Etoro is one of the biggest investment brokerages available to investors in Europe, the UK and the United States. But when you buy stocks and shares on eToro do you actually own them?
In this blog post, I will tell you exactly how it is.
Leveraged vs Unleveraged Positions
If you have traded on the eToro platform before then you know that when you open a trade you will have the option of choosing whether you want X1, X2, or X5 leverage on your position (depending on asset type).
Whether you choose to leverage your position or go with no leverage (X1) will have a bearing on if you are actually investing in the underlying stock or not.
When you open a BUY position with no leverage (X1) on eToro you will be investing in the underlying stock, and an equal number of shares will be purchased in your name.
However, if you choose to leverage up your trading instead you will be entering into a CFD (Contract for Difference) and you won’t own the underlying stock.
CFDs are a derivative product that are normally used to to speculate on prices rising or falling for lots of different underlying asset types and pays the differences in the settlement price between the open and closing trades.
There are a number of other scenarios where you technically do not actually own the stocks or shares which you are trading. Let’s go through them next.
Situations you are not investing in the underlying Stock/Asset
Here are some other situations that will most likely result in you trading with CFDs rather than actually owning the underlying stock.
1. Buy transactions carried out using leverage.
2. When you open a short position.
3. All transactions from certain countries and regions that are restricted due to regulatory reasons.
4. Stocks listed on some smaller exchanges.
5. If you are using the copy trade function and the trader you are copying positions are CFDs.
6. Etoro can also at their own discretion choose to open a CFD position rather than purchasing the underlying stock in your name. If this is the case then Etoro will highlight it to you on the trading platform.
Can you transfer shares in or out of eToro to other brokerages?
You generally will not be able to either transfer existing investments from another investment trading platform into eToro or remove your positions on the eToro platform.
eToro may facilitate the transfer of products to other affiliated businesses in some cases.;
What about Dividends and Corporate Events?
Another important question for eToro investors is whether they are still entitled to dividends and to be included in any corporate actions that take place for the underlying company such as Spin-offs etc.
Once you hold the shares at the dividend ex date you will be entitled to have the dividend payout credited to your account (less any taxes that may be due).
When it comes to corporate actions such as mergers, takeovers, spin-offs, etc, eToro take a much more pragmatic approach.
Here is an excerpt directly from the eToro terms and conditions on this matter:
“If a Corporate Event impacts a security in your eToro account, we will use reasonable endeavours to adjust the securities in your account in a way that is fair and which aligns with market practice, depending on the circumstances of each event and according to our sole discretion, although we are not obliged to do this.”
This appears to mean in most cases eToro will try to reflect any changes due to corporate actions directly to the you account but this may not be true for all cases.
Does eToro Lend out your Shares?
eToro may lend out your shares on occasion to institutional investors who intend on short selling the particular stock that you own. This is an additional income stream for eToro and you will not see any benefit from your shares being lent out, eToro will collect 100% of the interest from the share lending.
You may not like it but unfortunately this is now common practice for many brokerages. Other European brokers such as Trading 212 also use share lending to add additional income streams to their business model.
If you think about it, this is also common practice for the banking industry also. When you have money on deposit with a bank they are only required to keep a certain % of that on hand at one time and then lend out the rest at large interest rates while paying you next to no deposit interest.
If you want to read more about anything that I have discussed in this post then you can check out eToro’s terms and conditions.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
