Facebook-style investing

Even the Germans are finding out that investing can be fun. Social network-driven trading websites – in which users can share and discuss trading strategies and follow a network’s leading investors – are growing in popularity in Germany.

Unlike with a traditional broker, social investment networks allow users to duplicate the trades made by the network's best-performing traders. The top traders of social investment networks attract thousands of followers, in a way similar to popular people on micro-blogging website Twitter.

The leading player in the market is eToro, an online Forex and commodities and investment network, which has more than 1.75 million registered members across the globe. Germany has become one of eToro's leading markets, along with France, the UK and the US. Other leading networks in the sector include Currensee, Collective2 (C2), Tradency, ZuluTrade and Zecco.

Chance to 'step into the light'

Yoni Assia, the chief executive officer and founder of eToro, told Deutsche Welle that the trading platform offers a chance for budding star traders to "step into the light."

"Traders who attract followers are getting a lot of feedback and appreciation about what they are doing," said Assia. "Being a retail trader is a lonely task and we find people welcome others commenting on their trades. Knowledge- and information-sharing are very powerful in trading,"

Traders who sign up with the eToro service can start with a practice ‘dummy' account in which users get to speculate with $10,000 (7,300 euros) of virtual money to learn how the platform works and practise trading.

When a user is confident enough to trade for real, the minimum deposit for a live account is $50. While a typical account holder has a balance of about $10,000, users can speculate millions on the platform.

Mirror trading

Currency markets are a popular investment play among investors in social networks. Each network has its own model. For example, Tradency offers "mirror trading," where the trade signal of an expert trader is copied, but investors are allowed to set levels of financial risk that may be higher or lower than those of the expert.

Jorgen Babczyk, branch manager of a food discounting store in Kaiserslautern in the state of Rhineland-Palatinate, has attracted followers on the eToro platform and he believes that social investment networks provide a better way for investors to obtain higher returns than traditional brokers.

"I looked at the past performance of some traders [on the eToro platform] and I discovered that they were not as successful before they started copying the performance of other traders," says Babczyk. "By copying others they have changed their trading styles and now make a profit."

'Think twice' before you buy

Babczyk says he takes his responsibility as a followed trader on eToro seriously, which makes him more careful about the way he invests. "I think twice about what I buy. I am being copied by many traders who trust me with their money and I want to help them make a profit."

Matthew Klein, chief executive officer at C2, says it is important that social investment networks promote responsible investing, otherwise the sector runs the risk of uninformed investors suffering big losses.

"It does concern me a little bit that people are opening Forex accounts at very high leverage [financial risk] without really understanding what that means," says Klein. "You can make money for a long time picking up pennies in front of a steamroller."

But Assia of eToro says the platform has robust measures in place to ensure inexperienced investors do not take inappropriate risks. "Responsible trading is about limiting your account from taking risks that are too big," he says. "We do not allow people to follow gurus with more than 20 percent of their account balance. This way, you can't lose all your money on one trader."

Rapid growth

Aite Group, a financial research and consultancy firm based in Boston, has published research that predicts exponential growth in the social investment network sector over the next five years, with the market growing in size from about 130,000 active investors at the moment to more than ten million investors.

Javier Paz, a senior research analyst at Aite Group, predicts the size of the social investing market could mushroom to "hundred of millions," with an investor base that is less educated than those who trade through traditional brokers.

Research by Aite Group also gives some credence to the claims made by social investment networks, which argue that investors can enjoy higher profits under the follow-a-trader model. Forex social investing firms are producing a level of investor profitability of at least 50 percent, compared to 30 percent among US traders using traditional brokers, Aite's research found.

But the nascent social investment market's growth could be curtailed by restrictions from financial regulators on how the networks operate. "Social networking is an extension of communication to the public. Regulators have recently created direction in regards to the interpretation of the existing rules," says Nicholas Britz, president of Zecco's Forex retail trading business.

Author: Joe Morgan
Editor: Ben Knight