The Forex market is gaining popularity and becoming one of the most popular markets for trading. It is the trading market for all major currencies around the world. Many new investors are joining the Forex market in search of quicker and easier ways of earning money. They are not only diversifying their portfolio but also earning good returns from their minimum investment. Most people feel that the Forex market does not have any costs like the stock market. But this is not true. Below are two important costs incurred while Forex trading:
Costs involved in Forex trading
Commission
No commission is charged in Forex Trading like the stock market. When trading stocks you will have to open an account with a broker and deposit funds in that account. The broker executes transactions on your behalf for which you will pay the broker a commission. They will charge either a fixed amount per trade, or an amount per share, or a scaled commission based on how big your trade is. You will be charged commission twice that is while buying the stock and while selling the stock. On the other hand, in Forex trading, most of the brokers advertise "no commission". Nevertheless, brokers aren’t providing the services for free, but they are also making money. They do this by charging the investor with an amount which is the next cost stated below.
Spread
The spread is your primary cost of trading the Forex market. The brokers in Forex trading charge the investor an amount called the "spread". The spread is the difference between the bid price and the ask price for the currency being traded. The broker adds this spread onto the price of the trade, as a fee for their trading. Spread isn’t exactly a commission but it acts the same way. In other words, we can say that spread is a hidden cost involved in Forex trading. This spread is usually only charged on one side of the transaction. Thus, unlike the stock market, you do not pay the spread when you buy and then again when you sell. It is normally only charged on the "buy" side of the trades.
Spreads can vary from broker to broker. They can also be based on what currencies you are trading and what type of account you open. Some brokers offer different types of spreads for different types of accounts. Spreads are not guaranteed and fixed. During periods of low demand or very active trading when the spreads widen and you will be charged a wider spread. Be sure to carefully consider what currencies you are going to be trading, how frequently you will be trading, and in what type of account you will be dealing. These factors will help you decide which broker can offer you the best trading costs and enable you to maximize your returns as net profits.
source: folsol.com