The advent of online trading platforms has long been characterised by bringing financial markets to the individual. Indeed, the raison d’être for online brokers is to cut out the middlemen of wealth managers, allowing anyone to access the world of stocks, indices, commodities, forex, and cryptocurrencies. The fintech revolution is so successful that we can now say that the typical stock trader is not someone in a sharp suit in a swanky office block but someone sitting on their phone or laptop in a bedroom, AKA a retail trader.
But the rise in retail trading does not mean that the individual is alone or without support – far from it. Two distinct phenomena have evolved to support individual traders, particularly those who do not have a traditional background in financial trading – copy trading and social trading. The concepts are often confused, but they are both useful options for budding traders. But which is best for you? And what are the key differences? Let’s dive in:
What is Copy Trading
As the name suggests, copy trading is an online broker service that allows traders to automatically mimic the trades of successful and established traders. Online brokers will offer several different types of copy trading products, such as ZuluTrade and AvaSocial. Each will have a different emphasis and be used by beginners or experts to copy the trades of other traders on the platform. You should also note that there are different types of copy trading, such as mirror trading, which mimics an investment style instead of trade-for-trade transactions.
What is Social Trading?
Social trading is the concept of trading as part of a community set up on social media. The idea is that the groups share trade ideas, often acting in unison to execute their trades. One of the most prominent examples would be the r/wallstreetbets Reddit group, which successfully took on behemoth Wall Street hedge funds in the now infamous GameStop trade. It perfectly demonstrates the power of collective social trading.
Pros of Copy Trading
The advantages of copy trading should be abundantly clear: Professionals use online brokers, and you can simply copy their trades automatically. What’s more, the data available on the platforms will allow you to judge the success of selected traders. It is completely passive, and you don’t really need to engage with the trade at all.
Cons of Copy Trading
There are two main disadvantages to copy trading. The first is that you are dependent on another individual for your trading success. Even the best traders make mistakes, so be aware that copy trading does not guarantee profit. Secondly, a small fee may be involved (depending on the trade and platform), and these can add up if you are making frequent trades.
Pros of Social Trading
Trading as part of a community helps with the swapping of ideas, strategies, and collective trading action. Indeed, you may be surprised by the wealth of information that can be found on platforms like Reddit, Twitter/X, and YouTube. The key element is that these communities are geared up to help retail traders, not professionals.
Cons of Social Trading
While you can find plenty of useful trade ideas on social media, it can sometimes be like looking for a needle in a haystack. Moreover, you should always question the goals of those leading the conversation. Many social media influencers have been engaged in pump-and-dump schemes, and they can also be paid to promote specific products, particularly cryptocurrencies. As such, you’ll need to be sceptical about what you see and, where possible, carry out your own research on any trade.
Conclusion: Useful Tools that Come with Caveats
Both copy trading and social trading are useful tools. While both are arguably better suited to beginners, the educational journey of experienced traders never really comes to an end, and you can always learn a lot from other traders. That said, there is no trading strategy that is 100% guaranteed to lead to a profit. In copy trading, you are putting your success in the hands of another, and experienced traders may take on more risk than you, as a retail trader, are comfortable with. As for social trading, it enters you into a world of shared ideas and goals, but you must always question the motives of those behind the groups.
