eToro is a multi-asset trading platform. Australians can invest in real shares without commissions on eToro. So if eToro doesn't charge brokerage commissions like other brokers, how do they make money?
It's important to understand how a platform works before using it, so asking how eToro makes money is a legit questions. In this post I'm going to break down how eToro makes money:
eToro main business model is the spread. This is the price difference between the bid and ask prices (the long/buy and short/sell). For shares and forex the spreads are very tight. And similar (or better) to what you'll find on other trading platforms. The spreads on crypto trading are larger. And I suspect eToro makes quite a bit more on crypto trades.
This small difference between the prices is where eToro makes most of it's money. Basically every time you open a trade, eToro will make a small profit.
FX Conversion Fee
When you deposit $AUD on eToro it gets converted into USD. This is so you can US shares like Apple, Tesla etc which are priced in USD. eToro charges a small FX conversion fee which is added onto the exchange rate. So every time you deposit eToro is making a small profit. This FX fee is (much) better than the fee charged by banks in Australia. Most people won't even notice it.
How is eToro able to offer commission free trading
Brokers like Commsec charge >$9 per trade. How is it that eToro is able to offer commission free trading? Well eToro only offers commission free trading on US shares. Fortunately most of the worlds largest companies are listed on US stock exchanges. In the US there are multiple exchanges. So there is competition between each exchange to offer competitive pricing. In Australia the only major exchange is the ASX. They have a monopoly and can charge what they like. While there are a number of low cost exchanges popping up in Australia, none of them can offer commission free trading.
eToro has over 14 million customers around the world. So eToro is always relying the economics of scale to make profits.
So this is how eToro makes money. It's a legit broker and I use it to trade US shares.