Sit back, relax and watch the money roll in from your portfolio — and all you need is a smartphone. This is the seductive promise behind a number of “social trading” websites and apps that allow users to mimic the investments of other traders. But are these digital innovators offering a road to easy riches or blithely encouraging innocents to play with their savings as though it was a game of Candy Crush?
Increasing numbers of advertisements for the apps, which offer the chance to trade in shares, options, commodities and currencies, are appearing on Facebook feeds. Many sites say you can make profits with no market knowledge; one advertisement features a user watching football in their socks while making money on an app.
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Critics suggest that they present huge risks for the uninformed and encourage users to forget the golden rule of investing: past performance is not indicative of future results. The “gurus” may have stellar results thanks to luck rather than skill, they say, and on some sites can skew their apparent success level by sitting on loss-making positions and leaving them open.
However, fans claim that the path from novice to experienced trader can be shortened by learning from top performers, and that the sites allow investors to bypass highly paid fund managers and their opaque fee structures.
The market leader is eToro, which says that it has more than four million active traders in 200 countries. An account can be opened for £30 and you can trade with real or virtual money, with a separate portfolio for each.
The website allows you to filter traders based on their performance and risk. It also has a news feed, where you can discuss markets and the people you are copying, post comments and click a “like” button on those made by others. It rewards “popular investors” for the number of copiers they accumulate, with incentives such as rebates on trading fees.
Yoni Assia, the chief executive of eToro, says the company always tries to communicate the risks and users have to understand that copying somebody else is “for better or worse”.
He says: “We have built-in safeguards and risk-management tools such as mandatory stops on any copy trades, which users can set at whatever level they like, and portfolio safeguards that ensure that eToro users are not overexposed to risk through a lack of diversification. Every trader on eToro can make an informed decision about what level of risk they want to be exposed to.”
According to Nicola Duke, a professional trader who works from home for a City hedge fund, the apps could be marginally better for newcomers than “pressing and guessing” on their own. “Far too many people get into trading and have no idea what they’re doing,” she says. “They lose a lot of money before they figure it out. It could be dangerous, though — it’s tempting to follow or copy somebody who looks like they have spectacular returns based on about two months of information, which is nothing like enough.”
Rival sites to eToro include Zulutrade, GetStocks, Signal Trader and Ayondo. Matt Davis, 36, from Croydon, Surrey, has been using Ayondo for two months. He joined after self-selecting trades on another website and losing £200 during the Chinese equity crisis. “I decided I might do better following an expert,” he says. “I put in £1,000 in August and I follow the leading trader, whose name is ‘Mr Dachs’.” So far Davis has made about £100, in part as a result of a decision to short Volkswagen during the emissions scandal. “It’s cool to follow what he’s doing and try to understand his trades,” Davis says.
“He’s returned more than 70 per cent since last year, with relatively low risk. I feel like it’s worth putting £1,000 in just to see what happens. This is my ‘play money’, but in addition to this more risky trading I have a self-invested personal pension. I do feel that the amount I pay on charges on those investments, coupled with the shortfall in my retirement savings, make a good basis for social trading. It does sound a bit too good to be true, but it’s enjoyable and feels safer than playing poker.”
The pace of change in the sector is fast, and another site, CoalFace, aims to use technology that can choose a trader for you. Declan McEvoy, the chief executive, says: “We feel that crunching and curating the data about the traders and then following them is a full-time job for experts. However, we agree with the principle of trying to democratise fund management. There is disatisfaction with both the levels of returns achieved and fees charged.”
Whether you choose your own trader to copy, or allow an algorithm to do it for you, Danny Cox, of the investment company Hargreaves Lansdown, urges caution. “It’s important for investors to understand their own appetite for risk. Most of the sites seem to be geared to short-term speculating, whereas investing, for most private investors, is all about the long term.”
Because these sites blur the lines between financial “advice” and “information”, the City watchdog has been taking a close interest, and this year the Financial Conduct Authority confirmed that sites that offer automatically executed trades will require authorisation under similar regulation as portfolio management services.
Andrew Wingfield, a partner at King & Wood Mallesons, a law firm, says: “Their business model throws up two key legal and regulatory issues. First, how they market themselves, and second, how they manage the risks associated with volatile markets. As ever in the fintech sector, domestic and global regulators are still catching up but will no doubt be reviewing these platforms as they grow in prominence.”