What is social trading/investing?
Social trading is a concept which involves traders copying the trades of another trader/investor who has demonstrably better experience than the former or have historically gained good returns by investing or trading in the markets. For example, Warren Buffet, Rakesh Jhunjhunwala etc have had their portfolios copied by many passive investors; even many day-traders provide their trading activities to the community interested in generating better returns.
Is this something new? Of course, it’s not – for decades people who have been participating/active in capital markets (equity, derivatives, and commodities etc) have invested/ traded in the markets based on tips provided by the influencers. However, this has been done informally and in an unorganized fashion. Many movies/web-series have also showcased how the public in India used to get tips near Bombay Stock Exchange.
Even today many investors/traders engage with communities on Telegram, WhatsApp, and other private channels. However, now these age-old models have now evolved to befit the modern times.
How are the new-age social trading applications different?
The new-age social trading platforms are empowering users to track, assess and validate the trading activity of the professional traders. The idea is to build out an organized engagement which can facilitate the investment community to bridge the gap between them and more experienced traders. They provide a way to communicate with professionals and study from them to improve investing/trading skills rather than observing an investor and simply copying their actions.
The social investing feature on the platforms work like a social media/network site (ex.; Twitter or an Instagram community). For example, if Dheeraj is a recognized trader and has his own chatroom, where his strategies are published, Sandeep and Manasa can enter the chatroom, follow Dheeraj, and execute the trades which are relevant to them.
What makes it interesting?
The penetration of investment products in India has been comparatively low compared to global averages of ~75% (investment in mutual funds is ₹ 37.8 lakh Cr., which is ~15% of the GDP, US at 130%, Malaysia at 57%). In addition to this new age broking platforms with huge discounts in broking have democratized access to the stock markets, and Indians’ participation in the stock markets is steadily rising, with the total number of demat accounts in India now close to 10 Cr. Gen Z, who have a better risk appetite to trade in the capital markets, want to invest in riskier assets and make higher returns than traditional investing like FDs (fixed deposits) and willing to seek access to better financial education, interact and share their learnings with community. Hence there is an opportunity growing in the space for the new-age companies to address and help new investors through providing education on financial products, engagement with knowledgeable investors, and exchange investment ideas, allowing them to eventually perform copy trades.
Today, approximately 5 billion individuals use social media, with 500 million new users joining in 2022. Every day, people spend more than 2 hours on social networking sites. We know that Twitter as a social media giant has created an enormous value to the community to keep in touch with the likes, connecting with likeminded people, and get the latest news updates. The possibilities of extending community model are so wide that we have the likes of Dream11 and Inshorts which are into fantasy sports and content respectively. The question is, going ahead can this kind of community model be replicated in investing/trading community as well?
What next
Globally, we have seen this model play out with eToro in Europe and Public.com in the US, both unicorns have introduced a social investing feature on top of brokerage services. In India, the concept of organized social investing is just evolving, with companies such as Trinkerr, 3dots, FliplitMoney, and Stockgro trying to build the systems in place for engaging with a larger community. With a huge headroom for growth – with in retail investor participation standing at 7.5% when compared with US which is at over 50%, the space is just at the cusp of understanding product market fit and customer behaviour.