While managed funds have seen a waning interest as more investors prefer mutual and index funds, there are still those out there who prefer to follow the guidance of others when it comes to picking which stocks to buy and sell.
This is evident by the rise of online and mobile platforms that allow users to follow and copy stock traders. This is part of the growing sector of financial technology, which is rapidly changing the traditional methods of banking, trading, investing and other activities.
Known generally as social trading platforms, websites and apps that allow users to copy stock traders are playing a larger role in the growing online trading sector. Online trading initially gained popularity because it allowed individuals easy access to the market, usually with minimal to no fees.
Now, most online platforms also offer copy trading, where users set portions of their portfolios to automatically copy the investment moves of others. Those traders who are copied are paid a commission from the platforms. The potential to earn commission payments encourages experienced investors and traders to sign up and gain a following of users who copy them.
The ability to easily copy stock traders automatically and in real time stems from the use of CFDs, or contracts for a difference, which are derivatives based on the movement of assets such as stocks, currencies and precious metals.
Because copy-trading platforms sell CFDs rather than assets themselves, accounts can often be open with as little as $50 and users can also engage in leveraging. These lower bars of entry help open up financial markets to the masses, and the ability to copy traders that are more experienced offers new investors some guidance.
The development of the fintech sector, including copy-trading platforms, is changing the way people invest and manage their money, making markets more accessible. This is having a spillover effect into the general financial sector, which now needs to adapt to consumers’ expectations for automated services, lower fees and other demands.
In fact, even traditional money management firms, under growing pressure to justify the fees they charge, are increasingly bringing big data and other forms of technology into their investment strategies, according to a recent report from Fitch Ratings. Those firms open to such changes in strategy will likely be the ones to succeed, the report said.