Crowdsourcing Your Investments: The Twitter Effect

NEW YORK (MainStreet)—When Twitter momentarily crashed the market with a false news event, an interesting question was raised: rather than destroy the market, can we profit off the minds of the collective herd? We can crowdsource a logo, the financing of a festival -- or our next indie film – how about crowdsourcing our investments? Traders are doing that right now on social investment platforms like eToro, ZuluTrade and ForexCopy. For now, due to regulatory restrictions, U.S. trading is limited to currency and commodity transactions.

As the largest player in the field, lets you tap into the tribal "wisdom" of nearly 2.8 million users from 190 countries. You can choose your favorite market guru, share trades, copy those trades in your own portfolio – and according to ongoing MIT research – enhance your return by 5 to 10% over "normal" traders. Flush with a new $15 million round of venture capital, eToro allows you to get into the action for as little as $50.

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"I had been trading in the financial markets for a long time before establishing eToro, and I was always frustrated at the needless complexity of most the tools at my disposal," said Yoni Assia, founder of eToro. "I also realized that the Internet and the social movement that followed it would have to be an integral part of this new platform. Instead of investing in traditional market instruments, an eToro user can invest in another trader, and eventually build a 'people-based' portfolio."

Yaniv Altshuler, a post-doctoral associate at the MIT media lab headed by Professor Alex 'Sandy' Pentland, has been researching social investing for the past two years.

"A few years ago, the retail investor was at the bottom of the food chain," Altshuler said. "The fat cats -- the hedge fund managers -- were making the real money. So now, with access to the wisdom of the crowd, for the first time, retail investors can significantly improve their performance -- if the platform adheres to the correct model. So the hedge fund managers will have to settle for some lower returns."