Founded in 2007, headquartered in Tel Aviv-Yafo, Israel, and having amassed a customer base of over 20 million users so far, eToro has become one of the best-known online brokers. But how does eToro make profit? Actually, eToro makes money through the spread that applies on trades, weekend and overnight fees, inactivity fees, currency conversion fees, and withdrawal fees. It also makes money from the customers own losses!
When a user buys or sells an asset, spreads are then applied, which is the difference between the bid and ask for a financial asset that the customer trades in. For example, if the bid price is 1.3737 and the ask price is 1.3739, the spread is the calculated difference between both.
The difference between the two is eToro's profit margin. When you trade any sort of financial asset on eToro, such as cryptocurrencies or stocks, spreads will be applied.
As a result, eToro has every reason to increase a customer's trading volume, which is why services like CopyTrader help customers trade more.
It’s worth mentioning that eToro also makes money when its customers lose money. For example, if a customer buys a CFD expecting a decline in the price of Apple shares but the price rises, the trader will be responsible for the difference in price between when he started and closed his position.
CFDs are rather hazardous since they are naturally speculative. As a result, online brokerages that provide these sorts of products are required by law to disclose the level of risk associated with trading CFDs. “67% of retail investor accounts lose money when trading CFDs with this provider,” eToro states. You can read our in-depth guide on eToro Fees here.
Overnight & Weekend Fees
eToro, like many other CFD trading platforms, charges overnight and weekend fees (aka swap rates or rollover cost). Such fees are a kind of interest in exchange for the money that eToro lends to the customers to hold the assets through the weekend or overnight.
The traded financial asset, the position (whether buy or sell), and the trading volume all determine the fee structure. eToro applies the London Interbank Offered Rate in addition to its overnight and weekend fees.
Withdrawal & Conversion Fee
Users are charged a withdrawal fee whenever they withdraw money from their account. For example, by sending money back to their bank account.
Customers must withdraw at least $30 before being charged a $5 withdrawal fee. This fee is intended to cover the costs associated with international money transfers.
Moreover, if customers try to withdraw money in a currency other than the US Dollar, they will be charged conversion fees. Depending on the tier they're in, eToro Club members can either get a discount on those fees or even convert their money completely free of conversion fees.
eToro measures conversion fees with percentage points (PIP), or the difference between two percentages. Moving from 50% to 55%, for example, is a five-percentage-point increase, but it is a 10% increase in what is being measured. The percentage points differ depending on which currency is being converted. Converting from USD to EUR, for example, adds extra 50 percentage points.
If you haven't logged into your eToro account for 12 months, the broker will charge you an inactivity fee, which is $10 per month (it can vary depending on your country). The fee will be charged on your remaining available balance.
However, none of your open positions will be closed by eToro to cover the charge.
Market Maker Model
eToro is a hybrid market maker that uses both STP and NDD features, which is considerably different from a typical, pure market maker.
A pure market maker is simply in a position where they profit if you lose. This might be problematic for some, since it’s not a comfortable idea that a broker is benefitting directly off their loss. Consequently, this can get some traders not to trust the broker. But as far as we know, eToro is safe to use.
While eToro makes money on the other side of your unprofitable trades, they maintain a certain level of balance to minimize over-exposure. The broker uses an STP that allows it to release a volume of trades directly to the liquidity providers when they can’t be balanced up by the opposing orders from other traders or if their risk levels become too high.
If every trader wanted to purchase a specific asset and no one wanted to sell it, or if the market was turbulent, eToro's risk levels would be very high, and they would release positions to liquidity providers. As a result, their sole profit would come from the commissions or fees they earned.
eToro tries to keep orders well-balanced, so if you want to purchase USD, for example, your order will be matched with a trader who wants to sell the same asset. eToro takes the other side of users’ trades in many cases, benefitting from their losing trades just like any other market maker would.
None of these acts, in the end, need the use of a dealing desk, meaning that eToro should not influence your trade or its outcome in any way.
Is it possible for eToro to make money on real stock without commission? Yes. Due to the amount of revenue generated from other channels, eToro is able to offer commission-free real stock and crypto trading.
Users contribute revenue along the way via CFD spreads, withdrawal fees, and other fees. All of these tiny fees add up since millions of users are paying them on a daily basis. As a result, eToro can easily provide a zero-commission trading experience.
Since eToro takes 0% commissions, they have other ways to profit as a brokerage, including spreads, withdrawal and conversion fees, overnight and weekend fees, inactivity fees, and profit from your losses on the eToro platform.