Social investment networks the new craze?

EToro was founded in 2007 as an attempt at making trading more fun.

The exalted traders on eToro are called social gurus, and anyone can apply to be one as long as they meet the requirements. In addition to trading reasonably well, potential leaders must have a picture of themselves on their profile, share their trading performance and have at least 10 copiers.

There are two trading platforms built into the eToro website. One of eToro's platforms, called OpenBook, lets investors view other investors' messages and rankings and easily copy trades. The other platform, WebTrader, is similar to typical forex trading platforms with a control center and charts to view.

Account minimum

The minimum to get started is $50, but it depends on the method you use for funding. The minimum to fund the account with a credit card is $50, while the minimum for a bank wire is $500.

Types of investments available

Though investors do have the option to buy some stocks through eToro, they don't actually own the stock after making the purchase -- a drawback, since they have no shareholder rights or ownership stake in the company. Instead, the purchase is of a "contract for differences," or CFD. A CFD is a derivative contract; the underlying security is not traded. Instead, investors speculate on the future price of the asset.

When you buy a stock through the eToro account, the company agrees to pay you the difference between the price at which the security was bought and sold when you close the position. One benefit of their system is that you can buy as little as you like -- for instance, a fraction of a share.

There's a small transaction cost for purchasing one of the handful of stocks available on the site. Investors can also buy contracts for differences on commodities as well as some of the larger stock indexes from the U.S. and Europe, including Standard & Poor's 500, the Nasdaq 100 and Germany's Dax 30 index, among others.

How much does it cost?

There's no cost to use the service, but there is a cost per trade. EToro charges a fixed spread between the price a seller can get for selling his asset and the price at which you can buy it, called the bid and the ask.

"There is a fixed spread; we don't believe in dynamic spreads. It's a fixed commission per instrument. Some instruments are very volatile, and the instruments that are more liquid, the commission is lower," says Alon Levitan, head of product marketing at eToro.

Risk management

To protect investors from themselves, eToro restricts the amount of money investors can devote to any one trade or trader.

"You cannot put more than 20 percent of your balance on any one trader, and never at one time put more than 20 percent of your balance into one single position," Levitan says.


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