Social Trading: A new way to invest


Have you ever wanted to get into trading but don’t know where to get started? Trading and investing in stocks, currencies, indices and commodities offer a high potential payoff, however can be hard to get in to. Often people don’t know how and where to get started, and end up making poor choices due to the steep learning curve. In the past, people have looked to their brokers or third parties for advice and guidance in trading, however with the rise of social and crowd platforms, a new style of trading has emerged.

What is Etoro and how does social trading work?

Etoro is a social trading platform where people can trade using ‘the wisdom of the crowds’ principle. The platform offers free trading advice, tutorials, a trading simulator, and an integrated social trading platform. On the social trading platform experienced investors can make market predictions, share information, and show their current and past trades through their public profile.  The aggregate of the current trade actions is made visible for each stock, currency pair, and commodity, so users know what the crowd is doing. Users can also select individual investors based on their past trading success, subscribe to their profile (via which they can receive advice or information), and even select to automatically copy their trades. This adds a new element to investing as users can track all trades made by their favorite investors, and automatically execute those exact same trades.

copy_trades_etoro

Investors can moreover benefit from being a ‘popular investor’, through which they can earn payments and other benefits relating to their popularity within the platform. Etoro charges users with a transaction fee for each trade as well as a general fee when withdrawing funds (relating to the size of the amount withdrawn).

Efficiency Criteria

In essence, the platform is split into two distinct sides that interact to create value together. Experienced investors join the platform with the intention of sharing their knowledge and trades in order to build up a reputation, and benefit from the rewards and payments that come with being a ‘popular’ investor. Meanwhile, new investors join the platform with the intention of benefiting from the crowd’s collective knowledge and copying experienced investors. Through this, new investors can start building a portfolio while learning from the advice and behaviors of experienced traders. As such, the value derived on both sides of the platform is maximized by the combined knowledge and interaction of the crowd.

Etoro itself also greatly benefits from this network effect. The more experienced traders join the platform, the more useful content will be available to new users, thereby making the platform more attractive to join. Additionally, the more trades are executed by users, the higher the profit generated by the company. Etoro further encourages sign ups using a referral program in which users can gain rewards for each new person that signs up through their referral link. This serves to further enhance the network effect by bringing more users to both sides of the platform.

The business model itself is not specifically adapted to the political, social or legal regulations of each individual country in which it operates, but rather is static across all regions. As such, a country’s legal environment poses the greatest threat to the survival of the company. Due to the strict regulations that come with operating in the financial sector, Etoro’s business model has not yet been approved in all countries. Currently, the USA, Iran and Cuba are among a few countries that have not yet allowed Etoro to operate under its current business model. This is understandable since social trading and the concept of copying trades can bring about many negative consequences. For example, a user could instantly lose all their equity by forgetting they are ‘copying’ an investor who might have executed a (failed) high-leverage trade.

References:
Etoro. (2017). Retrieved from https://www.etoro.com/

 

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