Social trading has seen significant growth in recent years. And thanks to it, it is possible to see where other users are trading, which can be used to monitor and imitate their strategies.

The two social trading strategies have become remarkably popular: coattail trading and copy trading. Both seem similar, but are they?

This article will help explain what coattail investing and copy trading is, the differences between the two, and which one would suit you better.

Copy Trading

Copy trading is a feature that allows you to instantly replicate other traders' trades in their portfolios.

The practice of mirror trading, which allows investors to replicate the actions of a professional investor, was a service traditionally offered by various financial institutions. However, this system was usually accompanied by commissions and management fees. In contrast, the social trading system does not involve the payment of commissions or such expenses and thus can be used without hidden charges by millions of people on different trading platforms.

Moreover, it is not necessary to invest the same amount as the investor you copy, as the trading tools allow you to choose the proportional amount you want from your capital. In other words, if the investor were to invest 10% of his or her capital, you would invest 10% of yours. Thus, you would follow the same strategy, even if you were to invest less money.

Coattail investing

Coattail investing consists of copying the investments of the most successful experts.

As an investor, you may have considerable knowledge about economics, and therefore keep up with the latest crypto exchange asset news and stock market movements. Still, there is always something new to be learned from the knowledge and experience of the world's best investors.

The internet has made it easier to both access information and share it, which has benefited multiple industries, including investing. It has never been easier for investors to know what the most successful investors are doing, whether buying or selling stocks and therefore it is now easier to copy them.

The world's largest investors are required to share some of their positions regularly. These reports are made publicly available so that investors are aware of what they are investing in. Therefore, it can be said that coattail investing is a strategy based on public data.

Being able to copy the investments of successful managers presents a great opportunity for the average investor. Through platforms that make it easy for retail investors to access the financial markets, it can be easy to invest on your own.

The difference between coattail investing and copy trading

While coattail investing and copy trading are somewhat similar and be excellent tools for investors to copy the ideas and knowledge of some of the world's most successful investors, there is one key difference that sets them apart.

Coattail investing is not an automated process, so it is up to the investor to what extent he or she will copy someone else's strategy. This means that if you carry out coattail investing you do not have to copy exactly all the moves of a particular investor, but you can pick and choose the ones that suit you best. Therefore, they will not always open or close positions at the same time.

In contrast, copy trading automates a part of the investment process. Once you have carefully analyzed the past performance of other investors, you will choose one or more that you wish to copy. After that, once you have set up your account to follow your chosen investors through the copy trading feature, every time they open or close positions, so will you.

Pros and cons of coattail investing and copy trading

Benefits of copy trading

Copy trading reduces the number of decisions you have to make. All you have to do is determine your parameters, link your investments to those you wish to copy, and wait for the results in real time. Until you change the parameters set in your account, those investments will happen automatically.

Disadvantages of copy trading

Even if your investments mimic those of an investor with years of experience, copy trading will not eliminate the risk involved in investing. There is a risk that new investors may simply copy others and therefore stop looking for investment information. This is not advisable, as this will not allow you to achieve excellence as an investor.

Benefits of coattail investing

While it is important to do your research before deciding on your investments, coattail investing can make it easier to discover stocks with positive past performance or growth opportunities. In this way, you will learn more about the history of the stocks or investors you are interested in, and thus have a better chance of getting your decisions right.

Cons of coattail investing

With coattail investing, you acquire information and decide how much of your own capital to invest based on that information. Throughout the process, you will have to make conscious decisions about how to find such data, whether to invest and how much to invest. Consequently, you will need to constantly monitor the actions of investors and the markets, something that can require considerable time.

Which strategy should you choose?

There is a pro and con to each. Do not just follow investors blindly. Just because billionaires run a public company and deal with billions of dollars,they are required to reveal their stock purchases. You could copy their investments. You can easily find the list and buy exactly what they do. Except you really would not be purchasing the same things as them. But you, the investor has to wait till after the fact, to find out that investors like Buffett purchased into that stock. He does not reveal it till after he has done it. And then when you do find out that they have purchased the stock, the price of that equity has changed. You could buy in at the new price, but you will not be buying in at the price that they have bought in at.

On the other hand, copy trading is a powerful tool that can help you get more from your investment. Social trading can be incredibly beneficial to bridge a knowledge or time gap, while still being active in the market. However, it lacks the knowledge of successful investors that are on the other side of the fence (coattail investing).

You must ask yourself, what is my goal? Do your research no matter which strategy you choose and then and then work backwards from that. You can download your app here.