eToro Review; is it really Brokerage free share trading?

eToro is an international finance and brokerage firm that provide a number of financial products. Founded in 2006 in Tel Aviv, Israel, eToro is the largest social trading network in the world with over 13 million investors across 140 countries using eToro. They are known for developing, and remaining an industry leader in social trading or ‘trade matching’ software targeted at newer investors. Whilst traditionally only known for CFD and FOREX trading, eToro now allows you to buy and hold conventional shares with $0 Brokerage.

This article will explore a bit more about eToro, in order to determine whether their Brokerage-free fee structure might be suitable for someone on the path to Financial Independence

eToro

Initially founded in 2006 in Tel aviv, Isreal by brothers Yoni and Ronen Assia and David Ring under the name RetailFX. eToro is aimed at a target audience of novice investors, and provides a range of free educational content as well as their propriety ‘trade matching’ software which allows new or inexperienced investors to mirror the portfolio decisions of more experienced and successful investors – or should that be traders…?

Through both organic growth and aggressive marketing, eToro has grown to become worlds largest social trading network -servicing over 13 Million investors globally. eToro has become a massive privately owned firm currently worth over (USD) $800 Million. eToro is now headquartered in Cyprus, United Kingdom, but has offices in Israel, The UK, USA and Australia. It offers financial services in the USA, in Europe where it is regulated by the UK Financial Conduct Authority, and in Australia (eToro AUS Capital Pty Ltd) which is regulated by both the UK FCA and the Australian Securities Investment Commission (ASIC).

eToro is more targeted towards active traders, especially beginners and inexperienced investors, and encourages higher frequency trading on the platform. Whilst you can purchase shares in a conventional manner using eToro, its main product is supporting (and encouraging) high frequency and leveraged trading, such as through Contracts for Difference (CFDs) and FOREX pair trading. Essentially, you are betting on the price movements of various markets, assets or indices such as cryptocurrencies, rather than holding the underlying assets themselves. Its worth remembering that over 80% of retail investors lose money when dealing with CFDs and FOREX, and in my mind its as close to gambling as you an get.

What features does eToro offer?

Educational content and guides – eToro offer some great educational content and guides on investing and trading, which is really useful for beginners or those who aren’t confident with investing. They have a trading academy, an online course, a blog with loads of posts, resources and daily reports, and they occasionally run live webinars

Mobile application – eToro also has a very user friendly mobile app which can be accessed on both Android and iOS devices.

Stock Brokerage – You can currently buy (and hold) US listed stocks through eToro – stocks that are traded on the NASDAQ and NYSE markets. You currently cannot purchase Australian stocks through eToro (stocks listed on the ASX) – although you can get around this limitation with US listed Exchange Traded Funds that hold baskets of Australian (or other global) stocks. The downside is you can’t directly purchase an individual Australian stock.

Other features (which are less interesting to those in the Financial Independence movements) include CFDs on the following markets;

• Forex – Foreign currencies through CFDs with nearly 50 currency pairs available.
• Stock CFDs – Trade stocks as leveraged CFDs (as opposed to investing in the actual underlying asset itself)
• Indices – Trade CFDs on indices such as the S&P 500 or Nasdaq 100.
• Commodities CFDs – such as precious metals (gold, silver), copper, palladium, platinum, natural gas and oil.
• Cryptocurrencies – Cryptocurrency CFDs such as Bitcoin.

Social trading on eToro

One of eToro’s main selling features is its social trading aspect. eToro provides you with access to millions of other traders portfolio’s as well as insights into their performance and overall risk positions, as well as a propriety CopyTrader software which lets you copy individual users trades.

CopyTrader lets you automatically copy the trades of other users – the idea being you can find a successful investor to follow and simply copy their portfolio and trades. To copy a trader, you need to have at least $200 in your account (and the maximum amount you can copy with is $500,000). Australian users can copy up to 20 traders at once, and there are options for stop-loss and profit-take to help try and limit any potential losses if you copy a dud trader.

eToro fees

Whilst eToro doesn’t charge ‘brokerage’, its business model works on charging small foreign exchange spreads (aka brokerage?) on CFD and FOREX contracts, as well as various fees such as currency conversion and withdrawal fees. You can check out eToro’s website to get it straight from the horses mouth.

Brokerage fees: $0 brokerage on US listed stocks.

Deposit fees – eToro technically doesn’t have deposit fees, however since the entire platform only works in USD, anyone depositing funds which aren’t in USD are subject to a currency conversion fee. This is 0.5% for bank transfers, and 1% for other methods including PayPal or credit cards. You also will pay the spread on eToro’s currency conversion exchange rate.

Withdraw fees – Withdrawals are subject to the same currency conversion fee and foreign exchange rate spread as Deposits, as well as as a flat $5 fee. Withdrawals can take a few days for credit cards or PayPal, and over a week for bank transfers.

Inactivity fee – eToro charges a (USD) $10 inactivity fee if you do not log into your account for over 12 months.

Cryptocurrency fee – More recently, eToro has moved into the cryptocurrency space and can provide customers with access to a ‘crypto wallet’ and crypto / fiat currency exchange platforms – eToro charge 5% brokerage on crypto transactions.

CFD overnight and weekend fees – Personally I would never trade a CFD, but eToro charge an overnight and weekend fees for keeping an open position in a CFD. The Weekend fee is three times the standard overnight fee. These fees constantly change in response to ‘market conditions’. These fees are displayed at the bottom of your trade confirmation window before you confirm your trade. Conventional shares trading (i.e. buying the actual share itself) has no such fees.

eToro Customer support

From all accounts, customer support from eToro is pretty poor. Phone support is not available in Australia and they do not have a live chat feature, however they have a customer support team which is available for email support around the clock. They do support multiple languages (English preferred) including English, French, Spanish, German and Italian, however their response time is usually a couple of days at best.

Further, Withdrawals from your eToro account can prove difficult. They are subject to strict ID requirements and are scrutinized heavily – just like how a casino doesn’t want you cashing in your chips, eToro wants you to keep trading. For your first withdrawal, you must provide eToro with a clear (color) copy of your passport, written signature and a utility bill mailed to your current residential address (that is no older than 3 months old). If you are withdrawing funds to a credit card – you must provide a clear copy of both sides of the credit card.

How to sign up and trade with eToro

Trading with eToro is easy, and they make the sign up process very simple. You can sign up for a Retail or for a Professional account – A Retail account is brokerage free, however a Professional account will let you trade CFDs at up to 400:1 leverage.

How to create an account with eToro

• Supply your contact details: Full name, email address and phone number
• Create your login – username and password
• Choose type of account (Retail or Professional account)
• Verify your eToro account by providing proof of identification and your tax file number

You can do this directly through their site, and also can use Facebook and Google to auto fill / provide your data. You will want to familiarize yourself with eToro’s Product disclosure statement and terms and conditions. After verification, you need to fund your account

Depositing money into eToro

eToro works with only one baseline currency – USD. This makes it a little trickier for investors without access to USD (or USD transfer options). You can deposit money but it is subject to eToro’s foreign exchange conversion rate and their currency conversion fee (which is one of the ways they make money). The minimum deposit for Australians is AUD $50. You can deposit money via;

• Visa / Mastercard
• Diner’s Club debit / credit card
• Bank transfer
• Neteller
• Western Union
• PayPal

When making deposits, you should keep in mind that when you withdraw the money, you can only withdraw it with the same method you deposited it; for example if you transfer money to eToro via PayPal, you will only be able to withdraw it to your PayPal account.

How to buy a stock on eToro

Once you are logged into your eToro account, and it has been funded, then making a trade is incredibly easy.

“Click the ‘Trade Markets’ link on the left of the screen and select ‘Stocks’, before clicking ‘Buy‘ on your desired stock CFD and entering the quantity you want. Once bought, your eToro trading account’s balance will be credited accordingly”

eToro

If you are using eToro to buy and hold stocks, make sure that when you select leverage to only select 1X – If you select anything above 1X, you are not buying a share, and are instead entering into a speculative very risky and complex financial product based on the share price called a Contract For Difference. A CFD is not a share, and you do not own the underlying asset (the company) and instead you just own a speculative contract based on the price movement of that share.

Unlike a conventional broker, eToro only allows you to buy and sell stocks at market rate – you are not able to set a limit order. check out eToro’s video below on how to buy stocks on eToro

What I dont like about eToro

Pardon the pun, but there are a few ‘Red flags’ being waved by the eToro ‘Toreroes’ (Matadors) which have caught my eye…

Marketing budget

eToro spends a lot of money on marketing and new user acquisition. I see advertisements for eToro in airports, on TV, YouTube ads and on Google Adsense everywhere, and they must have spent tens of Millions to get Alec Baldwin on board – where is all this money coming from? I personally believe that if a product is truly that good, then its performance will speak for itself. Or at least, in today’s internet age, the message should organically or virally spread through the community.

CHESS sponsorship

As you also probably know by now, when I’m looking for a broker I prefer brokers which are CHESS sponsored – so eToro not having CHESS sponsorship with the ASX does bother me.

Not having CHESS sponsorship can make it difficult to know what happens to your shares if eToro should ever collapse or get investigated for fraud or misconduct. Technically, you don’t legally own the shares – eToro does, and they are held under a custodianship/trust arrangement for your benefit. This also means eToro is free to do whatever they want with your shares under the terms of your user agreement – I challenge you to read the entire PDS and fine print to see exactly what it is you are agreeing to let them do with your shares when you signed up.

Fees

I don’t like that they charge inactivity fees, withdrawal fees and conversion fees – because they only operate in a USD base currency, you are subject to currency conversion fees both ways – when you initially deposit before you buy shares, and then when the money eventually does come out to you after you ever sell shares.

Only US Shares

Currently, eToro only allows you to buy US listed shares. Whilst not technically a deal-breaker since you can buy US domiciled ETFs which give you global coverage (for example in the USA Vanguard offer a range of ETFs which track Australian, US domestic or broad global indexes), this can make things very complicated from an ownership and tax perspective.

Conclusion

eToro looks like it can provide a pretty good service if you are interested in day trading, especially if you want to use their social trading (share matching or mirroring) tool CopyTrader. Personally though, day trading isn’t for me – I know that the best way to generate my long term wealth is to maximise my savings rate and continue to invest long term into boring and low management fee index funds and ETFs – so I don’t really see the point of the social trading tool at all (it actually kind of sounds like the blind leading the blind to me).

What about using eToro for buy and hold investing? Well it is brokerage free, but there are also a lot of ‘hidden’ fees and charges, such as currency conversion fees and foreign exchange spreads. Since the trading is all done in USD, this hits you twice – once on the way in (deposits) and then again on the way out (withdrawals) – this effectively gives them a brokerage cost of around 1-2%, plus whatever their exchange rate is. You can also only buy US listed stocks, which complicates tax and accounting if you want to buy Aussie or other global shares through US listed ETFs. Ultimately, the number of drawbacks for eToro exceeds any potential benefit to me, so I won’t personally be using it.

Do you use eToro or have you been researching it for shares trading? Let us know your experience in the comments below!

Want to know which stock broker I personally use? Check out my monthly Net Worth Updates as well as my Personal Resources page where I share all of the tools I use to reach Financial Independence.