Share trading question: Should I try social trading or copy trading?
Want to dip your toes into the world of share trading but don’t know where to begin?
You might have heard via word of mouth or even by way of social media that social trading or copy trading can be good places to start. It’s okay if you have no idea what either of these mean, learning the share trading lingo could be an entire course all on its own. For now though, we’ll stick with these two terms. Here are brief definitions of both:
Aptly named, social trading is a type of trading where an investor can take inspiration from other more experienced traders. eToro Market Analyst, Josh Gilbert says social trading involves the free sharing and using of information amongst a group of traders.
“Being able to discuss your investment strategies with other traders and understand the retail sentiment is a huge part of the social trading aspect, '' says Gilbert. He adds that on eToro, traders can decide to have a public or private profile.
While social trading is more about taking inspiration from top-performing traders, copy trading is when an investor literally copies the activity of another trader. Gilbert says the general idea of the ‘CopyTrader’ tool on eToro is fairly simple: “Choose the traders you want to copy, decide on the amount you wish to invest and copy everything they do automatically, in real time, with one click of a button.”
How can I manage any share trading risks?
There’s no two ways about it, share trading is a risky business. A newbie trader will have a lot to learn and there is always a certain level of uncertainty. That said, Gilbert says there are ways traders can reduce the risk.
For example, when using the ‘CopyTrader’ tool on eToro, Gilbert suggests checking out the risk score of the trader you are looking to emulate. “A risk score is a numeric value, ranging from 1-10, with 10 being high risk and 1 being extremely low risk,” he says.
Another tip Gilbert gives is to stay up-to-date with your traders. “They will frequently post on the news feed, so ensure you’re reading their posts and that your strategy still aligns with theirs as time goes by.” Gilbert says to become “the backup ‘fact checker’ for the trades you are following and start to build your knowledge by seeing if you agree.”
Handling risks on single-trades
Besides evaluating the risk of the trader you are either copying or taking inspiration from, ThinkMarkets gives some tips on managing risks for single trades. The ASIC-regulated share trading platform says traders should decide how much capital they are willing to risk.
ThinkMarkets says that if you can’t fathom losing that much money, then you shouldn’t do the trade. In other words, if you can’t afford to lose a certain amount of money, then it’s probably best not to risk it (even for a chocolate biscuit). The share trading website says generally traders are only willing to risk between 1-3% of their capital. This means that before you start trading, it is a good idea to work out what your cut-off point is.*
Gilbert from eToro describes this cut-off as your ‘stop loss order’. He says that if the value of your investment falls below a specific percent or amount, eToro will close the trades automatically, meaning that your investment has a safety blanket in place.
To summarise: Know what the risk of each individual trade is. How much do you stand to lose if the investment goes south? Secondly, have a cap in place already - know how much money you are comfortable with losing.
The benefits of copy trading and social trading
Gilbert says a benefit of copy trading specifically is time. “When investing, analysis and research can take time. Inexperienced traders can often miss opportunities by acting too slowly,” he notes.
Gilbert says copying other traders can give new investors exposure to more diversified portfolios built by traders with a wealth of knowledge.
“Copying another user can help build your knowledge of the financial markets, the social aspect can help you understand why they are making an investment, which can help investors for their future investment journeys,” he says.
In short, the benefit of this type of share trading is that you can glean all the information you want from investors who have been on the virtual share trading floor a lot longer than you. Although, in knowing that, you will also be responsible for managing your own risk and vetting potential investors to take inspiration from or copy.
Ready to take the plunge? Head to Mozo’s compare share trading accounts page to see what platforms are available in Australia.
*Read ThinkMarket’s full guide to risk management here.