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.

Traditional vs. Social Traders – Who Is Smarter?

According to BaFin, the study is based on a survey of 1,037 investors who have invested 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.

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 contracts for difference (CFDs).

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.

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 the euro and dollar, less than half (46%) of social trading users recognized this distinction.

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.

Who Is More Likely to Embrace Risky Products?

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 like CFDs compared to traditional investors. Specifically, the research found that 60% of social traders in the study embraced these kinds of products compared to only a fifth or 22% among conventional investors.

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 between 18-39 have been engaged in social trading in the last two years. In comparison, less than 20% of individuals aged between 40-59 participated in the practice, and the rate plunged to a mere 4% for those aged 60 and up.

Social trading as an investment concept emerged over a decade ago. However, while the practice quickly gained popularity among many retail traders, Finance Magnates’ data shows that the method has failed to return significant volumes to brokerages. Nevertheless, companies in the traditional and emergent digital assets industry have continued to invest in the practice.