Are Social Traders Laggards? Research by Germany's BaFin Suggests So

<p>A knowledge
gap exists between investors who deploy social trading for their investments
and those that rely on more traditional methods, a recent study commissioned by
the German Federal Financial Supervisory Authority (BaFin) has found. The study
suggested that traditional investors outpace social traders in terms of
financial knowledge and literacy.</p><p>Traditional vs. Social Traders – Who Is Smarter?</p><p>According
to BaFin, <a href="https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2023/fa_bj_2308_Social_Trading.html?nn=7846988" target="_blank" rel="follow">the
study</a> is based on a survey of 1,037 investors who have put their money into investment funds, stocks, bonds and other securities in the past two
years. The survey was conducted in January by a market research institute.</p><p>In specific
details, the research found that German retail investors are not big on social
or copy trading. Only 16% of investors in the study said they have copied other
traders’ strategies to invest in risky financial products such as
digital assets and <a href="https://www.financemagnates.com/forex/education-centre/exploring-different-types-of-cfds-equities-commodities-forex-and-indices/" target="_blank" rel="follow">contracts
for difference (CFDs)</a>.</p><p>To measure
the level of financial intelligence, BaFin’s representatives asked the
respondents 12 questions. They found that traditional
investors answered an average of 7.8 questions correctly, compared to an average of 5.9 among investors who use social trading
platforms.</p><p>Furthermore,
the representatives found that while 64% of the respondents who shun social
trading were aware that buying bitcoin (BTC) differs from purchasing
traditional
currencies such as euro and dollar, less than half (46%) of social
trading users recognized this distinction. </p><p>Additionally,
while only 46% of
social trading participants understood that diversifying investments across
various assets reduces
risk, a greater majority (77%) of non-social trading respondents were aware of
this principle.</p><p>Who Is More
Likely to Embrace Risky Products?</p><p>Meanwhile,
BaFin’s study found that despite being less knowledgeable, German social
traders are more likely to invest in risky financial products such as
cryptocurrencies and leverage products such as CFDs
compared to traditional investors. Specifically, the research found that <a href="https://www.financemagnates.com/cryptocurrency/gen-z-dominates-crypto-copy-trading-space-85-make-profit/" target="_blank" rel="follow">60% of social traders
in the study</a> embraced
these kinds of products compared to only a fifth or 22% among conventional
investors. </p><p>Moreover, the
survey underscored a stronger penchant for copy trading among younger
participants compared to older ones. BaFin's data reveals that 30% of those
aged 18-39 engaged in social trading in the last two years. In comparison, less
than 20% of individuals aged 40-59 participated in the practice, and the rate plunged to a mere
4% for those aged 60 and up.</p><p>Social
trading as an investment concept <a href="https://www.financemagnates.com/forex/esma-eyes-copy-trading-stronger-investor-protection/" target="_blank" rel="follow">emerged over a decade
ago</a>. However,
while the practice quickly gained popularity among many retail traders, <a href="https://www.financemagnates.com/forex/technology/with-only-3-of-total-traded-volume-is-social-trading-dead/" target="_blank" rel="follow">Finance Magnates’ data</a> shows that the method has
failed to return significant volumes to brokerages. Nonetheless,
companies in <a href="https://www.financemagnates.com/forex/match-trader-technologies-teams-up-with-zulutrade-for-enhanced-social-trading/" target="_blank" rel="follow">the traditional</a> and <a href="https://www.financemagnates.com/cryptocurrency/bitmex-presents-guilds-a-new-idea-for-social-trading/" target="_blank" rel="follow">emergent digital assets
industry</a> continue
to invest in the practice.</p>

This article was written by Solomon Oladipupo at www.financemagnates.com.