Social investing and various kinds of social investment communities are not entirely new things. Sharing insights and opinions on different investments, investment philosophies, investment strategies, and financial markets, in general, has been part of our lives for years. Investors, as well as any other kind of communities of interest, have been utilizing mailing lists, discussion forums, and online chats as long as they have been in existence. Even today, beginners and experienced investors rely on each other’s opinions and viewpoints when setting up their investment targets, strategies and picking up particular financial instruments when executing specific investment strategies. 1)“Social investing/trading” should not be confused with “socially responsible investing/investment” as they are very different things. In Finland and Sweden, for example, we have witnessed the emergence of very lively and dynamic financial blogosphere in relatively short timespan.
Numerous of books, articles, conferences, podcasts, blogs, and people offer diverse opinions on investing in general, and as various social networks and platforms distribute information at ever-increasing speed, there is no lack of news and new insights every single day. It seems that whether we are talking about particular stock, dividend strategy or how specific events affect the financial markets, there is already someone commenting on it and suggesting a particular course of action. Investors have a vast array of domestic and international news sources and social websites at their fingertips. Of course, this is not a very familiar world for most of us as most of the people are not actually very much interested in investing per se but instead, we are all want to be wealthy. Reading financial news is not particularly exciting.
Asking for help, sharing insights with others, finding out what others are doing and trying to learn from others are part of our daily lives. Some of us rely more strongly on the opinions and views of others, and even if we don’t, we might catch something out of someone else without even realizing it. Humans are social creatures, and we like to be heard and listened to. Sharing information with a group is not without dangers, and there are both personality traits and specific motivations affecting our information sharing habits. Whether we are buying new consumer electronics, trying to find out a great place to stay for our trip, starting a new hobby or just comparing different mortgages, there is always someone in our immediate or secondary circle of relationships we can turn to ask for some help, ideas and assistance.
It’s not so easy to find reliable advice and insight as far as our personal investments and savings are concerned, and in most cases, we probably don’t even have reliable cues on the reliability of the information and the trustworthiness of our friends when it comes to financial matters. On the other hand, investments and savings are not particularly exciting topics to discuss with your friends and colleagues. Sure, (active) mutual funds and direct stock investments tend to be one of the most popular forms of investing and saving money in many Nordic and European countries but are they that exciting that you would disuss about your investments with a stranger? 2)Finanssialan Keskusliitto (2011). “Kotitalouksien sijoitusrahastosäästäminen“; Finanssialan Keskusliitto (2015). “Sijoitusrahastotutkimus“.
One could assume that as people are investing and saving more and more money through different means at their disposal, and there is a growing tendency to discuss various topics related to investing and savings in the mainstream media and social media, people would be more open to discussing their money-related matters.
It seems that cultural issues considerably affect our tendency to discuss money, investing and saving, and according to a recent survey commissioned by S-Bank, it appears that at least Finns are not very keen to talk about their finances with others. Curiously, Finns, in general, are much more open to discuss their health, salary, and debts than personal finances with the people closest to them personally.
S-Bank’s survey summarizes the responses of over 1000 Finns, and it’s not very surprising that “money and in particular [people’s] own savings and investments are taboo for Finns.” In this case, some answers to open questions reveal a lot about Finnish attitudes and beliefs about finances:
“It’s never been a habit to discuss [finances] because it’s a private matter.” (Female, 78 yo)
“I don’t want to stir up the envy.” (Male, 47 yo)
“I don’t want to be [perceived as] ostentatious.” (Male, 51 yo)
“I am bad with money. A spender one could say. I would be ashemed if others would know.” (Male, 34 yo)
“Finances are somehow a taboo and a private thing.” (Woman, 31 yo.)
“It has probably always been a taboo and a private thing.” (Female, 31 yo)
“The Finnish way. My money [is] my [own] thing.” (Male, 44 yo) 3)Translated freely by TB.
So, if people are not willing to discuss their personal finances with others and seek advice freely from others, there is no easy way for people to be actually more open about money-related issues and learn from each other.
Social investing and social investment communities to the rescue
Social investing, or, as it’s more often called, social trading is not entirely new phenomenon as I explained at the beginning of this article. 4)Terms like “social trading,” “mirror trading,” and “copy trading” are often used interchangeably. In the context, this article terms like “social investing” and “social trading” are used to designate platforms that allow (retail) investors to join and participate in an investing-related social community, and possibly execute trades either directly through the platform or separate broker. Investors have had their own websites, mailing lists and various kinds of other community-based ways to acquire information and transmit knowledge to others. Social investing platforms, services dedicated as a whole for investors and traders, add new free or comparatively cheap layers to the whole experience of investing.
When discussed in contemporary context, social investing refers mainly a way of (retail) investors to access a web-based community to discuss investments and investing, execute trades, share information, learn more about a wide range of topics, and engage the community of like-minded individuals. So, basically, the more advanced social investment communities bring together the trading/execution capabilities of more traditional online brokers (this is done either through some sort of API integration or is provided by the online broker as it offers this per default or allows it’s clients to activate social investing/trading capabilities) with various engagement and communication features of the most well-known social media services. So, why have social investing and social platforms become so popular? Fundamentally, there are economical, functional and symbolic values at play here. In general, social investing platforms give users the opportunity to see and study the investment portfolios of others, and as they become members of different “subcultures” of the community, they can share their insights with others (either anonymously or with their own name). Commenting, liking, sharing, tagging, and so on, are essential elements in creating a real community of interest as these social functionalities allow investors to easily interact with each other. As it’s pointed out in Ombori’s old blog post on Shareville:
“Among Nordnet’s 420,000 Nordic customers there are a lot of really talented investors who are sharing information about their portfolios and trades through Shareville. That level of detailed data helps all our customers to become successful and avoid making irrational decisions. They can see what is really working for others and follow suit.”
Social investing platforms serve as a breeding ground for various communities of interest as web- and mobile-based platforms can be flexibly adapted to diverse needs and even used with “Mickey Mouse money” only. Gamification of investing, applying game-like elements and functionalities in the context of investing, is one of the areas where many social investing platforms have been very good at. These platforms generally provide various ways to ranks users and financial instruments based on their performance and activity (see Figure 1), and some more advanced platforms recognize individual and group contributions by issuing badges and other forms of visual (or monetary) recognition to incentivize the users to be engaged and active on the platform.
These features and functionalities, when put together, allow the platforms to become more personalized, accessible, accessible, smooth, and convenient even for less tech-savvy users. The way social investing platforms operate in general is very much linked with the quality and quality of the various communities inhabiting the platform, and therefore just aggregating opinions and data is not enough as platforms need to provide additional contextual and situational cues for the users to track their own and other users’ performance as time passes. It’s important for the whole community to contribute to various activities (although we know that not everyone will be as active as a contributor as everyone else; different ‘membership roles’ will evolve over time), and therefore, for example, carefully executed peer rankings can provide a powerful way to influence users’ behavior in the community.
Social investing is not just about tapping into the wisdom of the crowds as such, but it’s one of the most critical elements of the whole concept. The emergence of social investing and social investment communities is closely tied with the overall democratization and transparentization of investing and portfolio management in general. Social investing and social investing platforms are part of making investing more accessible to everyone as crowdfunding, robo-advisory index funds, ICOs and other things of that sort are globally widening the scope and reach of investing beyond its traditional boundaries. The rise of DIY investing and increased price-sensitivity has to be recognized, and it seems like more and more people are willing to learn more about how to manage their finances on their own without a financial advisor (or at least they are concerned how much monetary value can an investment firm, or a broker create in a transaction/execution-only business).
The whole idea of social investing is based on the premise, as the founder of Nordic social investing community Fabian Grapengiesser explains in this video (in Swedish), that not every person in the world is expert in investing money, and as most of us don’t have friends or acquaintances working in the financial services industry, there is no other reasonable way to have meaningful conversation on investing and savings other than asking help from traditional financial advisors. Sure, we can google some information what to do and where to put our money to earn a decent return, but most people just don’t know, and as we don’t know, we either do nothing, or we just follow our old habits and ask advice from our bank. Some of us rely on the Internet, and as we google, and google a bit more, we end up making random investments here and there. So, the problem isn’t that there is not enough information available, but it can be hard to start to get moving and to make the first investment, especially if you don’t know a lot about investing to begin with. Following peers, asking and giving help, and getting feedback is part of the value proposition of social investing and social investment platforms.
On the other hand, we continuously evaluate the information we acquire, and there is a huge difference how we perceive and interpret the quality, reliability, and relevance of information depending on who is saying it and what the person in question is actually up to. As Grapengiesser basically states, there are those people who are good at what they do, and this also applies to investing so why not tap into the minds of these people who actually seem to know what they are doing? So, the wisdom of the crowds – even that it’s just one part of the value proposition of social investing – is at the heart of social investing. What is even more critical, as platforms like Shareville and eToro show, is that people might be more persuaded by investors who walk the walk rather than talk the talk.
Instead of relying on a single source of information when it comes to investing, an investor can use the collective intelligence of various individuals with differing and often conflicting opinions. Of course, this can be a bit confusing for a beginner, but if the social investing platform is advanced enough, it should incorporate functionalities for different kinds of user personas so that a beginner can find out the basics quickly and more speculative investors can find out things that they are interested in. 5)This doesn’t mean that every single platform has to be the same or that it’s realistic to say that one platform can get every job done. So, with the help of social investing, it’s possible to potentially connect multiple investors, traders and speculators all over the globe/region/country with one platform, and with the help of various social functionalities ranging from liking and sharing posts to crowdsourced trade idea generation, it’s possible for the people to share their opinions and beliefs with others almost real-time and receive alerts when something unusual takes place. So, in addition to primary fundamental, technical and indicator analysis, investor engaged with various social investment communities and social platforms have at least some sort of social sentiment to complement and back up different investment decisions. Sure, not every social investment platform out there has social sentiment metrics, but there are also proxies for this, e.g., Shareville Relax.
The Business Model of Social Investing
There is no single business model in the world of social investing, but instead, we are witnessing various kinds of business models emerging in the social investing and social trading space. Although in the past the underlying business model of social investing and trading platforms has revolved mostly around copy trading (e.g., eToro, Ayondo, Darwinex and ZuluTrade) and/or mirror trading (e.g., Tradency’s Mirror Trader, Spotware’s cMirror, FXCM Mirror Trader), there are new kind of business models popping up. 6)There is a difference between copy trading and mirror trading. The upcoming MiFID II regulation will affect social investing platforms and social trading too. As explained in an article published at MyDigiTrade, income directly generated from spreads and/or trading volume, spread sharing between various service providers, and subscription-based fees can also be part of the potential revenue streams. 7)Saks-McLeod, A. (2016). “How far has social trading come?“. FinanceFeeds, 16.6.2016. Some services, most notably Shareville, relies on voluntary registration. Shareville is free-to-use for Nordnet’s clients, and therefore the business logic of these broker-/bank-owned platforms is somewhat different from many other social investing and trading platforms.
The transition from Mickey Mouse money to real money trades has been slightly slow as people are still reasonably conservative regarding their personal finances and investing. Of course, they are also quite concerned about their data privacy and security. At the same time, we have witnessed that social investing has also become a part of the core offering of some brokers and investment firms, and this has lowered the threshold to try out new social functionalities. For example, Shareville, launched in its modern form in 2014 by Nordnet, has gone from zero users to over 160,000 users in three years. A remarkable transition from privacy to semi-transparency, right? It’s important to remember that standalone social investing platforms face the similar problems as standalone robo-advisors, i.e., the lack of brand awareness and high customer acquisition costs. Online brokers and financial advisors have a competitive edge against independent/standalone social trading and investing platforms as they own their clients, and therefore they don’t need to figure out where to find users.
The idea of combining cutting-edge technology with the wisdom of the crowds is exemplified by social investing and investment platforms, and as (retail) investors have easy ways to access their peers, traditional wealth managers are forced to prop up their game. It’s true that there is a lot of room for social investing and social investing platforms to grow, and as we have seen in the case of Nordnet’s Shareville, even more, traditional online brokers and banks are interested in bringing in new kind of community aspects for their clients. Shareville was initially a more conventional social network for retail investors and savers, and as it focused mainly on stocks and other exchange-listed products, all Nordnet had to do was to integrate it with its existing brokerage and fund distribution service.
Multiple brokers all over the world have combined social investing and social communities as part of their service offering. There are numerous examples of this, such as Saxo Bank’s TradingFloor, TD Ameritrade’s myTrade, Charles Schwab’s Online Trading Community for active traders, TipRanks for E*Trade’s clients, and Scottrade’s clients can access to StockTwits through its trading platform. 8)E*Trade used to have they also had for some time more user-driven communities as well in the past.
Social investing and social investment networks are already here, and there are some benefits that social investors can draw from these social investment communities. Sure, social investing on its own doesn’t’ guarantee better returns and blindly imitating (or directly copying) others’ trading behavior has its own dangers. Personally, I expect social investing to become even more popular in the future but how social investing is integrated with the core financial product and service offering remains to be seen. It is important to remember that social investing is a spectrum of various functionalities and community elements than just a simple either/or decision. Engaging the social investment space also requires a lot of work, e.g. promotion and creating awareness.
The whole idea of social investing is still relatively new, and investors, brokers and social investing platforms sill have somewhat different views on the possibilities and challenges of social investing as such. Some of the leading incumbent financial services firms have already integrated at least some social functionalities to their platforms, but people still are a bit skeptical and wary of sharing their personal financial matters somewhat publicly. 9)Humans are selective communicators, i.e., we want to be perceived in positive terms amongst our peers, as Jaakko Virtanen demonstrated in his captivating Master’s thesis on Shareville. Therefore social elements and entire platforms should be built around the user needs, e.g., anonymity and privacy. We have witnessed the successful implementation of social investing, e.g., eToro as a standalone platform and Shareville as an integrated social investing platform, in various forms and sizes. In the future, it’s reasonable to assume that we will witness new varieties of more focused social investing solutions, e.g., Voleo’s investment clubs and meetinvest’s social/guru investing, and at the same time, the new regulation (e.g., MiFID II) will drive the existing social investing/trading platforms to rethink their revenue logic, trading strategies, and compliance requirements. More importantly, every investment firm has to pay more attention to their social media governance and management due to MiFID II.
Crowdsourcing, community-driven idea generation and other forms of online collaboration and interaction have profoundly changed our world and the way we build relationships and interact with each other. Now we are witnessing how this trend will affect the investing and saving space, and personally, I have found this to be very fascinating and exciting turn of events.
As a passive member of a couple of these social communities, most notably Shareville and eToro, I have seen it valuable to communicate with other enthusiastic investors. By engaging the community of amateurs and experts, I have been able to tap into fascinating new sources of knowledge and insight when investing and saving. I have been able to find exciting new companies, ask for opinions, find further readings and just surfing around these social communities. Social investing is a further extension of the core stock brokerage, portfolio management, and mutual fund business, and although critical thinking is required to sort out the best from the rest, I think that social investing is well worth considering carefully about and whether it would make sense to incorporate some social functionalities and elements as part of the existing or new service offering.
PS. Read Jaakko Virtanen‘s study if you are interested in understanding who gets copy-traded in Shareville. An excellent Finnish summary of this particular research is available in Nordnet Blog.
References [ + ]
|1.||↲||“Social investing/trading” should not be confused with “socially responsible investing/investment” as they are very different things.|
|2.||↲||Finanssialan Keskusliitto (2011). “Kotitalouksien sijoitusrahastosäästäminen“; Finanssialan Keskusliitto (2015). “Sijoitusrahastotutkimus“.|
|3.||↲||Translated freely by TB.|
|4.||↲||Terms like “social trading,” “mirror trading,” and “copy trading” are often used interchangeably. In the context, this article terms like “social investing” and “social trading” are used to designate platforms that allow (retail) investors to join and participate in an investing-related social community, and possibly execute trades either directly through the platform or separate broker.|
|5.||↲||This doesn’t mean that every single platform has to be the same or that it’s realistic to say that one platform can get every job done.|
|6.||↲||There is a difference between copy trading and mirror trading. The upcoming MiFID II regulation will affect social investing platforms and social trading too.|
|7.||↲||Saks-McLeod, A. (2016). “How far has social trading come?“. FinanceFeeds, 16.6.2016.|
|8.||↲||E*Trade used to have they also had for some time more user-driven communities as well in the past.|
|9.||↲||Humans are selective communicators, i.e., we want to be perceived in positive terms amongst our peers, as Jaakko Virtanen demonstrated in his captivating Master’s thesis on Shareville.|