Stock trading has never been more popular.
For completely unexpected reasons, the pandemic turbocharged stock markets.
Stuck at home, bored, and with extra cash, many people turned to slick trading apps to play the turbulent markets.
Over this time, stock markets, cryptocurrencies, and even commodities took off, giving amateur retail investors wild returns for their impulsive bets.
Social trading is perhaps one of the biggest beneficiaries of this boom.
Yet, despite being around for over a decade, not everyone knows what social trading is or how it works.
If that sounds like you, you’re in luck!
We’ve got everything you need to know about social trading in one damn short blog post.
What is social trading, and how does it work?
Social trading enables individual traders to follow and copy other traders’ strategies.
To do so, they use specialized platforms that are a hybrid between a brokerage and social media.
Traders interact with each other, posting their trades, strategies, gains, and losses.
Users can follow and rank people and strategies while also copying them.
Since the platform provides trading services, users can quickly copy each other and automate buying and selling everything from stocks, cryptocurrencies, and more.
Why do people use it
Trading and investing is complicated (at least if you want to do it properly).
For starters, you’ll need to know how to read financial statements and noisy charts (see below!).
Second, you’d also have to learn how to trade.
To master that part, you’ll need to understand buying and selling orders, account funding, and how spreads work.
(We can hear your headache starting).
Social trading provides a shortcut around these barriers.
Instead of worrying about the details, social traders simply copy their successful peers.
Then, with your trading account topped up, the platform does all of the work for you.
If that wasn’t enough, the community aspect of these platforms lets people share ideas and knowledge.
At abroaden, we’re huge fans of learning about finance and economics, so that last aspect is always welcome.
Sounds great, right?
As futuristic as social trading sounds, there are a few big risks anyone wanting to participate should know about.
For starters, investing and trading is f*#$ing complicated.
Generally, the ‘safest way to trade is to not do it in the first place (unless you know what you’re doing).
Instead, people who get rich from investing do what’s known as “passive” investing, periodically buying funds as they grow over the long run.
Social trading takes an “active” approach to invest.
Active investing means trying to time market moves to consistently beat the average return.
Based on years of data and study, financial advisers generally agree that doing so is practically impossible.
Even the most professional investors struggle to always outperform markets.
In fact, that’s more or less the raison d’etre for hedge funds, who also struggle, despite their flashy names and high fees.
Social trading enables amateur investors to copy other amateur investors trying to beat the markets.
If the pros can’t do it consistently, what makes a social platform an exception to the rule?
Traders can and do lose money if they make the wrong bet or don’t hedge themselves.
Furthermore, social trading platforms like to use leveraged products and margins to help traders amplify their gains.
“Leveraged products” is fancy banker-speak for “borrowed money.”
When you borrow money to increase your gains, you also worsen your losses.
If the trading strategy you’re following goes Titanic, your investments and money sink with it.
Suppose you’re using borrowed money on that strategy. In that case, it’s like you tied yourself to a giant rock shortly before the ship hits the iceberg.
In fact, people who invest in CFDs — one of the most popular leveraged products — lose money around 75% of the time.
Finally, some social trading platforms register in less-than-reputable jurisdictions.
What people living abroad should know about social trading
Living abroad is pretty awesome until you have to want to make investments.
Like everything else with our international lives, there are a few unique points you need to be aware of if you want to do social trading.
First, we can talk about taxes.
Depending on what you trade and the registered location of the social trading platform, you could be liable for extra taxes and reporting.
Generally, suppose a stock isn’t registered in the country you live in. In that case, you have to declare it as a “foreign asset” to your loving local tax authorities.
If you’re socially trading cryptocurrencies or CFDs, the tax rules get even more complex as countries are still figuring out how they work.
There’s a chance that if you move countries, you might not be able to access the social trading platform or your investments anymore.
Why? The rules for retail financial services, at least in most countries, are clear.
If a company doesn’t have a license or passport to operate in a specific jurisdiction, it can’t offer its services.
Right now, we’re seeing many firms scramble to get a license in the UK or EU in the aftermath of Brexit.
If you’re an expat, be sure to check each social trading platform’s registrations with the local market regulator before opening an account.
Is social trading for me?
Like every investment decision, social trading isn’t for everyone.
However, it doesn’t mean that it’s not right or wrong for you.
As a rule, each person has their risk tolerance.
When people stay within or at its limits, they can safely invest and trade while not losing sleep.
The trouble starts when you get outside of these bounds.
Don’t know how much risk you’re comfortable taking? You can now with our awesome tool!
More importantly, though, it’s always prudent to never invest more money than you’re comfortable losing, especially when you don’t understand the investment.
While abroaden doesn’t offer any social trading, we do help people living abroad find suitable investments and strategies based on their risk.
From there, we make investing in your future easy.
We take care of the heavy lifting, letting you safely grow your wealth without the stress, regardless of where you call home.
Social trading is helping financial services evolve faster than ever before.
Even if you don’t participate, these changes will benefit everyone, which is good for all.