Yes, eToro is generally good for beginners, but there are also some downsides and significant risks for those new to investing. In this guide, I’ll go through why eToro is good for beginner traders, why it’s not, and also what better options there are for new investors.
I’ve covered in my main eToro review what I like and dislike about eToro as a trading platform, which is based on my experiences using the platform and interviews with founder and CEO Yoni Assia and UK MD Dan Moczulski, but here, I’ll focus on if they are right for beginners.
Why eToro is good for beginners:
There is also no doubt that with over 20 million customers signed up, eToro are too big to ignore and are certainly giving people what they want. If you look at the trading and investing industry eToro have out-marketed and out-advertised even some of the best trading platforms, particularly for new traders and investors taking their first step into financial speculation. So here are a few reasons why eToro is good for beginners:
Very easy to use
Part of eToro’s genius is simplifying a very complex subject. They have won business by making it easy to open an account, and the trading platform and app are both very simple to use compared to some of the more established investing platforms like Hargraves Lansdown and trading platforms like City Index. For example, when you buy stocks, there are no technical analysis tools on the charts, the research tab is fairly basic, just showing the key financial performance indicators, and the news flow links out to third parties with minimal integration.
There is also an emphasis on buying a certain amount of a stock, instead of the traditional number of shares, which reduces the number of calculations new traders need to make before executing a trade.
Access to popular markets
eToro actually offers some of the fewest markets to trade, with just under 3,000 (compared to IG’s 17,000) stocks, indices and commodities available to buy and sell. But, the markets they do offer are the most popular as most beginner investors focus mainly on FAANG stocks with the most news flow. They also provide investing in cryptocurrency, although not cryptocurrency derivatives like CFDs or spread betting, which are only available to professional traders in the UK.
Social & copy trading
The social aspect and feed allow beginners to see what stocks and investments other people on the eToro platform are discussing. The copy trading feature means that if you find a particular trader’s portfolio interesting, you can opt to copy it and their future traders. It makes building up a diverse portfolio of positions fairly easy. But, and this is a big but, it’s important to note that most people on the eToro platform are amateur investors, and most profitable portfolios have done well because we have been in a bull market (a rising stock market). If you do not want to make your own investment decisions and want to invest in the long term, you are better off buying a fund run by a properly regulated fund manager which you can do so through these fund supermarkets.
Set your own leverage
Even though eToro claim that less than 5% of their business last year was done on CFDs (probably because everyone was investing in crypto), they still offer contracts for difference (CFDs). But, CFDs are a very risky and complex trading tool and only suitable for experienced investors as around 77% of retail investors (private clients) lose money when trading CFDs on eToro. But there are advantages to CFDs, such as the ability to short stocks and profit from when they go down as well as up, which can help you hedge your longer-term positions if you think the market will dip or if you think the market is overvalued.
Most of the major CFD brokers in the UK, automatically give you maximin leverage, but with eToro, you are by default given zero leverage, and it is up to you if you want to increase this. This means that if you want to trade $1,000 of Tesla as a CFD, you need to have $1,000 in your eToro account. But if you want to take more risk, you can set your leverage to x5 which means you can buy or short $5,000 of Tesla stock with only $1,000 on your account.
Having the leverage setting set to zero by default is good for beginners because it means that you are not automatically taking the maximum risk possible without setting it yourself.
Why eToro is bad for beginners:
There are some major flaws with eToro which do not make them suitable for beginners at all. Investing and trading is not a game and should be taken very seriously, whilst eToro has gone to huge lengths to open up the markets to new investors, in some cases it is just not appropriate for people to be investing in a certain way.
No ISA account
The best way for beginners to start investing is through an ISA account. In the UK you can invest up to £20,000 in a stock and shares ISA, where the key benefit is that you do not have to pay tax on your profits. It is the first sort of account beginner investors should open as over time, if you make money a fair chunk of your profits will have to go to the tax-man. Before trading high-risk products you should consider opening a tax-efficient ISA account with on of these stock and shares ISA providers.
Only trade in USD
This is not only bad for beginners but is also bad for all eToro clients. eToro, only allow you to invest in USD so if you are based in the UK, deposit GBP into your account, then buy a UK share like Lloyds, eToro will make you convert your GBP into USD. This has two downsides; firstly, there is a fee of 0.45% to convert currency and secondly, if the USD falls in value compared to GBP you investment will be worth less.
Even though eToro allows you to set your own leverage, they market heavily to new investors. As I said before CFDs are not appropriate for beginners, so having the option to switch to a leveraged CFD position on all dealing tickets puts unnessecary temptation in front of those new to the market and may not fully understand the risks involved.
Also, when you opt for more leverage the dealing ticket doesn’t give you your full exposure, it just shows your deposit. Meaning that you are taking on more risk than you think.
Promotion of cryptocurrency
There is no doubt that cryptocurrency has been one of the most popular investments of the last two years. eToro have said that around 75% of what people are buying and selling on it’s platform is cryptocurrency. But, cryptocurrency is one of the riskiest things to invest in is as they are highly volatile (moves around a lot) and there is no fundamental value to digital currencies, meaning in theory they could go to zero at any time.
The heavy promotion of cryptocurrency will likely end in tears for many first-timers that have taken their first steps into investing online.
To see how eToro compares to other trading platforms you see our rankings of the best online trading apps in the UK here.