At first glance coattail and copy trading look very similar, right? Well maybe not. This guide will help you understand what coattail investing and copy trading are, the differences between them and why copy trading may be a better alternative to coattail investing.
Oscar Wilde once wrote that: ‘Imitation is the sincerest form of flattery…’ which might just be true when it comes to investing. There has been a significant rise in social trading in recent years, with platforms offering features such as eToro’s CopyTrader™, giving you the power to see where investors are choosing to invest their money.
This insight into the actions of other investors allows you to monitor and replicate their strategies. In particular, two key strategies within social trading have become increasingly popular — coattail investing and copy trading.
What is copy trading?
Copy trading is a function that enables you to allocate some of your funds to duplicate the actions of another investor on eToro. Invented in 2010, CopyTrader was the culmination of the social trading revolution led by eToro.
The practice of mirror trading, which enabled investors to replicate the actions of a professional investor, was a service traditionally offered by financial institutions. It was, however, typically accompanied by management fees and commissions.
Tip: Using CopyTrader incurs no management fees or hidden costs and can be used by millions of people on the eToro platform.
You do not need to invest the same dollar amount as the investor you are copying, you can take the same proportional positions. By assigning a portion of your capital to be invested in line with the strategy of the investor you are mimicking.
If the investor was to invest 15% of their capital, 15% of the capital you have allocated will be used to make the same investment. As a hypothetical example, say you start using our CopyTrader service which links your account to replicate the investments of a Popular Investor or another investor who interests you.
Whenever this investor buys or sells a stock, the proportion of capital you assigned to copy the investor, will make the same investment in accordance with the system you have created.
Invented in 2010, CopyTrader was the culmination of the social trading revolution led by eToro
What is coattail investing?
Coattail investing is when you copy the investment decisions of successful investors. It is also sometimes known as copycat investing.
As an investor, you might have a great depth of knowledge and be committed to undertaking careful research surrounding the latest cryptoasset news and stock movements. Regardless, there is always something to be learned from the knowledge and experience of some of the best investors in the world.
The internet has facilitated greater access to and sharing of information on many topics, including investing. It has never been easier for everyday investors to see what the world’s leading investors are doing in terms of buying, selling and holding, and then copy their investments.
One great example often used when discussing coattail investing is replicating the investments of Warren Buffet, perhaps one of the most famous investors of all time, and Berkshire Hathaway. The company’s investment returns have routinely beaten the S&P 500 index for more than two decades.
The biggest investors in the world must share some of their positions with regulatory commissions every three months. These reports are made available to the public so investors are aware of what they are investing in. In its most basic form, coattail investing is a strategy performed manually from publicly available data.
If there is a mutual fund that performs well consistently, and you know that the fund manager has been increasing a position in a solar panel production company or sustainable energy overall, you could tailor your investments to follow the decisions that they make.
The opportunity to replicate the investments of billionaires such as Buffet and successful mutual fund managers is an enticing prospect for the average investor. With platforms such as eToro increasing access to financial markets for many retail investors, coattail investing can be easy to do yourself.
Tip: Through eToro, you can learn more about the strategies other investors are using by engaging directly with them and asking questions via the feed.
So, what is the difference?
Coattail investing and copy trading are certainly similar. Both can be great tools for investors, as they provide access to the ideas and knowledge of some of the most successful investors in the world, but there is one key difference that sets them apart.
With coattail investing, you are taking knowledge of another individual’s investments and using that information to inform your own manual investment decisions
If, for example, you were to see that an investor was to open or close a position, you may or may not choose to do the same. Coattail investing is not an automated process and relies on your own research and investment decisions.
However, with copy trading, a portion of the process is automated. Once you’ve carefully analysed the past performance of other investors, you may choose an investor, or a selection of investors, that you trust and wish to copy. This will follow the trader no matter what time of day or night.
Tip: After setting up your account to follow your chosen investors using CopyTrader™, when they open or close a position, so do you.
What are the pros and cons of coattail investing and copy trading?
Want to work out if coattail investing or copy trading is right for you? Here are some of the potential benefits and drawbacks of each.
Pros of copy trading | Cons of copy trading |
|---|---|
| Copy trading reduces the number of manual decisions that need to be made. | Think long-term, understand what you are investing in, and don’t invest more than you can afford to lose |
| You set your parameters, link your account’s investment actions to those of another investor and copy their investments in real-time. | Although your investments may be copying those of an investor with years of experience, copy trading will not eliminate the risk that comes with investing |
| Until you change your account settings, these investments will happen automatically. | Keep track of your investments and how they are performing to ensure you make the best decisions for your circumstances |
| Copy trading can benefit those who find themselves struggling with emotional decisions, chasing losses and acting outside their strategy. | Knowing how to research companies and investments is a good skill to have to become a well-rounded investor. |
| If you are new to investing or are looking to try out strategies that have worked for others, copy trading can be an option that allows you to see how others are investing their money and the strategies that they use. | There is a risk that new investors may become complacent copying the investment choices of those they follow and not seek out useful information for themselves. |
Tip: If you are new to investing you can also try using a virtual account with eToro to test your investment strategies
Pros of coattail investing
While it is always important to do your own research before deciding to invest, coattail investing may make it easier to find stocks with positive past performance or growth opportunities. You can also study the strategies of these top traders; learning which trends they follow.
Cons of coattail investing
Just because a stock has done well in the past doesn’t mean it will do so in the future, so it’s important to research an asset before investing in it. If you are following a well-known fund or investor, they may have already published some of their research.
With coattail investing, you take information (most often from the investments of successful investors or managers) and decide how much of your own capital to invest according to that information.
Throughout the process, you make conscious decisions regarding how to seek out the information, whether or not to invest and how much to invest. If you are closely monitoring the actions of investors, this can be a very time-consuming process.
Tip: With coattail investments, you are following the traders, so the market might have moved by the time you decide to invest.
Coattail investing generally requires a different approach than copy trading. Even if you follow social media accounts that share advice or have go-to sources of market news and analysis, you must still physically input your investments using your chosen platform.
Should you choose copy trading or coattail investing?
While coattail investing has its place, 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.
With eToro’s CopyTrader™, you can embrace the power of social trading and build a diversified portfolio of investors as part of your investment strategy.
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This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.