It's important to know how your broker is making money because you need to know if you're trading on a fair playing field or if you're competing against your broker. And it's something that a lot of people wonder about. So I'm going to break down how eToro makes money.
eToro is known as a market maker. Essentially this means that when you open a trade, eToro attempts to match your trade with an opposite one on their platform. i.e, if you open a BUY trade of AUD/USD, they will match your trade with a SELL order. If the order book is unbalanced, with too many trades on one side, then they will hedge using liquidity providers.
Unlike some brokers which have been caught out during periods of extreme market volatility (by obviously not hedging correctly), eToro has been fine and performed well.
So how does eToro make money? Well through the spread. The spread is the difference between the buy and sell prices. When you open a BUY trade, the price it's opened at will be the SELL price. And when you open a SELL trade it will open at the BUY price. It's this small difference between prices where etoro profits.
A spread is applied whether you are manual trading or copy trading. This is why eToro loves copy trading and wants to make it as profitable for everyone as possible – because every time a popular investor opens a trade, the same trade is copied across thousands of accounts.
eToro does charge some other fees. There are daily and weekend fees. You'll be charged a tiny fraction of your trade depending on if it's a long or short trade, the leverage and the asset you're trading. Some trades, such as a buy stock trade, will be fee free. I'm not sure how much, if anything eToro will make from these fees as a portion will go straight to the financing arrangements they have with the bank that actually stores your funds.
eToro does charge a small withdrawal fee as well. Which is something to be aware of and I'm sure eToro are profiting from this.
It's always a great idea to know how your broker works and hopefully this post has answered your questions. eToro profits from the spread. This means that it's in their best interests to see you succeed as an investor – the more trades you open, the more they will profit.
You can find out more about etoro here.