Many of us look at the stock market with confusion. We don’t know what’s safe and what to buy – let alone start actively buying and selling stocks to make profits. Some basic research into trading shows us heaps of charts, variables, indicators and analysis to be done. It’s difficult to understand and we promptly drop the idea altogether.
At the same time, we’re attracted to the stories of people making quick and easy money just trading. One thought that must pass through most people’s mind is the dream of simply being able to copy all the trades made by the most successful traders.
A company called Ayondo has already begun to make this a reality. Ayondo is a platform that allows people to trade multiple assets classes such as equities, contract-for-differences (CFDs) and Foreign Exchange (Forex). However, what is most interesting about the company is that it also has a social trading platform that allows users to copy the trades made by others individuals on the platform.
What Is Social Trading?
Social trading is a technology developed by Ayondo that allows a user to simply copy the trades made by the “Top Traders” or traders a person wants to follow in the system.
This is a new and unique concept, particularly in Asia. Users can automate this process and have their own risk management settings in place. For example, they can (and should) have their own stop loss positions in place and choose to only follow the trades made by a “Top Trader” in certain markets (i.e. I only follow the actions of this trader when he is trading in the UK market).
A simple way to look at it would be how you follow your favourite food blogger on Instagram. You follow the person because you want to know where he or she is going for the best meals and what they are ordering. Essentially, you want to know the recommendations that the person is making, without having to do your own research.
The Risks And Concerns
The investing purist in us shudders to think that people would be making trades simply by following others. In fact, local regulations with regards to this form of trading are unclear. The founder of Ayondo, Mr Robert Lempka, agrees that the fragmented regulation of various countries does pose a problem for the Group.
Other concerns that we had included the liquidity of the products that trading platform offers. For instance, if a top trader executing a trade would means
1,000 more people following him in doing so, then the worry is that the act itself would move the market price. On that note, the company ensures that any products that are tradable on the social trading platform are highly liquid, such as index, Forex or large cap stocks like Google)
A Different Form Of Active Trading
From a personal finance perspective, what this platform offers is an alternative for people interested in active trading. Currently, people who want to beat market returns through active management of their portfolio would have to either a) do it themselves or b) engage a fund manager.
Both of these methods have their own limitations. When you do it yourselves, you not only need to be extremely knowledgeable, but you also need to have enough time and resources to be able to execute your strategy effectively.
When you engage a fund manager, you will have to deal with the management cost of the funds and also the transaction cost of buying or selling of units.
The interesting part about social trading is that you can actually “diversify” your portfolio of traders by following multiple top traders (up to 5). According to the company, the top 10 most popular top traders (based on the amount of followers they have) gave a return of 8.2% in 2014.
(Very) Different From Long Term Passive Investing
We think it is worth reminding readers that all types of active investing, be it doing the trading yourself, using a fund manager or via the social trading platform are fundamentally very different from long-term passive investing. If you don’t know the difference, we strongly suggest that you first understand both first before doing anything.
The Future Of Social Trading
There are very distinct advantages that social trading offers to its potential clients. The biggest of which is that it allows anyone in the world (you just need Internet connection) to be able to replicate the success (or failure) of top traders in the system.
Full transparency is also provided so that you can see every single trade a trader executes. There are no transaction costs or lock-in period if you would like withdraw your funds at any point in time for whatever reasons. Full control of your money remains in your hands at any given point in time.
In some ways, the platform offers users the advantage of replicating the actions of a good trader and his or her trades, yet at the same time, none of the disadvantages which are typically associated with a traditional fund manager.
Like with all types of investment instruments, we don’t believe this is a platform that is suitable for everyone. There is no escaping the fact that the users still assume all underlying risks involved, even though they did not make the trades. Success or failure relies heavily on the top traders in the systems. Any user who wants to put their money into such a system would need to do their own due diligence and risk management.
What are your thoughts on such a system? Would you put your money in such a system? Share with us your thoughts on our Facebook page.
DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which are relevant to the average Singaporean. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram @DNSsingapore to get your daily dose of finance knowledge through photos.
Bonds and Fixed Income