i. Brokers charge a commission from their clients for providing them access to the forex market.
ii. Brokers can earn in two ways - by charging a commission, and spreads.
When you buy or sell currencies in the forex market you do that through a broker. This broker provides you with different services and even allows to trade from anywhere you want just from your smartphone.
Well, when they provide you with such services, it is obvious they will need money to keep their business running? Because in the end, it is a business.
So, the broker charges you with a transaction fee whenever you open a trade. The more you trade the more your forex broker makes.
When you first step your foot in forex trading, while finding reliable and regulated brokers to open an account.
You must have seen a lot of brokers claiming to give you zero commission accounts and must have wondered how and why will a broker not charge any commission from you?
It may have made you think that the broker is not regulated and is going to scam you.
That's not exactly the case, regulated brokers do provide a zero commission account, but there is a catch. There are different ways by which brokers charge commissions.
How do brokers charge fee?
There are two ways by which the broker charges a fee from you.
When you first open a trade, no matter you buy/sell, the first thing that the broker will charge from you is the commission for the transaction you just made.
It is very important to know, that the commission is first deducted from your equity and not from your balance.
I am telling you this because it has a psychological effect on you and the way you take your next trade.
Every broker has its commission charges mentioned on their website. These commission charges are based on the number of units you buy/sell.
The commissions mentioned on the website are generally based on 1,00,000 units and vary from lot size to lot size.
These commissions can vary anywhere between $0.50 to $7 as it depends upon the broker you are using.
The moment you enter a trade, no matter you buy or sell, your trade is always opened a few pips above or below your level. That is the reason you see your trade in a loss when you open it.
This is because your broker charges you with some amount of spread.
Spread is nothing but the difference between the ask price and the bid price. Different brokers provide different spreads and based on that your commission is calculated.
For example, let us consider your broker provides the spread of 1 pip on USDJPY. Now, when you buy/sell 1,00,000 units (lot size=1.0) of that currency pair you will instantly see a loss of $10.
This $10 is the commission that they charge you via spread and no matter what the outcome of your trade is, that amount is charged from you when you close the trade.
This type of commission that they charge via spread varies with respect to the currency pair you are trading as different currency pairs have different spreads and it also varies by the lot size you are using.
So, when you see a broker claiming zero commission account, this means that they won't be charging you with the direct commission but they will charge you based on the spread.
Commission vs Spread, which account should you choose?
It becomes very important for you to know which account is suitable for you and which account saves you more money. Because the more money you save, the more money you can invest.
There is an important thing about these accounts which you should know. It is observed that the broker which charges you based on commission provides you very small and tight spreads.
The brokers which charge you through the spread usually have large spreads.
So, depending upon your trading style you should choose your account.
If you are a scalper or day trader then you should choose a commission account because they provide you with tight spreads which is very important for scalping and day trading.
If you are a swing trader or you keep your trades for months, you should go with the spread based commissions account as spread does not matter to you and direct commissions are usually less than the commissions charged via spreads and so it will save you a lot of money in the long term.