When trading on the exchange trading marketplaces, the trader is definitely going to face the broker’s commission. By paying the service fee, the trader has to put up with the additional costs which represent the missing profit. When planning his actions, the market trader must take into account commissions and add them to other expenses. The sound approach to developing a working strategy will avoid unexpected financial problems and keep the trader’s capital from large drawdowns. Today you will know what the broker’s commission is and what they are.
What is the broker’s commission?
Deals on the international market require certain financial costs, which are defined as the broker’s commission. These are the costs that are automatically deducted from the account when client makes trading activity. The intermediary performs specific actions – connects buyers and sellers – for which he receives a set fee.
Deals transfer to other market participants requires the connection of computer facilities, payment of staff and other needs. The broker is forced to introduce various commissions and deduct them from client accounts in order to maintain the company. At the same time, there are companies that claim zero commission or very small deductions. It’s commonly used by scammers who steal clients’ deposits immediately after the transfer of money to the account. By describing profitable trading conditions, criminal organizations lure trustful users and then refuse to provide the claimed services. By claiming no commissions, they make money on deception.
Each broker can set its own commission. Usually it depends on the appetite of the company and the choice of trading assets. The fees were previously relatively high due to low technology development and difficult access to trading platforms. That is no longer the case now, however. New generation computer programs improve trading activity and greatly simplify it. The Internet and new information technology have revolutionized the trading. The competition among brokers has increased, and now every trade intermediary seeks to offer its clients the best conditions of cooperation.
When choosing a broker to access the world market, the trader should pay attention to the amount of its commission payments. If the service fee is too high, the trader will not be able to withdraw the expected profit. The company that charges a moderate fee and has a positive online reputation is considered to be the optimal option.
The types of brokerage commissions
The commission of a Forex broker can be charged for different services. In most cases, the brokering company sets several types of commissions, which are automatically deducted from the trader’s account. To calculate the total payments, the trader must sum up several types of brokerage commissions:
- Swap – a fee for the transfer of a position to the next day. It applies only to those traders who leave an open order overnight. To avoid the swap, the trader can close the position and record the obtained result before the end of the session. Charges may be both negative and positive. The charges size depends directly on the differential between the deposit and credit rates in the currency pair. If the interest on the deposit is higher, then the trader will receive additional profits. The broker’s commission for trades is debited or credited at the end of every workday.
- Spread – the most common type of commission of brokerage companies. It is the difference in price between buying and selling an asset. Trading spreads may vary depending on the selected financial product or broker. The amount of deductions can be seen in a special table on the website of the broker.
- Transaction fees are charged on every transaction made. Some brokerage companies provide an opportunity for direct access to the marketplace. Thus, they reduce the spread, but add other commissions. In most cases, market trading is accompanied by a fee for each transaction made. The broker usually indicates the amount per lot in U.S. dollars. Some brokerages companies have no transaction fees at all, and the company’s profits are made exclusively from spreads and swaps.
- Inactivity commission is charged if the trader has not made a single trade within a month. Having a positive balance on his account, he risks losing the amount contained in the agreement with the brokerage company. Losses are usually only a few dollars or euros, but such terms of cooperation encourage the trader to be active.
- Currency conversion is usually charged separately. This commission applies when the trader operates with assets other than the currency of his account. For example, a trader wants to buy yuan for dollars, while his deposit is credited in rubles. The brokerage fee may be as low as 1-2 percent, but it is also worth considering as an expense.
- Deposit or withdrawal of profits is sometimes imposed by fees. When planning money transfer, the trader needs to calculate the amount including brokerage fees. For example, if the minimum deposit is 100 dollars, and brokerage fee is 2%, then the account should be deposited at least 102 dollars.
These and many other commissions must be taken into account by the trader when building a working strategy and action. Otherwise, the trader will discover the unplanned expenses and face the financial problems. The activity on the international market is related to huge risks, but the accurate calculation and competent approach to the developing tactics will help to avoid drawdowns and achieve success.