, has doubled his money this year – making him one of the most attractive investors for thousands of others who may choose to copy everything he does and make a profit for themselves. Can social trading even help balance out the inequalities in society?
Over the past two decades, inequality has increased sharply throughout the Western world, with the US, Sweden, and the UK at the top of the list for countries with the highest wealth inequality according to a recent report by Allianz, a financial services giant. The Gini coefficient, used to measure inequality, saw the United States at 80.56 and the United Kingdom number three at 75.72. The rich get richer, as the poor get poorer.
But, it’s not primarily wages that drive the gap further. The rich are investing their spare cash and, for the past 20 years, have earned big money on their capital.
Now, there is social trading. The question is: Can social trading be a form investment for the less wealthy – and perhaps help to even out the gaps?
The reason why the rich are so successful in their investments is because may of them have access to analysts and can familiarize themselves with related issues like currencies, commodities, and equities.
The new trend, social trading, uses real-time statistics to see how talented friends or other successful traders deal. You can then select whichever traders you’re most confident with and copy everything they do to share their successes without having to rely on your own expertise.
Social trading can open the door for many ordinary people who cannot afford the advice from expert analysts since connecting socially can provide free tips which are just as useful. Speaking of which, eToro, one of the largest social trading platforms, finds that 85% of those who copy successful traders are profitable, while only 55% of manual trades see a profit.
It’s actually quite simple. For example, let’s say you’re following Adam, 30, from the UK. He’s had a good year and could be the next rising star, after bringing in nearly 100% in returns this year. He’s also focused on learning new trading strategies and maintaining a safe level of trust for copiers. You decide to invest £500 and choose to copy him.
Now, when he invests you will in the same way, but with your £500. As Adam makes a profit, so will you. If he loses? Yes, unfortunately, you will too – which is why it all comes down to careful, clever copying.
How is social trading killing the banks?
So far, the banks aren’t completely worried, but it is clear that social trading is growing faster and faster. One of the leading sites, eToro, reported 1.5 million registered accounts worldwide in 2010. By the end of last year, that figure was over 3 million and growing.