Copy trading, otherwise known as social investing, is a way to (automatically) duplicate the behavior of others. Depending on the situation, this can be beneficial or lead to a herd mentality.
Copy trading, social investing and SRI/ESG clarified
First things first, the following words, although similar, mean very different things:
Copy trading is the ability to pick a specific person in a community who invests or trades, and mimic their exact behavior when instruments get bought or sold. Brokers such as Etoro offer this option, which you can read more about in the Etoro copy trading review.
Social investing is about being a part of a community where transparency is key to collectively investing in products over time.
Socially responsible investing (or ESG) is covered in a different article but comes down to prioritizing the current and future generations on this planet.
Why consider taking part in copy trading?
Copy trading can be a solid way of receiving a lot of information in a simple format. By knowing how many people buy a stock, for instance, you can decide to join the buying party or sell instead.
No one knows what the future will bring and deciding to follow a group or individual always comes with risk. Yet sometimes it is a more informed method to enter the market than jumping in and making mistakes along the way.
Examples of transparency involved
Choosing copy trading, or social investing for that matter, comes with certain benefit some people prioritize:
- Automatic buy/sell means you can be hands off
- You can pick someone you trust to follow your investing style
- Save time on market research
- Insights into how many people buy or sell an instrument
If this works, always, why don't more people do it? Well, because no one can predict or time the market consistently. And following even the best copy traders will not make you rich whilst sleeping.
There is still a risk you lose your money, just like if you make your own investment choices and similar to asset management.
So if you are considering this option, then make a clear investing plan with your motivations and timelines, before you decide on anything. Remember, this is not financial advice and no one is allowed to provide this to you without the proper license.