Online Social Trading
How does copy-trading work?
When choosing to copy someone, you copy each and every position of that person, relative to the amount you copy him or her with. If the investor has a total of €5000 invested in eToro, and you copy that person with €500, you will copy all of his trades by factor 1/10.
If that investor let's say, has €1000 invested in stock A, and €1000 available in cash (on eToro), and you copy that trader with €200, you will open a position of €100 in stock A, and keep €100 in cash. A more detailed example can be found on this answer I gave to one of my copiers.
What are the costs incurred by eToro?
eToro is a business and it has to make money. Here is how they charge you for using their services:
Spread: Is probably the most important source of income. On every trade you make, or every trade that you make because you copy an investor, eToro takes a spread. A spread is a difference between buying and selling price. Let's say Apple stocks trade at $100, eToro might charge you $100,05 for buying the stock and $99,95 for selling it, while you only get something that is valued at $100.
Pay-out fees: Adding funds to your account is free. Taking out money of your account is charged.
Currency spread: If you add funds to your account in another currency than the US Dollar, you will be charged a spread on the currency exchange. Just like banks and foreign currency exchanges do when you use their services.
Additional fees are charged for holding sell-positions and leveraged positions.
Most of the above costs are related to taking out money of your eToro account. That is why I advise to only enter eToro if you plan to stay for the longer term (>1 year).
Should I copy open trades?
Copying open trades means that the amount which you will be copying a trader with, will be immediately used to buy the positions that are held open at that moment by the trader. If you choose to not select this option, only new trades that the trader will open from that point in time onwards, will be copied. Usually the trader describes in his biography if he suggests to copy open trades or not. Usually, short-term traders tend to recommend not to copy open trades, while long-term investors tend to recommend to copy open trades.
Is there a minimum amount to copy traders?
Yes and no. Basically you can copy anyone from as little as USD 200. However, (copied) trades below USD 1 will not be opened. That means if you are copying a trader who has a portfolio of USD 20.000, with USD 200, you are following all of his trades at a proportion of 1/100. If that trader decides to open a trade at USD 50, you would be copying this trade at USD 0,5, which eToro will not make happen and thus you will not fully be exposed to the investor's choices.
Usually, the trader's biography mentions the recommended amount to copy him with.
Is it risky to invest with eToro?
Besides the risks that are inherently related to trading and investing, eToro implies another risk to be taken into account. The currency risk: When investing from another country than where the USD is the used currency, eToro investors are exposed to a currency risk. That means that if one day you want to take out your money out of your account, you are subject to the exchange rate of that moment. This can be an advantage (it the dollar is weak), or a disadvantage (if the dollar is strong).
I started copying someone, but the returns remain at 0%?
This could be due to several reasons.
You started copying someone during the weekend. Since markets are closed during the weekends and bank holidays, no trades or copy-trades are opened during those days and thus the returns remain 0% until the markets open.
You started copying someone without copying open trades. Some traders open and close trades at high frequency. Not having copied the open trades is less of a problem in those cases, since you will be gradually exposed to the investment choices of that trader as he continues opening positions. For longer term investors however, this is not the case. Since longer term investors open and close trades less frequently, it might take a while before you are fully exposes to his or her portfolio. Hence, for longer term investors it might be more interesting to copy the open trades.
eToro says that I should add funds to a copied person?
If the investor you are copying, decides to add funds to his or her portfolio, eToro will not automatically rebalance your portfolio. You have three options:
You do nothing and continue to copy that person. Fine, you will be copying that person according to a new proportion. If the investor had €1000 invested, and you were following him with €500, you were copying that person at a proportion of 1/2. If the investor decides to add another €1000, all of the newly opened trades will be copied by you at a proportion of 1/4, while maintaining your old copied trades at a proportion of 1/2. Of course, if you are copying a fully invested trader, and he opens new trades, since you don't have cash at hand you will not be able to follow the newly opened trades.
You decide to add funds and fully copy the investor's portfolio and investment choices.
You decide to close your copy, and re-open it. Likewise, you will be following the investor as before, but your entire portfolio will be copied at a ratio of 1/4. Only now you will be fully able to copy newly opened positions also since all of your portfolio is copied at the same proportion. This option incurs costs due to the spread that is incurred after closing and re-opening positions.
I received a major cash return, like a dividend from copying an investor?
When a copied investor decides to take out a part of his funds out of eToro, all the copiers get an amount divested in proportion to the amount they copy that investor with. If let's say a Popular Investor has €5000 of funds in eToro, and he he wants to withdraw €500 from eToro, his funds in eToro decrease by €500/5500 = 1/11. That means that all of the copiers will get 1/11 of their copied position returned in cash balance in their eToro account.
Does eToro pay dividends?
Although eToro trades in CFD's and not in stocks, dividends are paid out for non-leveraged buy-positions.