Ever wondered to yourself – how does eToro make money?
(Or maybe you have never even heard of eToro?)
Well, I’ve been a happy eToro user for a while now.
After all… they help me make passive income!
It wasn’t until recently that a friend of mine asked me an interesting question: “how does eToro make money?”.
Although I sort of knew the answer, I wasn’t completely sure.
And I like to know everything when it comes to investing my money.
So, I did some research on how eToro makes money.
Spoiler alert: It’s actually not that complicated. When compared to other social trading systems out there, the revenue-generating model of eToro is pretty transparent and relatively easy to understand.
This guest post was written by Luis. Luis is 32 years old and a backend developer. He started his FIRE-journey three years ago and uses eToro as his online broker.
Firstly, What Is Social Trading?
eToro is a social trading network.
Ok, what’s social trading?
Social trading is a latest-generation investment instrument that allows investors (experienced and beginners) to replicate professional investors’ financial transactions or trading strategies within a trading network. Traders or investors can copy other investors’ positions by observing their track records of their performance or by interacting with other investors inside the same social trading platforms.
How Does Etoro Make Money?
Before we get into some more detailed discussion – at a glance, eToro makes money in three basic ways:
First, eToro is a market maker like most other online brokers, but it follows a STP-NDD hybrid model.
A Direct Market Access (DMA)/Straight Through Processing (STP)/No Dealing Desk (NDD) is a broker that functions as an intermediary between (Forex) markets and traders. This means that eToro makes money from losing positions, but unlike other brokers, they do it ethically, by balancing it to avoid over-exposure trades. Furthermore, they are regularly audited for fairness.
Overall, this is likely to keep them more honest than the standard banks owned by “the man”.
Secondly, Etoro makes money through fees and commissions related to CFDs, or The spread (more on that later).
Finally, through fees and commission not-related to trading or non-trading fees. For instance, withdrawal fees and inactivity fees.
Hybrid Market Maker Model
Unlike other online brokers, eToro is a hybrid market maker using STP and NDD features.
This is what makes the operation of this social trading platform very different from regular market maker brokers.
In general, a typical market maker will profit from your losing positions. This can be frustrating for investors. Assuming that brokers are profiting from their losses brings up tricky questions about conflict of interest. This is one major reason why rifts between the brokers and traders exist.
Don’t get me wrong, I’m not saying that eToro doesn’t make any profits from your losses… they just do it differently than other market makers.
However, eToro is one of the most transparent market makers in the industry as they operate under a hybrid model. eToro will still profit from your losing trades; there is no denying that, but it retains part of the balance by avoiding over-exposure. eToro uses the STP model to release some of the trade’s volume to the liquidity providers. eToro executes this action if there is no way to balance it with opposing orders from other traders when the risk level exceeds the acceptable limit.
For example, if you open a trade to ‘BUY’ AUD/USD, eToro will match your trade with a trader with a ‘SELL’ order. If the order is unbalanced, for example if there is an excess of trades on one side, they’ll hedge using liquidity providers. That said, eToro also bets on the other side of your trade. The cheeky monkeys!
Consequently, they also profit from your losing trades, similar to any market maker.
However, all of these actions involve no dealing desk, meaning eToro will not interfere in your trades or its outcomes whatsoever. Now that’s something that Wall Street would never be able to do!
The simplest way eToro makes money is through the spread. The spread is the difference between the buy and sell prices. The spread is applied to every trading operation executed on the eToro trading platform. Whenever a trader opens a position like a BUY or SELL – an automatic fee is paid.
For example, let’s say you open a BUY trade, the system lists it at a price which will be the SELL price. Likewise, when you open a SELL trade, the system records it at a price which will be the BUY price. There is a small difference between the BUY and SELL price – the spread. This is where eToro sneaks out some more profit. The spread also allows eToro to maintain the platform, offering features like Copy Trading and Social Trading services.
Remember, the spread is applicable to both manual trading and copy trading. Copy trading is more profitable for eToro because every time a ‘popular investor’ or a trader opens a new position, the same trade will be replicated across all of the other accounts automatically. That’s a nice chunk of left over change for Etoro!
Non-Trading Fees And Commissions
Another major source of revenue for eToro is through non-trading related fees and commissions.
This applies to every broker in the industry. However, eToro keep things competitive, and the fees and commissions are pretty low. That’s one of the reason’s we have stuck with them!
Let’s take a look at an example. eToro charges a $10 inactivity fee for accounts that have been inactive for 12 months. Cheeky – but again, standard practice. Then thee’s the usual $5 withdrawal fee, deducted every time you make a withdrawal from your eToro balance. Thankfully however, eToro US account holders are no longer required to pay any withdrawal fees. Sorry everybody else!
Another income stream for eToro is the commission charged on all cryptocurrency transfers. If you have crypto in your eToro e-wallet, you can transfer them to eToro’s proprietary crypto wallet, eToroX. eToroX is a trading platform by eToro, that supports many cryptocurrencies. The fees vary depending on which currency you deal with and where you send it.
Personally, we prefer Coinbase for our cryptocurrency holdings. We find it easier to transfer our coins out to our offline hardware wallets.
However if you want a “one-stop-shop” for all of your investments, eToro isn’t a bad option.
That’s All Folks
So there you have it!
It’s always great to know about your broker before you start trading on their platform. Knowledge is power; use it to make more money!
I hope this article has answered the fundamental questions about how eToro generates profit.
Interested in using eToro? Sign Up Here
Other articles you should definitely read: Will Cryptocurrency Make You Rich?