Can you lose money on eToro?

There are five main ways you can lose money on eToro, making bad investment decisions, trading with leverage, overnight financing fees, FX conversion fees and currency exposure. I’ll explain a little about each, and how you lose money because of them.

1. Bad investments

The most obvious way you can lose money on eToro is to make bad investment decisions. eToro is an execution-only broker and not regulated to give you advice on what to invest in so you must choose your own investments. One of the most common investments, particularly for new investors is the S&P 500. Mainly because of social media, and the mighty Warren Buffett being endlessly quoted saying that most investors should just buy an SPX tracker and be done with it.

But, even though the S&P 500 has had a stratospheric +3,000% rise since inception there are many moments when you would have lost money. For example, if you invest on the 21st Feb 2020, by the 30th of March you would have lost, nearly 40%! A bad month for anyone.

2. Trading on leverage

In the UK, the FCA requires that all CFD brokers display the percentage of their clients that lose money. We keep a record of the risk warning percentages here. It is no secret that people lose money trading CFDs, and the figure across various trading platforms range from around 50% to 85%.

So by trading CFDs with leverage on eToro, there is a very high percentage chance that you will lose money.

3. Overnight financing rates

If you trade with leverage you also have to pay overnight funding for keeping a position open longer than intra-day. This is because if you are trading on margin your broker is essentially lending you money to get more exposure than buying a stock outright.

For example, if you trade Lloyds shares with leverage, you can put down $100 to trade $500 worth of stock. For this you will be charged $0.16 every weekday and $0.49 on the weekend. So if you keep the position open in the long term you will lose a lot in overnight fees. Also, eToro charges a staggering 6.4% over the benchmark which is a lot more than most other CFD brokers, 2.5% over/under SONIA is fairly industry standard. Plus, you don’t earn money on short positions, so if you hold a short position you are losing money owed to as opposed to using a broker that pays interest on short positions.

4. FX conversion fees

Every time you deposit GBP into your eToro account you have to change it to USD. This is one of the most annoying things about eToro and one reason, they score quite low as an investment platform. I’ll go into more detail when I talk about currency exposure next, but essentially, you are losing 1.5% of your money every time you convert GBP into USD, you also lose another 1.5% when you withdraw it. Although you can deposit for free if you have an eToro Money Account, but this is a separate app.

5. Currency exposure

You can also lose money on eToro due to currency exposure, as you are only allowed to trade and invest in USD.

Let’s say for example you want to invest in Lloyds shares, which are priced in GBP on the London Stock Exchange. To do that through eToro you first of all have to convert your GBP into USD, so you lose money there, but I’ve already discussed that.

In this example, we’ll say we are going to buy $10,000 worth of Lloyds shares.

Now, if the price of Lloyds shares goes up by 5% that $10,000 is going to be worth $10,500.

However, if the GBPUSD exchange rate moves against you and is now 1.2575 that $10,500 is only worth £8,349 instead of £8,416 if the rate had stayed at 1.2475

If you had been able to invest in a GBP-denominated stock, in GBP rather than USD you wouldn’t have lost that difference.

Obviously, the reverse is also true, if the rate moves in your favour you can be better off.