The Brave New World: Social Networking Meets Online Investing - dummies

The Brave New World: Social Networking Meets Online Investing

By Matt Krantz

General social networking tools have some applications for investors. But the technology of social networking continues to trickle into the investment world, and early signs seem promising. You find websites and services that apply social networking specifically to investors, social investing sites. Social investing sites answer some of the shortcomings of stock message boards and investment clubs.

Social investing sites as a higher form of stock message boards?

Social networking stands to be a major advance in how investors interface with each other. Unlike stock message boards, which cloak their users in anonymity, social networking is based on posting actual trades and often even investors’ real names. And unlike simulations, social investing sites are based on real trades with investors’ real money. The main advantages of this exciting new area of investing online are as follows:

  • Showing what’s possible in the real world.

  • Separating the good from the bad.

  • Allowing investors to profit from others’ expertise.

  • Providing some safeguards.

Plugging into social investing sites

Several popular social investing sites are in the following list, but they all, at their core, work roughly the same. Follow these six steps to get involved in social investing:

  1. Pick a site.

    Social investing sites are essentially gated communities of investors. You want to choose the site that fits you best and has a pool of investors you can identify with.

  2. Register.

    Most social investing sites require you to give more details about yourself than some stock message boards do. That might be a slight burden at first, but it’s also one of the ways these sites eliminate users who insist on being cloaked in privacy.

  3. Create a profile.

    Here you describe yourself, only giving details you’re comfortable sharing with the rest of the social investing site. Typically, you might say how long you’ve been investing, what kind of investor you are, and what types of stocks you prefer.

  4. Enter your transactions.

    The biggest thing that separates social investing sites from stock message boards is that other users can see your real trades if you give permission. That means you’ll need to import your trades or give the site permission to share them. Trades may be imported several ways, either manually by you or automatically when you enter an order to buy or sell shares with your online broker.

  5. Set your permissions.

    Permissions are rules that tell the social investing site how much personal information you’re comfortable with sharing. You can choose to use a fake name, or handle, or reveal your real name. You can decide whether you’ll let other users look at your trades or send messages to you. This is an important step. The more information you reveal about yourself, the more credibility you’ll have on the site with other users.

    Be careful about listening to stock tips and recommendations by social investing users who reveal very little personal information about themselves. These users might be cloaking themselves for the same reasons some investors are attracted to the anonymous world of stock message boards.

  6. Look around.

    After you’re set up with a profile, you can peruse the community to find people you might want to be “friends” with. These are investors you think are worthwhile listening to. You can also read other investors’ blogs (web logs), which are their personal narratives on how to invest.

Trying social investing sites

Two types of social investing sites exist: stand-alone sites and broker-operated sites. You need to decide which is better for you. The stand-alone sites might appeal to you if you want to

  • Keep your social investing and brokerage accounts apart from each other

  • Try out social investing with test trades before linking your real account

  • Maintain your online accounts with traditional or discount online brokerages that don’t offer social investing

  • Use multiple online brokerage accounts and be able to pull in all your holdings and trades to one social investing site

You might think about signing up with your online broker’s social investing service for the following reasons:

  • If you want to have your trades automatically shared with other users, after granting your permission

  • If you don’t want to bother getting another username and password and trying to remember them

  • If you feel that the other members of the brokerage firm have similar investing goals and styles as you do

Choosing a stand-alone social investing site

After you’ve chosen whether you want to join a stand-alone or broker-sponsored social investing site, it’s time to pick one. This is an emerging area, and new players will certainly be showing up, so be sure to search for new social investing sites that have started since this book was published.

Most online brokers don’t offer social investing capabilities, yet. If your broker hasn’t jumped on the social investing bandwagon yet, and you want to try it out, you might consider some of the dedicated social investing sites. These let you keep your existing brokerage account. Here are a couple to try:

  • Covestor: A stand-alone social investing site that lets regular online investors follow the trades of experts.

  • Collective2: This site is like most other social investing sites in that it tracks and shares real trades. You can use the site to find a “trade leader,” or one of tens of thousands of investment strategies.

Turning to your broker for social investing

Online brokerages are in a strong position to take social investing to the next level because they can show when users put their money where their wallets are. If a user talks up a stock, the brokerage can show whether the person owns the stock.

Two online brokerage firms, TradeKing and DittoTrade, have been the innovators in the area of social investing. Both offerings are very pioneering, and it will be interesting to see whether other online brokerages follow suit and add social networking to their sites, too.