How does eToro make money? Discover eToro Business Model

logomark Filippo Ucchino calendar Last Updated: April 2021 timer 3 min read

Many people wonder how does eToro make money through the Social Trading service on its platform.

The reason is simple.

Before start investing with eToro, many want to know how this society (one of the best in the copy trades sector) generates its revenues in order to have a clear picture of the background and understand if they can trust it (to do that you have also our detailed eToro Review).

67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

In reality, the way eToro produces its revenues is quite simple compared to other companies in the Social Trading panorama (eg ZuluTrade) that have a more complex model.

eToro is a financial broker in the most classic sense.

Every new user who wants to use the Copy Trading and Social Trading service has to simply open a trading account with the broker eToro.

Table of contents

So, how does eToro make money in practice?

eToro makes money in 3 ways. First, they are a market maker broker with an STP- NDD hybrid model. They make money from losing trades though they balance it to ensure no conflict and are also routinely audited to ensure fairness. Secondly, through commissions and fees when you trade CFDs. Finally, they can also earn from non-trading fees like a $5 withdrawal fee and inactivity fees.

Market Maker model

As we mentioned above, eToro operates as a hybrid market maker employing both NDD and STP features. This differs from a regular market maker broker operation quite significantly.

A pure market maker will simply be in a situation where, if you lose, they win. This can cause problems since many feel uncomfortable with a broker directly profiting from their loss, and that there is a conflict of interests here.

This is why some traders do not trust market makers, but this shouldn’t be the case with eToro. In fact we have extensively talked about this aspect in our “is etoro safe?” article, where we have analyzed every security feature offered by the broker.

In fact, eToro takes transparency seriously, and does really well in recognizing and addressing these concerns with the hybrid model they have employed. While eToro do still profit from the other side of your losing trades, they retain some balance to avoid over-exposure. The STP model they use allows them to release some volume of  trades directly to the liquidity providers if they cannot be balanced up by the opposing orders from traders on the other side or if their levels of risk get to high.

An example here may be if every trader wants to buy a certain asset with nobody willing to sell, or in a volatile market, risk levels for eToro would be very high and they may release some positions to the liquidity providers. In doing so, their only profits would then be from the commissions or fees earned.

eToro makes all the best efforts to ensure orders are well-balanced, so for example, if you want to buy EUR/USD, your order will be matched with a trader looking to sell the same market. With that said, eToro will also take the other side of your trade in many cases so they can also profit from your losing trades as with any market maker.

Ultimately though, all of these actions also involve no dealing desk. This means there should be no interference whatsoever from eToro in your trade and its outcome.

Non-Trading Commissions

When it comes to non-trading fees, this is a source of revenue for eToro just as it is for all other brokers. Still, they try to keep things very competitive and you won’t find too many fees here. The ones that you do find will still be pretty low.

They charge an inactivity fee which stands at $10 after you have been inactive for a 12-month period. There is also a withdrawal fee that is charged at $5 on every eToro withdrawal you make.

Finally, you will find some fees if you want to complete crypto transfers. You can do a transfer of cryptocurrency from eToro directly to their very own proprietary crypto wallet and trading platform, eToroX where many cryptocurrencies are supported. This fee will vary depending on which currency you are sending.

Spread

eToro simply earns through the spread it applies on each trading operation opened on each user’s account.

To offer the Copy Trading service, eToro simply connects all its Live account users with one another.

When a trader or Popular Investor opens a new position, a commission is also paid automatically in the form of “spread”.

Similarly, on all the accounts of the other investors, that are replicating automatically the operations of that trader, the same operation will be open, and another commission (always in proportion of course) will be paid.

So, in one fell swoop, eToro will gain both from the spreads of the trader or Popular Investor that generated the signals, and by all those who have replicated it.

Now you should have figured out how eToro makes money, but you can check our review if you’re not yet convinced if eToro is legit or not.

How does etoro make money without commission on real stocks?

We did mention commission but you may be thinking about trading real stocks with eToro which is possible. Then you may wonder exactly how eToro makes money on real stocks without commission?

eToro has the ability to offer commission-free real stock trading due to the amount of revenue they bring in from other channels. Traders eventually contribute revenue along the way through withdrawal fees, CFD spreads, or other fees. Tiny fees to millions of traders add up. This facilitates eToro to offer zero-commission stock trading without concern.

Who can trade Stocks and ETFs with zero commissions?

Trading stocks and ETFs without commission through eToro can be done by everyone. However, there are a few exceptions along the way:

While the vast majority of stocks and ETFs are offered free, there are a few where this is not the case. eToro offers stocks trading from 17 different stock markets around the world. Of these, there are some different rules depending on where you are based as a trader.

If you are a trader regulated under CySEC and FCA then trading stocks in 5 of these 17 stock markets will be on a CFD only basis. These are the Italian markets, Saudi, Helsinki, Copenhagen, and Oslo markets. The other 12 will be trading as real stocks.

If you are a customer with the eToro AUS Capital Pty Ltd entity, then the only commission-free stocks you will be able to trade are those that are listed on the NYSE and NASDAQ. With that said, this still accounts for a large portion of the eToro overall real stock offering.

So, what’s the point of giving 0% commissions?

Given the fact that eToro doesn’t earn any money from commission-free trading, you may wonder why they choose to offer it at all.

The answer is quite simple. A percentage of the eToro offering is in these real stocks, but they also have a huge number of CFDs and traders interested in CFDs. Offering commission-free stock trading brings in more traders and offers you great value if you are interested in free stock trading.

While you are trading with eToro you may then decide to try trading some CFDs or other products. These can make some money for the broker. It also is the case that many, perhaps even millions of traders with the company are more interested in CFD trading anyway. In that case, the broker is just adding more value, selection, and opportunities to trade. All positives for you as a trader.

FAQ

Is eToro really commission free?

In certain situations. With that said, eToro is only partially commission-free in many cases. This applies when trading stocks or ETFs within certain areas for those under CySEC, FCA, and ASIC regulations. Except for these circumstances and particular markets, eToro charges commissions and fees like any other broker.

What percentage does eToro take?

The eToro spreads and commissions are competitive. On forex these will start from 1 pip, on crypto from 0.75%, and there is a 0.00% commission on real ETFs and Stocks, but you have to be eligible for the service.

Does eToro have overnight fees?

An overnight fee is applied by eToro. This is only when you are trading CFDs though. If you are going long (holding positions for long periods) on stocks and ETFs, there are no similar holding fees charged.”

How do I avoid eToro conversion fees?

Only USD accounts are offered by eToro. This means if you want to avoid conversion fees then you will need to deposit directly in USD and not your local currency if it is different from this.

 

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Past performance is not an indication of future results.

Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework.

eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.



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