Social investment networks the new craze?

Unlike the other networks profiled, Collective2 is a marketplace for signal providers. Anyone can come up with a trading system and hang a shingle as someone to be followed. Investors can have trades automatically replicated in brokerage accounts, but they have to license the software to do so, which means more fees.

"The end result of having an open platform where anyone all over the world can submit their strategy and be a 'signal provider' in our lingo: You get thousands and thousands of really bad strategies," says Matthew Klein, founder and president of Collective2.

"Any open platform, whether it's investing platforms or "American Idol," the reality is that out of those thousands who submit, 950 are terrible. What's great about having the software that Collective2 has, you can just discard them," Klein says.

The signal providers are ranked, with the best performers highlighted for investors.

Account minimums

Collective2 has no minimum investment "other than common sense," says Klein. "For example, you wouldn't want to autotrade a system in which you expect a drawdown that is higher than the amount you plan to invest."

Collective2 does offer simulated brokerage accounts to try out autotrading, but the individual signal providers set the availability of free trials for their systems. More than 50 percent of the signal providers offer free trials, according to Klein.

Types of investments available

On Collective2, investors sign up with brokers that are compatible with the site and can follow currency, stock, options and futures traders.

How much does it cost?

With a wide array of brokers and instruments traded, fees are all over the place. For instance, Collective2-compatible forex brokers may charge no commission; they earn money from the spread between the bid and ask. The trading commission for futures contracts varies, and the commission for stocks is between $1 per order and $5 per trade. Options contracts vary between $0.75 per contract to $0.95 per contract, with a $2.50 minimum.

The fee for the autotrading license varies among instruments. For forex, it's $1 per minilot traded. A footnote tells us that means the fee is charged per 10,000 currency units traded. The fee is charged after the security is sold.

Autotrading costs $1.99 per futures contract, and there is a flat $99-per-month fee for stocks and options.

Also, the individual vendors or signal providers set their own fees. "It's not Collective2 that decides what you pay; they typically charge a monthly fee," says Klein. "Maybe $100 a month for a strategy, sometimes less. People just introducing themselves to the site may charge $10 a month."

Risk management

Collective2 goes to great lengths to stress the importance of risk management and the pitfalls of autotrading. Every time investors start a session on Collective2, they get a big warning screen that reviews the dangers and underscores that results are hypothetical.

The platform emphasizes that the results of individual investors will likely vary somewhat from the signal provider; that's why everything is labeled as hypothetical. (Even the photographs of the employees at Collective2 are deemed hypothetical; Klein bears a striking resemblance to George Clooney, for instance.)

There are a few reasons why results and statistics are hypothetical rather than actual, according to Klein.

"The hypothetical results Collective2 shows are based on real-life results -- they're not imaginary. For example, if you see within a trading record on Collective2 that, for example, the system 'bought at price 123.45,' that price will actually be determined as follows: by taking the volume-weighted average price of the actual prices received in real-life brokerage accounts," he says.

Your mileage can vary for other reasons as well, including slippage, or the change in price between the time the signal provider executes the trade and the followers receive it.


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