Forex, or foreign exchange, is the largest trading market in the world.
Traders and investors are the main players in forex as they look to capitalize on currencies that may increase in value relative to others. Travelers vacationing abroad and companies with operations in multiple countries participate in the market as well.
A broker that charges no commission will generally mark up the spread to compensate.
Forex differs drastically from other markets, as there aren’t central supervisors or strict regulations in place. The market’s brokerage fees are also computed less traditionally than those for stocks, options or futures.
FOREX Brokerage Fees
What often confuses newcomers to forex is whether brokers charge commission. The short answer is yes and no.
In the heavily regulated stock market, most brokers require a commission whenever you buy or sell shares. It is usually a flat rate multiplied by the number of shares traded or a fixed percentage of the trade’s value.
With forex, however, the price that an investor pays a brokerage firm is often calculated differently and can be much more volatile.
Most brokers advertise that their forex service does not require commission. This is true if they are not charging a set rate or percentage from the trade.
However, just because there is no commission DOES NOT mean that the service is free. Brokerage fees for forex trading are usually determined by a hidden cost called the spread.
What is the spread in Forex?
The spread is the difference between the bid and ask price. In forex, the bid price is how much someone receives for selling currency, and the ask price is what a buyer has to pay to acquire that same amount.
Spreads tend to be lower for highly demanded currency pairs with little volatility. This is because of the difficulty in profiting on common pairs with stable exchange rates. For example, EUR/USD is the most commonly traded currency pair and tends to be the least volatile at around 0.1 pips. Accordingly, it typically has the lowest spread in the market.
Can FOREX Brokers Set Multiple Fees?
Most brokers capitalize on the spread but can also profit from forex trading in other ways. They may simply require a commission on each trade, as is common in other markets, or they can charge commission and the spread.
Brokers work with currency dealers for quotes to competitively price their spreads relative to other firms. A broker that charges no commission will generally mark up the spread to compensate.
Depending on the broker, there may or may not be commission in forex trading. However, you will almost always be required to pay a brokerage fee. Check whether the broker charges you on commission, the spread, or a combination of the two and find the true price for your exchange.